
[Federal Register Volume 80, Number 121 (Wednesday, June 24, 2015)]
[Notices]
[Pages 36386-36388]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-15453]



[[Page 36386]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75245; File No. SR-CBOE-2015-026]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Instituting Proceedings to Determine Whether to 
Approve or Disapprove a Proposed Rule Change Relating to Rules 6.74A 
and 6.74B

June 18, 2015.

I. Introduction

    On March 6, 2015, Chicago Board Options Exchange, Incorporated (the 
``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend its rules regarding the 
solicitation of Market-Makers as the contra party to an agency order 
entered into the Exchange's Automated Improvement Mechanism (``AIM'') 
and Solicitation Auction Mechanism (``SAM'') auctions. The proposed 
rule change was published for comment in the Federal Register on March 
23, 2015.\3\ On May 4, 2015, the Commission extended the time period 
within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change, to June 21, 2015.\4\ The 
Commission received no comment letters on the proposed rule change. 
This order institutes proceedings under section 19(b)(2)(B) of the Act 
\5\ to determine whether to approve or disapprove the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 74519 (March 17, 
2015), 80 FR 15264 (``Notice'').
    \4\ See Securities Exchange Act Release No. 74862 (May 4, 2015), 
80 FR 26599 (May 8, 2015).
    \5\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal

    A CBOE Trading Permit Holder (``Initiating TPH'') may 
electronically execute an order it represents as agent (``Agency 
Order'') against principal interest or against a solicited order, by 
submitting the Agency Order for electronic execution into the AIM 
pursuant to CBOE Rule 6.74A. Also, an Initiating TPH may electronically 
execute certain Agency Orders against solicited orders, by submitting 
the Agency Order for electronic execution into the SAM pursuant to CBOE 
Rule 6.74B. CBOE rules currently require that any solicited orders 
submitted by an Initiating TPH into the AIM \6\ or SAM \7\ (together, 
the ``Auctions'') to trade against an Agency Order may not be for the 
account of a Market-Maker assigned to the option class.\8\ The Exchange 
proposes to eliminate from its rules the restriction against soliciting 
Market-Makers assigned to an options class as the contra party in the 
Auctions.
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    \6\ See CBOE Rule 6.74A.
    \7\ See CBOE Rule 6.74B. The Exchange notes that the SAM Auction 
is currently deactivated. See CBOE Regulatory Circular RG14-076--
Deactivation of the Solicitation Auction Mechanism (SAM) (May 16, 
2014).
    \8\ See Interpretation and Policy .04 to CBOE Rule 6.74A and 
Interpretation and Policy .03 to CBOE Rule 6.74B.
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    According to the Exchange, the current rules act to limit an 
Initiating TPH from access to liquidity that the Exchange believes 
should otherwise be available.\9\ Because a TPH initiating an AIM or 
SAM auction in an option class cannot solicit contra orders from 
Market-Makers assigned to the option class, the Exchange proposes to 
delete the rule language imposing this prohibition, which it believes 
will allow the TPH to access the additional liquidity that these market 
making firms can provide.\10\ The Exchange believes the proposed rule 
change is a reasonable modification designed to provide additional 
flexibility for the Exchange's TPHs to obtain executions on behalf of 
their customers and to provide CBOE Market-Makers assigned to a given 
option class with the same opportunity as other solicited parties to 
participate in the auction process through means of solicited orders 
submitted by the Initiating TPH.\11\ Additionally, the Exchange does 
not believe the proposed rule change will deplete the liquidity 
available through Auctions. Instead, the Exchange believes that by 
allowing more individuals to participate in the Auction process (i.e., 
through solicitation), liquidity will increase.\12\
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    \9\ The Exchange argues that the current rules effectively 
prohibit small market making firms from providing liquidity in the 
form of contra orders, whereas the current rules neither prohibit 
the proprietary arm of a global firm from submitting a contra order 
in these Auctions nor prohibit a global firm's market making 
operation from responding to an Auction in which the proprietary 
desk has submitted a contra order. Additionally, CBOE states that if 
two Market-Makers are nominees of the same firm--one appointed to a 
class on CBOE and the other appointed in the same class on another 
exchange (PHLX for example)--the current rules allow the PHLX 
Market-Maker to be solicited to participate on an AIM order and the 
CBOE Market-Maker to respond to the AIM auction. See Notice, supra 
note 3, at 15265.
    \10\ See id.
    \11\ If CBOE Market-Makers assigned to a given option class 
cannot be solicited, they will not be able to obtain the favorable 
priority status when trading against Agency Orders executed through 
the Auctions, while all other parties solicited by the Initiating 
TPH may have such priority status.
    \12\ See Notice, supra note 3, at 15265.
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    The Exchange further notes that a Market-Maker that is solicited to 
trade against an Agency Order in a class in which the Market-Maker is 
appointed would be required to abide by Exchange Rules 4.1 (Just and 
Equitable Principles of Trade), 4.18 (Prevention of the Misuse of 
Material, Nonpublic Information), and 6.9 (Solicited Transactions) (as 
well as all other Exchange rules). The Exchange states that a Market-
Maker would still be prohibited from, for example, learning (via 
solicitation) that a large order is being sent to the Exchange and 
therefore widening its quotes. Moreover, the Exchange argues that 
because upon entry an Auction order is ``stopped'' for its full 
quantity at the contra order's price, the price of the trade would not 
be impacted if a Market-Maker were to widen its quotes. The Exchange 
also believes that because many classes on the Exchange have a number 
of Market-Makers appointed, the widening of quotes by one Market-Maker 
would likely have limited impact on the NBBO.\13\ Additionally, the 
Exchange does not believe that the proposed rule change would have an 
adverse effect on quoting because in order to execute against order 
flow outside of the Auctions or on other exchanges, Market Makers will 
have to continue to quote aggressively.\14\
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    \13\ See id.
    \14\ See id.
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    The proposed rule change also would provide that ``a Market-Maker 
submitting a solicited order to execute against a particular Agency 
Order may not modify its pre-programmed response to Request for 
Responses based on information regarding the particular Agency Order or 
solicited order.'' \15\ The Exchange believes that this rule language 
would prohibit a Market-Maker from using any information regarding a 
particular Agency Order or the Market-Maker's solicited order for 
purposes of modifying the Market-Maker's response to an Auction Request 
for Responses.\16\
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    \15\ See id. at 15266.
    \16\ However, the Exchange states that a Market-Maker's quotes 
may change for many reasons other than an Agency Order or the 
Market-Maker's solicited order (e.g., a non-exclusive list of 
reasons that a Market-Maker may choose to adjust the size and/or 
price of quotes, irrespective of an Agency Order or a Market-Maker's 
solicited order, is a change in the price of the underlying, the 
Market-Maker's inventory, or interest rates), and according to the 
Exchange those unrelated changes would not be prohibited under the 
proposed rule change. The Exchange also notes that this language is 
not intended to prohibit a Market-Maker from providing multiple 
responses to a Request for Responses. See id.

