
[Federal Register Volume 80, Number 99 (Friday, May 22, 2015)]
[Notices]
[Pages 29767-29769]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-12417]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74990; File No. SR-CBOE-2015-047]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Relating to 
Floor Broker Due Diligence

May 18, 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 May 5, 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

    The Exchange proposes to amend Exchange rules related to Floor 
Broker due diligence. The text of the proposed rule change is provided 
below (additions are italicized; deletions are [bracketed]).
* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *
Rule 6.53. Certain Types of Orders Defined
    One or more of the following order types may be made available on a 
class-by-class basis. Certain order types may not be made available for 
all Exchange systems. The classes and/or systems for which the order 
types shall be available will be as provided in the Rules, as the 
context may indicate, or as otherwise specified via Regulatory 
Circular.
* * * * *
    (g) Not Held Order. A not held order is an order marked ``not 
held'', ``take time'' or which bears any qualifying notation giving 
discretion as to the price or time at which such order is to be 
executed. An order entrusted to a Floor Broker will be considered a Not 
Held Order, unless otherwise specified by a Floor Broker's client or 
the order was received by the Exchange electronically and subsequently 
routed to a Floor Broker or PAR Official pursuant to the order entry 
firm's routing instructions.
* * * * *
Rule 6.73. Responsibilities of Floor Brokers
    (a)-(c) No Change.
    . . . Interpretations and Policies:
    .01-.05 No Change.
    .06 Pursuant to Rule 6.73(a), an order entrusted to a Floor Broker 
will be considered a Not Held Order as defined in Rule 6.53(g), unless 
otherwise specified by a Floor Broker's client or the order was 
received by the Exchange electronically and subsequently routed to a 
Floor Broker or PAR Official pursuant to the order entry firm's routing 
instructions.
* * * * *
Rule 6.75. Discretionary Transactions
    No Floor Broker shall execute or cause to be executed any order or 
orders on this Exchange with respect to which such Floor Broker is 
vested with discretion as to: (1) The choice of the class of options to 
be bought or sold, (2) the number of contracts to be bought or sold, or 
(3) whether any such transaction shall be one of purchase or sale; 
however, the provisions of this paragraph shall not apply to any 
discretionary transaction executed by a Market-Maker for an account in 
which he has an interest. [Under normal market conditions, and in the 
absence of a ``not held'' instruction, a Floor Broker may not exercise 
time discretion on market or marketable limit orders and shall 
immediately execute such orders at the best price or prices available.] 
Unless an order was received by the Exchange electronically and 
subsequently routed to a Floor Broker or PAR Official pursuant to the 
order entry firm's routing instructions or it is otherwise specified by 
a Floor Broker's client, an order entrusted to a Floor Broker will be 
considered a Not Held Order as defined in Rule 6.53(g).
* * * * *
    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 amend Rules 6.53, 6.73, and 6.75 in 
order to clarify a Floor Broker's due diligence obligations as it 
relates to executing orders on the Exchange's floor.
    Currently, ``[a] Floor Broker handling an order is to use due 
diligence to execute the order at the best price or prices available to 
him, in accordance with the Rules.'' \3\ Rule 6.73 also provides a non-
exclusive list of the duties a Floor Broker must perform in order to 
satisfy the due diligence requirement.\4\ For instance, interpretation 
and policy .01 states that ``[p]ursuant to Rule 6.73(a), a Floor 
Broker's use of due diligence in executing an order shall include 
ascertaining whether a better price than is being displayed by the 
Order Book Official is being quoted by another Floor Broker or a 
Market-Maker.'' \5\ However, current Rule 6.73 is generally silent on 
the exact meaning of due diligence, including, for example, whether a 
Floor Broker must execute a portion of an order against an order in an 
applicable order book when the displayed size in the order book is less 
than the size of the Floor Broker's order. Additionally, Rule 6.75 
provides that ``[u]nder normal market conditions, and in the absence of 
a ``not held'' instruction, a Floor Broker may not exercise time 
discretion on market or marketable limit orders and shall immediately 
execute such orders at the best price or prices available.'' The 
Exchange believes that this requirement from Rule 6.75 is applicable 
and generally intended for situations when an entire order represented 
by a Floor Broker can be executed.\6\ Furthermore, even when that

