Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Related to Stock-Option Processing, 10026-10033 [2012-3902]
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Federal Register / Vol. 77, No. 34 / Tuesday, February 21, 2012 / Notices
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, 100 F Street NE.,
Washington, DC 20549–1090, 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 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–C2–
2012–004, and should be submitted on
or before March 13, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.30
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–3901 Filed 2–17–12; 8:45 am]
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66394; File No. SR–CBOE–
2012–005]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of a
Proposed Rule Change Related to
Stock-Option Processing
mstockstill on DSK4VPTVN1PROD with NOTICES
February 14, 2012.
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 February
7, 2012, 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
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
30 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
Designated Broker-Dealer(s)
The Exchange is proposing to amend
its complex order processing rules to
revise the procedures for electronically
processing stock-option orders. 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 the
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
The Exchange proposes to revise is
[sic] procedures for electronically
processing stock-option orders under
Rule 6.53C in order to (i) revise the
procedures for routing the stock leg of
a stock-option order; (ii) modify the
procedure for executing for [sic] stockoption orders to no longer permit
‘‘legging,’’ except in one limited context;
(iii) modify the default electronic
allocation algorithm applicable for
stock-option orders in the complex
order book (‘‘COB’’) and the complex
order RFR auction (‘‘COA’’); 3 (iv)
incorporate an additional price check
parameter specific to the electronic
processing of stock-option orders and
modify an existing price check
parameter and re-COA features
(described in more detail below) to
apply to stock-option orders; and (v)
make other changes to reorganize and
simplify the rule text. In addition, the
Exchange is proposing certain changes
to simplify the definitions for complex
orders, including stock-option orders,
3 COA is a process for auctioning eligible complex
orders, including stock-option orders, for price
improvement. See Rule 6.53C(d) and .06(d).
1 15
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subject to electronic processing under
Rule 6.53C.
1. Purpose
BILLING CODE 8011–01–P
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comments on the proposed rule change
from interested persons.
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The first purpose of this proposed
rule change is to revise the procedures
for routing the stock leg of a stockoption order. Interpretation and Policy
.06 to Rule 6.53C, Complex Orders on
the Hybrid System, currently describes
the procedure for processing electronic
stock-option orders. The procedure
provides that the stock portion of a
stock-option order shall be
electronically executed on the CBOE
Stock Exchange, LLC (‘‘CBSX,’’ CBOE’s
stock execution facility) consistent with
CBSX order execution rules. The
Exchange proposes to revise the process
to instead provide that the Exchange
will electronically transmit orders
related to a stock leg for execution by a
broker-dealer designated by the
Exchange (a ‘‘designated broker-dealer’’)
on behalf of the parties to the trade. The
Exchange will transmit the underlying
stock leg order to a designated brokerdealer for execution once the Exchange
trading system determines that a stockoption order trade is possible and at
what net prices. The stock leg
component will be transmitted to the
designated broker-dealer as two paired
orders with a designated limit price,
subject to one limited exception
pertaining to the stock leg of an
unmatched market stock-option order
(which is described in more detail
below). The designated broker-dealer
will act as agent for the stock leg of the
stock-option orders. The designated
broker-dealer may determine to match
the orders on an exchange or ‘‘over-thecounter.’’
To participate in this automated
process for stock-option orders, an
Exchange Trading Permit Holder
(‘‘TPH’’) must enter into a customer
agreement with one or more designated
broker-dealers that are not affiliated
with the Exchange.4 In addition, TPHs
may only submit complex orders with a
stock component if such orders comply
with the Qualified Contingent Trade
Exemption (the ‘‘QCT Exemption’’) from
Rule 611(a) of Regulation NMS.5 TPHs
submitting such complex orders
represent that such orders comply with
the QCT Exemption. The Exchange
intends to address fees related to routing
4 This provision for a designated broker-dealer is
similar to a provision in the International Securities
Exchange Rule 722.02, except that CBOE’s proposed
provision makes it clear the broker-dealer(s) that are
designated by the Exchange to perform this function
are not affiliated with CBOE.
5 17 CFR 242.611(a).
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the stock portion of stock-option trades
in a separate rule change filing.
The Exchange believes that the
electronic communication of the orders
by the Exchange to the designated
broker-dealer is a more efficient means
for processing stock-option orders than
the system of routing orders to CBSX.
The designated broker-dealer will be
responsible for the proper execution,
trade reporting and submission to
clearing of the stock trade that is part of
a stock option order. In this regard, once
the orders are communicated to the
broker-dealer for execution, the brokerdealer has complete responsibility for
determining whether the orders may be
executed in accordance with all the
rules applicable to execution of equity
orders, including compliance with the
applicable short sale, trade-through and
trade reporting rules. As with the
current procedure, if the broker-dealer
cannot execute the equity orders at the
designated price, the stock-option
combination order will not be executed
on the Exchange.6
With respect to trade throughs in
particular, the Exchange believes that
the stock component of a stock-option
order is eligible for the QCT Exemption
from Rule 611(a) of Regulation NMS. A
Qualified Contingent Trade (‘‘QCT’’) is
a transaction consisting of two or more
component orders, executed as agent or
principal, that satisfy the six elements
in the Commission’s order exempting
QCTs from the requirements of Rule
611(a), which requires trading centers to
establish, maintain, and enforce written
policies and procedures that are
reasonably designed to prevent tradethroughs.7 The Exchange believes that
the stock portion of a complex order
under this proposal complies with all
six requirements.8 Moreover, as
explained below, CBOE’s Hybrid
System will validate compliance with
each requirement such that any matched
order received by a designated brokerdealer under this proposal has been
6 See existing Rule 6.53C.01(a) and proposed
changes thereto.
7 See Securities Exchange Act Release No. 57620
(April 4, 2008), 73 FR 19271 (April 9, 2008) (‘‘QCT
Release’’); see also Securities Exchange Act Release
No. 54389 (August 31, 2006), 71 FR 52829
(September 7, 2006).
8 As discussed in more detail below, the stock
component of all stock-option orders will be
transmitted to a designated routing broker as paired
stock orders with a specified limit price, with one
limited exception. The exception pertains to the
stock leg of an unmatched market stock-option
order. In the limited circumstances when the
Exchange transmits the stock component leg of an
unmatched market stock-option order to the
designed [sic] routing broker, such a stock
component leg will be subject to NBBO pricing (and
therefore not be processed subject to the QCT
Exemption).
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checked for compliance with the
exemption to the extent noted below:
(1) At least one component order is in
an NMS stock: The stock component
must be an NMS stock, which is
validated by the Hybrid System;
(2) All components are effected with
a product or price contingency that
either has been agreed to by the
respective counterparties or arranged for
by a broker-dealer as principal or agent:
A complex order, by definition, is
executed at a single net credit/debit
price and this price contingency applies
to all the components of the order, such
that the stock price computed and sent
to the designated broker-dealer allows
the stock order to be executed at the
proper net debit/credit price based on
the execution price of each of the option
legs, which is determined by the Hybrid
System;
(3) The execution of one component
is contingent upon the execution of all
other components at or near the same
time: Once a stock-option is accepted
and validated by the Hybrid System, the
entire package is processed as a single
transaction and each of the option leg(s)
and stock components are
simultaneously processed;
(4) The specific relationship between
the component orders (e.g., the spread
between the prices of the component
orders) is determined at the time the
contingent order is placed: Stock-option
orders, upon entry, must have a size for
each component and a net debit/credit
price (or market price), which the
Hybrid System validates and processes
to determine the ratio between the
components; an order is rejected if the
net debit/credit price (or market price)
and size are not provided on the order;
(5) The component orders bear a
derivative relationship to one another,
represent different classes of shares of
the same issuer, or involve the securities
of participants in mergers or with
intentions to merge that have been
announced or since cancelled: Under
this proposal, the stock component must
be the underlying security respecting
the option leg(s), which is validated by
the Hybrid System; and
(6) The transaction is fully hedged
(without regard to any prior existing
position) as a result of the other
components of the contingent trade:
Under this proposal and as discussed in
more detail below, the ratio between the
options and stock must be a conforming
ratio (e.g., largest option leg to stock
cannot exceed a ratio of eight-to-one and
multiple options legs cannot exceed a
ratio of three-to-one), which the Hybrid
System validates, and which under
reasonable risk valuation
methodologies, means that the stock
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10027
position is fully hedged. In addition, if
all option and stock component legs are
on the same side of the market, which
the Hybrid System also validates, then
the order will not be eligible for
electronic processing pursuant to Rule
6.53C.
Furthermore, as noted above,
proposed Rule 6.53C.06(a) provides that
TPHs may only submit complex orders
with a stock component if such orders
comply with the QCT Exemption. TPHs
submitting such complex orders with a
stock component represent that such
orders comply with the QCT Exemption.
Thus, the Exchange believes that
complex orders consisting of a stock
component will comply with the
exemption and that the Hybrid System
will validate such compliance as noted
above to assist its designated routing
broker(s) in carrying out its
responsibilities as agent for these orders.
The Exchange believes the new
process offers effective and efficient
automatic execution for both the options
and stock components of a stock-option
order and it should promote just and
equitable principles of trade and remove
impediments to and perfect the
mechanism of a free and open market
and a national market system by
enhancing the electronic processing of
the stock-option orders. However, this
process is not exclusive. The Exchange
notes that TPHs will be able to continue
using open outcry procedures for
executing stock-option orders if they
choose to do so.9 TPHs can also utilize
other exchanges’ systems (several of
which offer stock-option processing) or
avoid using stock-option orders.
Legging
In conjunction with this change, the
second purpose of this proposed rule
change is to revise the stock-option
procedure to provide that ‘‘legging’’
against the individual orders and quotes
in the CBOE and CBSX electronic books
(‘‘EBooks’’) will no longer occur for
stock-option orders,10 except that that
legging may occur in the limited
instance provided in Rule 6.53C.06(d)
for eligible market orders that have been
subject to a COA (which market order
9 Stock-option orders may be represented in open
outcry by floor brokers or Exchange PAR Officials.
See, e.g., Rules 6.45A(b) and 6.45B(b).
