
[Federal Register Volume 81, Number 17 (Wednesday, January 27, 2016)]
[Notices]
[Pages 4728-4731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-01540]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76960; File No. SR-CBOE-2015-107]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Amendment No. 2 and Order Granting 
Accelerated Approval of Proposed Rule Change, as Modified by Amendment 
Nos. 1 and 2 Thereto, Relating to Price Protection Mechanisms for 
Quotes and Orders

January 21, 2016.

I. Introduction

    Chicago Board Options Exchange, Incorporated (the ``Exchange'' or 
``CBOE'') filed on November 24, 2015, with the Securities and Exchange 
Commission (the ``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposal to enhance its current price protection 
mechanisms and adopt certain new price protection functionality for 
orders and quotes. On December 4, 2015, the Exchange filed Amendment 
No. 1 to the proposed rule change. The proposed rule change, as 
modified by Amendment No. 1, was published for comment in the Federal 
Register on December 11, 2015.\3\ On December 29, 2015, the Exchange 
filed Amendment No. 2 to the proposed rule change.\4\ The Commission 
received no

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substantive comment letters on the proposal. This order approves the 
proposed rule change, as modified by Amendment Nos. 1 and 2, on an 
accelerated basis.
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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. 76585 (December 8, 
2015), 80 FR 77038 (December 11, 2015) (``Notice'').
    \4\ In Amendment No. 2, the Exchange amended the proposed rule 
language to (i) clarify that it will notify Trading Permit Holders 
by electronic message if the Exchange determines that the put strike 
price or call underlying value check should not apply in the 
interest of maintaining a fair and orderly market under proposed 
Exchange Rule 6.14(a)(ii) and (ii) limit the potential range of the 
percentage amount used to calculate the maximum value acceptable 
price range check in proposed Exchange Rule 6.53C, Interpretation 
and Policy .08(g)(1)(iii). In Amendment No. 2, CBOE also represented 
that it will document, retain, and periodically review any Exchange 
decision to not apply the put check or call check under proposed 
Exchange Rule 6.14(a)(ii), including the reason for the decision. 
See Amendment No. 2 to File No. SR-CBOE-2015-107, dated December 29, 
2015 (``Amendment No. 2''). To promote transparency of its proposed 
amendment, when CBOE filed Amendment No. 2 with the Commission, it 
also submitted Amendment No. 2 as a comment letter to the file, 
which the Commission posted on its Web site and placed in the public 
comment file for SR-CBOE-2015-107. The Exchange also posted a copy 
of its Amendment No. 2 on its Web site (http://www.cboe.com/aboutcboe/legal/submittedsecfilings.aspx) when it filed the 
amendment with the Commission.
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II. Description of the Proposed Rule Change, as Modified by Amendment 
Nos. 1 and 2

    The Exchange proposes to adopt new Exchange Rule 6.14 and amend 
Exchange Rule 6.53C, Interpretation and Policy .08, to enhance its 
current price protection mechanisms for orders and quotes in order to 
help prevent potentially erroneous executions.\5\
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    \5\ For a more detailed description of each proposed price 
protection mechanism, see Notice, supra note 3.
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A. Put Strike Price and Call Underlying Value Checks

    Proposed Exchange Rule 6.14(a) will provide a new price protection 
functionality pursuant to which the Exchange's Hybrid Trading System 
(``System'') will reject back to the Trading Permit Holder a quote or 
buy limit order for (i) a put if the price of the quote bid or order is 
equal to or greater than the strike price of the option or (ii) a call 
if the price of the quote bid or order is equal to or greater than the 
consolidated last sale price of the underlying security, with respect 
to equity and exchange-traded fund options, or the last disseminated 
underlying index value, with respect to index options.\6\ The Exchange 
may determine not to apply this proposed price protection mechanism if 
a senior official at the Exchange's Help Desk determines the applicable 
check should not apply in the interest of maintaining a fair and 
orderly market.\7\
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    \6\ If the System rejects a Market Maker's quote pursuant to 
either proposed price check, the Exchange will cancel any resting 
quote of the Market Maker in the same series. See proposed Exchange 
Rule 6.14(a); see also Notice, supra note 3, at 77038. These 
proposed checks also will apply to buy auction responses in the same 
manner as it does to orders and quotes, as well as pairs of orders 
submitted to the Exchange's Automated Improvement Mechanism 
(``AIM''), Solicitation Auction Mechanism (``SAM''), or as a 
qualified cross-contingent order (``QCC order''). See id.
    \7\ See proposed Exchange Rule 6.14(a)(ii); see also Notice, 
supra note 3, at 77039. The Exchange represented that it will 
document, retain, and periodically review any decision to not apply 
the put check or call check, including the reason for the decision. 
See Amendment No. 2, supra note 4.
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B. Quote Inverting NBBO Check

