
[Federal Register Volume 82, Number 54 (Wednesday, March 22, 2017)]
[Notices]
[Pages 14768-14774]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05608]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80264; File No. SR-CBOE-2017-021]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Related to Complex Orders

March 16, 2017.
    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 March 6, 2017, 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 and II below, which Items have been prepared by the 
Exchange. The Exchange filed the proposal 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 amend its rules related to complex orders. 
The text of the proposed rule change is provided below.

(additions are italicized; deletions are [bracketed])

* * * * *

[[Page 14769]]

Chicago Board Options Exchange, Incorporated Rules

* * * * *

Rule 6.53C. Complex Orders on the Hybrid System

    (a)-(c) No change.
    (d) Process for Complex Order RFR Auction: Prior to routing to 
the COB or once on PAR, eligible complex orders may be subject to an 
automated request for responses (``RFR'') auction process.
    (i) For purposes of paragraph (d):
    (1) ``COA'' is the automated complex order RFR auction process.
    (2) A ``COA-eligible order'' means a complex order that, as 
determined by the Exchange on a class-by-class basis, is eligible 
for a COA considering the order's size, complex order type (as 
defined in paragraphs (a) and (b) above) and complex order origin 
types (as defined in subparagraph (c)(i) above). Complex orders 
processed through a COA may be executed without consideration to 
prices of the same complex orders that might be available on other 
exchanges.
    (ii) Initiation of a COA:
    (A) The System will send an RFR message to all Trading Permit 
Holders who have elected to receive RFR messages on receipt of (1) a 
COA-eligible order with two or more legs (including orders submitted 
for electronic processing from PAR) that is better than the same 
side of the derived net market or (2) a complex order with three or 
more legs that [(A)] meets the class, size, and complex order type 
parameters of subparagraph (d)(i)(2) and [is better than the same 
side of the derived net market or (B)] is marketable against the 
derived net market[, designated as immediate or cancel and meets the 
class and size parameters of subparagraph (d)(i)(2)]. Complex orders 
as described in subparagraph (ii)(A)(2) will initiate a COA 
regardless of the order's routing parameters or handling 
instructions (except for orders routed for manual handling). 
Immediate or cancel orders that are not marketable against the 
derived net market in accordance with subparagraph (ii)(A)(2)[(B)] 
will be cancelled. The RFR message will identify the component 
series, the size and side of the market of the COA-eligible order 
and any contingencies, if applicable.
    (B) No change.
    (iii)-(ix) No change.
* * * * *