10 Currently under Rule 6.53C complex orders,
including stock-option orders, are eligible to trade
with other complex orders or by ‘‘legging’’ with the
individual orders and quotes residing in the EBook
for the individual component legs provided the
complex order can be executed in full (or in a
permissible ratio) by the orders and quotes in the
EBook in those individual component legs. In the
case of stock-option orders that are ‘‘legged,’’ the
stock leg would trade with CBSX’s EBook and the
option series leg(s) with the CBOE EBook.
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process is proposed to be revised as
described below).11 The Exchange
believes that limiting the electronic
trading of stock-option orders pursuant
to Rule 6.53C to executions against
other stock-option orders in the manner
proposed will provide for more efficient
execution and processing of stockoption orders and will assist with the
maintenance of fair and orderly markets
by helping to mitigate the potential risks
associated with legging stock-option
orders, including the risk of one leg of
the stock-option order going unexecuted
(and thereby not achieving a complete
stock-option order execution and having
a partial position that is unhedged).12
A limited exception will continue to
apply for certain market stock-option
orders, with certain modifications.
Currently, under Rule 6.53C.06(d), if at
the conclusion of a COA a stock-option
order that is an eligible market order 13
cannot be filled in whole or in a
permissible ratio, then any remaining
balance of the option leg(s) routes to the
CBOE Hybrid Trading System for
processing as a simple market order(s)
consistent with CBOE’s order execution
rules and any remaining balance of the
stock leg routes to CBSX for processing
as a simple market order consistent with
CBSX’s order execution rules.14 This
alternate legging functionality is
intended to assist in the automatic
execution and processing of stockoption orders that are market orders.
The Exchange notes that when a stockoption order is legged in this manner, it
is possible for CBOE to route the option
leg(s) to another options exchange and/
or for CBSX to route the stock leg to
11 The Exchange notes that at least one other
options exchange that offers electronic complex
order processing does not ‘‘leg’’ stock-option orders.
See, e.g., NASDAQ OMX PHLX LLC (‘‘Phlx’’) Rule
1080.08(f)(iii)(A)(1).
12 That is not to say that the Exchange would not
determine to permit additional ‘‘legging’’ of stockoption orders under Rule 6.53C in the future. Any
such change to the electronic processing of stockoption orders under Rule 6.53C would be subject
to a separate rule change filing.
13 For purposes of this legging functionality, an
‘‘eligible market order’’ means a stock-option order
that is within the designated size and order type
parameters, determined by the Exchange on a classby-class basis, and for which the national best bid
or offer (‘‘NBBO’’) is within designated size and
price parameters, as determined by the Exchange
for the individual leg. The rule currently provides
that the designated NBBO price parameters will be
determined based on a minimum bid price for sell
orders and a maximum offer price for buy orders.
The Exchange may also determine to limit the
trading times within regular trading hours that the
legging functionality will be available. See Rule
6.53C.06(d). Pursuant to Rule 6.53C.01, any
determination by the Exchange on these parameters
will be announced to TPHs via Regulatory Circular.
14 Pursuant to Rule 6.53C.01, any determination
by the Exchange to route stock-option market orders
in this manner will be announced to TPHs via
Regulatory Circular.
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another stock exchange, consistent with
their respective rules.15 As proposed to
be revised, the Exchange may determine
to continue to make this ‘‘legging’’
functionality available for stock-option
orders that are eligible market orders.
The legging functionality will continue
to operate in the same manner, with the
exception that the stock leg will no
longer route to CBSX and an order
eligibility provision will be eliminated
from the rule.16 Instead, the Exchange
will electronically transmit the stock leg
to a designated broker-dealer, who will
represent the order on behalf of the
party that submitted the stock-option
order.
This legging functionality is intended
to assist in the automatic execution and
processing of stock-option orders that
are market orders. The Exchange
believes the order eligibility parameters
provide the Exchange with the
flexibility to assist with the
maintenance of orderly markets by
helping to mitigate the potential risks
associated with legging stock option
orders, e.g., the risk of a [sic] order
drilling through multiple price points
on another exchange (thereby resulting
in execution at prices that are away
from the NBBO and potentially
erroneous), and/or the risk of one leg of
the stock-option order going unexecuted
(thereby not achieving a complete stockoption order execution and having a
partial position that is unhedged).
Allocation Algorithms
The third purpose of this proposed
rule change is to modify the default
electronic allocation algorithm
applicable for stock-option orders in
COB and COA. With respect to COB,
Interpretation and Policy .06(b), (c) and
(f), taken together, currently provide
that stock-option orders submitted to
COB will trade in the following
sequence: (i) Public customer orders
resting in the EBook in each of the
individual options leg(s) of a stockoption order have first priority; (ii)
stock-option orders resting in COB have
second priority, with public customer
15 See, e.g., CBOE’s Rules 6.14A, Hybrid Agency
Liaison 2 (HAL2), and 6.14B, Order Routing to
Other Exchanges, and CBSX’s Rule 52.6, Processing
of Round-lot Orders.
16 See note 13, supra, for a description of ‘‘eligible
market orders.’’ The Exchange is proposing to
eliminate an eligible market order provision that
permits the Exchange to specify a designated NBBO
price parameter based on a maximum offer price for
buy orders. The Exchange has no intention of
utilizing this parameter feature and is therefore
proposing to delete it from the rules at this time.
(By contrast, the Exchange will maintain a
provision that permits the Exchange to specify a
designated NBBO price parameter based on a
minimum bid price for sell orders.) See proposed
changes to Rule 6.53C.06(d).
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priority and then time priority; and (iii)
individual orders and quotes resting in
the EBook in each of the individual
options leg(s) have third priority
provided the order can be executed in
full or in a permissible ratio. Because
the Exchange is proposing to no longer
permit ‘‘legging’’ of orders in COB
against the individual orders and quotes
in the component legs, the Exchange is
proposing to the [sic] amend the
algorithm with respect to COB to
provide that stock-option orders that are
marketable against each other will
automatically execute. In the event there
are multiple stock-option orders at the
same price, they will be allocated
pursuant to the rules of trading priority
otherwise applicable to incoming
electronic orders in the individual series
legs (or such other allocation algorithm
as the Exchange may designate pursuant
to Rule 6.53C.09).17
As a condition for a stock-option
order to execute against another stockoption order in COB, the execution must
be at a net price where the individual
options series leg(s) of the stock-option
order has priority over the individual
orders and quotes residing in the CBOE
EBook (the ‘‘EBook Priority Condition’’).
To satisfy the EBook Priority Condition,
the individual option series leg(s) of a
stock-option order (i) must not trade
inferior to CBOE’s best bid (offer) in the
individual component series, and (ii)
must not trade at CBOE’s best bid (offer)
in the individual component series if
one or more public customer orders are
resting at the best bid (offer) in each of
the component series and the stockoption order could otherwise be
executed in full (or in a permissible
ratio).
Again, because there will be no
legging, the Exchange is also proposing
to amend the algorithm with respect to
COA. Interpretation and Policy .06(b),
(d) and (f), taken together, currently
provide that stock-option orders
submitted to COA will trade in the
following sequence: (i) Public customer
orders resting in the EBook in each of
the individual options leg(s) of a stockoption order have first priority; (ii)
public customer stock-option orders
resting in COB before, or that are
received during, the COA Response
17 The allocation algorithms for the individual
series legs include price-time, pro-rata, and the
ultimate matching algorithm (‘‘UMA’’) base
priorities and a combination of various optional
priority overlays pertaining to public customer
priority, Market-Maker participation entitlements,
small order preference, and market turner. See
Rules 6.45A, Priority and Allocation of Equity
Option Trades on the CBOE Hybrid System, and
6.45B, Priority and Allocation of Trades in Index
Options and Options on ETFs on the CBOE Hybrid
System.
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Federal Register / Vol. 77, No. 34 / Tuesday, February 21, 2012 / Notices
Time Interval 18 and public customer
responses collectively have second
priority, with multiple orders ranked by
time priority; (iii) non-public customer
stock-option orders resting in the COB
before the COA Response Time Interval
have third priority, with multiple orders
subject to the UMA allocation algorithm
described in Rule 6.45A or 6.45B, as
applicable; (iv) non-public customer
stock-option orders resting in COB that
are received during the Response Time
Interval and non-public customer
responses collectively have fourth
priority, with multiple orders subject to
the Capped UMA (‘‘CUMA’’) allocation
described in Rule 6.45A or 6.45B, as
applicable; and (iv) all other individual
orders and quotes residing in the EBook
have fifth priority, with multiple
interest subject to the UMA allocation
algorithm described in Rule 6.45A or
6.45B, as applicable. Because the
Exchange is proposing to no longer
permit ‘‘legging’’ of orders in COA
against the individual orders and quotes
in the component legs (except in the
limited instance involving market
orders described above), items (i) and
(vi) above will no longer be applicable.
Instead, the Exchange is proposing to
amend the algorithm with respect to
COA to provide that, in the event there
are multiple stock-option orders at the
same price, they will trade in the
following sequence: (i) Public customer
stock-option orders resting in COB
before, or that are received during, the
COA Response Time Interval and public
customer responses collectively have
first priority, with multiple orders
ranked by time priority; (ii) non-public
customer stock-option orders resting in
the COB before the COA Response Time
Interval have second priority, with
multiple orders subject to the UMA
allocation algorithm described in Rule
6.45A or 6.45B, as applicable; and (iii)
non-public customer stock-option
orders resting in COB that are received
during the Response Time Interval and
non-public customer responses
collectively have third priority, with
multiple orders subject to the CUMA
allocation described in Rule 6.45A or
6.45B, as applicable.
As with COB, as a condition for a
stock-option order to execute against
another stock-option order through
COA, the execution must satisfy the
EBook Priority Condition described
above.
18 The COA ‘‘Responses [sic] Time Interval’’
means the period of time during which responses
to the RFR may be entered. The Exchange
determines the length of the Response Time Interval
on a class-by-class basis, however, the duration
shall not exceed three (3) seconds. See Rule
6.53C(d)(iii)(2).
