
[Federal Register Volume 80, Number 58 (Thursday, March 26, 2015)]
[Notices]
[Pages 16040-16043]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-06893]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74560; File No. SR-CBOE-2015-031]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to the Solicitation Auction Mechanism

March 20, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on March 18, 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 Exchange filed the proposal as a ``non-controversial'' 
proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 
\3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rules 6.74B and 24B.5B relating to 
the Solicitation Auction Mechanism (``SAM''). The text of the proposed 
rule change is provided below (additions are italicized; deletions are 
[bracketed]).
* * * * *
Chicago Board Options Exchange, Incorporated
Rules
* * * * *

Rule 6.74B. Solicitation Auction Mechanism

    A Trading Permit Holder that represents agency orders may 
electronically execute orders it represents as agent (``Agency Order'') 
against solicited orders provided it submits the Agency Order for 
electronic execution into the solicitation auction mechanism (the 
``Auction'') pursuant to this Rule.
    (a) Auction Eligibility Requirements. A Trading Permit Holder (the 
``Initiating Trading Permit Holder'') may initiate an Auction provided 
all of the following are met:
    (1) The Agency Order is in a class designated as eligible for 
Auctions as determined by the Exchange and within the designated 
Auction order eligibility size parameters as such size parameters are 
determined by the Exchange (however, the eligible order size may not be 
less than 500 standard option contracts or 5,000 mini-option 
contracts);
    (2) Each order entered into the Auction shall be designated as all-
or-none and must be stopped with a solicited order priced at or within 
the NBBO as of the time of the initiation of the Auction (i.e. the time 
that the Agency Order is received in the order handling system 
(``OHS'') (the ``initial auction NBBO''); and
    (3) The minimum price increment for an Initiating Trading Permit 
Holder's single price submission shall be determined by the Exchange on 
a series basis and may not be smaller than one cent.
    (b) Auction Process. The Auction shall proceed as follows:
    (1) Auction Period and Requests for Responses.
    (A) To initiate the Auction, the Initiating Trading Permit Holder 
must mark the Agency Order for Auction processing, and specify a single 
price at which it seeks to cross the Agency Order with a solicited 
order priced at or within the initial auction NBBO.
    (B) When the Exchange receives a properly designated Agency Order 
for Auction processing, a Request for Responses message indicating the 
price, side, and size will be sent to all Trading Permit Holders that 
have elected to receive such messages.
    (C)-(G) No change.
    (2) Auction Conclusion and Order Allocation. The Auction shall 
conclude at the sooner of subparagraphs (b)(2)(A)

[[Page 16041]]

through (F) of Rule 6.74A. At the conclusion of the Auction, the Agency 
Order will be automatically executed in full or cancelled and allocated 
subject to the following:
    (A) The Agency Order will be executed against the solicited order 
at the proposed execution price, provided that:
    (I) The execution price must be equal to or better than the initial 
auction NBBO. If the execution would take place outside the initial 
auction NBBO, the Agency Order and solicited order will be cancelled;
    (II)-(III) No change.