    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
    On February 25, 2016, the Exchange submitted immediately effective 
filing SR-CBOE-2016-014, which amended Exchange rules related to the 
initiation of a complex order auction (``COA'').\5\ The purpose of SR-
CBOE-2016-014 (as well as predecessor filings SR-CBOE-2015-081 \6\ and 
SR-CBOE-2014-017) \7\ was to limit a potential source of unintended 
Market-Maker risk related to how the Exchange's Hybrid Trading System 
(the ``System'') \8\ calculates risk parameters under Rule 8.18 when 
complex orders leg into the market.\9\
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    \5\ See Securities Exchange Act Release No. 77297 (March 4, 
2016), 81 FR 12764 (March 10, 2016) (SR-CBOE-2016-014) (``2016 
Notice).
    \6\ See Securities Exchange Act Release No. 76106 (October 8, 
2015), 80 FR 62125 (October 15, 2015) (SR-CBOE-2015-081) (``2015 
Notice).
    \7\ See Securities Exchange Act Release No. 72986 (September 4, 
2014), 79 FR 53798 (September 10, 2014) (SR-CBOE-2014-017) 
(``Approval Order'').
    \8\ The System is a trading platform that allows automatic 
executions to occur electronically and open outcry trades to occur 
on the floor of the Exchange. To operate in this ``hybrid'' 
environment, the Exchange has a dynamic order handling system that 
has the capability to route orders to the trade engine for automatic 
execution and book entry, to Trading Permit Holder and PAR Official 
workstations located in the trading crowds for manual handling, and/
or to other order management terminals generally located in booths 
on the trading floor for manual handling. Where an order is routed 
for processing by the Exchange order handling system depends on 
various parameters configured by the Exchange and the order entry 
firm itself.
    \9\ See the Approval Order, the 2015 Notice, and the 2016 
Notice.
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Quote Risk Monitor
    Under Rule 8.18, CBOE offers Market-Makers that are obligated to 
provide and maintain continuous electronic quotes in an option class 
the Quote Risk Monitor Mechanism (``QRM''), which is functionality to 
help Market-Makers manage their quotes and related risk. Market-Makers 
with appointments in classes that trade on the System must, among other 
things, provide and maintain continuous electronic quotes in a 
specified percentage of series in each class for a specified percentage 
of time.\10\ To comply with this requirement, each Market-Maker may use 
its own proprietary quotation and risk management system to determine 
the prices and sizes at which it quotes. In addition, each Market-Maker 
may use QRM.
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    \10\ See Rules 8.7(d)(ii)(iv) (Market-Makers), 8.13(d) 
(Preferred Market-Makers), 8.15A(b)(i) (Lead Market-Makers) and 
8.85(a)(i) (Designated Primary Market-Makers).
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    A Market-Maker's risk in a class is not limited to the risk in a 
single series of that class. Rather, a Market-Maker is generally 
actively quoting in multiple classes, and each class may comprise 
hundreds or thousands of individual series. The System automatically 
executes orders against a Market-Maker's quotes in accordance with the 
Exchange's priority and allocation rules.\11\ As a result, a Market-
Maker has exposure and risk in all series in which it is quoting in 
each of its appointed classes. QRM is an optional functionality that 
helps Market-Makers, and TPH organizations with which a Market-Maker is 
associated, limit this overall exposure and risk.
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    \11\ See Rules 6.45 and 6.53C.
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    Specifically, if a Market-Maker elects to use QRM, the System will 
cancel a Market-Maker's quotes in all series in an appointed class if 
certain parameters the Market-Maker establishes are triggered. Market-
Makers may set the following QRM parameters (Market-Makers may set 
none, some or all of these parameters):
     A maximum number of contracts for that class (the 
``contract limit'') and a specified rolling time period in seconds 
within which such contract limit is to be measured (the ``measurement 
interval'');
     a maximum cumulative percentage (which is the sum of the 
percentages of the original quoted size of each side of each series 
that trade) (the ``cumulative percentage limit'') that the Market-Maker 
is willing to trade within a specified measurement interval; or
     a maximum number of series for which either side of the 
quote is fully traded (the ``number of series fully traded'') within a 
specified measurement interval.
    If the Exchange determines the Market-Maker has traded more than 
the contract limit or cumulative percentage limit, or has traded at 
least the number of series fully traded, of a class during the 
specified measurement interval, the System will cancel all of the 
Market-Maker's electronic quotes in that class (and any other cases 
with the same underlying security) until the Market-Maker refreshes 
those quotes (a ``QRM Incident''). A Market-Maker, or TPH organization 
with which the Market-Maker is associated, may also specify a

[[Page 14770]]