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The system also has some features
that would apply to the extent that a
stock-option order is or becomes
marketable. First, to the extent that a
marketable stock-option order cannot
automatically execute in full (or in a
permissible ratio) when it is routed to
COB or after being subject to COA
because there are individual orders and
quotes residing in the EBook that have
priority (but the order resting in COB
would not trade against them because
there will be no ‘‘legging’’), any part of
the order that may be executed would
be executed automatically and the part
that cannot automatically execute
would 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
would be cancelled. Second, to the
extent that a stock-option order resting
in COB becomes marketable against the
derived net market (and cannot
automatically execute because there is
no ‘‘legging’’), the full order would be
subject to COA (and the processing
described above). For purposes of this
feature, the ‘‘derived net market’’ for a
given stock-option strategy would be
calculated using the Exchange’s best bid
or offer in the individual option series
leg(s) and the NBBO in the stock leg.
The Exchange notes this feature would
only be applicable to resting stockoption orders that become marketable
against the derived net market. This
feature would not be applicable to
resting stock-option [sic] that would
become marketable with other stockoption orders. Having the system
automatically initiate a COA once such
a stock-option order resting in COB
becomes marketable against the derived
net market 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 stock-option order
is routed for manual handling to PAR or
a booth.19 As noted above, after being
19 The Exchange notes that, in these
circumstances when a resting stock-option order
becomes marketable, COA will automatically
initiate regardless of whether a TPH has requested
that the stock-option order be COA’d pursuant to
Rule 6.53C.04. In this regard, the Exchange notes
that, currently, all of its TPHs 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., 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.
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subject to COA, any part of the order
that may be executed would be executed
automatically and the part of the order
that cannot automatically execute
would 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
would be cancelled.
The following examples illustrate the
operation of the proposed system
functionality:
Example 1: Assume an incoming market
stock-option order for 75 units is submitted
to COA, where the strategy involves the sale
of 75 call contracts and purchase of 7,500
stock shares. At the conclusion of COA,
assume the best net price response is $9.13
for 50 units and the best derived net market
price is 9.15 for 100 units. The incoming
market order to purchase 75 units of the
stock-option strategy would receive a partial
execution of 50 units at a net price of $9.13.
Because the remaining 25 units are
marketable against individual orders and
quotes in the EBook, the 25 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 25 units
will be cancelled.20
Example 2: Assume a stock-option order
for 75 units is resting in COB, where the
strategy involves the sale of 75 call contracts
and purchase of 7,500 stock shares at a net
debit price of $9.13. By virtue of the fact that
it is resting [sic] the COB, the stock-option
order is not marketable—meaning there are
no orders or quotes within the derived net
market price or other stock-option orders
within COB against which the resting stockoption order may trade. Assume there are no
other stock-option orders representing [sic] in
the COB for the strategy and also assume the
best derived net market price for the strategy
is a net price of $9.15 per unit for 100 units.
If the price of the component option series
leg or the stock is thereafter updated such
that the derived net market price becomes
$9.13 per unit for 100 units, then the full size
of the resting stock-option order will become
marketable but cannot automatically execute.
As a result, the full size (75 units) of the
resting stock-option order would be subject
to COA. At the conclusion of COA, any part
of the stock-option order that may be
executed against other stock-option orders or
auction responses will be automatically
executed. Any part of the order that is
marketable and cannot automatically execute
20 However, if the Exchange has activated the
market stock-option order ‘‘legging’’ functionality
and the and the [sic] order is eligible, in lieu of
routing to PAR or a booth, any remaining balance
of the option leg will route to the CBOE Hybrid
Trading System for processing as a simple market
order and any remaining balance of the stock leg
will be electronically transmitted by the Exchange
to a designated broker-dealer, who will represent
the order on behalf of the party that submitted the
stock-option order. See note 13, supra, and
surrounding discussion on Legging.
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(because the stock-option order cannot ‘‘leg’’
against the derived net market) 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 stock-option order is not marketable, it
will continue resting in COB.
mstockstill on DSK4VPTVN1PROD with NOTICES
Price Protection and Re-COA Features
The fourth purpose of this proposed
rule change is to adopt a new price
check parameter applicable to the
electronic processing of stock-option
orders and to make some modification
to an existing price check parameter to
address stock-option orders. In
particular, the Exchange is proposing to
provide that, on a class-by-class basis,
the Exchange may determine (and
announce to TPHs via Regulatory
Circular) to not automatically execute a
stock-option order that is marketable if,
following COA, the execution would not
be within the acceptable derived net
market for the strategy that existed at
the start of COA. As indicated above, a
‘‘derived net market’’ for a strategy will
be calculated using the Exchange’s best
bid or offer in the individual option
series leg(s) and the NBBO in the stock
leg. An ‘‘acceptable derived net market’’
for a strategy will be calculated using
the Exchange’s best bid or offer in the
individual option series leg(s) and the
NBBO in the stock leg plus/minus an
acceptable tick distance. The
‘‘acceptable tick distance’’ will be
determined by the Exchange on a classby-class and premium basis.21 Such a
21 It should be noted that this is simply a
parameter for determining whether a stock-option
order will be subject to automatic execution, or
routed to PAR, a booth or cancelled. A stock-option
order that is subject to automatic execution remains
subject to the applicable priority requirements
prescribed in Rule 6.53C.
It should also be noted that the Exchange has not
proposed to prescribe a minimum acceptable tick
distance for this parameter (e.g., the acceptable tick
distance may be established at 0). This will provide
the Exchange with the flexibility to set the price
check feature so that automatic executions of stockoption orders must be within the derived net
market, which considers the Exchange’s best bid or
offer for the options component leg(s) and the
NBBO for the stock component leg. The Exchange
believes it is reasonable and appropriate to utilize
the Exchange best bid and offer in the calculation
as the option component leg(s) are not permitted to
trade at a price inferior to the Exchange’s best bid
and offer. The Exchange also believes it is
reasonable and appropriate to consider the NBBO
for the stock component leg in the calculation as the
NBBO should serve as a reasonable proxy for what
may be considered a reasonable price for the
automatic execution of the stock component leg.
However, the Exchange also recognizes that some
range outside the NBBO may also be appropriate for
determining whether an automatic execution
should occur as the QCT Exemption does not
require the stock component leg of a qualifying
stock-option order to be executed at the NBBO. The
proposed parameter therefore provides the
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stock-option order will route on a classby-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 Exchange believes that users are
more concerned about obtaining a net
price execution of their stock-option
strategy orders than about achieving an
execution of the stock leg at the NBBO.
The price check parameter, however,
would serve to prevent automatic
executions at extreme prices beyond the
NBBO.
The following example illustrates the
operation of the proposed system
functionality:
Example 3: Assume that at the start of COA
the CBOE best bid and offer for the option
leg of a stock-option strategy is $1.00–$1.20
(100 × 100) and the NBBO for the stock leg
of the strategy is $10.05–$10.15 (10,000 ×
10,000). Thus, the derived net market for the
strategy is $8.85–$9.15 (calculated as $1.20–
$10.05 and ¥$1.00 + $10.15, respectively). In
addition, assume that the acceptable tick
distance for the stock leg is two ticks ($0.02).
Under this parameter, an order to sell stock
could not execute at a price below $10.03
and an order to buy stock could not execute
at a price above $10.17. Thus, the acceptable
derived net market for the strategy would be
calculated as $8.83–$9.17 (calculated as
$1.20–$10.03 and ¥$1.00 + $10.17,
respectively). Under this scenario, following
COA, a marketable stock-option order to sell
the option series and buy the stock that
would trade with another stock-option order
at [sic] net debit price of $9.17 (within the
acceptable derived net market for the
strategy) will be executed. However, a
marketable stock-option [sic] to sell the
option series and buy the stock that would
trade with another stock-option order at a net
debit price of $9.18 ($0.01 outside the
acceptable derived net market for the
strategy) will be routed 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.
In addition to the foregoing,
additional parameters would apply. In
classes where these price check
parameters are available, they will also
be available for COA stock-option
responses under Rule 6.53C(d), stockoption orders and responses under
Rules 6.74, Automated Improvement
Mechanism (‘‘AIM’’), and 6.74B,
Solicitation Auction Mechanism
(‘‘SAM’’), or AIM customer-to-customer
immediate cross of stock-option orders
Exchange with the flexibility to determine to utilize
the NBBO (which equates to an acceptable tick
distance of 0) or some range outside the NBBO
(which equates to the derived net part plus/minus
an acceptable tick distance of 1, 2, 3 or some other
number of ticks) for determining whether to
automatically execute a stock-option order.
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under Rule 6.74A.08 (‘‘CTC’’).22 Under
these provisions, such paired stockoption orders and responses would not
be accepted. In this regard, if any paired
stock-option order submitted by an
order entry firm for AIM, SAM or CTC
processing exceeds the parameters, then
both the order that exceeds the
parameters and the paired contra-side
order would not be accepted regardless
of whether the contra-side order exceeds
the parameters. However, to the extent
that only the paired contra-side order
submitted by an order entry firm for
AIM or SAM processing would exceed
the price check parameter, the paired
contra-side order would not be accepted
while the original Agency Order would
not be accepted or, at the order entry
firm’s discretion, continue processing as
an unpaired stock-option order (e.g., the
original Agency Order would route to
COB or COA for processing). The
proposal also provides that, to the
extent a contra-side order or response is
marketable, its price will be capped at
the price inside the acceptable derived
net market.
Example 4: Assume the acceptable derived
net market is $1.00–$1.20. Also assume two
paired stock-option orders are submitted to
an AIM auction. If the original Agency Order
to sell the option leg and buy the stock is a
market order, but the contra-side order to buy
the option leg and sell the stock has a net
credit price of $1.25, the AIM auction will
not initiate because the contra-side order
does not satisfy the price check parameter.
Such a contra-side order would not be
accepted because it is outside the acceptable
net market price range. The paired original
Agency Order would either not be accepted
along with the contra-side order or, at the
order entry firm’s discretion, would continue
processing as an unpaired complex order. By
comparison, if the contra-side order has a net
credit price of $0.95, the price will be capped
at $1.01.
