
[Federal Register Volume 80, Number 94 (Friday, May 15, 2015)]
[Notices]
[Pages 28021-28027]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-11716]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74923; File No. SR-CBOE-2015-030]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Related to Floor Broker Errors and the Use of 
Floor Broker Error Accounts

May 11, 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 April 30, 2015, Chicago Board Options Exchange, Incorporated (the 
``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I and II 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 seeks to update its rules related to floor broker 
errors and the use of floor broker error accounts. The text of the 
proposed rule change is provided below.

(additions are italicized; deletions are [bracketed])
* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *

Rule 6.79. Floor Broker Practices

    (a) Liquidation or Reduction of Error Account Positions. For a 
position obtained as a result of a bona fide error, a floor broker may 
reduce or liquidate a position in the floor broker's error account 
(``error account position'') in accordance with this Rule, but any 
profit/loss from the liquidation or reduction belongs to the floor 
broker (``liquidating floor broker'').
    A liquidating floor broker may personally represent an order that 
will liquidate or reduce the broker's error account position 
(``liquidation order''); however, a liquidating floor broker may not 
cross a liquidation order with a client's order also represented by the 
liquidating floor broker, unless the liquidating floor broker either: 
(1) Prior to executing the orders, the liquidating floor broker informs 
the client of the broker's intention to execute the client's order 
against an order for the floor broker's error account and the client 
does not object; (2) the liquidating floor broker sends the liquidation 
order to an unassociated broker; or (3) the liquidating floor broker 
sends the client's order to a PAR Official. For 1 through 3 above, the 
client's order must either be displayed in the relevant order book or 
announced in open outcry in accordance with Rule 6.74. An unassociated 
broker for purposes of this rule is any broker who is not directly or 
indirectly controlling, controlled by, or under common control with the 
liquidating floor broker. After a floor broker executes a liquidation 
order, the floor brokers must notify the Exchange in a form and manner 
prescribed by the Exchange via Regulatory Circular.
    (b) Erroneously Executed Orders. Orders erroneously executed (e.g., 
executing a call order as a put or a buy order as a sell) on the 
Exchange must clear in the error account of the floor broker that 
executed the erroneous order, unless the erroneously executed orders 
are nullified pursuant to a mutual agreement under Exchange Rules. It 
shall be considered conduct inconsistent with just and equitable 
principals of trade and a violation of Rule 4.1 for a floor broker to 
give a trade acquired through an error to another Trading Permit Holder 
or for a Trading

[[Page 28022]]