maximum number of QRM Incidents that may occur on an Exchange-wide 
basis during a specified measurement interval. If the Exchange 
determines that a Market-Maker or TPH Organization, as applicable, has 
reached its QRM Incident limit during the specified measurement 
interval, the System will cancel all of the Market-Maker's or TPH 
Organization's quotes, as applicable, and the Market-Maker's orders 
resting in the book in all classes and prevent the Market-Maker and TPH 
organization from sending additional quotes or orders to the Exchange 
until the earlier to occur of (1) the Market-Maker or TPH organization 
reactivates this ability or (2) the next trading day.
    The purpose of the QRM functionality is to allow Market-Makers to 
provide liquidity across most series in their appointed classes without 
being at risk of executing the full cumulative size of all their quotes 
before being given adequate opportunity to adjust their quotes. For 
example, if a Market-Maker can enter quotes with a size of 25 contracts 
in 100 series of class ABC, its potential exposure is 2,500 contracts 
in ABC. To mitigate the risk of having all 2,500 contracts in ABC 
execute without the opportunity to evaluate its positions, the Market-
Maker may elect to use QRM. If the Market-Maker elects to use the 
contract limit functionality and sets the contract limit at 100 and the 
measurement interval at five seconds for ABC, the System will 
automatically cancel the Market-Maker's quotes in all series of ABC if 
100 or more contracts in series of ABC execute during any five-second 
period.
    To assure that all quotations are firm for their full size, the 
System performs the parameter calculations after an execution against a 
Market-Maker's quote occurs. For example, using the same parameters in 
class ABC as above, if a Market-Maker has executed a total of 95 
contracts in ABC within the previous three seconds, a quote in a series 
of ABC with a size of 25 contracts continues to be firm for all 25 
contracts. An incoming order in that series could execute all 25 
contracts of that quote, and, following the execution, the total size 
parameter would add 25 contracts to the previous total of 95 for a 
total of 120 contracts executed in ABC. Because the total size executed 
within the previous five seconds now exceeds the 100 contract limit for 
ABC, the System would, following the execution, immediately cancel all 
of the Market-Maker's quotes in series of ABC. The Market-Maker would 
then enter new quotes for series in ABC. Thus, QRM limits the amount by 
which a Market-Maker's executions in a class may exceed its contract 
limit to the largest size of its quote in a single series of the class 
(or 25 in this example).
Proposal
    SR-CBOE-2016-014 indicated that the Exchange would announce the 
implementation date of that rule change in a Regulatory Circular to be 
published no later than 90 days following the effective date of that 
filing and that the implementation date would be no later than 180 days 
following the effective date of that filing. The Exchange was unable to 
make the necessary system changes in time to meet the deadlines set 
forth in SR-CBOE-2016-014. Thus, the Exchange proposes to revise the 
implementation date of SR-CBOE-2016-014. In conjunction with revising 
the implementation date of SR-CBOE-2016-014, the Exchange is proposing 
to revise the relevant rule text of Rule 6.53C to modify the manner in 
which the rule text describes complex orders that will initiate a COA.
    The purpose of the rule filings in this series (SR-CBOE-2014-017, 
SR-CBOE-2015-081, and SR-CBOE-2016-014), including the instant filing, 
is to limit a potential source of unintended Market-Maker risk related 
to how the System calculates risk parameters under Rule 8.18 when 
complex orders leg into the market.\12\ As discussed above, and 
described in the previous filings, by checking the risk parameters 
following each execution in a series, the risk parameters allow a 
Market-Maker to provide liquidity across multiple series of a class 
without being at risk of executing the full cumulative size of all its 
quotes. This is not the case, however, when a complex order legs into 
the regular market (i.e. the market for individual, or simple, orders). 
Because the execution of each leg of a complex order is contingent on 
the execution of the other legs, the execution of all the legs in the 
regular market is processed as a single transaction, not as a series of 
individual transactions.
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    \12\ Rule 6.53C(c)(ii)(1) provides that complex orders in the 
complex order book (``COB'') may execute against individual orders 
or quotes in the book provided the complex order can be executed in 
full (or a permissible ratio) by the orders and quotes in the book. 
Rule 6.53C(d)(v)(1) provides that orders that are eligible for the 
complex order auction (``COA'') may trade with individual orders and 
quotes in the book provided the COA-eligible order can be executed 
in full (or a permissible ratio) by the orders and quotes in the 
book. COA is an automated request for responses (``RFR'') auction 
process. Upon initiation of a COA, the Exchange sends an RFR message 
to all Trading Permit Holders who have elected to receive RFR 
messages, which RFR message identifies the series, size and side of 
the market of the COA-eligible order and any contingencies. Eligible 
market participants may submit responses during a response time 
interval. At the conclusion of the response time interval, COA-
eligible orders are allocated in accordance with Rule 6.53C(d)(v), 
including against individual orders and quotes in the book.
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    For example, if market participants enter into the System 
individual orders to buy 25 contracts for the Jan 30 call, Jan 35 call, 
Jan 40 call and Jan 45 call in class ABC, the System processes each 
order as it is received and calculates the Market-Makers parameters in 
class ABC following the execution of each 25-contract call. However, if 
a market participant enters into the System a complex order to buy all 
four of these strikes in class ABC 25 times, which complex order 
executes against bids and offers for the individual series (i.e. legs 
into the market), the System will calculate the Market-Maker's 
parameters in class ABC following the execution of all 100 contracts. 
If the Market-Maker had set the same parameters in class ABC as 
discussed above (100-contract limit with five-second measurement 
interval) and had executed 95 contracts in class ABC within the 
previous three seconds, the amount by which the next transaction might 
exceed 100 is limited to the largest size of its quote in a single 
series of the class. In that example, since the largest size of the 
Market-Maker's quotes in any series was 25 contracts, the Market-Maker 
could not have exceeded the 100-contract limit by more than 20 
contracts (95 + 25 = 120). However, with respect to the complex order 
with four legs 25 times, the next transaction against the Market-
Maker's quotes potentially could be as large as 100 contracts 
(depending upon whether there are other market participants at the same 
price), creating the potential in this example for the Market-Maker to 
exceed the 100-contract limit by 95 contracts (95 + 100 = 195) instead 
of 20 contracts.
    As this example demonstrates, legging of complex orders into the 
regular market presents higher risk to Market-Makers than executing 
their quotes against individual orders entered in multiple series of a 
class in the regular market, because it may result in Market-Makers 
exceeding their risk parameters by a greater number of contracts. This 
risk is directly proportional to the number of legs associated with a 
complex order. Market-Makers have expressed concerns to the Exchange 
regarding this risk.
    In order to alleviate this potential risk to Market-Makers, the 
Exchange, in SR-CBOE-2015-081, amended Rule 6.53C(d) to, among other 
things, provide that a COA will be initiated when a complex order with 
three or more legs is designated as immediate or cancel (``IOC'') and 
meets the class, marketability, and size parameters of