    Proposed Exchange Rule 6.14(b) will apply new a price reasonability 
check to Market Maker quotes based on the national best bid or offer 
(``NBBO'') or the Exchange's best bid or offer if the NBBO is 
unavailable.\8\ Specifically, if CBOE is at the NBBO, the System will 
reject a quote back to a Market Maker if the quote bid or offer crosses 
the opposite side of the NBBO by more than a number of ticks specified 
by the Exchange.\9\ If CBOE is not at the NBBO, the System will reject 
a quote back to a Market-Maker if the quote bid or offer locks or 
crosses the opposite side of the NBBO.\10\ The Exchange may determine 
not to apply this check to quotes entered during the pre-opening, a 
trading rotation, or a trading halt, and would announce to Trading 
Permit Holders any such determination thorough a Regulatory 
Circular.\11\
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    \8\ See proposed Exchange Rule 6.14(b); see also Notice, supra 
note 3, at 77039-41.
    \9\ The Exchange states that the number of ticks will be no less 
than three minimum increment ticks and announced to Trading Permit 
Holders by Regulatory Circular. See proposed Exchange Rule 6.14(b); 
see also Notice, supra note 3, at 77040. In addition, proposed 
Exchange Rule 6.14(b)(iii) addresses situations where CBOE accepts a 
quote that locks or crosses the NBBO.
    \10\ See proposed Exchange Rule 6.14(b)(i); see also Notice, 
supra note 3, at 77040. As an additional risk control feature, if a 
Market Maker submits a quote in a series in which the Market Maker 
already has a resting quote and the Exchange rejects that quote 
pursuant to this proposed check, the Exchange will cancel the Market 
Maker's resting quote in the series. See Notice, supra note 3, at 
77040.
    \11\ See proposed Exchange Rule 6.14(b)(ii); see also Notice, 
supra note 3, at 77040. Additionally, this proposed check will not 
apply if a senior official at the Exchange's Help Desk determines it 
should not apply in the interest of maintaining a fair and orderly 
market. See id.
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C. Debit/Credit Price Reasonability Checks

    The Exchange proposes to amend its price check parameters 
applicable to complex orders that are contained in current Exchange 
Rule 6.53C, Interpretation and Policy .08(c), to prevent the automatic 
execution of complex orders that appear to be erroneously priced based 
on general options volatility and pricing principles.\12\ Under current 
Exchange Rule 6.53C, Interpretation and Policy .08(c), the System will 
not automatically execute (i) a limit order for a debit strategy with a 
net credit price that should have been entered at a net debit price, 
(ii) a limit order for a credit strategy with a net debit price that 
should have been entered at a net credit price, and (iii) a market 
order for a credit strategy that would be executed at a net debit price 
when it should execute at a net credit price.\13\ The amended rule 
expands this check to certain complex orders which the System can 
determine are credits or debits.\14\
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    \12\ See proposed Exchange Rule 6.53C, Interpretation and Policy 
.08(c); see also Notice, supra note 3, at 77041-43.
    \13\ See Notice, supra note 3, at 77041.
    \14\ See id. at 77041. The proposed rule contains new 
definitions of vertical spread, butterfly spread and box spread, and 
states how the System will define a complex order as a debit or 
credit. See id at 77041-43; see also proposed Exchange Rule 6.53C, 
Interpretation and Policy .08(c). These checks will also apply to 
buy auction responses and pairs of orders submitted to AIM, SAM, or 
as a QCC order. See proposed Exchange Rule 6.53C, Interpretation and 
Policy .08(c)(4)-(5); see also Notice, supra note 3, at 77043.
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D. Maximum Value Acceptable Price Range Check

    Finally, the Exchange proposes to amend Exchange Rule 6.53C, 
Interpretation and Policy .08, to add an additional price check for 
complex orders. The new price check would apply to vertical, true 
butterfly, and box spreads, and would block executions of such 
strategies at prices that exceed their quantifiable maximum possible 
values by more than a reasonable amount.\15\ Under the proposed rule, 
the Exchange will determine the acceptable price range for these 
strategies and will reject back to the Trading Permit Holder any limit 
order and cancel any market order that does not satisfy this proposed 
check.\16\
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    \15\ See proposed Exchange Rule 6.53C, Interpretation and Policy 
.08(g); see also Notice, supra note 3, at 77044-45.
    \16\ See Notice, supra note 3, at 77044-45. The proposed check 
will also apply to auction responses and pairs of orders submitted 
to AIM, SAM, or as a QCC order. See id.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with section 6(b) of the Act.\17\ In particular, 
the Commission finds that the proposed rule change is consistent with 
sections 6(b)(5) of the Act,\18\ which requires, among other things, 
that the rules of a national securities 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

