
[Federal Register Volume 82, Number 71 (Friday, April 14, 2017)]
[Notices]
[Pages 18048-18051]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-07534]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80421; File No. SR-CBOE-2017-029]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Relating to 
the Automated Improvement Mechanism and the Solicitation Auction 
Mechanism

April 10, 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 31, 2017, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or

[[Page 18049]]

``CBOE'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to reduce the order handling and exposure 
periods of the Exchange's Automated Improvement Mechanism (``AIM'') and 
Solicitation Auction Mechanism (``SAM''). The text of the proposed rule 
change is available on the Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of 
the Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to reduce the order 
handling and exposure periods contained in Rules 6.74A and 6.74B from 1 
second to a time period designated by the Exchange of no less than 100 
milliseconds and no more than 1 second.
    Rule 6.74A contains the requirements applicable to the execution of 
orders using AIM. AIM allows the Exchange's Trading Permit Holders 
(``TPHs'') to electronically cross orders on the Exchange's Hybrid 
Trading System (``Hybrid''). Specifically, AIM allows TPHs to designate 
certain customer orders for price improvements and submit such orders 
into AIM with a matching facilitated or solicited contra order. Once 
the order is properly submitted, the Exchange commences an auction by 
broadcasting a message to all TPHs who have elected to receive AIM 
Request for Responses (``RFRs''). The RFR includes size and side of the 
order. Orders entered into AIM are currently exposed for a period of 1 
second, giving an opportunity for additional trading interest to be 
entered before the orders are automatically executed. Agency orders 
entered into AIM must be for 50 standard contracts or 500 mini-option 
contracts or more.
    Rule 6.74B contains the requirements applicable to the execution of 
orders using SAM. SAM allows TPHs to cross large all-or-none orders on 
Hybrid. Specifically, SAM allows TPHs to designate certain customer 
orders as all-or-none for price improvements and submit such orders 
into SAM with a matching solicited contra order. Once the order is 
properly submitted, the Exchange commences an auction by broadcasting a 
message to all TPHs who have elected to receive SAM RFRs. The RFR 
includes size and side of the order. Orders entered into SAM are 
currently exposed for a period of 1 second, giving an opportunity for 
additional trading interest to be entered before the orders are 
automatically executed. Agency orders entered into SAM must be for 500 
standard contracts or 5000 mini-option contracts or more.
    Under the proposal, the Exchange could reduce the exposure period 
for AIM and SAM to no less than 100 milliseconds (but no more than 1 
second) consistent with the exposure periods permitted on other 
Exchanges such as NASDAQ BX (``BX''), NASDAQ PHLX (``Phlx'') and the 
International Securities Exchange (``ISE'').\3\
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    \3\ See Securities Exchange Act Release No. 76301 (October 29, 
2015), 80 FR 68347 (November 4, 2015) (SR-BX-2015-032); Securities 
Exchange Act Release No. 77557 (April 7, 2016), 81 FR 21935 (April 
13, 2016) (SR-PHLX-2016-40) and Securities Exchange Act Release No. 
79733 (January 4, 2017), 82 FR 3055 (January 10, 2017) (SR-ISE-2016-
26).
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    In adopting the current 1-second exposure period for both AIM and 
SAM, the Exchange recognized that TPHs had become automated to the 
point that they could react to these orders electronically within that 
timeframe. In this context, the Exchange recognizes that it is in all 
TPHs' best interest to minimize the exposure period to a time frame 
that continues to allow adequate time for the TPHs to electronically 
respond, as both the order being exposed and the TPHs responding are 
subject to market risk during the exposure period. In this respect, our 
experience with the 1 second exposure period indicates that 100 
milliseconds would provide an adequate response time.\4\ Indeed, most 
TPHs either respond to RFRs within a much smaller time window. This is 
best evidenced by a review of responses to the Exchange's HAL auction, 
which awards the trade to the first responder at the NBBO price. Within 
HAL, 99.8% of the traded responses are received in 3 milliseconds or 
less. The COA auction is also configured with an auction timer of 100 
milliseconds, meaning that all traded responses are received during 
that interval. Accordingly, the Exchange does not believe it is 
necessary or beneficial to the orders being exposed to continue to 
subject them to market risk for a full second.
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    \4\ The Exchange has numerous TPHs that have the capability and 
do opt to respond within a 100 millisecond exposure period or less 
on its Hybrid trading platform. In this regard, the Exchange notes 
that it has other Hybrid electronic exposure mechanisms for which 
the applicable timers are currently set at 100 milliseconds or less 
and provide for an adequate response time. For example, the response 
timer for the Exchange's Hybrid Agency Liaison (``HAL''), Complex 
Order Auction (``COA''), and Simple Auction Liaison (``SAL'') 
mechanisms are currently set at 100 milliseconds or less and 
numerous TPHs can and do opt to respond to HAL, SAL, and COA 
messages within these time frames. The Exchange believes that our 
experience with the HAL, SAL, and COA mechanisms supports our view 
that 100 milliseconds is sufficient time for TPHs to respond to 
CBOE's AIM and SAM mechanisms which operate on the Hybrid Trading 
System and employ the same type of mechanical messaging as the HAL, 
SAL, and COA mechanisms. The Exchange also notes that any delay or 
latency associated with submitting responses to an AIM or SAM 
auction would be the same as responding to HAL, SAL, or COA because 
all such responses are processed over the same network. Further, 
CBOE has received no complaints from TPHs concerning the current 100 
millisecond timer on the COA mechanism and the current 20 
millisecond timers on the HAL and SAL mechanisms.
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    TPHs who initiate AIM or SAM auctions (``Initiating TPH'') are 
required to guarantee an execution at the National Best Bid/Offer 
(``NBBO'') or a better price and are subject to market risk while the 
order is exposed in AIM or SAM. While responding TPHs are also subject 
to market risk, the Initiating TPH is the most exposed because the 
market can move against them during the entire auction period and they 
have guaranteed the customer an execution at the NBBO or better based 
on market prices prior to the commencement of the auction. In today's 
fast paced markets, large price changes can occur in 1 second or less, 
leaving Initiating TPHs vulnerable to trading losses as a result of 
their choice to seek price improvement for their customer. The 
Initiating TPH acts in a critical role in the price improvement 
process, and its willingness to guarantee the customer an execution at 
the NBBO or better price is essential to the customer order

