Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Proposed Rule Change Related to Complex Order Processing in Hybrid 3.0 Classes, 77878-77881 [2011-32034]
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the User to direct the remainder to post
to EDGX instead of EDGA.
The Exchange also proposes to amend
Rule 11.9(b)(3)(a), which currently
states that any shares that remain
unexecuted after routing are posted to
‘‘the EDGX Exchange book’’, to
eliminate the word ‘‘Exchange’’. In light
of the routing options modifications
proposed herein, paragraph 11.9(b)(3)
would also be modified to define EDGX
at the outset and state that except for the
routing options provided in paragraphs
(a) and (n)–(q), Users can post any
remainder of an order to EDGX.
Accordingly, the reference to the word
‘‘Exchange’’ in Rule 11.9(b)(3)(a) would
be redundant.
The Exchange believes the proposed
modification of the routing options
described above will provide market
participants with greater flexibility in
routing orders without having to
develop their own complicated routing
strategies. In addition, the varied
routing options allow Users to take
primary advantage of EDGA’s low cost
fee structure to remove liquidity on
EDGA and if applicable, other
destinations. Yet, the User retains the
option of posting the remainder of the
order to EDGX.
Assuming the Commission approves
the proposed rule change, the Exchange
will notify its Members in an
information circular of the exact
implementation date(s) of this rule
change, which will be no later than
March 31, 2012.
the option of posting the remainder of
the order to EDGX.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6(b)(5) of the Act,7 which
requires the rules of an exchange to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system and, in general, to protect
investors and the public interest. The
proposed change to introduce the
routing options described above will
provide market participants with greater
flexibility in routing orders without
having to develop their own order
routing strategies. In addition, it will
provide additional clarity and
specificity to the Exchange’s rulebook
regarding routing strategies and will
further enhance transparency with
respect to Exchange routing offerings.
Finally, the varied routing options allow
Users to take primary advantage of
EDGA’s low cost fee structure to remove
liquidity on EDGA and if applicable,
other destinations. Yet, the User retains
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://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 on official business
days between 10 a.m. and 3 p.m. Copies
of the filing will also 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–EDGA–
2011–40 and should be submitted on or
before January 4, 2012.
IV. Solicitation of Comments
7 15
U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization’s
Statement on Burden on Competition
The proposed rule change does not
impose any burden on competition that
is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has not solicited, and
does not intend to solicit, comments on
this proposed rule change. The
Exchange has not received any
unsolicited written comments from
members or other interested parties.
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 (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(a) By order approve or disapprove
the proposed rule change, or
(b) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
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 https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
No. SR–EDGA–2011–40 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–EDGA–2011–40. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.8
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2011–32066 Filed 12–13–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–65914; File No. SR–CBOE–
2011–114]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Proposed Rule
Change Related to Complex Order
Processing in Hybrid 3.0 Classes
December 8, 2011.
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 November
29, 2011, the Chicago Board Options
Exchange, Incorporated (‘‘Exchange’’ or
‘‘CBOE’’) filed with the Securities and
Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I and II,
which Items have been prepared by the
Exchange. The Commission is
8 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is proposing to amend
its electronic complex order rules. The
text of the rule proposal is available on
the Exchange’s Web site (https://
www.cboe.org/legal), at the Exchange’s
Office of the Secretary and at the
Commission.
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
self-regulatory organization 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 those 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 parts of such
statements.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Currently, complex orders that are
submitted to the electronic complex
order book (‘‘COB’’) or the complex
order RFR auction process (‘‘COA’’)
automatically execute against individual
orders and quotes residing in the
electronic book (‘‘EBook’’) provided the
complex order can be executed in full
or in a permissible ratio, and against
other complex orders represented in
COB or COA (as applicable).
The Exchange is proposing to revise
the operation of COB and COA as it
relates to options classes trading on the
Hybrid 3.0 Platform, which currently
only includes options on the S&P 500
Index (option symbol SPX). The
‘‘Hybrid 3.0 Platform’’ is an electronic
trading platform on the Hybrid Trading
System 3 that allows one or more
quoters to submit electronic quotes
which represent the aggregate MarketMaker quoting interest in a series for the
trading crowd. The quotes are
represented, along with other orders, in
the EBook. The function of generating
the aggregate trading crowd quote is
3 The ‘‘Hybrid Trading System’’ refers to the
Exchange’s trading platform that allows MarketMakers to submit electronic quotes in their
appointed classes. See Rule 1.1(aaa).