[[Page 14771]]

subparagraph (d)(i)(2).\13\ The Exchange observed IOC orders causing 
the risk to Market-Makers described above and believed the previous 
amendment proposed in SR-CBOE-2015-081 would reduce that risk by 
initiating a COA in those circumstances. SR-CBOE-2016-014 attempted to 
fine tune this requirement by amending Rule 6.53C(d)(ii)(A)(2)(B) to 
provide that a COA will be initiated when a complex order with three or 
more legs that is marketable against the derived net market is 
designated as immediate or cancel and the order meets the class and 
size parameters of subparagraph (d)(i)(2). SR-CBOE-2016-014 also 
hardcoded the price at which an order could initiate a COA.
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    \13\ See Rule 6.53C(d)(ii)(A)(2)(B). The Exchange has not yet 
implemented the changes described in SR-CBOE-2015-081 in 
anticipation of this proposal.
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    The Exchange is proposing to further fine tune the rule text by 
amending Rule 6.53C(d)(ii)(A)(1) and (2).\14\ Currently the term COA-
eligible order in Rule 6.53C(d)(ii)(A)(1) is used in relation to orders 
with two legs. The Exchange is proposing to keep the term COA-eligible 
as the starting point for orders with three or more legs as well,\15\ 
because all orders with two or more legs that are COA-eligible (i.e., 
meets the class, size, order type, and origin code parameters of Rule 
6.53C(d)(i)(2)) will be treated the same by the Exchange--meaning the 
number of legs of an order under Rule 6.53C(d)(ii)(A)(1) will not be a 
factor in determining whether a complex order will or will not COA. In 
order to effectuate this change the Exchange is also modifying 
subparagraph (ii)(A)(2)(A) because all orders with three legs or more 
that are priced better than the same side of the derived net market 
will only COA if they are COA-eligible under subparagraph (ii)(A)(1), 
which means the current rule text of (ii)(A)(2)(A) is unnecessary. The 
Exchange notes that the difference between the current rule text with 
regards to orders with three legs that are priced better than the same 
side of the derived net market is that current subparagraph 
(ii)(A)(2)(A) requires a complex order with three or more legs that 
meets the class, size, and order type parameter to COA, regardless of 
the origin code, and proposed subparagraph (ii)(A)(1) provides that the 
origin code is an additional parameter the Exchange may set with 
regards to complex orders with three legs that are priced better than 
the same side of the derived net market. The Exchange believes it's 
appropriate to apply the origin code parameter to such orders because 
the flexibility allows the Exchange to use its considerable expertise 
in an effort to ensure COAs are beneficial to the marketplace, which is 
why the Exchange is proposing this particular rule change and why the 
Exchange developed the COA origin code parameter in 2008.\16\ Applying 
the origin code parameter to complex orders with three legs that are 
priced better than the same side of the derived net market is 
consistent with the manner in which the rule text was written prior to 
SR-CBOE-2014-017. To illustrate, SR-CBOE-2008-082 added the origin type 
parameter to the definition of a COA-eligible order, such that a COA-
eligible order was defined as:
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    \14\ As with SR-CBOE-2015-081 and SR-CBOE-2016-014, this 
proposed change applies to Hybrid classes only, and not Hybrid 3.0 
classes. The Exchange does not believe the risk discussed in this 
rule filing is present in Hybrid 3.0 classes because in Hybrid 3.0 
classes complex orders are not legged into the regular market. See 
Rule 6.53C.10 (providing flexibility for the Exchange to determine 
to not allow marketable complex orders entered into COB and/or COA 
to automatically execute against individual quotes residing in the 
EBook).
    \15\ See Proposed Rule 6.53C(d)(ii)(A)(1).
    \16\ See Securities Exchange Act Release No. 58326 (August 7, 
2008), 73 FR 47986 (August 15, 2008) (SR-CBOE-2008-82).

A complex order that, as determined by the Exchange on a class-by-
class basis, is eligible for a COA considering the order's 
marketability (defined as a number of ticks away from the current 
market), size, complex order type (as defined in paragraphs (a) and 
(b) above) and complex order origin types (as defined in 
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subparagraph (c)(i) above).\17\