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is possible, Rule 6.73 requires a broker to ascertain if a better price 
is available in the trading crowd.\7\ Thus, we strongly believe that 
these provisions are intended to protect against a broker failing to 
properly represent and ultimately execute orders. This makes even more 
sense when considering that virtually all options orders (large or 
small and retail or professional) were handled by Floor Brokers at the 
time these rules were adopted. Given the discrete profile of orders 
handled by Floor Brokers today (generally large size orders and often 
multi-leg) it is reasonable for Floor Brokers to ``work'' orders that 
are entrusted to them because that is the reason a customer would 
utilize a Floor Broker in today's environment. In order to address the 
above scenarios, as well as to provide clarity and latitude to Floor 
Brokers using their experience and expertise in the execution of 
orders, the Exchange is proposing to add new interpretation and policy 
.06 to Rule 6.73, which is proposed to state that ``[p]ursuant to Rule 
6.73(a), an order entrusted to a Floor Broker will be considered a Not 
Held Order as defined in Rule 6.53(g), unless otherwise specified by a 
Floor Broker's client or the order was received by the Exchange 
electronically and subsequently routed to a Floor Broker or PAR 
Official pursuant to the order entry firm's routing instructions.'' \8\ 
The Exchange is also proposing to make conforming changes to Rules 6.53 
and 6.75 in order for an order received by a Floor Broker to be 
considered a Not Held Order, unless the order was routed to the 
Exchange electronically or otherwise specified by the Floor Broker's 
client.
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    \3\ See Rule 6.73(a).
    \4\ See, e.g., Rule 6.73 Interpretation and Policies .01-.05.
    \5\ See Rule 6.73.01.
    \6\ The Exchange notes that the rule filing that added the rule 
text in Rule 6.75, which this current proposal seeks to amend, did 
not specify whether brokers had to execute a portion of an order 
against a smaller sized order to satisfy the requirements of Rule 
6.75. See Securities Exchange Act Release No. 24666, 50 FR 25679 
(July 8, 1987) (SR-CBOE-85-31).
    \7\ See Rule 6.73.01.
    \8\ A ``Not Held Order'' is defined as an order marked ``not 
held'', ``take time'' or which bears any qualifying notation giving 
discretion as to the price or time at which such order is to be 
executed. See Rule 6.53(g).
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    The purpose of this filing is to codify the amount of discretion a 
Floor Broker has when they receive an order. As Rules 6.73 and 6.75 
were adopted prior to electronic trading, the rules did not contemplate 
the interaction between an electronic environment and a trading floor, 
and they have not been amended to specifically address that 
interaction. While it is clear that Floor Brokers have more discretion 
with regards to the manner in which they represent and execute orders 
on a trading floor than does a computer routing an order to the 
Exchange for execution, the bounds of the discretion have not been 
entirely clear. Rules 6.73 and 6.75, among others, set certain 
boundaries to a Floor Broker's discretion, but the Exchange believes 
the current marketplace, with electronic and floor trading, favors an 
amendment to those boundaries.
    Electronic and floor trading gives clients the choice between a 
Trading Permit Holder (``TPH'') that routes orders to the Exchange 
electronically or a TPH that executes orders via a Floor Broker. 
Clients are keenly aware that the differences between electronic and 
floor trading include at least the following factors: A computer cannot 
deviate from its programed instructions and a Floor Broker can take 
into account the nuisances [sic] of the marketplace, such as the makeup 
of a particular trading floor, the individuals on that trading floor, 
and how the electronic books interact with that environment. The 
Exchange argues that the reason clients use Floor Brokers is precisely 
because Floor Brokers can take into account the nuisances [sic] of the 
marketplace (i.e., exercise a certain level of discretion) to 
potentially provide higher execution quality. The argument is furthered 
by the fact that if a client did not want a Floor Broker to use their 
expertise in the execution of an order, the client would simply send 
orders to the Exchange electronically.
    It is evident that Floor Brokers have more discretion with regards 
to the manner in which they represent and execute orders than do 
computers executing electronic orders. With this rule change the 
Exchange seeks to amend certain boundaries related to that discretion. 
In particular, in recognition of the discretion implicit with the use 
of a Floor Broker, the Exchange seeks to provide notice to the 
marketplace that, unless otherwise specified by a Floor Broker's client 
or if the order is received by the Exchange electronically and routed 
to a Floor Broker, an order is deemed to be ``not held.'' The Exchange 
believes clients that choose to use Floor Brokers do so in order to 
utilize a Floor Broker's expertise in the execution of orders. This 
rule change updates Exchange rules by setting forth the presumptive 
discretion available to Floor Brokers in a manner consistent with 
modern market structure and the Floor Broker's role in the current 
trading environment. This filing also serves as notice to the investing 
community that orders sent to Floor Brokers will be deemed ``not held'' 
unless otherwise specified by the client or if the order is received by 
the Exchange electronically and routed to a floor broker. In addition, 
the Exchange will announce the implementation of this rule change in a 
Regulatory Circular to be published within 90 days of the effective 
date of this filing. The implementation date will be within 180 days of 
the effective date of this filing.
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.\9\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \10\ 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) \11\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ Id.
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    In particular, the Exchange believes the proposed change adds 
clarity and removes ambiguity related to the due diligence requirements 
of Floor Brokers, which helps serve the public interest and perfect the 
mechanism of a free and open market. In addition, the Exchange believes 
designating certain orders as ``not held'' is in the interest of 
facilitating transactions in securities and reflective of today's 
marketplace, which generally helps to protect investors and the public 
interest.

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. The Exchange does not believe 
the proposed rule change will impose any burden on competition because 
the rule change adds clarity to the due diligence requirements 
governing Floor Brokers, reflects the modern market structure, is 
consistent with the reasons customers utilize Floor Brokers, and will 
be applied equally to all TPHs. To the extent that the proposed rule 
change

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will cause clients or brokers to choose CBOE over other trading venues, 
market participants on other exchanges are welcome to become TPHs and 
trade at CBOE if they determine that this proposed rule change has made 
CBOE more attractive or favorable.

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-2015-047 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2015-047. 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 will also 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-2015-047 and should be 
submitted on or before June 12, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-12417 Filed 5-21-15; 8:45 am]
BILLING CODE 8011-01-P


