
[Federal Register Volume 80, Number 27 (Tuesday, February 10, 2015)]
[Notices]
[Pages 7515-7518]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-02641]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74200; File No. SR-CBOE-2015-010]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change To Amend Rules 
6.41 and 24.8

February 4, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on January 22, 2015, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to add an interpretation to each of Rules 6.41 and 
24.8. The text of the proposed rule change is provided below.


[[Page 7516]]


(additions are in italics; deletions are [bracketed])
* * * * *
Chicago Board Options Exchange, Incorporated Rules
* * * * *
Rule 6.41. Meaning of Premium Bids and Offers

    (a)-(c) No change.
    . . . Interpretations and Policies:
    .01 When a customer submits to a Trading Permit Holder for open 
outcry handling a complex order with a total cash price (the ``total 
order price'') and the total number of contracts for each leg, if 
pricing the legs for execution would result in a difference between the 
total execution price and the total order price, the Trading Permit 
Holder must resolve the difference in a manner that provides price 
improvement to the customer (i.e. the broker must determine leg prices 
that correspond to a total purchase (sale) price that is less (greater) 
than the total order price).
* * * * *
Rule 24.8. Meaning of Premium Bids and Offers

    No change.
    . . . Interpretations and Policies:
    .01 When a customer submits to a Trading Permit Holder for open 
outcry handling a complex order with a total cash price (the ``total 
order price'') and the total number of contracts for each leg, if 
pricing the legs for execution would result in a difference between the 
total execution price and the total order price, the Trading Permit 
Holder must resolve the difference in a manner that provides price 
improvement to the customer (i.e. the broker must determine leg prices 
that correspond to a total purchase (sale) price that is less (greater) 
than the total order price).
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to adopt Interpretation and Policy .01 to 
each of Rules 6.41 and 24.8 to describe the process of establishing 
final leg execution prices when a broker receives from a customer a 
complex order for open-outcry handling at a total cash price for the 
order. Rules 6.41 (with respect to equities) and 24.8 (with respect to 
indexes) provide that bids and offers must be expressed in terms of 
dollars per unit of the underlying security or index, as applicable.\3\ 
However, the Exchange understands that a customer will sometimes 
express interest in executing a complex order at a total cash price for 
the order (rather than at a price per contract for each leg) (the 
``total order price'') and the total number of contracts of each leg. 
In this situation, the broker may represent the order to the trading 
crowd at the total order price, and Trading Permit Holders in the 
trading crowd may respond to trade with the order at that total order 
price. Due to the complexity of the order and the price and number of 
contracts involved, there may be instances in which the complex order 
may not break down into a per-unit price for each leg based on the 
existing market for the leg that corresponds to the total order price. 
When this occurs, the broker resolves any difference in a manner that 
provides price improvement to the customer (i.e. the broker must 
determine leg prices that correspond to a total purchase (sale) price 
that is less (greater) than the total order price). The proposed rule 
change codifies in its rules the requirement that Trading Permit 
Holders resolve any difference between the total order price and total 
execution price in this manner.
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    \3\ Additionally, Rule 6.44 requires that bids and offers made 
on the trading floor be for one option contract unless a specific 
number is expressed in the bid or offer.
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    For example, suppose a customer sends to its broker a complex order 
in class XYZ to buy 371 July 50 Calls and buy 400 July 50 Puts for a 
total order price of $96,920. The market for July 50 Calls is 1.21-
1.22, and the market for the July 50 Puts is 1.29-1.30. The floor 
broker represents the order to the trading crowd, and two Market-Makers 
respond with a willingness to participate in the trade (the floor 
broker is unable to reasonably determine the sequence in which the 
Market-Makers responded so determines to apportion the order 
equally).\4\ They establish a per-contract price of 1.21 for the July 
50 Calls and 1.30 for the July 50 Puts. Because there is an uneven 
number of July 50 Calls, in splitting up the order, one Market-Maker 
(``Market-Maker A'') agrees to sell 185 July 50 Calls, and the other 
Market-Maker (``Market-Maker B'') agrees to sell 186 July 50 Calls, and 
Market-Makers A and B each agree to sell 200 July 50 Puts.\5\ These 
market participants execute the trade at the leg prices set forth 
above: Market-Maker A sells the July 50 Calls for $22,385 ($1.21 price/
share x 100 shares/contract x 185 contracts = $22,385) and the July 50 
Puts for $26,000 ($1.30 price/share x 100 shares/contract x 200 
contracts = $26,000), and Market-Maker B sells the July 50 Calls for 
$22,506 ($1.21 price/share x 100 shares/contract x 186 contracts = 
$22,506) and the July 50 Puts for $26,000 ($1.30 price/share x 100 
shares/contract x 200 contracts = $26,000). Therefore, the customer's 
total purchase price is $96,891 ($22,385 + $22,506 + $26,000 + 
$26,000), which represents price improvement of $29 to the customer's 
total order price. Pursuant to the proposed rule change, the broker and 
Market-Makers could not execute the order at, for example, $1.22 for 
the July 50 Calls and $1.30 for the July 50 Puts, because the total 
purchase price for the customer would be $97,262, which is higher than 
the customer's total order price.\6\ Brokers