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currently performed by certain
designated Lead Market-Makers.
Under the proposed rule change, for
each class trading on the Hybrid 3.0
Platform, the Exchange may determine
to not allow marketable complex orders
entered into COB and/or COA to
automatically execute with the
individual quotes residing in the
EBook.4 In such classes, the allocation
of such marketable complex orders
against orders residing in the EBook and
other complex orders shall be based on
the best net price(s), as is currently the
case under the existing rule. At the same
net price, multiple orders will be
allocated subject to the existing
applicable COB or COA allocation
algorithm,5 subject to the following:
First, a complex order submitted to
COB or COA, as applicable, that is
marketable against the individual orders
residing in the EBook will automatically
4 Pursuant to Rule 6.53C.01, any determination by
the Exchange to designate a class for complex order
execution in this manner will be announced to the
membership via Regulatory Circular.
5 For COB, at the same net price, (i) individual
orders and quotes in the EBook have first priority,
provided the complex order can be executed in full
(or in a permissible ratio), with multiple orders and
quotes at the same price allocated based on the
rules of trading priority otherwise applicable to
incoming electronic orders in the individual
component legs; and (ii) complex orders in COB
have second priority, with multiple complex orders
at the same price allocated based on the rules of
trading priority otherwise applicable to incoming
electronic orders in the individual series legs or
such other algorithm as the Exchange may
designate. For COA, at the same net price, (i)
individual orders and quotes residing in the EBook
have first priority, provided the complex order can
be executed in full (or in a permissible ratio), with
multiple orders allocated pursuant to the Ultimate
Match Algorithm (‘‘UMA’’) allocation described in
Rule 6.45A or 6.45B, as applicable; (ii) public
customer complex orders resting in COB before, or
that are received during the COA auction, and
public customer COA responses collectively have
second priority, with multiple orders/responses
allocated based on time priority; (iii) non-public
customer orders resting in COB before the COA
auction have third priority, with multiple orders
allocated pursuant to the UMA allocation described
in Rule 6.54A or 6.45B, as applicable; and (iv) nonpublic customer orders resting in COB that are
received during the COA auction and non-public
customer COA responses collectively have fourth
priority, with multiple orders/responses allocated
based on the capped UMA (‘‘CUMA’’) allocation
described in Rule 6.45A or 6.45B, as applicable. See
Rule 6.53C(c)(ii) and (d) and Interpretation and
Policy .09. The Exchange notes that the
aforementioned electronic allocation algorithms for
COB and COA are consistent with Rule 6.45A(b)(ii)
and 6.45B(b)(ii) (which relate to the allocation of
orders represented in open outcry and generally
allow a Trading Permit Holder holding a complex
order to trade at the same price as the trading crowd
and public customer limit order book, provided at
least one leg of the complex order betters the
corresponding bid (offer) in the public customer
limit order book by at least one minimum trading
increment (i.e., $0.10, $0.05 or $0.01, as applicable)
or a $0.01 increment, which increment will be
determined by the Exchange on a class-by-class
basis).
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77879
execute against those individual orders
residing in the EBook provided the
complex order can be executed in full
(or in a permissible ratio) by the orders
in the EBook and provided the orders in
the EBook are priced equal to or better
than the individual quotes residing in
the EBook.
Second, complex orders that are
marketable against each other will
automatically execute provided the
execution is at a net price that has
priority over the individual orders and
quotes residing in the EBook. As noted
above, the allocation of a complex order
will otherwise be consistent with the
existing rules of trading priority
otherwise applicable to COB or COA.6
Third, to the extent that a marketable
complex order cannot automatically
execute when it is routed to COB or
after being subject to COA because there
are individual quotes residing in the
EBook that have priority, any part of the
order that may be executed will be
executed automatically and the part of
the order that cannot automatically
execute will be routed on a class-byclass basis to PAR or, at the order entry
firm’s discretion, to the order entry
firm’s booth. If an order is not eligible
to route to PAR, then the remaining
balance will be cancelled.