Permit Holder to accept a transaction that another Trading Permit 
Holder acquired through an error. If a floor broker discovers an order 
was erroneously executed on the Exchange, the floor broker shall 
proceed as follows:
    (i) If a better price is available at the time the error was 
discovered, the client's order is entitled to be executed at the better 
price. If a better price is not available, then the floor broker is 
responsible at the price at which the client's order should have been 
executed, and the floor broker shall either: (1) Execute the order at 
the available market and give the client a ``difference check'' or (2) 
execute the order out of the floor broker's error account and notify a 
CBOE Official, in a form and manner prescribed by the Exchange and 
announced via Regulatory Circular, for potential reporting of the error 
account transaction as late or out of sequence as necessary. If 
executing an order out of the floor broker's error account will reduce 
or liquidate a position in the floor broker's error account, the floor 
broker must follow the procedures in paragraph (a).
    (c) Lost or Misplaced Market Orders. If a floor broker fails to 
execute a market order, the client's order is entitled to an execution 
on up to the size of the disseminated bid or offer at the time the 
order was received or at a better price if it is available at the time 
the error is discovered. If a better price or the price the client's 
order is entitled to is not available at the time the error is 
discovered, the floor broker shall provide an execution in the manner 
described in (b)(i) above. If the unexecuted market order is in excess 
of the disseminated bid or offer at the time the order was received, 
the execution price on the additional contracts shall be negotiated 
between the floor broker and client.
    (d) Legging Multi-Part Orders. A floor broker is not restricted 
from legging multi-part orders. For the purposes of this Rule, multi-
part orders include complex orders, stock-option orders, and futures 
and option orders where one of the legs is executed on the Exchange. If 
a broker executes a leg of a complex option order, for example, the 
price of the remaining leg of the order must be within the current 
disseminated market (e.g., when a broker executes the buy side, the 
price of the sell side of the order must be at the disseminated offer 
price or lower). If a floor broker is unable to complete the execution 
of an order that the floor broker has legged, the floor broker must 
either: (1) Offer the executed leg to the client; (2) liquidate the leg 
and then offer the trade, regardless of whether it's a profit or loss, 
to the client; (3) execute the remaining leg(s) of the order at the 
available market and give the client a ``difference check''; or (4) 
execute the order out of the floor broker's error account and notify a 
CBOE Official, in a form and manner prescribed by the Exchange and 
announced via Regulatory Circular, for potential reporting of the error 
account transaction as late or out of sequence as necessary. The floor 
broker must document the time and to whom the offer noted in (1) and 
(2) above was made and retain this record. If executing an order out of 
the floor broker's error account will reduce or liquidate a position in 
the floor broker's error account, the floor broker must follow the 
procedures in paragraph (a).
    (e) Print-Throughs. A print-through on a limit order occurs when a 
trade is effected at a better price than the order's limit during the 
time that the order should have been represented in the crowd. The 
order that is `printed-through' is entitled to the number of contracts 
which trade through the order's limit up to the number of contracts 
specified in the order. Generally, the order that is `printed-through' 
should be given a better price if it is available at the time the error 
is discovered. However, under certain circumstances, such as a systems 
failure, where a large number of orders were not received or receipt 
was delayed, it would not be improper for a floor broker to execute the 
client's order at the original limit price rather than the better 
price. A floor broker shall generally proceed as follows when a print-
through has occurred:
    (i) If a floor broker discovers a print-through and a better price 
is available at that time, the client's order is entitled to be 
executed at the better price. If a better price is no longer available, 
then the floor broker is responsible at the original limit price and 
the floor broker shall either: (1) Execute the order at the available 
market and give the client a ``difference check'' or (2) execute the 
order out of the floor broker's error account and notify a CBOE 
Official, in a form and manner prescribed by the Exchange and announced 
via Regulatory Circular, for potential reporting of the error account 
transaction as late or out of sequence as necessary. If executing an 
order out of the floor broker's error account will reduce or liquidate 
a position in the floor broker's error account, the floor broker must 
follow the procedures in paragraph (a).
    (ii) If a print-through occurs on the opening, the order that is 
`printed-through' is entitled to the number of contracts which print 
through at the opening price. If a better price than the opening price 
is available at the time the error is discovered, the client's order 
shall be filled at the better price; if a better price is not 
available, the floor broker shall either: (1) Execute the order at the 
available market and give the client a ``difference check'' or (2) 
execute the order out of the floor broker's error account and notify a 
CBOE Official, in a form and manner prescribed by the Exchange and 
announced via Regulatory Circular, for potential reporting of the error 
account transaction as late or out of sequence as necessary. If 
executing an order out of the floor broker's error account will reduce 
or liquidate a position in the floor broker's error account, the floor 
broker must follow the procedures in paragraph (a).
    (f) Stopping Orders. A floor broker may not ``Stop'' or guarantee 
an execution on a client's order the floor broker is holding from the 
floor broker's error account because doing so would be acting as a 
market-maker in violation of Rule 8.8.
    (g) Documentation of Errors and Record Keeping Requirements. All 
transactions executed for a floor broker's error account must be 
documented. These records must be retained for a minimum of three 
years, the first two years in an easily accessible place.
    Rules adopted by the SEC under the Securities Exchange Act of 1934 
(the ``Act'') require that a floor broker keep a copy of every order 
the floor broker receives, including orders received via hand signals 
or phone, and all cancelled orders and unexecuted orders. A floor 
broker may arrange to have these records kept on the floor broker's 
behalf; however, it is still the responsibility of the floor broker to 
produce such documents upon request. These records must be retained for 
a minimum of three years, the first two years in an easily accessible 
place. Failure to do so is a violation of the Act, SEC Rules 17a-3 and 
17a-4, and CBOE Rules 4.2 (``Adherence to Law'') and 15.1 
(``Maintenance, Retention and Furnishing of Books, Records and Other 
Information'').
    . . .Interpretations and Policies:
    .01 A liquidating floor broker executing a liquidation order in 
accordance with this rule in the trading crowd where the broker is 
active as a floor broker is not a violation of Rule 8.8. Additionally, 
CBOE Rules generally do not prohibit a floor broker from entering into 
transactions on other exchanges for the floor broker's personal