. . . Interpretations and Policies:
.01-.03 No change.
* * * * *

Rule 24B.5B. FLEX Solicitation Auction Mechanism

    A FLEX Trader that represents agency orders may electronically 
execute orders it represents as agent (``Agency Order'') against 
solicited orders provided it submits the Agency Order for electronic 
execution into the solicitation auction mechanism (the ``SAM Auction'') 
pursuant to this Rule.
    (a) No change.
    (b) SAM Auction Process. Only one SAM Auction may be ongoing at any 
given time in a series and SAM Auctions in the same series may not 
queue or overlap in any manner. In addition, unrelated FLEX Orders may 
not be submitted to the electronic book for the duration of a SAM 
Auction. The SAM Auction may not be cancelled and shall proceed as 
follows:
    (1) SAM Auction Period and Requests for Responses (``RFR'').
    (i) No change.
    (ii) When the Exchange receives a properly designated Agency Order 
for SAM Auction processing, an RFR message indicating the price, side 
and size will be sent to all FLEX Traders that have elected to receive 
such messages.
    (iii)-(vii) No change.
    (2)-(3) No change.
* * * * *
    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 make changes to its existing SAM auction 
rules in Rule 6.74B and Flexible Exchange Option Solicitation Auction 
Mechanism (``FLEX SAM'') rules in Rule 24B.5B. The Exchange believes 
that the proposed amendments would ensure greater consistency between 
the Exchange's SAM auction rules and Order Protection Rule 6.81 \5\ and 
provide additional clarity in the Rules regarding the Exchange's SAM 
Auction procedures.
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    \5\ See also Securities and Exchange Act Release No. 34-43086 
(July 28, 2000), 65 FR 48023 (August 4, 2000) (Order Approving 
Options Intermarket Linkage Plan) (File No. 4-429).
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    Rules 6.74B and 24B.5B permit Trading Permit Holders (``TPHs'') and 
FLEX Traders to electronically execute an all-or-none (``AON'') orders 
for 500 or more standard (or FLEX) options contracts or 5,000 or more 
mini-options contracts that they represent as agent (``Agency Order'') 
against solicited orders provided the TPH (or FLEX Trader) submits the 
Agency Order for electronic execution into SAM for auction (the 
``Auction'') pursuant to Rule 6.74B or Rule 24B.5B (for FLEX 
orders).\6\ Under Rules 6.74B(a)(2) and (b)(1)(A), each order entered 
into SAM shall be designated AON by the Initiating TPH with the Agency 
Order marked for auction processing with a specific single price at 
which the Initiating TPH seeks to cross the Agency Order with the 
solicited order.\7\ Pursuant to Rule 6.74B(b)(2)(A)(I), the Agency 
Order will be executed against the solicited order at the proposed 
execution price, provided that, among other things, the execution price 
must be equal to or better than the CBOE best bid or offer 
(``BBO'').\8\ If the execution would take place outside the BBO, the 
Agency Order and solicited order will be cancelled.\9\
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    \6\ Neither SAM nor FLEX SAM functionality is currently 
activated for auctions on the Exchange. See RG14-076 (Deactivation 
of the Solicitation Auction Mechanism (SAM) (May 16, 2014)); see 
also notes 7 and 8, infra.
    \7\ See also Rules 24B.5B(a)(2) and (b)(1)(i).
    \8\ See also Rule 24B.5B(b)(3)(i)(A).
    \9\ See Rule 6.74(b)(2)(A)(I); see also Rule 24B.5B(b)(3)(i)(A).
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    Although TPHs are subject to the Exchange's Order Protection Rule 
6.81 and thus, prevented from trading through the displayed national 
best bid and offer (``NBBO''), including within the context of SAM 
auctions, Rule 6.74B does not specifically require Initiating TPHs to 
stop Agency Orders at or within the NBBO or expressly prohibit Agency 
Orders from being executed against solicited orders at prices outside 
the NBBO.\10\ In addition, current Rule 6.74B does not specify whether 
the Agency Order may be executed against a solicited order priced at or 
within the BBO as of the time that the Agency Order is received in the 
Exchange's order handling system (``OHS''), as of the time of the 
beginning of the auction (i.e. the time when requests for responses 
(``RFRs'') are sent), or as of the time of execution.\11\ Accordingly, 
the Exchange is proposing to make several clarifying amendments to Rule 
6.74B to require that Agency Orders be stopped and executed at or 
within the NBBO and to define when the NBBO will be looked at for 
purposes of order protection during the SAM auction process.\12\
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    \10\ Notably, the Exchange's other auction rules expressly 
provide that Initiating TPHs must stop Agency Orders at or within 
the NBBO and prohibit Agency Orders from being executed against 
solicited orders at prices outside the NBBO. See Rule 6.74A(a)(3), 
(b)(1)(A), (b)(3)(D) (Automated Improvement Mechanism (``AIM'')).
    \11\ SAM auction functionality has been deactivated since May 
20, 2014. See RG14-076 (Deactivation of the Solicitation Auction 
Mechanism (SAM) (May 16, 2014)). Prior to May 20, 2014, SAM auction 
prices were checked against the BBO at the time that the Agency 
Order was received for auction processing in the OHS.
    \12\ Consistent with these objectives, effective May 20, 2014, 
the Exchange deactivated SAM. Any future reactivation of SAM will be 
announced via Regulatory Circular prior to reactivation. See RG14-
076 (Deactivation of the Solicitation Auction Mechanism (SAM) (May 
16, 2014)).
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    Specifically, the Exchange is proposing to amend Rules 6.74B(a)(2), 
6.74B(b)(1)(A), and 6.74B(b)(2)(A)(I) to provide that Agency Orders 
submitted into SAM must be stopped with a solicited order priced at or 
within the national best bid or offer (``NBBO'') as of the time of the 
initiation of the Auction (i.e. the time that the Agency Order is 
received for SAM auction processing in the OHS) (the ``initial auction 
NBBO'') and that Agency Orders that are submitted for electronic 
execution into SAM must be executed at a price at or better than the 
initial