The Exchange is also proposing to
modify its existing ‘‘market width’’
parameters under Rule 6.53C.08(a) to
extend the application of the individual
series leg width parameters to stockoption orders. Under this price check
parameter, eligible market complex
orders will not be automatically
executed if the width between the
Exchange’s best bid and best offer in any
individual series leg is not within an
22 AIM, SAM and CTC are mechanisms that may
be used to cross two paired orders. COA is a
mechanism that may be used to expose an unpaired
complex order for price improvement. Orders
submitted for COA, AIM or SAM processing are
exposed for price improvement through an auction
(and thus other market participants may submit
responses), whereas orders submitted for CTC
processing are executed immediately without
exposure.
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acceptable price range.23 As proposed,
the Exchange may also determine on a
class-by-class basis to make this price
check parameter available for market
and marketable limit stock-option
orders.
The Exchange believes that the
application of these price protection
features will assist with the
maintenance of fair and orderly markets
by helping to mitigate the potential risks
associated with stock-option orders
drilling through multiple price points
(thereby resulting in executions at
prices that are extreme and potentially
erroneous). Rather than automatically
executing or booking orders at extreme
and potentially erroneous prices, the
Exchange would route orders that are
not within the price check parameters to
PAR or the order entry firm’s booth so
that the orders can be further evaluated.
In addition, the Exchange is
proposing to extend the application of
its ‘‘re-COA’’ feature to stock option
orders. Under this feature, to the extent
any non-marketable order resting at the
top of the COB is priced within the
acceptable tick distances of the derived
net market, the full order would be
subject to COA (referred to herein as a
‘‘re-COA’’).24 The Exchange notes that
this re-COA feature for resting orders
would only be applicable to resting nonmarketable stock-option orders that
move close to the derived net market.
This feature is not applicable to resting
stock-option orders that become
marketable with other stock-option
orders. The Exchange may also
determine on a class-by-class and
strategy basis to limit the frequency of
re-COA auctions initiated for stockoption orders resting in COB. For
example, the Exchange might determine
to limit the frequency of re-COA
auctions to once every ‘‘X’’ seconds (the
‘‘interval timer’’) for a total of ‘‘Y’’
intervals. Once this cycle is complete,
the Exchange may determine to wait for
23 The ‘‘acceptable price range’’ is determined by
the Exchange on a class-by-class basis (and
announced to TPHs via Regulatory Circular) on a
series by series basis for each series comprising a
complex order and is currently defined to be no less
than 1.5 times the corresponding bid/ask
differentials for individual series legs determined
by the Exchange pursuant to Rule 8.7(b)(iv). See
also SR–CBOE–2012–004 (wherein the Exchange is
proposing, among other things, to expand the
application of this price check parameter to include
marketable limit orders (currently the rule text only
addresses market complex orders) and to specify
particular minimum acceptable price ranges within
the rule that are equal to 1.5 times the bid/ask
differential requirements that the Exchange had in
its rules at the time the price check parameters were
adopted and are the same as the acceptable price
range parameters set forth in Rule 6.13(b)(v)–(vi)).
24 This feature will apply regardless of whether
the stock-option order was subject to COA before
it was booked in COB. See note 19, supra.
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a period of time ‘‘Z’’ (the ‘‘sleep timer’’)
and then reactivate the re-COA
feature.25 All timers would be reset if a
new stock-option order improves the
top of the COB (i.e., improves the best
net price bid or offer of the stock-option
orders resting in COB). These
limitations on the frequency of COA
auctions due to the re-COA feature are
intended to address system efficiency
and effectiveness considerations, such
as limiting repeated initiations of COA
auctions (and related messaging) when
there are flickering quotes. Once the reCOA feature is initiated for a resting
order, all other aspects of the COA
process described in Rule 6.53C would
apply unchanged. The Exchange
believes this re-COA feature facilitates
the orderly execution of stock-option
orders by providing an automated
opportunity for price improvement to
(and execution of) resting orders priced
near the current market, similar to what
a TPH might seek to do if the TPH were
representing a stock-option order in
open outcry (or just entering an order
initially into COB).
The following example illustrates the
operation of this proposed system
functionality:
Example 5: Assume that the acceptable tick
distance to re-COA is 2 ticks ($0.02). Also
assume the frequency for the re-COA feature
is limited to once every 15 seconds (the
interval timer) for 1 interval. Under this
setting, only 1 re-COA auctions [sic] could be
triggered—the original re-COA auction.26 No
further auctions would be triggered until the
sleep timer expires, and only then if a quote
update which is received AFTER the sleep
timer expires would result in the order being
within 2 ticks of the derived net market.
Assume the sleep timer is set at 60 minutes.
Assume the current derived net market is
$8.85–$9.15. If a stock-option order resting in
the COB is priced at a net credit price of
$8.88, the stock-option order is not
marketable and is priced inside the derived
net market by 3 ticks. If subsequently the
individual leg prices are updated such that
the current derived net market for the
strategy moves to a net price of $8.86–$9.14
the resting order priced at a net credit price
25 Determinations by the Exchange regarding the
classes where the re-COA feature is activated and
related tick distance and frequency parameters will
be announced to TPHs via Regulatory Circular.
26 In a prior rule change filing, the Exchange
provided an example indicating that if the setting
for the interval timer was once every 15 seconds for
1 interval, then a total of 2 re-COA auctions would
occur during the interval—the original re-COA
auction and a second re-COA auction after the
expiration of the 15-second interval timer. See
Securities Exchange Act Release No. 65939
(December 12, 2011), 76 FR 78708 (December 19,
2011)(SR–CBOE–2011–119). However, the
Exchange notes that only one re-COA auction will
occur under these settings. Therefore, Example 5
above is intended to update the previous example
and provide a more detailed illustration of the
interval timer.
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10031
of $8.88 would trigger the re-COA feature and
initiate the re-COA auction process (as the
order is now priced within 2 ticks of the
derived net market). If there are no responses,
the order would be placed back in COB. The
resting order would not initiate the re-COA
feature again until the 60-minute sleep timer
has expired, and only then if a quote update
received AFTER the 60-minute sleep timer
expires would result in the order being
within 2 ticks of the derived net market.
If the number of attempts was set to a value
greater than 1 (assume 2 for the below
discussion), when the 15-second interval
timer expires, the order would be eligible to
initiate the re-COA feature again if the
current market moves after the expiration of
the timer and the order meets the tick
distance parameter (the order would not
automatically initiate the re-COA feature
after the expiration of the interval timer;
instead there must be an update to the
current market after the expiration of the
interval timer and the order must meet the
tick distance parameter for the system to reCOA again). For example, if after the end of
the 15-second interval timer the derived net
market moves to $8.87–$9.13 (or, for
example, if the derived market moves back to
$8.85–$9.15 and then, after the end of the 15second interval timer moves back again to
$8.86–$9.14), then the resting complex order
would again initiate the re-COA feature. If
there are no responses, the order would be
placed back in COB. The cycle is complete.
Now that the resting order has been subject
to COA 2 times since it was booked in COB,
the 60-minute sleep timer will begin and the
resting order will not be eligible for the reCOA feature again until the sleep timer
expires and there is a quote update after that
timer expires that is within the tick distance
parameter. All timers would be reset anytime
there is a price change at the top of the COB.
For example, if five minutes into the sleep
interval a second stock-option order is
entered to rest in COB at a price of $8.87
($0.01 better than the original resting order
priced at $8.88), the original resting order
would no longer be at the top of the COB and
subject to the re-COA feature. The timers
would reset and the second complex order
(which now represents the top of the COB)
would be subject to the re-COA process. If,
for example, the second order subsequently
trades (constituting a price change at the top
of the COB), the original order would be at
the top of the COB again and could become
subject to the re-COA feature again.
Other Changes Related to Stock-Option
Orders
The fifth purpose of this proposed
rule change is to make certain other
changes to generally reorganize and
simplify the rule text pertaining to
stock-option orders. As noted above, the
current priority rules for stock-option
orders for COB are contained in four
locations—paragraphs (b), (c) and (f) of
Interpretation and Policy .06 to Rule
6.53C. Similarly, the current priority
rules for stock-option orders processed
through COA are contained in three
locations—paragraphs (b), (d) and (f) of
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Complex Order Definitions
Finally, the sixth purpose of this
proposed rule change is to simplify
some of the definitions contained
within Rule 6.53C. By way of
background, for many years, the options
exchanges have recognized that
strategies involving more than one
option series or more than one
instrument associated with an
underlying security are different from
regular buy and sell orders for a single
series, and an order to achieve such
strategies should be defined separately.
As the sophistication of the industry as
[sic] grown, so have the strategies, and
the options exchanges have regularly
added new strategies to the list of
defined complex order types. The
investing industry, however, creates
new, legitimate investment strategies
that do not necessarily fit into one of the
narrow definitions for complex order
types that the exchanges presently use.
These order types are often developed
for a particular strategy, specific to a
particular issue. To attempt to define
every individual strategy, and file
additional rules to memorialize them,
would be a time consuming and
extremely onerous process, and would
serve only to confuse the investing
public. As a result, bona fide
transactions to limit risk are not
afforded the facility of execution
afforded more common complex orders.
Rule 6.53C currently defines at least
ten specific complex strategies
(including stock-option order strategies).
These are the most comprehensive list
of complex strategies defined in a rule
set, yet they do not cover all of the
possibilities of complex orders. To
provide for greater flexibility in the
design and use of complex strategies,
the Exchange proposes to eliminate
specific complex order types described
in Rule 6.53C, and to adopt generic
definitions. Specifically, under the
proposed new definitions, first, a
complex order will be defined as any
order involving the execution of two or
more different options series in the
same underlying security, for the same
account, occurring at or near the same
time in a ratio that is equal to or greater
than one-to-three (.333) and less than or
equal to three-to-one (3.00) (or such
lower ratio as may be determined by the
Exchange on a class-by-class basis) and
for the purpose of executing a particular
investment strategy. In addition, only
those complex orders with no more than
the applicable number of legs, as
determined by the Exchange on a classby-class basis, will be eligible for
electronic processing.28 Second, a stockoption order will be defined is as an
order to buy or sell a stated number of
units of an underlying stock or a
security convertible into the underlying
stock (‘‘convertible security’’) coupled
with the purchase or sale of options
contract(s) on the opposite side of the
market representing either (i) the same
number of units of the underlying stock
or convertible security, or (ii) the
number of units of the underlying stock
necessary to create a delta neutral
position, but in no case in a ratio greater
than eight (8) options contracts per unit
of trading of the underlying stock or
convertible security established for that
series by The Options Clearing
Corporation (referred to in the text as
the ‘‘Clearing Corporation’’) (or such
lower ratio as may be determined by the
Exchange on a class-by-class basis).