[[Page 28023]]

account in financial instruments underlying or related to the classes 
in the trading crowd where the floor broker acts as a floor broker.
    .02 Pursuant to the due diligence provisions of Rule 6.73, a floor 
broker's agency business has priority over the broker's liquidation 
orders.
* * * * *
    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 is proposing to adopt new Rule 6.79 to codify policies 
related to floor broker errors and the use of floor broker error 
accounts. The proposed rule incorporates several aspects of CBOE 
Regulatory Circular RG95-49.\5\ In addition, the proposed rule will 
supersede RG95-49. The Exchange believes it would be beneficial to 
codify policies related to floor broker errors and the use of floor 
broker error accounts in Exchange rules in order to provide further 
detail regarding errors and the use of error accounts.
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    \5\ RG95-49 reissued Regulatory Circular RG94-44. RG94-44 was 
filed with the SEC and approved on June 1, 2014 [sic]. See SR-CBOE-
93-44; Securities Exchange Act Release No. 34-34138 (June 7, 1994), 
59 FR 108. The proposed rule will supersede RG95-49 and RG94-44.
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    First, with proposed Rule 6.79(a), the Exchange proposes to clarify 
and amend its policy related to a floor broker representing orders for 
the floor broker's own error account. The general principle is that for 
a position obtained as a result of a bona fide error, a broker may 
reduce or liquidate a position in the floor broker's error account 
(``error account position'') in accordance with proposed Rule 6.79, but 
any profit/loss from the liquidation or reduction belongs to the floor 
broker (``liquidating floor broker''). Furthermore, a liquidating floor 
broker may personally represent an order that will liquidate or reduce 
the floor broker's error account position (``liquidation order''). As 
stated, the proposed rule does not prohibit floor brokers from 
personally representing a liquidation order, except in limited 
circumstances. For example, a liquidating floor broker may not cross a 
liquidation order with a client's order \6\ also represented by the 
floor broker, unless either: (1) Prior to executing the orders, the 
liquidating floor broker informs the client of the floor broker's 
intention to execute the client's order against an order for the floor 
broker's error account and the client does not object \7\; (2) the 
liquidating floor broker sends the liquidation order to an unassociated 
broker; \8\ or (3) the liquidating floor broker sends the client's 
order to a PAR Official.\9\ For 1 through 3 above, the client's order 
must either be displayed in the relevant order book or announced in 
open outcry in accordance with Rule 6.74.\10\ An unassociated broker 
for purposes of this rule is any broker who is not directly or 
indirectly controlling, controlled by, or under common control with the 
liquidating broker. In addition, after a floor broker executes a 
liquidation order, the floor brokers must notify the Exchange in a form 
and manner prescribed by the Exchange via regulatory circular.\11\ The 
Exchange believes the proposed method for liquidating an error account 
position is non-controversial because the procedural requirements, 
especially requiring the client's order to either be displayed in the 
relevant order book or announced in open outcry in accordance with Rule 
6.74, help to ensure the client's order receives the best possible 
execution price.
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    \6\ RG95-49 utilized the term customer. The proposed rule 
replaces `customer' with `client' in order to avoid confusion as to 
the type of `customer' (i.e., retail customer, client customer, 
etc.) referred to in RG95-49.
    \7\ In order to exit an error account position, floor brokers 
often solicit contra side orders. The Exchange believes floor 
brokers should be able to cross liquidating orders with those 
solicited orders. In addition, the Exchange notes that client 
consent is presumed only after the client has been properly 
notified. The Exchange also notes that the client may always object 
to the transaction, which will prohibit the floor broker from 
crossing the liquidation order with the objecting client's order. 
Additionally, notification will be made on a per order basis.
    \8\ The Exchange notes that sending the liquidation order to an 
unassociated broker removes the potential conflict of interest 
between a floor broker's due diligence requirements and the floor 
broker's personal interest in executing a trade for himself. In 
addition, as noted below, the client's order is further protected by 
requiring the order to either be displayed in the order book or 
announced via open outcry.
    \9\ RG95-49 utilized the term OBO's and DPM. The Exchange 
proposes to remove the reference to OBOs, as the Exchange no longer 
has OBOs. The Exchange also proposes to replace DPM with PAR 
Official.
    \10\ The Exchange believes client consent protects clients by 
allowing them to determine on a per order basis whether their 
interests are being served by trading with a liquidating floor 
broker. The Exchange also notes that the requirement to either 
display the client's order in the relevant order book or announce 
the crossing transaction in open outcry also serves to protect the 
client by ensuring the client's order has access to greater 
liquidity and potentially better prices.
    \11\ The Exchange notes that this provision will allow CBOE to 
surveil for potential abuses related to floor brokers liquidating 
positions, especially when a liquidating floor broker trades with a 
client order.
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    Next, proposed Rule 6.79(b) requires erroneously executed orders 
(e.g., executing a call order as a put or a buy order as a sell) to be 
cleared in the error account of the floor broker that executed the 
erroneous order (creating an ``error account position'') unless the 
erroneously executed orders are nullified pursuant to a mutual 
agreement under Exchange rules.\12\ Furthermore, it will be considered 
a violation of just and equitable principles of trade and a violation 
of CBOE Rule 4.1 for a floor broker to give a trade acquired through 
error to another Trading Permit Holder (``TPHs'').\13\ The proposed 
rule also makes it a violation of Rule 4.1 for a TPH to accept a trade 
that another TPH has acquired through an error. The Exchange believes 
that maintaining a uniform process for the handling of errors by floor 
brokers is appropriate. More specifically, by not allowing the transfer 
of error positions between floor brokers and market-makers, the 
Exchange is eliminating