[[Page 7517]]

may not be able to execute a complex order at a customer's exact total 
order price because the current markets for the legs and allocation 
among Trading Permit Holders may not break down in such a manner. In 
addition, brokers must exercise due diligence and obtain the best price 
for their customers and comply with the Exchange's rules regarding 
minimum increments and complex order priority.\7\ The Exchange believes 
the proposed rule change eliminates any potential confusion in the 
rules regarding how Trading Permit Holders in the trading crowd must 
determine the leg execution prices of these orders in these situations.
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    \4\ Rules 6.45 (with respect to options that do not trade on the 
Hybrid trading system), 6.45A(b) (with respect to equity options 
that trade on the Hybrid trading system), and 6.45B(b) (with respect 
to index and exchange-traded fund options that trade on the Hybrid 
trading system) sets forth the allocation and priority rules for 
orders represented in open outcry. Generally, when there are 
multiple bids (offers) at the best price, public customer orders 
have first priority (multiple public customer orders at the same 
price are ranked based on time priority), then orders of other 
market participants are prioritized by time (for classes on the 
Hybrid trading system, in-crowd market participants have priority 
ahead of market participants with orders or quotes in the electronic 
book). If the sequence in which bids (offers) were made cannot 
reasonably be determined, then priority will be apportioned equally.
    \5\ As described above, if the floor broker cannot reasonably 
determine the sequence in which the Market-Makers responded, it 
should apportion the order equally. The allocation and priority 
provisions for open outcry trading do not address to which market 
participant the ``extra'' contract should be allocated. See Rules 
6.45, 6.45A(b) and 6.45B(b). Generally, the market participants 
involved in the transaction will agree which one should receive the 
extra contract; ultimately the Trading Permit Holder representing 
the order (in this example, the floor broker) reasonably determines 
how to allocate the order in accordance with the applicable rule.
    \6\ This process of leg price determination becomes far more 
complicated and time-consuming for complex orders with more than two 
legs or when there are more than two responses from Trading Permit 
Holders (which occurs regularly). The purpose of this filing is to 
simplify this process (to the potential benefit of customers) so 
that executions of these complex orders can be completed more 
quickly.
    \7\ Complex orders may be executed at a net debit or credit 
price with another Trading Permit Holder without giving priority to 
equivalent bids (offers) in the individual leg series that are 
represented in the trading crowd or in the public customer limit 
order book provided at least one leg of the order betters the 
corresponding bid (offer) in the public customer limit order book by 
at least one minimum trading increment or $0.01, as applicable. The 
Exchange intends to make explicit in its rules in a separate rule 
filing that a complex order (with any number of legs and in any 
ratio) may be represented on the Exchange; however only those 
complex orders that satisfy certain requirements (such as ratio 
requirements) are eligible for this complex order priority, as well 
as other special complex order treatment under the rules (such as 
the ability to execute complex orders at minimum increments 
different than simple orders). The proposed rule change in this 
filing applies to all complex orders (both eligible and noneligible 
for complex order priority and treatment). A complex order must 
continue to satisfy eligibility requirements in the rules to receive 
such priority and treatment (complex orders that do not satisfy 
those eligibility requirements do not receive such priority and 
treatment). See Rule 6.42 (minimum increment for complex orders) and 
Rules 6.45(e), 6.45A(b)(ii) and 6.45B(b)(ii) (complex order priority 
exception).
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    The proposed rule change does not amend the allocation or priority 
rules for open outcry trading.\8\ For example, if a customer submitted 
an order in class XYZ to buy 371 July 50 Calls for $1.21 and 400 July 
50 Puts for $1.30, the order would execute in the same manner (with 
respect to allocation and priority) as the order originally 
communicated with a total order price in the example above. The legs 
would be required to trade in accordance with Exchange pricing rules, 
including the requirement to trade at prices at the applicable 
increment for the class that are at or better than the Exchange's best 
bid or offer, and the complex order priority rule.\9\ Similarly, in 
both situations, the order would be allocated to the two responding 
Market-Makers in time priority, or apportioned equally if the floor 
broker could not reasonably determine the sequence in which the Market-
Makers responded (as was done in the example above). Thus, the proposed 
rule change does not impact how complex orders trade in open outcry; it 
only makes explicit in the rules that Trading Permit Holders must 
handle orders for which the customer's total order price does not equal 
the total execution price in a manner that ensures any price 
improvement accrues to the customer.
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    \8\ See id.
    \9\ As set forth above, to be eligible for complex order 
priority in open outcry, one leg would have to improve the best 
public customer price of the strategy by $0.01 for the order to 
receive complex order priority. See id. In the initial example 
above, the leg price for the July 50 Puts improved on the market, so 
the July 50 Calls could receive priority over all other orders and 
quotes at the leg execution price, which was the best bid. The 
complex order would not have been eligible for complex order 
priority had it executed at leg prices of $1.21 (for the July 50 
Calls) and $1.29 (for the July 50 Puts). The Exchange notes that 
each strategy must execute at least at these prices to receive the 
priority (in this example, all 371 calls and 400 puts must have 
prices of $1.21 or [sic] $1.29 [sic], respectively, or better to 
qualify for complex order priority). The Commission notes that the 
Exchange incorrectly noted in the previous sentence that to receive 
priority, the strategy in the example must have prices of $1.21 or 
$1.29. The Exchange clarified in an email that the sentence should 
have stated that to receive priority, the strategy must have prices 
of $1.21 and $1.30. See Email to David Hsu, Assistant Director, 
Division of Trading and Markets, Commission from Laura Dickman, 
Senior Attorney, CBOE, dated February 2, 2015.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\10\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \11\ requirements that the rules 
of an exchange be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \12\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ Id.
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    The Exchange believes that specifying in its rules how Trading 
Permit Holders must handle complex orders submitted by customers with a 
total order price rather than individual leg prices protects investors 
and the public interest, because it ensures that price improvement 
accrues to the customer. The Exchange believes that the proposed rule 
change is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers because, even though the 
proposed rule changes provides customers with benefits. The Exchange 
believes it is appropriate to ensure price improvement accrues to 
customers because they send orders from off the Exchange and are not in 
a position to adjust their prices like the market participants on the 
floor executing the orders. In addition, the proposed rule change is 
consistent with the long-established history in the options industry of 
providing beneficial treatment to customers in various circumstances 
(such as providing for public customer priority in trade allocations) 
for the purpose of encouraging continuing customer investment.
    The Exchange notes that the proposed rule change does not amend the 
allocation or priority rules for open outcry trading, including the 
complex order priority exception. Any orders represented to the crowd 
at a customer's total order price will execute in accordance with the 
Exchange's current allocation and priority rules, and will execute in 
the same manner as order represented at individual leg prices. In 
addition, the Exchange notes that orders represented to the crowd at a 
customer's order price must execute at the applicable increment for the 
class (or the complex order minimum increment if eligible) and in 
accordance with all other pricing rules. The proposed rule change 
merely addresses how brokers that receive customer orders with a total 
order price must handle those orders and simplifies the process of 
determining the leg prices for such order to accelerate the executions 
of complex orders.