[[Page 4730]]

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.
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    \17\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \18\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed new price protection 
mechanisms are reasonably designed to promote just and equitable 
principles of trade to the extent they are able to mitigate potential 
risks associated with market participants entering orders at what CBOE 
believes are clearly unintended prices and executing trades at prices 
that are both extreme and potentially erroneous.\19\ Specifically, the 
Commission believes that the proposed price protection for simple 
orders to buy put and call options based on the strike price or 
underlying value, respectively, is designed to promote fair and orderly 
markets and protect investors by rejecting quotes and orders that 
exceed the strike price for puts and the value of the underlying for 
calls, which may likely have occurred due to human or operational 
error. The Commission also believes that the proposed quote inverting 
NBBO check is reasonably designed to promote just and equitable 
principles of trade by preventing potential price dislocation that 
could result from erroneous Market Maker quotes sweeping through 
multiple price points.\20\
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    \19\ See Notice, supra note 3, at 77045.
    \20\ See Notice, supra note 3, at 77045.
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    In addition, the proposed enhanced price checks that would apply to 
complex orders, including the debit and credit price reasonability 
checks and the maximum value acceptable price range checks, are 
designed to mitigate the potential risks associated with complex orders 
trading at prices that likely are inconsistent with their strategies 
and could potentially result in erroneous executions.\21\ Furthermore, 
the Commission believes that the proposed maximum value acceptable 
price range adds a second layer of price protection to complex 
strategies that is reasonably designed to mitigate the potential risks 
associated with orders that have complex strategies with quantifiable 
maximum values trading at prices that are potentially erroneous.\22\
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    \21\ See Notice, supra note 3, at 77046.
    \22\ See Notice, supra note 3, at 77046.
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    Accordingly, for the reasons discussed above, the Commission 
believes that the proposed rule change, as modified by Amendment Nos. 1 
and 2, is consistent with the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 2 
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-2015-107 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-2015-107. 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-2015-107 and should be 
submitted on or before February 17, 2016.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment Nos. 1 and 2

    The Commission finds good cause, pursuant to section 19(b)(2) of 
the Act, to approve the proposed rule change, as modified by Amendment 
Nos. 1 and 2, prior to the 30th day after the date of publication of 
Amendment No. 2 in the Federal Register. As discussed above, Amendment 
No. 2 clarified that the Exchange will notify Trading Permit Holders by 
electronic message if the Exchange determines that the put strike price 
or call underlying value check should not apply in the interest of 
maintaining a fair and orderly market under proposed Exchange Rule 
6.14(a)(ii).\23\ CBOE also represented in Amendment No. 2 that the 
Exchange will document, retain, and periodically review any Exchange 
decision to not apply the put check or call check under proposed 
Exchange Rule 6.14(a)(ii), including the reason for the decision.\24\ 
Lastly, in Amendment No. 2, CBOE clarified that the potential range of 
the percentage amount it will use to calculate the maximum value 
acceptable price range check in proposed Exchange Rule 6.53C, 
Interpretation and Policy .08(g)(1)(iii), is between 1% and 5%.\25\ The 
Commission believes that these changes provide greater clarity and 
remove any possible uncertainty regarding the potential exercise of 
Exchange discretion with regard to the proposed price protection 
mechanisms. In particular, the representation about documenting, 
retaining, and periodically reviewing decisions to suspend a price 
check will enable CBOE to monitor the actions of its senior Help Desk 
personnel and assure that the suspension of any price check is 
appropriate and consistent with CBOE's responsibilities as a self-
regulatory organization and the principles articulated in the Act that 
are applicable to exchanges. Further, clarifying the possible range of 
the maximum value acceptable price range provides valuable information 
to Trading Permit Holders to help them better understand and evaluate 
this price protection functionality. Accordingly, the Commission finds 
good cause for approving the proposed rule change, as modified by 
Amendment Nos. 1 and 2, on an accelerated basis, pursuant to section 
19(b)(2) of the Act.
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    \23\ See Amendment No. 2, supra note 4.
    \24\ Id.
    \25\ Id.
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VI. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act 
\26\ that the proposed rule change (SR-CBOE-2015-107), as modified by 
Amendment Nos. 1 and 2, be, and hereby is, approved on an accelerated 
basis.
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    \26\ 15 U.S.C. 78f(b)(2).
    \27\ 17 CFR 200.30-3(a)(12).


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
Brent J. Fields,
Secretary.
[FR Doc. 2016-01540 Filed 1-26-16; 8:45 am]
BILLING CODE 8011-01-P


