
[Federal Register Volume 80, Number 164 (Tuesday, August 25, 2015)]
[Notices]
[Pages 51642-51644]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-20935]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75736; File No. SR-CBOE-2015-045]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove a Proposed Rule Change, as Modified by Amendment 
No. 1, Relating to Rule 6.53C and Complex Orders on the Hybrid System

August 19, 2015.

I. Introduction

    On May 12, 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 ``Exchange Act'' or ``Act''),\1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to modify CBOE 
Rule 6.53C, Complex Orders on the Hybrid System, regarding eligibility 
for participation in the Complex Order Book (``COB'') and the Complex 
Order Auction (``COA''). The proposed rule change was published for 
comment in the Federal Register on May 27, 2015.\3\ On June 3, 2015, 
CBOE filed Amendment No.1 to the proposed rule change.\4\ On July 6, 
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 August 25, 2015.\5\ The Commission has received no 
comments on the proposed rule change. This order institutes proceedings 
under Section 19(b)(2)(B) of the Act \6\ to

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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. 75003 (May 20, 
2015), 80 FR 30306 (``Notice'').
    \4\ Amendment No. 1 to the proposed rule change amended the 
statutory basis and burden on competition sections regarding 
distinguishing between Professional and non-Professional orders for 
purposes of determining eligibility for COA.
    \5\ See Securities Exchange Act Release No. 75359 (July 6, 
2015), 80 FR 39821 (July 10, 2015).
    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal

    The Exchange seeks to modify CBOE Rule 6.53C to allow the Exchange 
to further distinguish between the complex order origin types that are 
eligible for the COB and COA.\7\ Currently, under CBOE Rule 6.53C, the 
Exchange may determine whether orders from non-broker dealer public 
customers, broker-dealers that are not Market-Makers or specialists on 
an options exchange, and/or Market-Makers or specialists on an options 
exchange are eligible for entry into the COB or COA. Under these 
current COA and COB eligibility parameters, there is no distinction 
between professional public customers and non-professional public 
customers.
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    \7\ The COA is a feature within CBOE's Hybrid System that 
exposes eligible complex orders for price improvement. In classes 
where the COA is activated, eligible orders are electronically 
exposed for an exposure period. At the conclusion of the COA 
process, the order is then allocated or, to the extent not executed, 
sent to the COB or routed. See Notice, 80 FR at 15264.
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    The Exchange proposes to modify CBOE Rule 6.53C so that it could 
determine whether the following two additional types of market 
participants are eligible for entry into the COB and the COA: (i) Non-
broker-dealer public customers that are Voluntary Professional 
Customers or Professional Customers (herein, ``Professionals'') and 
(ii) non-broker-dealer public customers that are not Voluntary 
Professional Customers or Professional Customers.
    CBOE states that it is proposing this change so that it may prevent 
orders from Professionals from triggering a COA. According to the 
Exchange, CBOE participants currently may cancel and replace their 
complex orders as often as they wish without incurring any cancellation 
fees. Each order that meets the eligibility requirements detailed in 
CBOE Rule 6.53C,\8\ including cancellations and replacements, generates 
a new COA. The Exchange states that few of the complex orders entered 
by Professional Customers that trigger a COA actually execute in the 
auction process.\9\ Accordingly, CBOE believes that allowing COA 
eligibility to be determined by origin code (e.g., by whether the order 
comes from a Professional), which permits CBOE to prevent orders from 
Professionals from triggering a COA, will ``eliminate the clutter of 
unnecessary Professional COA messages, as well as increase the 
likelihood of executions for public customers.'' \10\ The Exchange 
further believes that allowing Professionals to participate in the COA 
can be detrimental to non-professional public customer order flow.\11\ 
The Exchange also believes that ``removing unnecessary Professional COA 
messages may encourage more participants to provide auction responses 
(ultimately increasing the likelihood of executions for public 
customers . . .) because fewer unnecessary COA messages will most 
likely increase the proportion of responses that lead to an 
execution.'' \12\
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    \8\ A COA-eligible order is a complex order that, as determined 
by the Exchange on a class-by-class basis, is eligible for COA 
considering the order's marketability (defined as a number of ticks 
away from the current market), size, complex order type, and complex 
order origin type. See Rule 6.53C(d)(1). This proposed rule change 
would change the term ``complex order origin type'' to ``complex 
order origin code.''
    \9\ For example, in Amendment No. 1, the Exchange notes that 
orders for Professionals made up 52% of COA auctions but resulted in 
0.62% of COA executions in the month of February 2015. The Exchange 
states that this is a representative example of Professional orders 
participation and execution rates in the COA.
    \10\ See Notice, 80 FR at 30307.
    \11\ See id.
    \12\ See Amendment No. 1 at 4.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2015-045 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \13\ to determine whether the proposed rule 
change, as modified by Amendment No. 1, 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.
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    \13\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\14\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of, and comment on, whether the proposed rule change is 
consistent with: Section 6(b)(5) of the Act,\15\ 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, and are not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers; and Section 6(b)(8) of the 
Act,\16\ which requires that the rules of a national securities 
exchange not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.
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    \14\ 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.
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ 15 U.S.C. 78f(b)(8).
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    The Exchange's proposed rule change would provide the Exchange 
discretion to determine whether two additional groups of market 
participants are eligible for entry into the COA and COB: (i) 
Professionals and (ii) non-broker-dealer public customers that are not 
Professionals.\17\ The Commission believes that the proposal raises 
important issues that warrant further public comment and Commission 
consideration regarding whether the proposal would result in unfair 
discrimination or would impose an unnecessary and or inappropriate 
burden on competition to the extent the Exchange exercises its proposed 
discretion and excludes either of the two categories of market 
participants discussed above from the COA and COB.
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    \17\ Under the current Rule, CBOE already may determine that 
Broker-dealers that are not Market-Makers or specialists on an 
options exchange and Market-Makers or specialists on an options 
exchange are not eligible for entry into the COA and COB pursuant to 
CBOE Rule 6.53C.
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    In light of these issues and concerns, the Commission believes that 
questions arise regarding whether the proposal is consistent with the 
requirements of Sections 6(b)(5) and 6(b)(8) of the Act. As the 
Commission continues to evaluate the issues presented by the proposal, 
the Commission solicits comment on whether the proposal is consistent 
with the Act and whether the Exchange has met its burden in presenting 
a statutory analysis of how its proposal is consistent with the Act. In 
particular, the grounds for disapproval under consideration include 
whether the Exchange's proposal is consistent with Sections 6(b)(5) 
\18\ and 6(b)(8) \19\ of the Act.
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    \18\ 15 U.S.C. 78f(b)(5).
    \19\ 15 U.S.C. 78f(b)(8).
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    In addition, under the Commission's rules of procedure, a self-
regulatory organization that proposes to amend its rules bears the 
burden of demonstrating