B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. All brokers that receive 
complex orders from customers at a total order price must comply with 
the proposed rule change.

[[Page 7518]]

Additionally, these complex orders will trade in the same manner as, 
including in accordance with allocation, priority and pricing rules 
applicable to, complex orders that brokers receive from customers with 
individual leg prices. All complex orders must continue to satisfy 
eligibility requirements in the rules to receive complex order priority 
and other complex order treatment. While the proposed rule change 
provides customers with benefits, the Exchange believes it is 
appropriate to ensure price improvement accrues to customers because 
they send orders from off the Exchange and are not in a position to 
adjust their prices like the market participants on the floor executing 
the orders. In addition, the proposed rule change is consistent with 
the a long-established history in the options industry of providing 
beneficial treatment to customers in various circumstances (such as 
providing for public customer priority in trade allocations) for the 
purpose of encouraging continuing customer investment. CBOE does not 
believe that the proposed rule change will impose any burden on 
intermarket competition because the proposed rule change relates to the 
form in which customer orders may be presented to the Exchange for 
execution, not how orders may be allocated or prioritized. To the 
extent the proposed change makes CBOE a more attractive marketplace for 
customers to submit orders, those customers may elect to become CBOE 
market participants.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2015-010 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2015-010. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2015-010 and should be 
submitted on or before March 3, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-02641 Filed 2-9-15; 8:45 am]
BILLING CODE 8011-01-P