Only those stock-option orders with no
more than the applicable number of
legs, as determined by the Exchange on
a class-by-class basis, will be eligible for
processing.
The Exchange believes adopting these
generic definitions will give investors
more flexibility in creating strategies
with greater accuracy. Further, these
definitions would conform with
definitions used in other exchanges’
27 The ‘‘N-second group timer’’ refers to a timer
that the Exchange may establish when market
participants (as defined in Rule 6.45A or 6.45B, as
applicable) quotes and/or orders interact with
orders in the EBook. See Rules 6.45A(c), 6.45B(c),
6.53C.03 and proposed changes to Rule 6.53C.06 for
additional information on the N-second timer
group.
28 Currently the rule limits the number of legs to
four. See existing Rule 6.53C(b)(iii). This limitation
is proposed to be removed. In addition, a
duplicative reference to the one-to-three ratio for
complex orders in Rule 6.53C(b)(iii) is proposed to
be removed as the applicable ratio will now be
included within the proposed definitions contained
in proposed Rule 6.53C(a)(1).
mstockstill on DSK4VPTVN1PROD with NOTICES
Interpretation and Policy .06 of Rule
6.53C. The Exchange is proposing to
eliminate paragraph (e)(which provides
that the N-second group timer 27 for
executions by market participants
against orders in the COB shall not be
in effect for stock-option orders) and to
combine it with paragraph (c)(which
also addresses executions against the
COB). The Exchange is proposing to
eliminate paragraph (f) (which relates to
stock-option orders with more than one
option leg) and to simplify and combine
it with paragraph (b) (which relates to
stock-option orders with one option
leg). The Exchange is also proposing
various other miscellaneous changes,
such as revising the text to consistently
use the term ‘‘stock-option order(s)’’
with no capitalization and to use the
phrase ‘‘not be accepted’’ to replace
various references to ‘‘rejected.’’
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rules 29 and is modeled after the generic
definitions approved for use for
exemptions from Trade Through
Liability by the Options Linkage
Authority as described in the ‘‘Plan For
The Purpose of Creating And Operation
An Intermarket Options Linkage’’ (the
‘‘Linkage Plan’’) and as provided in
Exchange Rules 6.80(4) and 6.81(b)(7).
2. Statutory Basis
The proposed rule change is
consistent with Section 6(b) of the Act 30
in general and furthers the objectives of
Section 6(b)(5) of the Act 31 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 the proposed
rule change will assist in the electronic
processing of stock-option orders by
providing a more efficient mechanism
for carrying out these strategies. The
Exchange also believes the proposed
additional stock-option order related
price check parameters will enhance the
functionality and assist with the
maintenance of fair and orderly markets
by helping to mitigate the potential risks
associated with an order drilling
through multiple price points (thereby
resulting in execution at prices that are
extreme and potentially erroneous). The
Exchange believes the additional
changes to reorganize and simplify the
rule text will make it easier for users to
read and understand the electronic
processing procedures for stock-option
orders. Finally, the Exchange believes
adopting generic definitions for
complex orders, including stock-option
orders, as proposed, is appropriate in
that complex orders and stock-option
orders are widely recognized and
utilized by market participants and are
invaluable, both as an investment
strategy and a risk management strategy.
The proposed change will provide the
opportunity for a more efficient
mechanism for carrying out these
strategies.
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.
29 See, e.g., International Securities Exchange
Rule 722(a).
30 15 U.S.C. 78f(b).
31 15 U.S.C. 78f(b)(5).
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Federal Register / Vol. 77, No. 34 / Tuesday, February 21, 2012 / Notices
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 (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
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 rulecomments@sec.gov. Please include File
Number SR–CBOE–2012–005 on the
subject line.
mstockstill on DSK4VPTVN1PROD with NOTICES
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–2012–005. 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
VerDate Mar<15>2010
17:29 Feb 17, 2012
Jkt 226001
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 20549–1090, 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 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–
2012–005, and should be submitted on
or before March 13, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.32
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–3902 Filed 2–17–12; 8:45 am]
BILLING CODE 8011–01–P
DEPARTMENT OF STATE
[Public Notice: 7762]
Advisory Committee International
Postal and Delivery Services
10033
comments to five minutes. Requests to
be added to the speaker list must be
received in writing (letter, email or fax)
prior to the close of business on March
13, 2012; written comments from
members of the public for distribution at
this meeting must reach Mr. Hillsberg
by letter, email or fax by this same date.
A member of the public requesting
reasonable accommodation should make
the request to Mr. Hillsberg by that same
date.
Meeting agenda: The agenda of the
meeting will include a review of the
results of the November 2011 UPU
Council of Administration and the
February–March 2012 joint session of
the UPU Postal Operations Council and
Council of Administration, issues and
proposals related to the 2012 UPU
Congress, and other subjects related to
international postal and delivery
services of interest to Advisory
Committee members and the public.
For further information, please
contact Mr. Matthew Hillsberg of the
Office of Global Systems (IO/GS),
Bureau of International Organization
Affairs, U.S. Department of State, at
(202) 736–7039 or by email at
HillsbergM@state.gov.
Dated: February 14, 2012.
Patricia Lacina,
Director, Office of Global Systems, Bureau
of International Organization Affairs,
Department of State.
AGENCY:
Department of State.
Notice; FACA Committee
meeting announcement.
[FR Doc. 2012–3968 Filed 2–17–12; 8:45 am]
ACTION:
BILLING CODE 4710–19–P
As required by the Federal
Advisory Committee Act, Public Law
92–463, the Department of State gives
notice of a meeting of the Advisory
Committee on International Postal and
Delivery Services. This Committee has
been formed in fulfillment of the
provisions of the 2006 Postal
Accountability and Enhancement Act
(Pub. L. 109–435) and in accordance
with the Federal Advisory Committee
Act.
Date and Time: The meeting will be
held on Tuesday, March 20, 2012, from
1 to 5 p.m.
Location: The American Institute of
Architects, 1735 New York Ave. NW.,
Washington, DC 20006.
Public input: Any member of the
public interested in providing public
input to the meeting should contact Mr.
Matthew Hillsberg, whose contact
information is listed under FOR FURTHER
INFORMATION CONTACT section of this
notice. Each individual providing oral
input is requested to limit his or her
DEPARTMENT OF STATE
SUMMARY:
32 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00146
Fmt 4703
Sfmt 4703
[Public Notice: 7803]
30–Day Notice of Proposed
Information Collection: Gender
Assessment Surveys, OMB Control
Number 1405-xxxx
Notice of request for public
comment and submission to OMB of
proposed collection of information.
ACTION:
The Department of State has
submitted the following information
collection request to the Office of
Management and Budget (OMB) for
approval in accordance with the
Paperwork Reduction Act of 1995.
• Title of Information Collection:
Gender Assessment Surveys.
• OMB Control Number: None.
• Type of Request: New Collection.
• Originating Office: Bureau of
Educational and Cultural Affairs, Office
of Policy and Evaluation, Evaluation
Division (ECA/P/V).
• Form Number: SV2011–0027
(FORTUNE Survey); SV2011–0028
SUMMARY:
E:\FR\FM\21FEN1.SGM
21FEN1
]]>Agencies
[Federal Register Volume 77, Number 34 (Tuesday, February 21, 2012)]
[Notices]
[Pages 10026-10033]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-3902]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66394; File No. SR-CBOE-2012-005]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change Related to
Stock-Option Processing
February 14, 2012.
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 February 7, 2012, 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 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange is proposing to amend its complex order processing
rules to revise the procedures for electronically processing stock-
option orders. 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 the
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
The Exchange proposes to revise is [sic] procedures for
electronically processing stock-option orders under Rule 6.53C in order
to (i) revise the procedures for routing the stock leg of a stock-
option order; (ii) modify the procedure for executing for [sic] stock-
option orders to no longer permit ``legging,'' except in one limited
context; (iii) modify the default electronic allocation algorithm
applicable for stock-option orders in the complex order book (``COB'')
and the complex order RFR auction (``COA''); \3\ (iv) incorporate an
additional price check parameter specific to the electronic processing
of stock-option orders and modify an existing price check parameter and
re-COA features (described in more detail below) to apply to stock-
option orders; and (v) make other changes to reorganize and simplify
the rule text. In addition, the Exchange is proposing certain changes
to simplify the definitions for complex orders, including stock-option
orders, subject to electronic processing under Rule 6.53C.
---------------------------------------------------------------------------
\3\ COA is a process for auctioning eligible complex orders,
including stock-option orders, for price improvement. See Rule
6.53C(d) and .06(d).
---------------------------------------------------------------------------
Designated Broker-Dealer(s)
The first purpose of this proposed rule change is to revise the
procedures for routing the stock leg of a stock-option order.
Interpretation and Policy .06 to Rule 6.53C, Complex Orders on the
Hybrid System, currently describes the procedure for processing
electronic stock-option orders. The procedure provides that the stock
portion of a stock-option order shall be electronically executed on the
CBOE Stock Exchange, LLC (``CBSX,'' CBOE's stock execution facility)
consistent with CBSX order execution rules. The Exchange proposes to
revise the process to instead provide that the Exchange will
electronically transmit orders related to a stock leg for execution by
a broker-dealer designated by the Exchange (a ``designated broker-
dealer'') on behalf of the parties to the trade. The Exchange will
transmit the underlying stock leg order to a designated broker-dealer
for execution once the Exchange trading system determines that a stock-
option order trade is possible and at what net prices. The stock leg
component will be transmitted to the designated broker-dealer as two
paired orders with a designated limit price, subject to one limited
exception pertaining to the stock leg of an unmatched market stock-
option order (which is described in more detail below). The designated
broker-dealer will act as agent for the stock leg of the stock-option
orders. The designated broker-dealer may determine to match the orders
on an exchange or ``over-the-counter.''