Finally, fourth, to the extent that a
complex order resting in COB becomes
marketable and cannot automatically
execute in full (or in a permissible
ratio), the full order will be subject to
COA (and the process for COA
described above). Having the system
automatically initiate a COA once such
a complex order resting in COB becomes
marketable provides an opportunity for
other market participants to match or
improve the net price and allows for an
opportunity for an automatic execution
before a marketable complex order is
routed for manual handling to PAR or
a booth.7 As noted above, after being
6 See
note 5, supra.
Exchange notes that, in these circumstances
when a resting complex order becomes marketable,
COA will automatically initiate regardless of
whether a Trading Permit Holder has requested that
the complex order be COA’d pursuant to Rule
6.53C.04. In this regard, the Exchange notes that,
currently, all of its Trading Permit Holders have
elected to have their COA-eligible orders COA’d. In
addition, the Exchange notes that other markets
have programs in place that provide for the
automatic auctioning of complex orders. See, e.g.,
NASDAQ OMX PHLX LLC (‘‘Phlx’’) Rule
1080(e)(i)(A) which, among other things, provides
that a complex order live auction (‘‘COLA’’) will
initiate if the Phlx system receives a complex order
that improves the Phlx complex order best debit or
credit price respecting the specific complex order
strategy that is the subject of the complex order.
During a COLA, Phlx market participants may bid
and offer against the COLA-eligible order pursuant
to the Phlx Rule.
7 The
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subject to COA, any part of the order
that may be executed will be executed
automatically and the part of the order
that cannot automatically execute will
be routed on a class-by-class basis to
PAR or, at the order entry firm’s
discretion, to the order entry firm’s
booth. If an order is not eligible to route
to PAR, then the remaining balance will
be cancelled.
The following examples illustrate the
operation of the proposed system
functionality:
Example 1: Assume an incoming market
complex order for 75 units is submitted to
COA, where the strategy involves the
purchase of SPX Dec 1250 calls and sale of
SPX Dec 1255 calls. At the conclusion of
COA, assume the best offer in the individual
SPX Dec 1250 call series is $27.90 for a size
of 50 contracts made up only of orders
resting in the EBook, and the next best offer
is $28.20 for 100 contracts made up only of
Lead Market-Maker quotes. Also assume the
best bid in the individual SPX Dec 1255 call
series is $22.90 with a size of 50 contracts
made up only of orders resting in the EBook,
and the next best bid is $22.50 made up only
of Lead Market-Maker quotes. The best
derived net leg market price would therefore
be $5.00 ($27.90¥$22.90). Also assume that
there is a COA response for 10 units at a net
price of $4.90. The incoming market order to
purchase 75 units of the call/put strategy
would receive a partial execution of 60 units:
10 units would execute at a net debit price
of $4.90 against the COA response (which
has priority over the individual orders net
priced at $5.00), and 50 units at a net debit
price of $5.00 against the orders resting in
each of the individual series legs (the
execution is in a permissible ratio and the
orders in the EBook are priced equal to or
better than the individual quotes residing in
the EBook). Because the remaining 15 units
are only marketable against the quotes in the
individual series legs at a net price of $5.70
($28.20¥$22.50), the 15 units would be
routed to PAR or, at the order entry firm’s
discretion, to the order entry firm’s booth, for
manual handling. If the order would
otherwise route to PAR but is not eligible to
route to PAR, then the remaining 15 units
will be cancelled.
Example 2: Assume a complex order for 75
units with a net debit price of $5.00 is resting
in COB, where the strategy involves the
purchase of SPX Dec 1250 calls and sale of
SPX Dec 1255 calls. By virtue of the fact that
it is resting the COB, the complex order is not
marketable—meaning there are no orders or
quotes within the derived net leg market
price or other complex orders within COB
against which the resting complex order may
trade. Assume there are no other complex
orders representing in the COB for the
strategy and also assume the best offer in the
individual SPX Dec 1250 call series is
$27.90, with a size of 100 contracts (50
contracts are orders and 50 contracts
represent the Lead Market-Maker quote) and
the best bid in the individual SPX Dec 1255
call series is $22.75, with a size of 100
contracts (50 contracts are orders and 50
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contracts represent the Lead Market-Maker
quote). The best derived net leg market price
would therefore be $5.15 ($27.90¥$22.75). If
the Lead Market-Maker bid in the SPX Dec
1255 call series is thereafter updated to
$22.90 (with a size of 100 contracts), the
derived net leg market price would become
$5.00 ($27.90¥$22.90) and the full size of
the resting complex order will become
marketable but cannot automatically execute.