[[Page 28024]]

perceived conflicts of interest that may result from error account 
position transfers between TPHs.
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    \12\ CBOE Rule 6.19 currently provides that ``[a] trade on the 
Exchange may be nullified or adjusted if the parties to the trade 
agree to the nullification or adjustment.'' However, as part of an 
industry-wide initiative to harmonize exchange rules regarding 
obvious errors, Rule 6.19 will be replaced by revised Rule 6.25. 
With regards to mutually agreed nullifications and adjustments, 
revised Rule 6.25 is proposed to state that ``[a] trade may be 
nullified or adjusted on the terms that all parties to a particular 
transaction agree, provided, however, that such agreement to nullify 
or adjust must be conveyed to the Exchange in a manner prescribed by 
the Exchange prior to 7:30 a.m. Central Time on the first trading 
day following the execution. It is considered conduct inconsistent 
with just and equitable principles of trade for any TPH to use the 
mutual adjustment process to circumvent any applicable Exchange 
rule, the Act or any of the rules and regulations thereunder.'' See 
Securities Exchange Act Release No. 34-73884 (December 18, 2014), 79 
FR 77557 (June 2, 2009 [sic]) (SR-BATS-2014-067).
    \13\ RG95-49 referred to Trading Permit Holders as ``members'', 
and the proposed rule seeks to update the terminology in this 
respect.
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    In addition to the above restriction, proposed Rule 6.79(b)(i) 
provides that if a floor broker discovers an order was erroneously 
executed on the Exchange, the floor broker shall generally proceed as 
follows: If a better price is available at the time the error was 
discovered, the client's order is entitled to be executed at the better 
price. If a better price is not available, then the floor broker is 
responsible at the price at which the client's order should have been 
executed, and the floor broker shall either: (1) Execute the order at 
the available market and give the client a ``difference check'' or (2) 
execute the order out of the floor broker's error account \14\ and 
notify a CBOE Official, in a form and manner prescribed by the Exchange 
and announced via Regulatory Circular, for potential reporting of the 
error account transaction as late or out of sequence as necessary. 
Additionally, if executing an order out of the floor broker's error 
account will reduce or liquidate a position in the floor broker's error 
account, the floor broker must follow the procedures in paragraph (a). 
The Exchange believes giving floor brokers the option to execute the 
client's order out of the floor broker's error account is non-
controversial because RG95-49 generally provides the same relief for 
print-throughs, lost or misplaced market orders, and erroneously 
executed orders. Although under RG95-49 when a print-through, lost or 
misplaced market order, or erroneously executed order is discovered 
during trading hours floor brokers are prohibited from correcting the 
error by filling the client out of an error account if doing so would 
reduce or liquidate a position in the floor broker's error account, the 
proposed rule is non-controversial because the floor broker must follow 
the procedures outlined in paragraph (a) of Rule 6.79 whenever reducing 
or liquidating a position in the floor broker's error account. As noted 
above the procedural requirements of Rule 6.79(a), especially requiring 
the client's order to either be displayed in the relevant order book or 
announced in open outcry in accordance with Rule 6.74, help to ensure 
the client's order receives the best possible execution price.\15\
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    \14\ The Exchange notes that the Continuous Trade Match System 
(``CTM'') is the mechanism by which a floor broker would execute a 
client's order out of the floor broker's error account.
    \15\ The Exchange believes that all similar provisions in this 
proposed rule that allow a floor broker to provide a fill out of the 
broker's error account are non-controversial for the same reasons 
outlined above.
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    Next, proposed Rule 6.79(c) seeks to codify policies related to 
lost or misplaced market orders.\16\ The Exchange believes it's 
beneficial to codify the lost or misplaced market orders policy because 
doing so more adequately notifies floor brokers of their obligations 
and clients of their rights regarding lost or misplaced market orders. 
The proposed rule mandates that if a floor broker fails to execute a 
market order that has been lost or misplaced, the client's order is 