[[Page 16042]]

auction NBBO.\13\ Agency Orders paired against solicited orders priced 
outside of the NBBO that are submitted for electronic execution into 
SAM would be rejected by the OHS and cancelled by the Exchange.
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    \13\ The Exchange's proposal to consider the NBBO as of the time 
that the Agency Order is received in the OHS for purposes of the 
entire auction period (i.e. 1 second) is consistent with the 
exception to the Exchange's Order Protection Rule in Rule 
6.81(b)(8).
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    The Exchange believes that requiring SAM orders to be stopped and 
executed at a price equal to, or better than, the NBBO as of the time 
of receipt of the Agency Order in the OHS is consistent with the Order 
Protection Rule 6.81. As proposed, the range of permissible crossing 
prices and executions would be defined based on a snapshot of the 
market at the time when the Agency Order is received.\14\ This proposed 
rule change would thus, make clear that although the NBBO may update 
during the SAM auction response time (currently SAM auctions last one 
second),\15\ the initial auction NBBO would be considered the NBBO for 
SAM auction execution purposes. Accordingly, a SAM order execution 
outside of the NBBO would not violate the Order Protection Rule if the 
execution price were within the NBBO that existed when the Agency Order 
was received in the OHS. The Exchange believes that the proposed rule 
changes would promote consistency within the Rules and across the 
Exchange's various auction procedures.\16\ The Exchange also believes 
that the proposed rule changes would further the interests of investors 
and market participants by helping to ensure best executions and 
protection of bids and offers across multiple exchanges.
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    \14\ See id.
    \15\ See Rule 6.74B(b)(1)(C); see also Rule 24B.5B(b)(1)(iii).
    \16\ The Exchange also notes that the proposed order protection 
rule changes are consistent with similar electronic price 
improvement auction rules of other exchanges. See, e.g., BOX Rule 
7270(b)(2)(i) (Block Trades).
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    The following example demonstrates how the Exchange's proposal 
would provide an additional layer of order protection within the Rules. 
Assume that the NBBO for a particular option is $1.00-$1.20 with quotes 
on both sides for 100 contracts each. The CBOE BBO is $0.95-$1.25. An 
Initiating TPH submits an Agency Order to buy 500 contracts against a 
solicited order to sell 500 contracts into SAM priced at $1.21. An RFR 
is transmitted to TPHs that have elected to receive auction messages 
without any response. In this case, under current Rule 6.74B(b)(2)(A), 
the Agency Order would be executable against the solicited order 
because the execution price of $1.21 improves the CBOE best offer price 
of $1.25. Such execution, however, would be in violation of Rule 6.81 
because the Agency Order would have been executed outside of the NBBO 
of $1.00-$1.20. The Exchange proposes to remedy this inconsistency in 
the Rules by changing references to the BBO to NBBO and defining the 
term ``initial auction NBBO'' to mean priced at or within the NBBO as 
of the time of the initiation of the Auction (i.e. the time that the 
Agency Order is received in the OHS). Under the Exchange's proposal, 
the Agency Order would be rejected by the OHS and cancelled by the 
Exchange because, at the time when the Agency Order to buy 500 
contracts priced at $1.21 was received in the OHS, the solicited would 
have been outside of the NBBO of $1.00-$1.20.
    The Exchange's proposal would not, however, change the priority of 
public customer orders resting in the book. Assume again that the NBBO 
for a particular option is $1.00-$1.20 with quotes on both sides for 
100 contracts each. Assume this time, however, that there is also a 
public customer order to sell 50 contracts resting in the book at 
$1.20. The CBOE BBO is $0.95-$1.20. An Initiating TPH submits an Agency 
Order to buy 500 contracts against a solicited order to sell 500 
contracts into SAM priced at $1.20. An RFR is transmitted to TPHs that 
have elected to receive auction messages with a single response to sell 
150 contracts also at $1.20. In this case, under both current Rule 
6.74B(b)(2)(A) and the proposed rule changes, because there is a public 
customer order resting in the book on the opposite side of the Agency 
Order at the proposed price without sufficient size (considering all 
resting orders (i.e. 50), electronic quotes (i.e. 100), and responses 
(i.e. 150) (50 + 100 + 150 = 300)), both the Agency Order and solicited 
order would be cancelled.\17\
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    \17\ See Rule 6.74B(b)(2)(A). Note, however, that in this 
example, under both the current and proposed rules, had the resting 
order in the book to sell 50 contracts at $1.20 been a Market-Maker 
quote or order rather than a public customer order, the Agency Order 
to buy 500 contracts would trade against the solicited order at 
$1.20 because there would not have been a public customer order in 
the book on the opposite side of the Agency Order and there would 
have been insufficient size to execute the Agency Order at a price 
equal to, or better than, the initial auction NBBO. See Rules 
6.74B(b)(2)(A)(II)-(III).
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    The Exchange also proposes to amend Rules 6.74B(b)(1)(B) and 
24B.5B(b)(1)(ii) to further make clear that upon receiving a properly 
designated Agency Order for SAM or FLEX SAM Auction processing, the 
Exchange's RFR message would indicate the price, side, and size of the 
Agency Order that the Initiating TPH is seeking to cross. Rules 
6.74B(b)(1)(B) and 24B.5B(b)(1)(ii) both currently provide that the 
Exchange will send an RFR message to all TPHs that have elected to 
receive such messages, indicating the price and size of the Agency 
Order that the Initiating TPH is seeking to cross, but neither Rule 
6.74B(b)(1)(B) or 24B.5B(b)(1)(ii) currently specify that the RFR will 
also indicate the side (i.e. buy v. sell) of the Agency Order that the 
Initiating TPH is seeking to cross.\18\ In order to add additional 
clarity to the Rules and in an effort to minimize confusion among 
market participants, the Exchange proposes to add the ``side'' 
indication requirement to the SAM auction rules. The Exchange believes 
that the proposed changes will provide additional clarity regarding the 
Exchange's SAM auction processes and reduce the potential for confusion 
in the Rules.
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    \18\ The Exchange's other auction rules require the side of the 
Agency Order to be indicated in the RFR. See, e.g., Rule 
6.74A(b)(1)(B), Automated Improvement Mechanism, which provides that 
the Initiating TPH must expressly disclose the side of the Agency 
Order that it seeks to cross. (``When the Exchange receives a 
properly designated Agency Order for Auction processing, a Request 
for Responses (``RFR'') detailing the side and size of the order 
will be sent to all Trading Permit Holders that have elected to 
receive RFRs.'' Emphasis added.) Although not expressly stated in 
the Rules, prior to May 20, 2014, the Exchange's SAM RFR messages 
indicated the side of the Agency Order that the Initiating TPH 
sought to cross.
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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.\19\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \20\ 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) \21\ requirement that