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[[Page 36387]]

III. Proceedings to Determine Whether to Approve or Disapprove SR-CBOE-
2015-026 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to section 
19(b)(2)(B) of the Act \17\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change, as discussed below. 
Institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved. 
Rather, as described in greater detail below, the Commission seeks and 
encourages interested persons to provide additional comment on the 
proposed rule change.
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    \17\ 15 U.S.C. 78s(b)(2)(B).
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    As discussed above, the Exchange proposes to amend CBOE Rules 6.74A 
and 6.74B, in order to permit a Market-Maker assigned to an option 
class to be solicited as the contra party to an Agency Order in that 
class on the Exchange's Auctions. The Commission believes that the 
proposal raises important issues that warrant further public comment 
and Commission consideration. Specifically, the Commission believes 
that proceedings are appropriate to consider, among other matters, the 
impact of the proposal on competition in the Auctions, incentives for 
Market-Makers to continue to quote aggressively, and CBOE's ability to 
deter potential abuses involving the non-public information obtained 
through the solicitation process.
    The prohibition on the solicitation of Market-Makers assigned to an 
option class as the contra party to an Agency Order in the Auctions has 
been in place on CBOE since the AIM was adopted in 2006 \18\ and the 
SAM was adopted in 2008.\19\ In addition, the Commission has noted that 
the same prohibition, contained in the rules of another SRO, was 
designed to permit the price improvement auction and solicitation 
mechanism to remain mechanisms for exposing solicited transactions to 
the competition of the marketplace.\20\ Because the current proposal 
would remove this prohibition, it raises questions as to whether the 
proposal may undermine the quality of competition in the Auctions. For 
example, the Commission notes that responses to an AIM Request for 
Responses (``RFR'') broadcast may only be submitted by Market-Makers 
with an appointment in the relevant option class and TPH's acting as 
agent for orders resting at the top of the Exchange's book opposite the 
Agency Order.\21\ The proposed rule change thus raises concerns that 
the quality of the Auctions may degrade to the extent the number of 
potential responders is reduced because one of the responders is now 
the solicited party. Although the Exchange argues that its proposal 
will lead to increased liquidity in the Auctions,\22\ the Exchange has 
not provided any data to support its arguments.
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    \18\ See Securities Exchange Act Release No. 53222 (February 3, 
2006), 71 FR 7089 (February 10, 2006) (SR-CBOE-2005-60) (``CBOE AIM 
Approval Order'').
    \19\ See Securities Exchange Act Release No. 57610 (April 3, 
2008), 73 FR 19535 (April 10, 2008) (SR-CBOE-2008-14).
    \20\ See Securities Exchange Act Release No. 54644 (October 23, 
2006), 71 FR 63374, 63375 (October 30, 2006) (SR-ISE-2004-17).
    \21\ See CBOE Rule 6.74A(b)(1)(D)-(E).
    \22\ See Notice, supra note 3, at 15265.
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    Additionally, because solicited Market-Makers may receive material 
non-public information regarding an Agency Order as part of the 
solicitation process, the proposed rule change raises concerns that 
Market-Makers may alter their quoting behavior by, for example, 
widening their quotes when learning (i.e., through solicitation) that a 
large order is being sent to the Exchange. In the CBOE AIM Approval 
Order, the Commission noted that the prohibition against soliciting 
Market-Makers in the class to be the contra party to the Agency Order, 
as well as CBOE Rules limiting solicitation from members or nonmember 
customers or broker-dealers \23\ and prohibiting members from engaging 
in acts or practices inconsistent with just and equitable principles of 
trade,\24\ ``should permit members to solicit, in advance, the other 
side of an order, while providing for adequate disclosure of such 
orders to limit manipulation and abuse.'' \25\ The Commission believes 
that proceedings are appropriate to consider whether the proposed rule 