As a result, the full size (75 units) of the
resting complex order would be subject to
COA. At the conclusion of COA, any part of
the complex order that may be executed
against orders in the EBook and other
complex orders will be automatically
executed. Any part of the order that is
marketable and cannot automatically execute
(because of Lead Market-Maker quotes in an
individual series leg(s)) will be routed on a
class-by-class basis to PAR or, at the order
entry firm’s discretion, to the order entry
firm’s booth. If an order is not eligible to
route to PAR, then the remaining balance
will be cancelled. To the extent any part of
the complex order is not marketable, it will
continue resting in COB.
Over time, the Exchange has
introduced various enhancements to the
operation of COB and COA, which
enhancements the Exchange believes are
generally designed to make the
processes operate more efficiently and
effectively, as well as to avoid
executions at extreme and potentially
erroneous prices. The Exchange believes
the instant proposed rule change is
another example of such an
enhancement. The Exchange believes
the proposed system functionality will
permit more efficient and effective
execution of complex orders in our
electronic trading environment. In
addition, the Exchange believes the
change will assist in preventing
complex orders from automatically
executing against the individual quotes
residing in the individual series legs at
potentially erroneous prices,
particularly when there are momentary
or inadvertent discrepancies that occur
between the pricing of an individual
series leg that is a component of a
complex order strategy. The Exchange
recognizes that Market-Makers could
encounter difficulties maintaining
quotations in the individual series legs
if the quotes are allowed to execute
against complex orders in COB or COA.
In particular, Market-Maker pricing
systems automatically update the price
of a Market-Maker’s quotations when
there is a move in the price of the
underlying stock, index, component
securities or related futures. When such
a change occurs, a Market-Maker will
need to send updates for its quotes all
[sic] the individual series legs it is
quoting in each of the Market-Maker’s
appointed classes. In the SPX options
class alone this can include thousands
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of series, and when considering all
series across a Market-Makers [sic]
various appointed classes, this can
include millions of series. Accordingly,
it is possible that the Market-Maker
could unintentionally trade with
another Market-Maker or market
participant via COB or COA before a
quote update(s) in the individual series
leg is processed.8 The result is
executions at price(s) that were not
intended and, at times, that may also be
at extreme or potentially erroneous
prices.
The proposed rule change is designed
to protect the Lead Market-Maker that
generate [sic] quotes in SPX, as well as
other Market-Makers and other market
participants that may trade against these
quotes with complex orders at extreme
or potentially erroneous prices. The
Exchange believes the proposed system
functionality is fair and reasonable with
respect to classes trading on the Hybrid
3.0 Platform in particular, where the
quotes represent the aggregate MarketMaker quoting interest in a series for the
trading crowd but the responsibility for
generating the quotes and satisfying
trades against those quotes in relation to
executions occurring through COB or
COA rests with the designated Lead
Market-Maker(s) that generates the
quote. The functionality will mitigate
the risk borne only by the Lead MarketMakers that a complex order may
execute against a quote in an individual
series leg at an extreme or potentially
erroneous price. The Exchange believes
that the proposed system functionality
is a reasonable limitation on Hybrid 3.0
Market-Maker quotations that will
appropriately address an operational
issue that would discourage MarketMakers, particularly Lead MarketMakers, from offering additional
liquidity in the individual series legs. It
also will prevent other Market-Makers
and other market participants from
receiving executions at extreme or
potentially erroneous prices.9
2. Statutory Basis
The proposed rule change is
consistent with Section 6(b) of the Act 10
in general and furthers the objectives of
8 Indeed, the Exchange has long recognized the
need to ameliorate small timing differences in
processing Market-Maker quotations updates by
delaying Market-Maker quotations from executing
against each other for up to one second. See, e.g.,
Exchange Rule 6.45B(d).
9 The Exchange has determined to limit the
application of this proposed rule change to Hybrid
3.0 classes. In the future, the Exchange may
determine to expand the alternate process of not
permitting complex orders to trade against MarketMaker quotes to other option classes. Any such
expansion would be the subject of a separate rule
change filing.
10 15 U.S.C. 78f(b).
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Federal Register / Vol. 76, No. 240 / Wednesday, December 14, 2011 / Notices
Section 6(b)(5) of the Act 11 in particular
in that it should promote just and
equitable principles of trade, serve to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and
protect investors and the public interest.