To participate in this automated process for stock-option orders,
an Exchange Trading Permit Holder (``TPH'') must enter into a customer
agreement with one or more designated broker-dealers that are not
affiliated with the Exchange.\4\ In addition, TPHs may only submit
complex orders with a stock component if such orders comply with the
Qualified Contingent Trade Exemption (the ``QCT Exemption'') from Rule
611(a) of Regulation NMS.\5\ TPHs submitting such complex orders
represent that such orders comply with the QCT Exemption. The Exchange
intends to address fees related to routing
[[Page 10027]]
the stock portion of stock-option trades in a separate rule change
filing.
---------------------------------------------------------------------------
\4\ This provision for a designated broker-dealer is similar to
a provision in the International Securities Exchange Rule 722.02,
except that CBOE's proposed provision makes it clear the broker-
dealer(s) that are designated by the Exchange to perform this
function are not affiliated with CBOE.
\5\ 17 CFR 242.611(a).
---------------------------------------------------------------------------
The Exchange believes that the electronic communication of the
orders by the Exchange to the designated broker-dealer is a more
efficient means for processing stock-option orders than the system of
routing orders to CBSX. The designated broker-dealer will be
responsible for the proper execution, trade reporting and submission to
clearing of the stock trade that is part of a stock option order. In
this regard, once the orders are communicated to the broker-dealer for
execution, the broker-dealer has complete responsibility for
determining whether the orders may be executed in accordance with all
the rules applicable to execution of equity orders, including
compliance with the applicable short sale, trade-through and trade
reporting rules. As with the current procedure, if the broker-dealer
cannot execute the equity orders at the designated price, the stock-
option combination order will not be executed on the Exchange.\6\
---------------------------------------------------------------------------
\6\ See existing Rule 6.53C.01(a) and proposed changes thereto.
---------------------------------------------------------------------------
With respect to trade throughs in particular, the Exchange believes
that the stock component of a stock-option order is eligible for the
QCT Exemption from Rule 611(a) of Regulation NMS. A Qualified
Contingent Trade (``QCT'') is a transaction consisting of two or more
component orders, executed as agent or principal, that satisfy the six
elements in the Commission's order exempting QCTs from the requirements
of Rule 611(a), which requires trading centers to establish, maintain,
and enforce written policies and procedures that are reasonably
designed to prevent trade-throughs.\7\ The Exchange believes that the
stock portion of a complex order under this proposal complies with all
six requirements.\8\ Moreover, as explained below, CBOE's Hybrid System
will validate compliance with each requirement such that any matched
order received by a designated broker-dealer under this proposal has
been checked for compliance with the exemption to the extent noted
below:
---------------------------------------------------------------------------
\7\ See Securities Exchange Act Release No. 57620 (April 4,
2008), 73 FR 19271 (April 9, 2008) (``QCT Release''); see also
Securities Exchange Act Release No. 54389 (August 31, 2006), 71 FR
52829 (September 7, 2006).
\8\ As discussed in more detail below, the stock component of
all stock-option orders will be transmitted to a designated routing
broker as paired stock orders with a specified limit price, with one
limited exception. The exception pertains to the stock leg of an
unmatched market stock-option order. In the limited circumstances
when the Exchange transmits the stock component leg of an unmatched
market stock-option order to the designed [sic] routing broker, such
a stock component leg will be subject to NBBO pricing (and therefore
not be processed subject to the QCT Exemption).
---------------------------------------------------------------------------
(1) At least one component order is in an NMS stock: The stock
component must be an NMS stock, which is validated by the Hybrid
System;
(2) All components are effected with a product or price contingency
that either has been agreed to by the respective counterparties or
arranged for by a broker-dealer as principal or agent: A complex order,
by definition, is executed at a single net credit/debit price and this
price contingency applies to all the components of the order, such that
the stock price computed and sent to the designated broker-dealer
allows the stock order to be executed at the proper net debit/credit
price based on the execution price of each of the option legs, which is
determined by the Hybrid System;
(3) The execution of one component is contingent upon the execution
of all other components at or near the same time: Once a stock-option
is accepted and validated by the Hybrid System, the entire package is
processed as a single transaction and each of the option leg(s) and
stock components are simultaneously processed;
(4) The specific relationship between the component orders (e.g.,
the spread between the prices of the component orders) is determined at
the time the contingent order is placed: Stock-option orders, upon
entry, must have a size for each component and a net debit/credit price
(or market price), which the Hybrid System validates and processes to
determine the ratio between the components; an order is rejected if the
net debit/credit price (or market price) and size are not provided on
the order;
(5) The component orders bear a derivative relationship to one
another, represent different classes of shares of the same issuer, or
involve the securities of participants in mergers or with intentions to
merge that have been announced or since cancelled: Under this proposal,
the stock component must be the underlying security respecting the
option leg(s), which is validated by the Hybrid System; and
(6) The transaction is fully hedged (without regard to any prior
existing position) as a result of the other components of the
contingent trade: Under this proposal and as discussed in more detail
below, the ratio between the options and stock must be a conforming
ratio (e.g., largest option leg to stock cannot exceed a ratio of
eight-to-one and multiple options legs cannot exceed a ratio of three-
to-one), which the Hybrid System validates, and which under reasonable
risk valuation methodologies, means that the stock position is fully
hedged. In addition, if all option and stock component legs are on the
same side of the market, which the Hybrid System also validates, then
the order will not be eligible for electronic processing pursuant to
Rule 6.53C.
Furthermore, as noted above, proposed Rule 6.53C.06(a) provides
that TPHs may only submit complex orders with a stock component if such
orders comply with the QCT Exemption. TPHs submitting such complex
orders with a stock component represent that such orders comply with
the QCT Exemption. Thus, the Exchange believes that complex orders
consisting of a stock component will comply with the exemption and that
the Hybrid System will validate such compliance as noted above to
assist its designated routing broker(s) in carrying out its
responsibilities as agent for these orders.
The Exchange believes the new process offers effective and
efficient automatic execution for both the options and stock components
of a stock-option order and it should promote just and equitable
principles of trade and remove impediments to and perfect the mechanism
of a free and open market and a national market system by enhancing the
electronic processing of the stock-option orders. However, this process
is not exclusive. The Exchange notes that TPHs will be able to continue
using open outcry procedures for executing stock-option orders if they
choose to do so.\9\ TPHs can also utilize other exchanges' systems
(several of which offer stock-option processing) or avoid using stock-
option orders.
---------------------------------------------------------------------------
\9\ Stock-option orders may be represented in open outcry by
floor brokers or Exchange PAR Officials. See, e.g., Rules 6.45A(b)
and 6.45B(b).
---------------------------------------------------------------------------
Legging
In conjunction with this change, the second purpose of this
proposed rule change is to revise the stock-option procedure to provide
that ``legging'' against the individual orders and quotes in the CBOE
and CBSX electronic books (``EBooks'') will no longer occur for stock-
option orders,\10\ except that that legging may occur in the limited
instance provided in Rule 6.53C.06(d) for eligible market orders that
have been subject to a COA (which market order
[[Page 10028]]
process is proposed to be revised as described below).\11\ The Exchange
believes that limiting the electronic trading of stock-option orders
pursuant to Rule 6.53C to executions against other stock-option orders
in the manner proposed will provide for more efficient execution and
processing of stock-option orders and will assist with the maintenance
of fair and orderly markets by helping to mitigate the potential risks
associated with legging stock-option orders, including the risk of one
leg of the stock-option order going unexecuted (and thereby not
achieving a complete stock-option order execution and having a partial
position that is unhedged).\12\
---------------------------------------------------------------------------
\10\ Currently under Rule 6.53C complex orders, including stock-
option orders, are eligible to trade with other complex orders or by
``legging'' with the individual orders and quotes residing in the
EBook for the individual component legs provided the complex order
can be executed in full (or in a permissible ratio) by the orders
and quotes in the EBook in those individual component legs. In the
case of stock-option orders that are ``legged,'' the stock leg would
trade with CBSX's EBook and the option series leg(s) with the CBOE
EBook.
\11\ The Exchange notes that at least one other options exchange
that offers electronic complex order processing does not ``leg''
stock-option orders. See, e.g., NASDAQ OMX PHLX LLC (``Phlx'') Rule
1080.08(f)(iii)(A)(1).
\12\ That is not to say that the Exchange would not determine to
permit additional ``legging'' of stock-option orders under Rule
6.53C in the future. Any such change to the electronic processing of
stock-option orders under Rule 6.53C would be subject to a separate
rule change filing.
---------------------------------------------------------------------------
A limited exception will continue to apply for certain market
stock-option orders, with certain modifications. Currently, under Rule
6.53C.06(d), if at the conclusion of a COA a stock-option order that is
an eligible market order \13\ cannot be filled in whole or in a
permissible ratio, then any remaining balance of the option leg(s)
routes to the CBOE Hybrid Trading System for processing as a simple
market order(s) consistent with CBOE's order execution rules and any
remaining balance of the stock leg routes to CBSX for processing as a
simple market order consistent with CBSX's order execution rules.\14\
This alternate legging functionality is intended to assist in the
automatic execution and processing of stock-option orders that are
market orders. The Exchange notes that when a stock-option order is
legged in this manner, it is possible for CBOE to route the option
leg(s) to another options exchange and/or for CBSX to route the stock
leg to another stock exchange, consistent with their respective
rules.\15\ As proposed to be revised, the Exchange may determine to
continue to make this ``legging'' functionality available for stock-
option orders that are eligible market orders. The legging
functionality will continue to operate in the same manner, with the
exception that the stock leg will no longer route to CBSX and an order
eligibility provision will be eliminated from the rule.\16\ Instead,
the Exchange will electronically transmit the stock leg to a designated
broker-dealer, who will represent the order on behalf of the party that
submitted the stock-option order.