entitled to an execution on up to the size of the disseminated bid or 
offer at the time the order was received or at a better price if it is 
available at the time the error is discovered. If a better price or the 
price the client's order is entitled to is not available at the time 
the error is discovered, the floor broker shall provide an execution in 
the manner described in (b)(i). If the unexecuted market order is in 
excess of the disseminated bid or offer at the time the order was 
received, the execution price on the additional contracts shall be 
negotiated between the floor broker and client.
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    \16\ The Exchange notes, however, that this provision does not 
mandate that off floor brokers follow the procedures in 6.79(c); 
however, to the extent that a transaction is executed on the 
Exchange to fix an error due to a lost or misplaced market order, 
the broker will be held to the standard set forth in Rule 6.79(c).
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    Next, proposed Rule 6.79(d) sets forth specific policies related to 
legging multi-part orders.\17\ The Exchange believes it's beneficial to 
describe the procedures a floor broker must follow when the broker is 
unable to complete an order the floor broker has legged. If a floor 
broker executes a leg of a complex option order, for example, the price 
of the remaining leg of the order must be within the current 
disseminated market (e.g., when a broker executes the buy side, the 
price of the sell side of the order must be at the disseminated offer 
price or lower). If a floor broker is unable to complete the execution 
of an order that the floor broker has legged, the floor broker must 
either: (1) Offer the executed leg to the client; (2) liquidate the leg 
and then offer the trade, regardless of whether it's a profit or loss, 
to the client; (3) execute the remaining leg(s) of the order at the 
available market and give the client a difference check; or (4) execute 
the order out of the floor broker's error account \18\ and notify a 
CBOE Official, in a form and manner prescribed by the Exchange and 
announced via Regulatory Circular, for potential reporting of the error 
account transaction as late or out of sequence as necessary. The floor 
broker must document the time and to whom the offer noted in (1) and 
(2) above was made and retain this record. Additionally, if executing 
an order out of the floor broker's error account will reduce or 
liquidate a position in the floor broker's error account, the floor 
broker must follow the procedures in paragraph (a).
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    \17\ Multi-part orders include complex orders, stock-option 
orders, and futures and option orders where one of the legs is 
executed on the Exchange.
    \18\ The Exchange recognizes that RG95-49 stated that if a floor 
broker was unable to complete an order the broker legged, the broker 
could not provide an execution on the unexecuted portion of the 
order from the broker's error account because doing so would be 
acting as a market-maker in violation of Rule 8.8. The Exchange now 
believes that failing to complete an order that the broker has 
legged is as much an error as a print-through and providing an 
execution with an error account would not implicate Rule 8.8 in most 
situations. The Exchange recognizes, however, that a pattern and 
practice of consistently using the error account in this manner may 
lead the Exchange to the conclusion that a broker is acting like a 
market-maker in violation of Rule 8.8. The same is true for the 
other provisions of the proposed rule that allow a broker to provide 
a client a fill via the broker's error account.
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    Next proposed Rule 6.79(e) seeks to codify policies related to 
print-throughs.\19\ The rule mandates that if a print-through is 
discovered the order that is `printed-through' should be executed at 
the available market at the time the print-through is discovered. If 
the available market is at a better price, the order that is `printed-
through' is entitled to the better price. If the available market is at 
a worse price, the floor broker becomes responsible at the original 
limit price \20\ and must either: (1) Execute the order at the 
available market while providing the client a ``difference check'' or 
(2) execute the order out of the floor broker's error account and 
notify a CBOE Official, in a form and manner prescribed by the Exchange 
and announced via Regulatory Circular, for potential reporting of the 
error account transaction as late or out of sequence as necessary.\21\