The Exchange believes that the
proposed rule change will facilitate the
orderly execution of complex orders in
our Hybrid 3.0 electronic trading
environment.
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 not necessary or
appropriate in furtherance of the
purposes of the Act.
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 proposal.
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 of such date (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 self-regulatory
organization 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.
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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 (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–CBOE–2011–114 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
11 15
U.S.C. 78f(b)(5).
VerDate Mar<15>2010
15:14 Dec 13, 2011
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–CBOE–2011–114. 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 (https://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 inspection and copying in
the Commission’s Public Reference
Room, 100 F Street, NE., Washington,
DC 20549, on official business days
between the hours of 10 a.m. and 3 p.m.
Copies of such filing also will be
available for inspection and copying at
the principal office of CBOE. 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–2011–114 and
should be submitted on or before
January 4, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2011–32034 Filed 12–13–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–65916; File No. SR–ISE–
2011–80]
Self-Regulatory Organizations;
International Securities Exchange,
LLC; Notice of Filing and Immediate
Effectiveness of Proposed Rule
Change Relating to API Fees
‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that, on
November 25, 2011, the International
Securities Exchange, LLC (the
‘‘Exchange’’ or the ‘‘ISE’’) 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 Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The ISE is proposing to amend its
Schedule of Fees regarding the
Exchange’s API or login fees. The text of
the proposed rule change is available on
the Exchange’s Web site (https://
www.ise.com), at the principal office of
the Exchange, 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
self-regulatory organization 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 self-regulatory organization 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 ISE is proposing to amend its
Schedule of Fees regarding the
Exchange’s API or login fees. ISE
currently charges its Members a fee for
each login that a Member utilizes for
quoting or order entry, with a lesser
charge for logins used for the limited
purpose of ‘‘listening’’ to broadcast
messages.3 The Exchange currently has
the following categories of authorized
logins: (1) Quoting, order entry and
listening (allowing the user to enter
quotes, orders, and perform all other
miscellaneous functions, such as setting
parameters and pulling quotes); (2)
December 8, 2011.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
12 17
Jkt 226001
77881
PO 00000
CFR 200.30–3(a)(12).
Frm 00116
Fmt 4703
Sfmt 4703
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Exchange Act Release No. 53522 (March 20,
2006), 71 FR 14975 (March 24, 2006) (SR–ISE–
2006–09).
2 17
E:\FR\FM\14DEN1.SGM
14DEN1
]]>Agencies
[Federal Register Volume 76, Number 240 (Wednesday, December 14, 2011)]
[Notices]
[Pages 77878-77881]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-32034]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65914; File No. SR-CBOE-2011-114]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Proposed Rule Change Related to Complex Order
Processing in Hybrid 3.0 Classes
December 8, 2011.
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 November 29, 2011, the Chicago Board Options Exchange,
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and
Exchange Commission (the ``Commission'') the proposed rule change as
described in Items I and II, which Items have been prepared by the
Exchange. The Commission is
[[Page 77879]]
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 Substance
of the Proposed Rule Change
The Exchange is proposing to amend its electronic complex order
rules. The text of the rule proposal is available on the Exchange's Web
site (https://www.cboe.org/legal), at the Exchange's Office of the
Secretary and at the Commission.
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 self-regulatory organization
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 those 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 parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
Currently, complex orders that are submitted to the electronic
complex order book (``COB'') or the complex order RFR auction process
(``COA'') automatically execute against individual orders and quotes
residing in the electronic book (``EBook'') provided the complex order
can be executed in full or in a permissible ratio, and against other
complex orders represented in COB or COA (as applicable).
The Exchange is proposing to revise the operation of COB and COA as
it relates to options classes trading on the Hybrid 3.0 Platform, which
currently only includes options on the S&P 500 Index (option symbol
SPX). The ``Hybrid 3.0 Platform'' is an electronic trading platform on
the Hybrid Trading System \3\ that allows one or more quoters to submit
electronic quotes which represent the aggregate Market-Maker quoting
interest in a series for the trading crowd. The quotes are represented,
along with other orders, in the EBook. The function of generating the
aggregate trading crowd quote is currently performed by certain
designated Lead Market-Makers.
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\3\ The ``Hybrid Trading System'' refers to the Exchange's
trading platform that allows Market-Makers to submit electronic
quotes in their appointed classes. See Rule 1.1(aaa).