---------------------------------------------------------------------------
\13\ For purposes of this legging functionality, an ``eligible
market order'' means a stock-option order that is within the
designated size and order type parameters, determined by the
Exchange on a class-by-class basis, and for which the national best
bid or offer (``NBBO'') is within designated size and price
parameters, as determined by the Exchange for the individual leg.
The rule currently provides that the designated NBBO price
parameters will be determined based on a minimum bid price for sell
orders and a maximum offer price for buy orders. The Exchange may
also determine to limit the trading times within regular trading
hours that the legging functionality will be available. See Rule
6.53C.06(d). Pursuant to Rule 6.53C.01, any determination by the
Exchange on these parameters will be announced to TPHs via
Regulatory Circular.
\14\ Pursuant to Rule 6.53C.01, any determination by the
Exchange to route stock-option market orders in this manner will be
announced to TPHs via Regulatory Circular.
\15\ See, e.g., CBOE's Rules 6.14A, Hybrid Agency Liaison 2
(HAL2), and 6.14B, Order Routing to Other Exchanges, and CBSX's Rule
52.6, Processing of Round-lot Orders.
\16\ See note 13, supra, for a description of ``eligible market
orders.'' The Exchange is proposing to eliminate an eligible market
order provision that permits the Exchange to specify a designated
NBBO price parameter based on a maximum offer price for buy orders.
The Exchange has no intention of utilizing this parameter feature
and is therefore proposing to delete it from the rules at this time.
(By contrast, the Exchange will maintain a provision that permits
the Exchange to specify a designated NBBO price parameter based on a
minimum bid price for sell orders.) See proposed changes to Rule
6.53C.06(d).
---------------------------------------------------------------------------
This legging functionality is intended to assist in the automatic
execution and processing of stock-option orders that are market orders.
The Exchange believes the order eligibility parameters provide the
Exchange with the flexibility to assist with the maintenance of orderly
markets by helping to mitigate the potential risks associated with
legging stock option orders, e.g., the risk of a [sic] order drilling
through multiple price points on another exchange (thereby resulting in
execution at prices that are away from the NBBO and potentially
erroneous), and/or the risk of one leg of the stock-option order going
unexecuted (thereby not achieving a complete stock-option order
execution and having a partial position that is unhedged).
Allocation Algorithms
The third purpose of this proposed rule change is to modify the
default electronic allocation algorithm applicable for stock-option
orders in COB and COA. With respect to COB, Interpretation and Policy
.06(b), (c) and (f), taken together, currently provide that stock-
option orders submitted to COB will trade in the following sequence:
(i) Public customer orders resting in the EBook in each of the
individual options leg(s) of a stock-option order have first priority;
(ii) stock-option orders resting in COB have second priority, with
public customer priority and then time priority; and (iii) individual
orders and quotes resting in the EBook in each of the individual
options leg(s) have third priority provided the order can be executed
in full or in a permissible ratio. Because the Exchange is proposing to
no longer permit ``legging'' of orders in COB against the individual
orders and quotes in the component legs, the Exchange is proposing to
the [sic] amend the algorithm with respect to COB to provide that
stock-option orders that are marketable against each other will
automatically execute. In the event there are multiple stock-option
orders at the same price, they will be allocated pursuant to the rules
of trading priority otherwise applicable to incoming electronic orders
in the individual series legs (or such other allocation algorithm as
the Exchange may designate pursuant to Rule 6.53C.09).\17\
---------------------------------------------------------------------------
\17\ The allocation algorithms for the individual series legs
include price-time, pro-rata, and the ultimate matching algorithm
(``UMA'') base priorities and a combination of various optional
priority overlays pertaining to public customer priority, Market-
Maker participation entitlements, small order preference, and market
turner. See Rules 6.45A, Priority and Allocation of Equity Option
Trades on the CBOE Hybrid System, and 6.45B, Priority and Allocation
of Trades in Index Options and Options on ETFs on the CBOE Hybrid
System.
---------------------------------------------------------------------------
As a condition for a stock-option order to execute against another
stock-option order in COB, the execution must be at a net price where
the individual options series leg(s) of the stock-option order has
priority over the individual orders and quotes residing in the CBOE
EBook (the ``EBook Priority Condition''). To satisfy the EBook Priority
Condition, the individual option series leg(s) of a stock-option order
(i) must not trade inferior to CBOE's best bid (offer) in the
individual component series, and (ii) must not trade at CBOE's best bid
(offer) in the individual component series if one or more public
customer orders are resting at the best bid (offer) in each of the
component series and the stock-option order could otherwise be executed
in full (or in a permissible ratio).
Again, because there will be no legging, the Exchange is also
proposing to amend the algorithm with respect to COA. Interpretation
and Policy .06(b), (d) and (f), taken together, currently provide that
stock-option orders submitted to COA will trade in the following
sequence: (i) Public customer orders resting in the EBook in each of
the individual options leg(s) of a stock-option order have first
priority; (ii) public customer stock-option orders resting in COB
before, or that are received during, the COA Response
[[Page 10029]]
Time Interval \18\ and public customer responses collectively have
second priority, with multiple orders ranked by time priority; (iii)
non-public customer stock-option orders resting in the COB before the
COA Response Time Interval have third priority, with multiple orders
subject to the UMA allocation algorithm described in Rule 6.45A or
6.45B, as applicable; (iv) non-public customer stock-option orders
resting in COB that are received during the Response Time Interval and
non-public customer responses collectively have fourth priority, with
multiple orders subject to the Capped UMA (``CUMA'') allocation
described in Rule 6.45A or 6.45B, as applicable; and (iv) all other
individual orders and quotes residing in the EBook have fifth priority,
with multiple interest subject to the UMA allocation algorithm
described in Rule 6.45A or 6.45B, as applicable. Because the Exchange
is proposing to no longer permit ``legging'' of orders in COA against
the individual orders and quotes in the component legs (except in the
limited instance involving market orders described above), items (i)
and (vi) above will no longer be applicable. Instead, the Exchange is
proposing to amend the algorithm with respect to COA to provide that,
in the event there are multiple stock-option orders at the same price,
they will trade in the following sequence: (i) Public customer stock-
option orders resting in COB before, or that are received during, the
COA Response Time Interval and public customer responses collectively
have first priority, with multiple orders ranked by time priority; (ii)
non-public customer stock-option orders resting in the COB before the
COA Response Time Interval have second priority, with multiple orders
subject to the UMA allocation algorithm described in Rule 6.45A or
6.45B, as applicable; and (iii) non-public customer stock-option orders
resting in COB that are received during the Response Time Interval and
non-public customer responses collectively have third priority, with
multiple orders subject to the CUMA allocation described in Rule 6.45A
or 6.45B, as applicable.
---------------------------------------------------------------------------
\18\ The COA ``Responses [sic] Time Interval'' means the period
of time during which responses to the RFR may be entered. The
Exchange determines the length of the Response Time Interval on a
class-by-class basis, however, the duration shall not exceed three
(3) seconds. See Rule 6.53C(d)(iii)(2).
---------------------------------------------------------------------------
As with COB, as a condition for a stock-option order to execute
against another stock-option order through COA, the execution must
satisfy the EBook Priority Condition described above.
The system also has some features that would apply to the extent
that a stock-option order is or becomes marketable. First, to the
extent that a marketable stock-option order cannot automatically
execute in full (or in a permissible ratio) when it is routed to COB or
after being subject to COA because there are individual orders and
quotes residing in the EBook that have priority (but the order resting
in COB would not trade against them because there will be no
``legging''), any part of the order that may be executed would be
executed automatically and the part that cannot automatically execute
would 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 would be
cancelled. Second, to the extent that a stock-option order resting in
COB becomes marketable against the derived net market (and cannot
automatically execute because there is no ``legging''), the full order
would be subject to COA (and the processing described above). For
purposes of this feature, the ``derived net market'' for a given stock-
option strategy would be calculated using the Exchange's best bid or
offer in the individual option series leg(s) and the NBBO in the stock
leg. The Exchange notes this feature would only be applicable to
resting stock-option orders that become marketable against the derived
net market. This feature would not be applicable to resting stock-
option [sic] that would become marketable with other stock-option
orders. Having the system automatically initiate a COA once such a
stock-option order resting in COB becomes marketable against the
derived net market 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 stock-option
order is routed for manual handling to PAR or a booth.\19\ As noted
above, after being subject to COA, any part of the order that may be
executed would be executed automatically and the part of the order that
cannot automatically execute would 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 would be cancelled.
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\19\ The Exchange notes that, in these circumstances when a
resting stock-option order becomes marketable, COA will
automatically initiate regardless of whether a TPH has requested
that the stock-option order be COA'd pursuant to Rule 6.53C.04. In
this regard, the Exchange notes that, currently, all of its TPHs
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.,
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.
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The following examples illustrate the operation of the proposed
system functionality:
Example 1: Assume an incoming market stock-option order for 75
units is submitted to COA, where the strategy involves the sale of
75 call contracts and purchase of 7,500 stock shares. At the
conclusion of COA, assume the best net price response is $9.13 for
50 units and the best derived net market price is 9.15 for 100
units. The incoming market order to purchase 75 units of the stock-
option strategy would receive a partial execution of 50 units at a
net price of $9.13. Because the remaining 25 units are marketable
against individual orders and quotes in the EBook, the 25 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 25 units will be cancelled.\20\
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\20\ However, if the Exchange has activated the market stock-
option order ``legging'' functionality and the and the [sic] order
is eligible, in lieu of routing to PAR or a booth, any remaining
balance of the option leg will route to the CBOE Hybrid Trading
System for processing as a simple market order and any remaining
balance of the stock leg will be electronically transmitted by the
Exchange to a designated broker-dealer, who will represent the order
on behalf of the party that submitted the stock-option order. See
note 13, supra, and surrounding discussion on Legging.