    \17\ Id.
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    Making current subparagraph (ii)(A)(2)(A) inapplicable to complex 
orders that are priced better than the derived net market and making 
subparagraph (ii)(A)(1) applicable to all such orders (i.e., allowing 
the origin code parameter to apply to complex orders that are priced 
better than the same side of the derived net market) is consistent with 
the Act because it essentially reverts rule text regarding COA-eligible 
orders back to how the rule text read prior to SR-CBOE-2014-017.
    Additionally, prior to SR-CBOE-2014-017, the rule text essentially 
provided that any COA-eligible order will COA (as long as a member 
requested that a particular order COA), and as previously noted, what 
determines COA-eligibility has included the origin code parameter since 
2008.\18\ To illustrate, SR-CBOE-2005-65, which created COA, provided 
that a COA would be initiated ``[o]n receipt of a COA-eligible order 
and request from the member representing the order that it be 
COA'd[.]'' \19\ SR-CBOE-2015-089 removed the requirement that an order 
include a request to initiate a COA, and instead implemented the 
opposite--a ``do-not-COA'' request that is only allowed for certain 
orders.\20\ This particular proposed rule change essentially provides 
that all COA-eligible orders will COA (unless the ``do-not-COA 
provision of Rule 6.53C(d)(ii)(B) applies) provided that the complex 
order is priced better than the same side of the derived net market, 
except the proposal goes further by allowing certain orders that are 
not COA-eligible to still COA according to proposed subparagraph 
(ii)(A)(2). In short, it was consistent with the Securities Exchange 
Act of 1934 (the ``Act'') to: Initiate a COA for COA-eligible order 
when COA was established in 2005; include the origin type parameter in 
the COA-eligibility definition when the origin type parameter was 
applied to the COA-eligibility definition in 2008; and allow COA-
eligible orders to COA unless a ``do-not-COA'' accompanies certain 
orders when the ``do-not-COA'' request was established in 2015. Thus, 
it remains consistent with the Act to initiate a COA for a COA-eligible 
order today, which is essentially all proposed subparagraph (ii)(A)(1) 
states. It similarly remains consistent with the Act to allow COA-
eligibility to include the origin type parameter and to COA all COA-
eligible orders unless particular orders defined in Rule 
6.53C(d)(ii)(B) include a ``do-not-COA'' request.
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    \18\ Id.
    \19\ See Securities Exchange Act Release No. 54135 (July 12, 
2006), 71 FR 41287 (July 20, 2006) (SR-CBOE-2005-65).
    \20\ See current Rule 6.53C(d)(ii)(B), which provides: 
Notwithstanding subparagraph (ii)(A)(1), Trading Permit Holders may 
request on an order-by-order basis that an incoming COA-eligible 
order with two legs not COA (a ``do-not-COA'' request). 
Notwithstanding subparagraph (ii)(A)(2), the System will reject back 
to a Trading Permit Holder any complex order described in that 
subparagraph that includes a do-not-COA request. Any complex order 
in subparagraph (ii)(A)(2) on PAR will COA even if the PAR operator 
includes a do-not-COA request. If a two-legged order with a do-not-
COA request rests on PAR, then the PAR operator may not request that 
the order COA. An order initially submitted to the Exchange with a 
do-not-COA request may still COA after it has rested on the COB 
pursuant to Interpretation and Policy .04. Securities Exchange Act 
Release No. 76622 (December 11, 2015), 80 FR 78803 (December 17, 
2015) (SR-CBOE-2015-089).
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    The Exchange also notes that adding the words ``or more'' to 
current subparagraph (ii)(A)(1) to provide that a COA-eligible order 
``with two legs or more'' will COA is consistent with the Exchange Act 
because it is no different than not identifying the number of legs at 
all, which is how the rule text read from COA's inception in 2005 until 
the

[[Page 14772]]

Exchange submitted SR-CBOE-2014-017. As previously noted, SR-CBOE-2005-
65, provided that a COA would be initiated ``[o]n receipt of a COA-
eligible order and request from the member representing the order that 
it be COA'd[.]'' \21\ In both cases--a ``COA-eligible order with two or 
more legs'' as proposed or ``a COA-eligible order'' as provided in SR-
CBOE-2005-65-- the phrase means a complex order with two or more legs. 
In fact, there really is no purpose to identifying the number of legs 
of a COA-eligible order in subparagraph (d)(ii)(A)(1), but it might 
provide some kind of clarity to market participants, considering that 
proposed subparagraph (d)(ii)(A)(2) will indicate that that particular 
provision applies to complex orders with three or more legs. Thus, it 
was consistent with the Act to initiate a COA upon receipt of COA-
eligible order when COA was established in 2005, and it remains 
consistent with the Act to initiate a COA for a COA-eligible order, 
even if the rule text indicates that a COA will be initiated upon 
receipt of a COA-eligible order with two or more legs.
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    \21\ See Securities Exchange Act Release No. 54135 (July 12, 
2006), 71 FR 41287 (July 20, 2006) (SR-CBOE-2005-65).
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    The purpose of proposed subparagraph (2) of Rule 6.53C(d)(ii)(A) is 
simply to allow certain orders with three legs that will not COA under 
subparagraph (1) to COA pursuant to subparagraph (2). Proposed Rule 
6.53C(d)(ii)(A)(2) provides that a COA will be initiated upon receipt 
of a complex order with three or more legs that meets the class, size, 
and complex order type parameters of subparagraph (d)(i)(2) and is 
marketable against the derived net market. In short, if an order with 
three or more legs does not COA pursuant to Rule 6.53C(d)(ii)(A)(1)--
because it is not COA-eligible--it may still COA pursuant to Rule 
6.53C(d)(ii)(A)(2), as long as the order meets the class, size, complex 
order type parameters of subparagraph (d)(i)(2) and is marketable 
against the derived net market.
    The Exchange notes that the flaw with SR-CBOE-2016-014 lies in 
current rule 6.53C(d)(ii)(A)(2)(B), which provides that a COA will be 
initiated when a complex order with three or more legs:

is marketable against the derived net market, designated as 
immediate or cancel and meets the class and size parameters of 
subparagraph (d)(i)(2).

    This provision would prevent the Exchange from initiating a COA for 
an order that does not have the IOC contingency--even though the order 
has three or more legs, the order is marketable against the derived net 
market, and the order meets the class the class and size parameters of 
subparagraph (d)(i)(2). As previously noted, the purpose of the rule 
filings in this series (SR-CBOE-2014-017, SR-CBOE-2015-081, and SR-
CBOE-2016-014), including the instant filing, is to limit a potential 
source of unintended Market-Maker risk related to how the System 
calculates risk parameters under Rule 8.18 when complex orders leg into 
the market. Complex orders with three or more legs that are not 
designated as IOC may still cause the risk to Market-Makers; thus, it 
is prudent for the Exchange to include the order type parameter in 
proposed Rule 6.53C(d)(ii)(A)(2) instead of singling out IOCs. The 
Exchange believes the reason SR-CBOE-2016-014 specifically identified 
IOCs in Rule 6.53C(d)(ii)(A)(2)(B) is because IOC's are not currently 
COA-eligible so all IOC orders with two or more legs do not currently 
initiate a COA and identifying IOCs in the rule text provided further 
notice to market participants that orders designated as IOC may COA. 
However, the Exchange believes it's unnecessary to identify IOCs in the 
rule text in this manner--although the Exchange notes that the rule 
text will continue to state that IOCs that are not marketable against 
the derived net market in accordance with subparagraph (ii)(A)(2) will 
be cancelled, which serves as notice to market participants that IOCs 
will initiate a COA in certain circumstances, especially considering 
that upon filing this proposal the Exchange will also be publishing a 
circular that identifies IOCs as a contingency that may initiate a COA 
in certain circumstances.
    The Exchange also notes that SR-CBOE-2016-014 proposed to treat all 
market participants the same when the Exchange received an order with 
three or more legs that met the class, size, complex order type 
parameters of subparagraph (d)(i)(2) and was better than the same side 
of the derived net market. Proposed subparagraph (2) of Rule 
6.53C(d)(ii)(A) will continue to treat all market participants the same 
when the Exchange receives an order with three or more legs that meets 
the class, size, and complex order type parameters of subparagraph 
(d)(i)(2)--except the Exchange will only utilize subparagraph (2) when 
the incoming order is marketable against the derived net market--
instead of when the orders is priced better than the same side of the 
derived net market as SR-CBOE-2016-014 proposed. Ultimately, the 
Exchange believes this proposal represents much simpler rule text than 
what was proposed in SR-CBOE-2016-014.
    In sum, if a complex order with two or more legs is COA-eligible 
and priced better than the same side of the derived net market, the 
order will initiate a COA. If a complex order with three more legs is 
not otherwise COA-eligible it will still initiate a COA if it is 
marketable against the derived net market and it meets the class, size, 
and order type parameters. To illustrate, assuming all of the non-price 
specific requirements are met, a complex order with two or more legs 
under subparagraph (d)(ii)(A)(1) will initiate a COA if the derived net 
market is 1-1.20 and the complex order is to buy at $1.01 or higher or 
to sell at 1.19 or lower.\22\ As described above, assuming the non-
price specific requirements are met, a complex order with three legs 
under subparagraph (d)(ii)(A)(2) will initiate a COA if the derived net 
market is 1--1.20 and the complex order is to buy at $1.20 or higher or 
to sell at $1.00 or lower. Initiating a COA in these situations will 
relieve the risk to Market-Makers noted above and throughout this 
series of rule filings, which helps promote just and equitable 
principles of trade by relieving risk to Market-Makers allowing them to 
more efficiently and effectively provide important liquidity.
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    \22\ As previously noted, the price at which an order may 
initiate a COA was hardcoded by SR-CBOE-2016-014. This proposal 
makes no changes to the price at which an order may initiate a COA.
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    As previously noted, the Exchange was unable to implement the 
amendments made by SR-CBOE-2016-014 in the timeframe set forth in SR-
CBOE-2016-014. Thus, the Exchange will announce the implementation date 
of amendments made in SR-CBOE-2016-014, as modified by this proposed 
rule change, in a Regulatory Circular to be published no later than 90 
days following the effective date of this filing. The implementation 
date will be no later than 180 days following 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.\23\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \24\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable

[[Page 14773]]

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) \25\ requirement that the rules of an exchange not be designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78f(b)(5).
    \25\ Id.
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    In particular, the Exchange believes the proposed rule change is 
consistent with the purpose of SR-CBOE-2014-017, SR-CBOE-2015-081, and 
SR-CBOE-2016-14, which was to alleviate a potential risk to Market-
Makers that arises through the use of QRM. Complex orders with three or 
more legs that are designated that meet the class, size, and order type 
(including IOCs) parameters of subparagraph (d)(i)(2) and that are 
marketable against the derived net market (which the Exchange has 
identified as potentially causing risk to Market-Makers) will initiate 
a COA, which helps promote just and equitable principles of trade by 
relieving risk to Market-Makers allowing them to more efficiently and 
effectively provide important liquidity. Orders that are designated as 
IOC and meet the class and size parameters of subparagraph (d)(i)(2), 
but that are not marketable against the derived net market, will be 
cancelled, which allows order entry firms to use their own 
sophisticated technology to manage their orders helping to remove 
impediments to and perfect the mechanism of a free and open market. SR-
CBOE-2016-014 removed the Exchange's flexibility to determine that 
price at which an order may initiate a COA, and this proposal makes no 
changes in that regard. Although the Exchange prefers flexibility, the 
Exchange does not foresee the need to retain flexibility in this regard 
and hardcoding the parameter may help avoid confusion with regards to 
the price at which a complex order may initiate a COA, which also helps 
to remove impediments to and perfect the mechanism of a free and open 
market.
    The Exchange also believes the proposed rule change to initiate a 
COA upon receipt of complex orders with three or more legs that meet 
the class, size, and order type (including IOCs) parameters of 
subparagraph (d)(i)(2) and that are marketable against the derived net 
market is consistent with the requirement that Market-Makers' quotes be 
firm under Rule 602 of Regulation NMS.\26\ The proposed rule change 
does not relieve Market-Makers of their obligation to provide ``firm'' 
quotes. If a complex order in a Hybrid class with three or more legs 
goes through COA and then legs into the market for execution upon 
completion of the COA, at which point the complex order would execute 
against a Market-Maker's quotes based on priority rules, the Market-
Maker must execute its quotes against the order at its then-published 
bid or offer up to its published quote size, even if such execution 
would cause the Market-Maker to significantly exceed its risk 
parameters. However, prior to the end of COA (and thus prior to a 
complex order legging into the market), a Market-Maker may adjust its 
published quotes to manage its risk in a class as it deems necessary, 
including to prevent executions that would exceed its risk parameters. 
In this case, the firm quote rule does not obligate the Market-Maker to 
execute its quotes against the complex order at the quote price and 
size that was published when the order entered the System and initiated 
the COA. Rather, the Market-Maker's firm quote obligation applies only 
to its disseminated quote at the time an order is presented to the 
Market-Maker for execution, which presentation does not occur until the 
System processes the order against the leg markets after completion of 
the COA.\27\ Thus, the proposed rule change is consistent with the firm 
quote rule.
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    \26\ Rule 602(b)(2) obligates a Market-Maker to execute any 
order to buy or sell a subject security presented to it by another 
broker or dealer or any other person belonging to a category of 
persons with whom the Market-Maker customarily deals, at a price at 
least as favorable to the buyer or sell as the Market-Maker's 
published bid or offer in any amount up to its published quotation 
size. Rule 602(b)(3) provides that no Market-Maker is obligated to 
execute a transaction for any subject security to purchase or sell 
that subject security in an amount greater than its revised 
quotation size if, prior to the presentation of an order for the 
purchase or sale of a subject security, the Market-Maker 
communicated to the Exchange a revised quotation size. Similarly, no 
Market-Maker is obligated to execute a transaction for any subject 
security if, before the order sought to be executed is presented, 
the Market-Maker has communicated to the Exchange a revised bid or 
offer. CBOE Rule 8.51 imposes a similar obligation (Market-Maker 
must sell (buy) at least the established number of contracts at the 
offer (bid) which is displayed when the Market-Maker receives a buy 
(sell) order at the trading station where the reported security is 
located for trading; however, no Market-Maker is obligated to 
execute a transaction for a listed option when, prior to the 
presentation of an order to sell (buy) to the Market-Maker, the 
Market-Maker has communicated to the Exchange a revised quote).
    \27\ See Staff Legal Bulletin No. 16, Transaction in Listed 
Options Under Exchange Act Rule 11Ac1-1, U.S. Securities and 
Exchange Commission, Division of Market Regulation, January 20, 2004 
(``Scenario 3: When an Order is ``Presented'' . . . If an individual 
market maker generates its own quotations . . . and exchange systems 
route incoming orders to the responsible broker-dealer with 
priority, when is an order presented to a responsible broker-dealer? 
Response:. . . . When each market maker is the responsible broker-
dealer with respect to its own quote, an order is presented to it 
when received by the market maker from the exchange system.''). When 
a complex order is processing through COA, the order is still in the 
System and has not yet been presented to a broker or dealer 
(including a Market-Maker) for execution. Only after completion of 
the COA, when the System allocates the complex order for execution 
in accordance with priority rules, will that order be ``presented'' 
to the Market-Maker for firm quote purposes.
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    The Exchange also notes making subparagraph (ii)(A)(2)(A) 
inapplicable to complex orders that are priced better than the derived 
net market and making subparagraph (ii)(A)(1) applicable to all such 
orders is consistent with the Act because it essentially reverts rule 
text regarding COA-eligible orders back to how the rule text read prior 
to SR-CBOE-2014-017. Prior to SR-CBOE-2014-017, the rule text 
essentially provided that any COA-eligible order will COA.\28\ This 
proposed rule change essentially provides the same, except certain 
orders that are not COA-eligible may still COA according to proposed 
subparagraph (ii)(A)(2). Thus, it was consistent with the Securities 
Exchange Act of 1934 (the ``Act'') to initiate a COA-eligible order 
when COA was established in 2005, and it remains consistent with the 
Act to initiate a COA-eligible order.
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    \28\ See Securities Exchange Act Release No. 54135 (July 12, 
2006), 71 FR 41287 (July 20, 2006) (SR-CBOE-2005-65).
---------------------------------------------------------------------------