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Under the proposed rule change, for each class trading on the
Hybrid 3.0 Platform, the Exchange may determine to not allow marketable
complex orders entered into COB and/or COA to automatically execute
with the individual quotes residing in the EBook.\4\ In such classes,
the allocation of such marketable complex orders against orders
residing in the EBook and other complex orders shall be based on the
best net price(s), as is currently the case under the existing rule. At
the same net price, multiple orders will be allocated subject to the
existing applicable COB or COA allocation algorithm,\5\ subject to the
following:
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\4\ Pursuant to Rule 6.53C.01, any determination by the Exchange
to designate a class for complex order execution in this manner will
be announced to the membership via Regulatory Circular.
\5\ For COB, at the same net price, (i) individual orders and
quotes in the EBook have first priority, provided the complex order
can be executed in full (or in a permissible ratio), with multiple
orders and quotes at the same price allocated based on the rules of
trading priority otherwise applicable to incoming electronic orders
in the individual component legs; and (ii) complex orders in COB
have second priority, with multiple complex orders at the same price
allocated based on the rules of trading priority otherwise
applicable to incoming electronic orders in the individual series
legs or such other algorithm as the Exchange may designate. For COA,
at the same net price, (i) individual orders and quotes residing in
the EBook have first priority, provided the complex order can be
executed in full (or in a permissible ratio), with multiple orders
allocated pursuant to the Ultimate Match Algorithm (``UMA'')
allocation described in Rule 6.45A or 6.45B, as applicable; (ii)
public customer complex orders resting in COB before, or that are
received during the COA auction, and public customer COA responses
collectively have second priority, with multiple orders/responses
allocated based on time priority; (iii) non-public customer orders
resting in COB before the COA auction have third priority, with
multiple orders allocated pursuant to the UMA allocation described
in Rule 6.54A or 6.45B, as applicable; and (iv) non-public customer
orders resting in COB that are received during the COA auction and
non-public customer COA responses collectively have fourth priority,
with multiple orders/responses allocated based on the capped UMA
(``CUMA'') allocation described in Rule 6.45A or 6.45B, as
applicable. See Rule 6.53C(c)(ii) and (d) and Interpretation and
Policy .09. The Exchange notes that the aforementioned electronic
allocation algorithms for COB and COA are consistent with Rule
6.45A(b)(ii) and 6.45B(b)(ii) (which relate to the allocation of
orders represented in open outcry and generally allow a Trading
Permit Holder holding a complex order to trade at the same price as
the trading crowd and public customer limit order book, provided at
least one leg of the complex order betters the corresponding bid
(offer) in the public customer limit order book by at least one
minimum trading increment (i.e., $0.10, $0.05 or $0.01, as
applicable) or a $0.01 increment, which increment will be determined
by the Exchange on a class-by-class basis).
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First, a complex order submitted to COB or COA, as applicable, that
is marketable against the individual orders residing in the EBook will
automatically execute against those individual orders residing in the
EBook provided the complex order can be executed in full (or in a
permissible ratio) by the orders in the EBook and provided the orders
in the EBook are priced equal to or better than the individual quotes
residing in the EBook.
Second, complex orders that are marketable against each other will
automatically execute provided the execution is at a net price that has
priority over the individual orders and quotes residing in the EBook.
As noted above, the allocation of a complex order will otherwise be
consistent with the existing rules of trading priority otherwise
applicable to COB or COA.\6\
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\6\ See note 5, supra.
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Third, to the extent that a marketable complex order cannot
automatically execute when it is routed to COB or after being subject
to COA because there are individual quotes residing in the EBook that
have priority, any part of the order that may be executed will be
executed automatically and the part of the order that cannot
automatically execute will be routed on a class-by-class basis to PAR
or, at the order entry firm's discretion, to the order entry firm's
booth. If an order is not eligible to route to PAR, then the remaining
balance will be cancelled.
Finally, fourth, to the extent that a complex order resting in COB
becomes marketable and cannot automatically execute in full (or in a
permissible ratio), the full order will be subject to COA (and the
process for COA described above). Having the system automatically
initiate a COA once such a complex order resting in COB becomes
marketable provides an opportunity for other market participants to
match or improve the net price and allows for an opportunity for an
automatic execution before a marketable complex order is routed for
manual handling to PAR or a booth.\7\ As noted above, after being
[[Page 77880]]
subject to COA, any part of the order that may be executed will be
executed automatically and the part of the order that cannot
automatically execute will be routed on a class-by-class basis to PAR
or, at the order entry firm's discretion, to the order entry firm's
booth. If an order is not eligible to route to PAR, then the remaining
balance will be cancelled.