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that its proposal is consistent with the Act.\20\ In this regard:
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    \20\ Rule 700(b)(3), 17 CFR 201.700(b)(3).

the description of the proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and 
specific to support an affirmative Commission finding. Any failure 
of the self-regulatory organization to provide the information 
elicited by Form 19b-4 may result in the Commission not having a 
sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the rules and 
regulations thereunder that are applicable to the self-regulatory 
organization.\21\
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    \21\ Id.

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 consistent with Sections 6(b)(5) and 6(b)(8) \22\ 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,\23\ any request for an opportunity to make an 
oral presentation.\24\
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    \22\ 15 U.S.C. 78f(b)(5) and (b)(8).
    \23\ 17 CFR 240.19b-4.
    \24\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 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 September 15, 2015. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
September 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 whether the proposed rule change is consistent with Section 
6(b)(5),\25\ Section 6(b)(8),\26\ and all 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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    \25\ 15 U.S.C. 78f(b)(5).
    \26\ 15 U.S.C. 78f(b)(8).
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    1. Would excluding orders submitted by Professionals from entry 
into the COA or COB adversely affect the ability of Professionals to 
execute their orders? Why or why not?
    2. Do commenters agree with the Exchange that there are an 
excessive number of Professional COA messages that adversely affect the 
likelihood of executions for non-broker-dealer public customers that 
are not Professionals? Would excluding Professionals orders from the 
COA increase the likelihood of, or otherwise impact, executions for 
non-broker-dealer public customers that are not Professionals? If so, 
how?
    3. Is the volume of auction messages generated by Professionals 
disruptive to the auction process? If so, how?
    4. Are there other methods that involve less potential for unfair 
discrimination that could be used to reduce the volume of messages?
    5. Do Professionals want their orders to be eligible for entry into 
the COA or the COB? Why or why not?
    6. Although the Exchange states that the proposal is intended to 
allow the Exchange to prevent Professionals from entry into the COB or 
COA, the proposed rule change, as drafted, would also allow the 
Exchange to determine that non-broker-dealer public customers that are 
not Professionals Customers are not eligible for entry into both the 
COA and the COB. Do commenters believe that excluding non-broker-dealer 
public customers that are not Professionals from the COA and COB is 
consistent with the Act? Is so, why? If not, why not?
    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-2015-045 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-2015-045. 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-2015-045 and should be 
submitted by September 15, 2015. Rebuttal comments should be submitted 
by September 29, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(57).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-20935 Filed 8-24-15; 8:45 am]
BILLING CODE 8011-01-P