    The Exchange also notes that adding the words ``or more'' to 
current subparagraph (ii)(A)(1) to provide that a COA-eligible order 
``with two legs or more'' will COA is consistent with the Exchange Act 
because it is no different than not identifying the number of legs at 
all, which is how the rule text read from COA's inception in 2005 \29\ 
until the Exchange submitted SR-CBOE-2014-017. In both cases--a ``COA-
eligible order with two or more legs'' or ``a COA-eligible order''--the 
phrase means a complex order with two or more legs. In fact, there 
really is no purpose to identifying the number of legs of a COA-
eligible order in subparagraph (d)(ii)(A)(1), but it might provide some 
kind of clarity to market participants, considering that proposed 
subparagraph (d)(ii)(A)(2) will indicate that that particular provision 
applies to complex orders with three or more legs. Thus, it was 
consistent with the Act to initiate a COA-eligible order when COA was 
established in 2005, and it remains

[[Page 14774]]

consistent with the Act to initiate a COA-eligible order, even if the 
rule text indicates that a COA will be initiated upon receipt of a COA-
eligible order with two or more legs.
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    \29\ [sic]
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on intramarket or intermarket 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 
intramarket competition because all IOC orders will be treated equally 
by the Exchange. The proposed rule change is intended to reduce risk to 
Market-Makers that are quoting in the regular market. CBOE believes 
that the proposed rule change will promote competition by encouraging 
Market-Makers to increase the size of and to more aggressively price 
their quotes, which will increase liquidity on the Exchange. To the 
extent that the rule change makes CBOE a more attractive marketplace, 
market participants are free to become Trading Permit Holders on CBOE 
and other exchanges are free to amend their rules in a similar manner. 
Furthermore, the Exchange does not believe the proposed rule change 
will impose any burden on intermarket competition because the rule 
change does not materially affect the outcome or purpose of SR-CBOE-
2014-017, SR-CBOE-2015-081, or SR-CBOE-2016-014, which was to alleviate 
potential risk to Market-Makers using QRM. The Exchange also does not 
believe that the hardcoding of the price at which a complex order may 
initiate a COA, as described in SR-CBOE-2016-014, will impose a burden 
on competition. Finally, the Exchange does not believe initiating a COA 
for a COA-eligible order pursuant to Rule 6.53C(d)(ii)(A)(1) will 
impose any burden on competition as the Exchange has initiated a COA 
for such orders since the inception of COA in 2005.

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: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
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 \30\ and Rule 19b-
4(f)(6) thereunder.\31\
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    \30\ 15 U.S.C. 78s(b)(3)(A).
    \31\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the 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.
---------------------------------------------------------------------------

    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule change should be approved or 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-2017-021 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-2017-021. 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-2017-021 and should be 
submitted on or before April 12, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05608 Filed 3-21-17; 8:45 am]
 BILLING CODE 8011-01-P