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\7\ The Exchange notes that, in these circumstances when a
resting complex order becomes marketable, COA will automatically
initiate regardless of whether a Trading Permit Holder has requested
that the complex order be COA'd pursuant to Rule 6.53C.04. In this
regard, the Exchange notes that, currently, all of its Trading
Permit Holders have elected to have their COA-eligible orders COA'd.
In addition, the Exchange notes that other markets have programs in
place that provide for the automatic auctioning of complex orders.
See, e.g., NASDAQ OMX PHLX LLC (``Phlx'') Rule 1080(e)(i)(A) which,
among other things, provides that a complex order live auction
(``COLA'') will initiate if the Phlx system receives a complex order
that improves the Phlx complex order best debit or credit price
respecting the specific complex order strategy that is the subject
of the complex order. During a COLA, Phlx market participants may
bid and offer against the COLA-eligible order pursuant to the Phlx
Rule.
---------------------------------------------------------------------------
The following examples illustrate the operation of the proposed
system functionality:
Example 1: Assume an incoming market complex order for 75 units
is submitted to COA, where the strategy involves the purchase of SPX
Dec 1250 calls and sale of SPX Dec 1255 calls. At the conclusion of
COA, assume the best offer in the individual SPX Dec 1250 call
series is $27.90 for a size of 50 contracts made up only of orders
resting in the EBook, and the next best offer is $28.20 for 100
contracts made up only of Lead Market-Maker quotes. Also assume the
best bid in the individual SPX Dec 1255 call series is $22.90 with a
size of 50 contracts made up only of orders resting in the EBook,
and the next best bid is $22.50 made up only of Lead Market-Maker
quotes. The best derived net leg market price would therefore be
$5.00 ($27.90-$22.90). Also assume that there is a COA response for
10 units at a net price of $4.90. The incoming market order to
purchase 75 units of the call/put strategy would receive a partial
execution of 60 units: 10 units would execute at a net debit price
of $4.90 against the COA response (which has priority over the
individual orders net priced at $5.00), and 50 units at a net debit
price of $5.00 against the orders resting in each of the individual
series legs (the execution is in a permissible ratio and the orders
in the EBook are priced equal to or better than the individual
quotes residing in the EBook). Because the remaining 15 units are
only marketable against the quotes in the individual series legs at
a net price of $5.70 ($28.20-$22.50), the 15 units would be routed
to PAR or, at the order entry firm's discretion, to the order entry
firm's booth, for manual handling. If the order would otherwise
route to PAR but is not eligible to route to PAR, then the remaining
15 units will be cancelled.
Example 2: Assume a complex order for 75 units with a net debit
price of $5.00 is resting in COB, where the strategy involves the
purchase of SPX Dec 1250 calls and sale of SPX Dec 1255 calls. By
virtue of the fact that it is resting the COB, the complex order is
not marketable--meaning there are no orders or quotes within the
derived net leg market price or other complex orders within COB
against which the resting complex order may trade. Assume there are
no other complex orders representing in the COB for the strategy and
also assume the best offer in the individual SPX Dec 1250 call
series is $27.90, with a size of 100 contracts (50 contracts are
orders and 50 contracts represent the Lead Market-Maker quote) and
the best bid in the individual SPX Dec 1255 call series is $22.75,
with a size of 100 contracts (50 contracts are orders and 50
contracts represent the Lead Market-Maker quote). The best derived
net leg market price would therefore be $5.15 ($27.90-$22.75). If
the Lead Market-Maker bid in the SPX Dec 1255 call series is
thereafter updated to $22.90 (with a size of 100 contracts), the
derived net leg market price would become $5.00 ($27.90-$22.90) and
the full size of the resting complex order will become marketable
but cannot automatically execute. As a result, the full size (75
units) of the resting complex order would be subject to COA. At the
conclusion of COA, any part of the complex order that may be
executed against orders in the EBook and other complex orders will
be automatically executed. Any part of the order that is marketable
and cannot automatically execute (because of Lead Market-Maker
quotes in an individual series leg(s)) will be routed on a class-by-
class basis to PAR or, at the order entry firm's discretion, to the
order entry firm's booth. If an order is not eligible to route to
PAR, then the remaining balance will be cancelled. To the extent any
part of the complex order is not marketable, it will continue
resting in COB.