[[Page 18050]]

gaining the opportunity for price improvement.
    When approving the existing 1 second order handling and exposure 
period for AIM and SAM, the Commission concluded that reducing each of 
the exposure periods from 3 seconds to 1 second could facilitate the 
prompt execution of orders, while continuing to provide the TPHs in 
Hybrid with an opportunity to compete for exposed bids and offers.\5\ 
Continuing on that same logic, the Exchange believes that reducing its 
AIM and SAM order handling and exposure periods from 1 second to no 
less than 100 milliseconds will benefit TPHs. Since TPHs react to these 
orders electronically, and often opt to respond at the beginning or the 
end of the 1 second period, the Exchange believes that having the 
flexibility to reduce the time periods will continue to provide TPHs 
with sufficient time to ensure effective interaction with orders.\6\ At 
the same time, this flexibility will allow the Exchange to provide 
investors and other TPHs with more timely executions, thereby reducing 
their market risk.
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    \5\ See Securities Exchange Act Release No. 58088 (July 2, 
2008), 73 FR 39747 (July 10, 2008) (SR-CBOE-2008-016).
    \6\ The Exchange believes that the proposed timeframe would give 
TPHs sufficient time to respond, compete and provide price 
improvement for orders. The Exchange also notes that electronic 
systems are readily available to, if not already in place for, TPHs 
that allow them to respond in a meaningful way within the proposed 
timeframe.
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    This shortened exposure period is fully consistent with the 
electronic nature of Hybrid. TPHs have electronic systems available 
that would allow them to respond in a meaningful way within the 
proposed timeframe. The Exchange anticipates that TPHs will continue to 
compete within the proposed auction duration designated by the 
Exchange.
    The Exchange will continue to provide TPHs with sufficient time to 
respond, compete, and provide price improvement for orders. Although 
the Exchange currently plans to reduce the time period allowed to 
respond to AIM and SAM to 100 milliseconds, the Exchange believes it is 
appropriate to provide the flexibility to choose a response period of 
up to 1 second as this is consistent with the Rules of other options 
markets.\7\
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    \7\ See supra note 1.
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    To substantiate that TPHs can receive, process and communicate a 
response to an auction broadcast within 100 milliseconds, the Exchange 
surveyed its top 15 AIM and SAM responders. The Exchange received 
responses from all of the TPHs surveyed and each TPH confirmed that 
they can receive, process and communicate a response back to the 
Exchange within 100 milliseconds.
    Also in consideration of this proposed rule change, the Exchange 
reviewed all responses that resulted in traded orders in December 2016. 
This review of both AIM and SAM responses indicated that approximately 
63% of AIM responses and 63% of SAM responses that resulted in price 
improving executions at the conclusion of the auction occurred within 
100 milliseconds of the initial order. In addition to the 63% of AIM 
responses and 63% of SAM responses that occur within 100 milliseconds 
of the initial order, approximately 20% of AIM responses and 15% of SAM 
responses that resulted in price improving executions at the conclusion 
of the auction occurred in the final 800-1000 milliseconds (i.e. within 
200 milliseconds of the end of the RFR). The timing of these responses 
indicates that TPHs have configured their trading systems to either 
respond immediately to an AIM or SAM auction or to wait until the end 
of an auction period to reduce the risk of the market moving.
    Accordingly, the Exchange believes that an auction time as low as 
100 milliseconds will continue to provide TPHs with sufficient time to 
respond to, compete for, and provide price improvement for orders, and 
will provide investors and other market participants with more timely 
executions, and reduce their market risk. Moreover, Rule 6.74A(b) 
provides that only one AIM auction may be ongoing at any given time in 
a series and auctions in the same series may not queue or overlap in 
any manner. As a result, TPHs may be unable to initiate AIM auctions on 
behalf of their customers. Reducing the auction time to 100 
milliseconds will decrease the likelihood that an auction is underway 
when a customer order is received. Accordingly, the Exchange believes 
it is less likely that an auction attempt would be blocked due to 
another auction being in progress if the timer were to be reduced.
    The Exchange believes that the information outlined above regarding 
price improving transactions in AIM and SAM and the feedback provided 
by TPHs provides substantial support for its assertion that reducing 
the auction 1 second to as low as 100 milliseconds will continue to 
provide TPHs with sufficient time to ensure competition for orders 
entered into AIM and SAM and could provide customers with additional 
opportunities for price improvements.
    With regard to the impact of this proposal on system capacity, the 
Exchange has analyzed its capacity and represents that it has the 
necessary systems capacity to handle the potential additional traffic 
associated with the additional transactions that may occur with the 
implementation of the proposed reduction in the AIM and SAM duration to 
no less than 100 milliseconds. Additionally, the Exchange represents 
that its systems will be able to sufficiently maintain an audit trail 
for order and trade information with the reduction in the AIM and SAM 
duration.
    Upon effectiveness of the proposed rule change, and at least six 
weeks prior to implementation of the proposed rule change, the Exchange 
will issue a circular to TPHs, informing them of the implementation 
date of the reduction of the AIM and SAM duration from 1 second to the 
auction time designated by the Exchange to allow TPHs to perform any 
necessary systems changes. The Exchange also represents that it will 
issue a circular at least four weeks prior to any future changes, as 
permitted by its rules, to the auction time.
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.\8\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \9\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \10\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ Id.
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    In particular, the proposed rule change will provide investors with 
more timely execution of their options orders, while ensuring there is 
adequate exposure of orders in AIM. Additionally, the proposed rule 
change