[[Page 28025]]

Additionally, if executing an order out of the floor broker's error 
account will reduce or liquidate a position in the floor broker's error 
account, the floor broker must follow the procedures in paragraph (a).
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    \19\ A print-through on a limit order occurs when a trade is 
effected at a better price than the order's limit during the time 
that the order should have been represented in the crowd. For 
example, a floor broker holds a client's limit order to sell at 
$1.00. If a trade occurs at $1.05 during the time in which the order 
should have been represented in the trading crowd, a print-through 
has occurred.
    \20\ The rule contemplates situations in which the client would 
not be entitled to the better price. For example, a systems failure 
that causes a large number of orders to not be received or if 
receipt was delayed.
    \21\ RG95-49 provided for three separate procedures for print-
throughs (print throughs during trading hours; print-throughs 
outside trading hours; and print-throughs on the opening). Although 
the proposed rule includes a separate procedure for print-throughs 
occurring on the opening, the Exchange believes the proposed rule 
protects investors and avoids potential confusion related to 
separate procedures by consolidating procedures related to print-
throughs during trading hours and print-throughs outside trading 
hours. In addition, the Exchange notes that the proposed rule 
provides that for a print-through that occurs on the opening, the 
order that is `printed-through' is entitled to the number of 
contracts which print through at the opening price. For print-
throughs not occurring on the opening, the proposed rule does not 
limit the number of contracts to which the order is entitled.
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    Next, proposed Rule 6.79(f) seeks to codify its policy related to 
stopping orders. Again, pursuant to Rule 8.8, the Exchange believes it 
is a violation of Rule 8.8 for a broker to ``Stop'' or guarantee an 
execution on a client's order he is holding from the floor broker's 
error account. The Exchange believes that prohibiting floor brokers 
from stopping orders or guaranteeing an execution on a client's order 
from the floor broker's error account ensures that the floor broker is 
acting in the best interest of the floor broker's client; rather than 
the interest of the broker's proprietary position.
    Next, proposed Rule 6.79(g) seeks to codify its policy related to 
the documentation of errors and record keeping requirements. The 
proposed rule mandates that ``[a]ll transactions executed for a floor 
broker's error account must be documented.'' In addition, the ``records 
must be retained for a minimum of three years, the first two years in 
an easily accessible place.'' In addition, in order to further stress 
the importance of maintaining adequate and complete records, the 
Exchange specifies some of the records that must be maintained in 
accordance with the Securities Exchange Act of 1934, SEC Rules 17a-3 
and 17a-4, and CBOE Rules 4.2 (``Adherence to Law'') and 15.1 
(``Maintenance, Retention and Furnishing of Books, Records and Other 
Information), including all cancelled orders and unexecuted orders.
    Next, the Exchange proposes to adopt Interpretation and Policy .01 
to provide clarity regarding its policy prohibiting floor brokers from 
acting as market-makers. According to CBOE rules \22\ floor brokers are 
generally prohibited from acting as a market-maker on the same business 
day in which they act as a floor broker. However, Rule 8.8 is not clear 
on whether a floor broker representing the broker's error account is 
acting as a market-maker. The Exchange does not believe in the ordinary 
course of business that a floor broker is acting as a market-maker when 
providing fills via an error account in accordance with this proposed 
rule or executing liquidating orders in accordance with this proposed 
rule. However, as noted previously, the Exchange recognizes that a 