that would prohibit a solicited Market-Maker from modifying its pre-
programmed response to an RFR based on information regarding the 
particular Agency Order or solicited order is sufficient, in 
conjunction with other Exchange rules, to address concerns about the 
potential misuse of non-public information obtained through the 
solicitation process.
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    \23\ See CBOE Rule 6.9.
    \24\ See CBOE Rule 4.1.
    \25\ See CBOE AIM Approval Order, supra note 21, at 7091.
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    Pursuant to section 19(b)(2)(B) of the Act,\26\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the proposed 
rule change's consistency with section 6(b)(5) of the Act,\27\ which 
requires that the rules of a national securities exchange be designed, 
among other things, to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, 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. The Commission is also instituting proceedings to 
allow for additional analysis of, and input from commenters with 
respect to, the proposed rule change's consistency with section 6(b)(8) 
of the Act,\28\ which requires that the rules of a national securities 
exchange do not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.
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    \26\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Exchange 
Act also provides that proceedings to determine whether to 
disapprove a proposed rule change must be concluded within 180 days 
of the date of publication of notice of the filing of the proposed 
rule change. See id. The time for conclusion of the proceedings may 
be extended for up to 60 days if the Commission finds good cause for 
such extension and publishes its reasons for so finding. See id.
    \27\ 15 U.S.C. 78f(b)(5).
    \28\ 15 U.S.C. 78f(b)(8).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data and arguments with respect to the 
concerns identified above, as well as any other concerns they may have 
with the proposed rule change. In particular, the Commission invites 
the written views of interested persons concerning whether the proposal 
is inconsistent with sections 6(b)(5) \29\ and 6(b)(8) \30\ or any 
other provision of the Act, or the rules and regulations thereunder. 
Although there do not appear to be any issues relevant to approval or 
disapproval which would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4 under the Act,\31\ any request for an

[[Page 36388]]

opportunity to make an oral presentation.\32\
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    \29\ 15 U.S.C. 78f(b)(5).
    \30\ 15 U.S.C. 78f(b)(8).
    \31\ 17 CFR 240.19b-4.
    \32\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Pub. L. 94-29 (June 4, 1975), grants to the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by July 15, 2015. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by July 29, 
2015. In light of the concerns raised by the proposed rule change, as 
discussed above, the Commission invites additional comment on the 
proposed rule change as the Commission continues its analysis of the 
proposed rule change's consistency with sections 6(b)(5) and 
6(b)(8),\33\ or any other provision of the Act, or the rules and 
regulations thereunder. The Commission asks that commenters address the 
sufficiency and merit of the Exchange's statements in support of the 
proposed rule change, in addition to any other comments they may wish 
to submit about the proposed rule change. In particular, the Commission 
invites comment on the following:
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    \33\ 15 U.S.C. 78f(b)(5), (b)(8).
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    1. What are commenters' views on how CBOE's proposal could impact 
the quality of the Auctions, internalization rates, liquidity, and 
competition, within or outside of the Auctions?
    2. What are commenters' views on the potential impact of CBOE's 
proposal on the quoting behavior of Market-Makers?
    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-2015-026 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-2015-026. 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-2015-026 and should be 
submitted by July 15, 2015. Rebuttal comments should be submitted by 
July 29, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(57).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-15453 Filed 6-23-15; 8:45 am]
 BILLING CODE 8011-01-P