Over time, the Exchange has introduced various enhancements to the
operation of COB and COA, which enhancements the Exchange believes are
generally designed to make the processes operate more efficiently and
effectively, as well as to avoid executions at extreme and potentially
erroneous prices. The Exchange believes the instant proposed rule
change is another example of such an enhancement. The Exchange believes
the proposed system functionality will permit more efficient and
effective execution of complex orders in our electronic trading
environment. In addition, the Exchange believes the change will assist
in preventing complex orders from automatically executing against the
individual quotes residing in the individual series legs at potentially
erroneous prices, particularly when there are momentary or inadvertent
discrepancies that occur between the pricing of an individual series
leg that is a component of a complex order strategy. The Exchange
recognizes that Market-Makers could encounter difficulties maintaining
quotations in the individual series legs if the quotes are allowed to
execute against complex orders in COB or COA. In particular, Market-
Maker pricing systems automatically update the price of a Market-
Maker's quotations when there is a move in the price of the underlying
stock, index, component securities or related futures. When such a
change occurs, a Market-Maker will need to send updates for its quotes
all [sic] the individual series legs it is quoting in each of the
Market-Maker's appointed classes. In the SPX options class alone this
can include thousands of series, and when considering all series across
a Market-Makers [sic] various appointed classes, this can include
millions of series. Accordingly, it is possible that the Market-Maker
could unintentionally trade with another Market-Maker or market
participant via COB or COA before a quote update(s) in the individual
series leg is processed.\8\ The result is executions at price(s) that
were not intended and, at times, that may also be at extreme or
potentially erroneous prices.
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\8\ Indeed, the Exchange has long recognized the need to
ameliorate small timing differences in processing Market-Maker
quotations updates by delaying Market-Maker quotations from
executing against each other for up to one second. See, e.g.,
Exchange Rule 6.45B(d).
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The proposed rule change is designed to protect the Lead Market-
Maker that generate [sic] quotes in SPX, as well as other Market-Makers
and other market participants that may trade against these quotes with
complex orders at extreme or potentially erroneous prices. The Exchange
believes the proposed system functionality is fair and reasonable with
respect to classes trading on the Hybrid 3.0 Platform in particular,
where the quotes represent the aggregate Market-Maker quoting interest
in a series for the trading crowd but the responsibility for generating
the quotes and satisfying trades against those quotes in relation to
executions occurring through COB or COA rests with the designated Lead
Market-Maker(s) that generates the quote. The functionality will
mitigate the risk borne only by the Lead Market-Makers that a complex
order may execute against a quote in an individual series leg at an
extreme or potentially erroneous price. The Exchange believes that the
proposed system functionality is a reasonable limitation on Hybrid 3.0
Market-Maker quotations that will appropriately address an operational
issue that would discourage Market-Makers, particularly Lead Market-
Makers, from offering additional liquidity in the individual series
legs. It also will prevent other Market-Makers and other market
participants from receiving executions at extreme or potentially
erroneous prices.\9\
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\9\ The Exchange has determined to limit the application of this
proposed rule change to Hybrid 3.0 classes. In the future, the
Exchange may determine to expand the alternate process of not
permitting complex orders to trade against Market-Maker quotes to
other option classes. Any such expansion would be the subject of a
separate rule change filing.
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2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the Act
\10\ in general and furthers the objectives of
[[Page 77881]]
Section 6(b)(5) of the Act \11\ in particular in that it should promote
just and equitable principles of trade, serve to remove impediments to
and perfect the mechanism of a free and open market and a national
market system, and protect investors and the public interest. The
Exchange believes that the proposed rule change will facilitate the
orderly execution of complex orders in our Hybrid 3.0 electronic
trading environment.
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
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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 competition not necessary or appropriate in furtherance of
the purposes of the Act.
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
proposal.
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 of such
date (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 self-regulatory organization 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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-CBOE-2011-114 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2011-114. 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 (https://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 inspection and
copying in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of CBOE. 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-2011-114 and should be
submitted on or before January 4, 2012.
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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-32034 Filed 12-13-11; 8:45 am]
BILLING CODE 8011-01-P