pattern of consistently using an error account to provide fills to 
customers may lead the Exchange to the conclusion that a floor broker 
is acting as a market-maker in violation of Rule 8.8. In addition, 
although the proposed rule clearly states that a broker may execute 
liquidation orders, Interpretation and Policy .01 makes it abundantly 
clear that the prohibition against a broker acting as a market-maker 
does not apply to a liquidation order being executed by a liquidating 
floor broker in the trading crowd in which the floor broker is active. 
In addition, CBOE Rules generally do not prohibit a floor broker ``from 
entering into transactions on other exchanges for the floor broker's 
personal account in financial instruments underling or related \23\ to 
the classes in the trading crowd where the floor broker acts as a floor 
broker.'' The Exchange notes, however, that it would be a violation of 
CBOE Rules 4.1 (``Just and Equitable Principles of Trade'') and 6.73 
(``Responsibilities of Floor Brokers'') and Regulatory Circular RG94-76 
(``Front-running of Blocks'') for a floor broker to enter into 
transactions in an underlying or related financial instrument based on 
information concerning a client's option order the floor broker holds, 
and regulatory staff monitors for such activity in the same manner it 
monitors for front-running generally. In addition, floor broker 
transactions in underlying or related financial instruments are not 
entitled to good faith credit under Regulation T and must be margined 
as customer transactions.
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    \22\ CBOE Rule 8.8.
    \23\ A related financial instrument would include index futures 
if you are an OEX or SPX floor broker, OEX options if you are an SPX 
floor broker, and SPX options if you are an OEX floor broker.
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    Finally, the Exchange proposes to adopt Interpretation and Policy 
.02 to make it clear that a broker's agency business takes priority 
over a floor broker's liquidation orders. For example, marketable 
agency orders should be executed prior to a broker attempting to 
liquidate or reduce the broker's error account position.
    To conclude, the Exchange believes that the proposed rule is in 
furtherance of the Act because it will allow floor broker's a straight-
forward mechanism for liquidating error account positions while 
protecting investors. As stated above, the Exchange intends to release 
a Regulatory Circular to announce the implementation of the Rule and 
other specifics surrounding the procedures of the implementation. In 
addition, prior to implementation, the Exchange will ensure it has 
proper policies and procedures in place to correctly administer the 
Rule.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\24\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \25\ 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) \26\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \24\ 15 U.S.C. 78f(b).
    \25\ 15 U.S.C. 78f(b)(5).
    \26\ Id.
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    In particular, in addition to codifying relevant portions of RG95-
49, the Exchange believes that the proposed rule change enhances 
several aspects of RG95-49, which helps perfect the mechanism of a free 
and open market and protect investors and the public interest. Where 
RG95-49 disallows a floor broker from crossing a client order with an 
order for the broker's error account (i.e., a client order reducing an 
error account position), the proposed rule allows the activity if 
certain procedures are followed (e.g., notifying a client that the 
broker intends to execute the client's order against an order for the 
broker's error account in order to allow the client to consent to trade 
with the floor broker's error account), which promotes a free and open 
market by allowing brokers to source liquidity.
    In addition, where RG95-49 ensured that a customer is entitled to 
only ten contracts at the disseminated bid or offer when a broker loses 
or misplaces