[[Page 16043]]

the rules of an exchange not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(5).
    \21\ Id.
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    In particular, the Exchange believes that the proposed changes 
would ensure further consistency within the Exchange's Rules. The 
Exchange also believes that the proposed rule changes would further the 
objectives of the Act to protect investors by promoting the intermarket 
price protection goals of the Exchange's Order Protection Rule 6.81 and 
the Options Intermarket Linkage Plan.\22\ The Exchange believes its 
proposal would help ensure intermarket competition across all 
exchanges, aid in preventing intermarket trade-throughs, and facilitate 
compliance with best execution practices. The Exchange believes that 
these objectives are consistent with the Act and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 11A of the Act. In addition, the Exchange 
believes that the proposed rule changes will clarify the manner in 
which orders are submitted into the SAM auction process and reduce the 
potential for confusion in the Rules. The Exchange believes that 
providing additional clarity to its Rules furthers the goal of 
promoting transparency in markets, which is in the best interests of 
market participants and the general public and consistent with the Act.
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    \22\ See generally Securities and Exchange Act Release No. 34-
43086 (July 28, 2000), 65 FR 48023 (August 4, 2000) (Order Approving 
Options Intermarket Linkage Plan) (File No. 4-429).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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. Rather, the Exchange 
believes that the proposed rule would bolster intermarket competition 
by promoting fair competition among individual markets, while at the 
same time assuring that market participants receive the benefits of 
markets that are linked together, through facilities and rules, in a 
unified system, which promotes interaction among the orders of buyers 
and sellers. The Exchange believes its proposal would help ensure 
intermarket competition across all exchanges, aid in preventing 
intermarket trade-throughs, and facilitate compliance with best 
execution practices. In addition, the Exchange believes that the 
proposed rule change would help promote fair and orderly markets by 
helping to ensure compliance with the Order Protection Rule. Thus, the 
Exchange does not believe the proposal creates any significant impact 
on competition.

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 written comments on the 
proposed rule change.

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

    Because the foregoing proposed rule change does not (i) 
significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \23\ and Rule 19b-
4(f)(6) thereunder.\24\
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    \23\ 15 U.S.C. 78s(b)(3)(A).
    \24\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission will institute proceedings to 
determine whether the proposed rule change should be approved or 
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-2015-031 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-2015-031. 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-2015-031 and should be 
submitted on or before April 16, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-06893 Filed 3-25-15; 8:45 am]
 BILLING CODE 8011-01-P