[[Page 18051]]

will allow more investors the opportunity to receive price improvement 
through AIM and SAM, and will reduce the market risk for TPHs using AIM 
and SAM. Finally, as mentioned above, other options exchanges, such as 
the BX, Phlx, and ISE, have already amended their rules to permit 
response times consistent with those proposed here.\11\ As such, the 
Exchange believes the proposed rule change would help perfect the 
mechanism for a free and open national market system and generally help 
protect investors' and the public's interest.
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    \11\ See note 1 supra.
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    The Exchange believes the proposed rule change is not unfairly 
discriminatory because the AIM and SAM duration would be the same for 
all TPHs. All TPHs who have elected to participate in AIM and SAM 
auctions have today, and will continue to have, an equal opportunity to 
receive and respond to AIM and SAM messages. Additionally, CBOE 
believes the reduction in the AIM and SAM duration reduces the market 
risk for all TPHs using AIM and SAM. The reduction in time period 
reduces the market risk for the Initiating TPH as well as any TPHs 
providing orders in response to an AIM and SAM auction. Moreover, based 
on the feedback the Exchange received from its TPHs, the Exchange 
believes that a reduction in the RFR period to a minimum of 100 
milliseconds would not impair TPHs' ability to compete in the AIM and 
SAM. The Exchange believes these results support the assertion that a 
reduction in the AIM and SAM duration would not be unfairly 
discriminatory and would benefit investors.

B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change is not 
designed to address any aspect of competition, but instead would 
continue to provide market participants with sufficient time to 
respond, compete, and provide price improvement for orders entered into 
AIM and SAM. The proposed rule also provides investors and other market 
participants with more timely executions, thereby reducing their market 
risk. As proposed, the rule does not impose an undue burden on 
competition because TPHs who elect to participate in AIM and SAM are 
capable of responding to the RFR in under 100 milliseconds (based on 
the recent TPH survey, review of auction responses, and shorter 
response periods in other auction mechanisms available on the Exchange, 
as discussed above). Finally, the proposed rule change offers the same 
exposure period to all TPHs and would not impose a competitive burden 
on any particular participant.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2017-029 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-2017-029. 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 such 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-2017-029, and should be 
submitted on or before May 5, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-07534 Filed 4-13-17; 8:45 am]
 BILLING CODE 8011-01-P