[[Page 28026]]

a market order, the proposed rule provides that the customer is 
entitled to the price and size of the disseminated bid or offer, which 
the Exchange believes promotes just and equitable principles of trade 
because it more adequately reflects the size and price that a customer 
would have been entitled to if no mistake was made. Also, where RG95-49 
prohibits the use of a floor broker error account to provide an 
execution to a client in certain circumstances (e.g., when providing a 
fill from an error account to correct a print-through, lost or 
misplaced market order, or erroneously executed order would reduce or 
liquidate a position in the floor broker's error account or when 
providing a fill from an error account to provide an execution on an 
unexecuted portion of a multi-leg order,), the proposed rule gives the 
broker the flexibility to execute the order out of the broker's error 
account, which protects investors and the public interest by ensuring 
that customer orders are executed. As noted above, the Exchange 
believes giving floor brokers the option to correct an error by 
executing the client's order out of the floor broker's error account is 
non-controversial because RG95-49 generally provides the same relief 
for print-throughs, lost or misplaced market orders, and erroneously 
executed orders. Although under RG95-49 when a print-through, lost or 
misplaced market order, or erroneously executed order is discovered 
during trading hours floor brokers are prohibited from correcting the 
error by filling the client out of an error account if doing so would 
reduce or liquidate a position in the floor broker's error account, the 
proposed rule is non-controversial because the floor broker must follow 
the procedures outlined in paragraph (a) of Rule 6.79 whenever reducing 
or liquidating a position in the floor broker's error account. As noted 
above the procedural requirements of Rule 6.79(a), especially requiring 
the client's order to either be displayed in the relevant order book or 
announced in open outcry in accordance with Rule 6.74, help to ensure 
the client's order receives the best possible execution price. Finally, 
where RG95-49 provided for three separate procedures for print-throughs 
(print throughs during trading hours; print-throughs outside trading 
hours; and print-throughs on the opening), the proposed rule protects 
investors and avoids potential confusion related to separate procedures 
(even though the proposed rule maintains a separate procedure for 
print-throughs that occur on the opening) by consolidating procedures 
related to print-throughs during trading hours and print-throughs 
outside trading hours.
    Additionally, the proposed rule prevents fraudulent and 
manipulative acts and practices by requiring brokers to clear errors in 
their own accounts unless nullified pursuant to a mutually agreement 
under Exchange rules. Furthermore, requiring floor brokers to notify 
the Exchange after executing an order for the floor broker's error 
account or providing a fill to a client via the floor broker's error 
account will aid the Exchange in the surveillance of error account 
activity, which helps prevent fraudulent and manipulative acts and 
practices and promotes just and equitable principles of trade. Finally, 
the Exchange believes the proposed rule promotes just and equitable 
principles of trade by ensuring client orders are not harmed for 
mistakes that are the fault of brokers. The Exchange does not believe 
the proposed rule is unfairly discriminatory toward customers, issuers, 
or brokers because the proposed rule simply sets forth the process for 
floor brokers to correct certain mistakes.
    Finally, the proposed rule change is also consistent with Section 
11(a)(1) of the Act and the rules promulgated thereunder. Generally, 
Section 11(a)(1) of the Act restricts any member of a national 
securities exchange from effecting any transaction on such exchange for 
(i) the member's own account, (ii) the account of a person associated 
with the member, or (iii) an account over which the member or a person 
associated with the member exercises discretion, unless a specific 
exemption is available. Examples of common exemptions include the 
exemption for transactions by broker dealers acting in the capacity of 
a market maker under Section 11(a)(1)(A), the ``G'' exemption for 
yielding priority to non-members under Section 11(a)(1)(G) of the Act 
and Rule 11a1-1(T) thereunder, and ``Effect vs. Execute'' exemption 
under Rule 11a2-2(T) under the Act. In this regard, we note that, 
consistent with existing Exchange Rules for effecting proprietary 
orders from on the floor of the Exchange, Floor Broker TPHs effecting 
orders for their error accounts and relying on the G exemption would be 
required to yield priority to any interest in the electronic book at 
the same price (not just public customer orders) to ensure that non-
member interest is protected.

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. More specifically, the Exchange 
does not believe the proposed rule changes will impose any burden on 
intramarket competition because it will be applicable to all floor 
brokers. In addition, the Exchange does not believe the proposed 
changes will impose any burden on intermarket competition because 
proposed Rule 6.79 simply provides a clearer mechanism for correcting 
errors.

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

    Because the foregoing proposed rule change does not:
    A. Significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. 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 \27\ and 
Rule 19b-4(f)(6) \28\ thereunder.
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    \27\ 15 U.S.C. 78s(b)(3)(A).
    \28\ 17 CFR 240.19b-4(f)(6).
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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.\29\
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    \29\ In addition, Rule 19b-4(f)(6)(iii) requires the Exchange to 
give the Commission written notice of the Exchange's intent to file 
the proposed rule change, along with a brief description and 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. The Exchange has satisfied this 
requirement.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule

[[Page 28027]]

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-2015-030 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-2015-030. 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 such filing also will be available 
for inspection and copying at the principal offices 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-2015-030, 
and should be submitted on or before June 5, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-11716 Filed 5-14-15; 8:45 am]
 BILLING CODE 8011-01-P