---------------------------------------------------------------------------
Example 2: Assume a stock-option order for 75 units is resting
in COB, where the strategy involves the sale of 75 call contracts
and purchase of 7,500 stock shares at a net debit price of $9.13. By
virtue of the fact that it is resting [sic] the COB, the stock-
option order is not marketable--meaning there are no orders or
quotes within the derived net market price or other stock-option
orders within COB against which the resting stock-option order may
trade. Assume there are no other stock-option orders representing
[sic] in the COB for the strategy and also assume the best derived
net market price for the strategy is a net price of $9.15 per unit
for 100 units. If the price of the component option series leg or
the stock is thereafter updated such that the derived net market
price becomes $9.13 per unit for 100 units, then the full size of
the resting stock-option order will become marketable but cannot
automatically execute. As a result, the full size (75 units) of the
resting stock-option order would be subject to COA. At the
conclusion of COA, any part of the stock-option order that may be
executed against other stock-option orders or auction responses will
be automatically executed. Any part of the order that is marketable
and cannot automatically execute
[[Page 10030]]
(because the stock-option order cannot ``leg'' against the derived
net market) 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 stock-
option order is not marketable, it will continue resting in COB.
Price Protection and Re-COA Features
The fourth purpose of this proposed rule change is to adopt a new
price check parameter applicable to the electronic processing of stock-
option orders and to make some modification to an existing price check
parameter to address stock-option orders. In particular, the Exchange
is proposing to provide that, on a class-by-class basis, the Exchange
may determine (and announce to TPHs via Regulatory Circular) to not
automatically execute a stock-option order that is marketable if,
following COA, the execution would not be within the acceptable derived
net market for the strategy that existed at the start of COA. As
indicated above, a ``derived net market'' for a strategy will be
calculated using the Exchange's best bid or offer in the individual
option series leg(s) and the NBBO in the stock leg. An ``acceptable
derived net market'' for a strategy will be calculated using the
Exchange's best bid or offer in the individual option series leg(s) and
the NBBO in the stock leg plus/minus an acceptable tick distance. The
``acceptable tick distance'' will be determined by the Exchange on a
class-by-class and premium basis.\21\ Such a stock-option order will
route 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 Exchange believes that users are more concerned about obtaining a
net price execution of their stock-option strategy orders than about
achieving an execution of the stock leg at the NBBO. The price check
parameter, however, would serve to prevent automatic executions at
extreme prices beyond the NBBO.
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\21\ It should be noted that this is simply a parameter for
determining whether a stock-option order will be subject to
automatic execution, or routed to PAR, a booth or cancelled. A
stock-option order that is subject to automatic execution remains
subject to the applicable priority requirements prescribed in Rule
6.53C.
It should also be noted that the Exchange has not proposed to
prescribe a minimum acceptable tick distance for this parameter
(e.g., the acceptable tick distance may be established at 0). This
will provide the Exchange with the flexibility to set the price
check feature so that automatic executions of stock-option orders
must be within the derived net market, which considers the
Exchange's best bid or offer for the options component leg(s) and
the NBBO for the stock component leg. The Exchange believes it is
reasonable and appropriate to utilize the Exchange best bid and
offer in the calculation as the option component leg(s) are not
permitted to trade at a price inferior to the Exchange's best bid
and offer. The Exchange also believes it is reasonable and
appropriate to consider the NBBO for the stock component leg in the
calculation as the NBBO should serve as a reasonable proxy for what
may be considered a reasonable price for the automatic execution of
the stock component leg. However, the Exchange also recognizes that
some range outside the NBBO may also be appropriate for determining
whether an automatic execution should occur as the QCT Exemption
does not require the stock component leg of a qualifying stock-
option order to be executed at the NBBO. The proposed parameter
therefore provides the Exchange with the flexibility to determine to
utilize the NBBO (which equates to an acceptable tick distance of 0)
or some range outside the NBBO (which equates to the derived net
part plus/minus an acceptable tick distance of 1, 2, 3 or some other
number of ticks) for determining whether to automatically execute a
stock-option order.
---------------------------------------------------------------------------
The following example illustrates the operation of the proposed
system functionality:
Example 3: Assume that at the start of COA the CBOE best bid and
offer for the option leg of a stock-option strategy is $1.00-$1.20
(100 x 100) and the NBBO for the stock leg of the strategy is
$10.05-$10.15 (10,000 x 10,000). Thus, the derived net market for
the strategy is $8.85-$9.15 (calculated as $1.20-$10.05 and -$1.00 +
$10.15, respectively). In addition, assume that the acceptable tick
distance for the stock leg is two ticks ($0.02). Under this
parameter, an order to sell stock could not execute at a price below
$10.03 and an order to buy stock could not execute at a price above
$10.17. Thus, the acceptable derived net market for the strategy
would be calculated as $8.83-$9.17 (calculated as $1.20-$10.03 and -
$1.00 + $10.17, respectively). Under this scenario, following COA, a
marketable stock-option order to sell the option series and buy the
stock that would trade with another stock-option order at [sic] net
debit price of $9.17 (within the acceptable derived net market for
the strategy) will be executed. However, a marketable stock-option
[sic] to sell the option series and buy the stock that would trade
with another stock-option order at a net debit price of $9.18 ($0.01
outside the acceptable derived net market for the strategy) will be
routed 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.
In addition to the foregoing, additional parameters would apply. In
classes where these price check parameters are available, they will
also be available for COA stock-option responses under Rule 6.53C(d),
stock-option orders and responses under Rules 6.74, Automated
Improvement Mechanism (``AIM''), and 6.74B, Solicitation Auction
Mechanism (``SAM''), or AIM customer-to-customer immediate cross of
stock-option orders under Rule 6.74A.08 (``CTC'').\22\ Under these
provisions, such paired stock-option orders and responses would not be
accepted. In this regard, if any paired stock-option order submitted by
an order entry firm for AIM, SAM or CTC processing exceeds the
parameters, then both the order that exceeds the parameters and the
paired contra-side order would not be accepted regardless of whether
the contra-side order exceeds the parameters. However, to the extent
that only the paired contra-side order submitted by an order entry firm
for AIM or SAM processing would exceed the price check parameter, the
paired contra-side order would not be accepted while the original
Agency Order would not be accepted or, at the order entry firm's
discretion, continue processing as an unpaired stock-option order
(e.g., the original Agency Order would route to COB or COA for
processing). The proposal also provides that, to the extent a contra-
side order or response is marketable, its price will be capped at the
price inside the acceptable derived net market.
---------------------------------------------------------------------------
\22\ AIM, SAM and CTC are mechanisms that may be used to cross
two paired orders. COA is a mechanism that may be used to expose an
unpaired complex order for price improvement. Orders submitted for
COA, AIM or SAM processing are exposed for price improvement through
an auction (and thus other market participants may submit
responses), whereas orders submitted for CTC processing are executed
immediately without exposure.
Example 4: Assume the acceptable derived net market is $1.00-
$1.20. Also assume two paired stock-option orders are submitted to
an AIM auction. If the original Agency Order to sell the option leg
and buy the stock is a market order, but the contra-side order to
buy the option leg and sell the stock has a net credit price of
$1.25, the AIM auction will not initiate because the contra-side
order does not satisfy the price check parameter. Such a contra-side
order would not be accepted because it is outside the acceptable net
market price range. The paired original Agency Order would either
not be accepted along with the contra-side order or, at the order
entry firm's discretion, would continue processing as an unpaired
complex order. By comparison, if the contra-side order has a net
---------------------------------------------------------------------------
credit price of $0.95, the price will be capped at $1.01.
The Exchange is also proposing to modify its existing ``market
width'' parameters under Rule 6.53C.08(a) to extend the application of
the individual series leg width parameters to stock-option orders.
Under this price check parameter, eligible market complex orders will
not be automatically executed if the width between the Exchange's best
bid and best offer in any individual series leg is not within an
[[Page 10031]]
acceptable price range.\23\ As proposed, the Exchange may also
determine on a class-by-class basis to make this price check parameter
available for market and marketable limit stock-option orders.
---------------------------------------------------------------------------
\23\ The ``acceptable price range'' is determined by the
Exchange on a class-by-class basis (and announced to TPHs via
Regulatory Circular) on a series by series basis for each series
comprising a complex order and is currently defined to be no less
than 1.5 times the corresponding bid/ask differentials for
individual series legs determined by the Exchange pursuant to Rule
8.7(b)(iv). See also SR-CBOE-2012-004 (wherein the Exchange is
proposing, among other things, to expand the application of this
price check parameter to include marketable limit orders (currently
the rule text only addresses market complex orders) and to specify
particular minimum acceptable price ranges within the rule that are
equal to 1.5 times the bid/ask differential requirements that the
Exchange had in its rules at the time the price check parameters
were adopted and are the same as the acceptable price range
parameters set forth in Rule 6.13(b)(v)-(vi)).
---------------------------------------------------------------------------
The Exchange believes that the application of these price
protection features will assist with the maintenance of fair and
orderly markets by helping to mitigate the potential risks associated
with stock-option orders drilling through multiple price points
(thereby resulting in executions at prices that are extreme and
potentially erroneous). Rather than automatically executing or booking
orders at extreme and potentially erroneous prices, the Exchange would
route orders that are not within the price check parameters to PAR or
the order entry firm's booth so that the orders can be further
evaluated.
In addition, the Exchange is proposing to extend the application of
its ``re-COA'' feature to stock option orders. Under this feature, to
the extent any non-marketable order resting at the top of the COB is
priced within the acceptable tick distances of the derived net market,
the full order would be subject to COA (referred to herein as a ``re-
COA'').\24\ The Exchange notes that this re-COA feature for resting
orders would only be applicable to resting non-marketable stock-option
orders that move close to the derived net market. This feature is not
applicable to resting stock-option orders that become marketable with
other stock-option orders. The Exchange may also determine on a class-
by-class and strategy basis to limit the frequency of re-COA auctions
initiated for stock-option orders resting in COB. For example, the
Exchange might determine to limit the frequency of re-COA auctions to
once every ``X'' seconds (the ``interval timer'') for a total of ``Y''
intervals. Once this cycle is complete, the Exchange may determine to
wait for a period of time ``Z'' (the ``sleep timer'') and then
reactivate the re-COA feature.\25\ All timers would be reset if a new
stock-option order improves the top of the COB (i.e., improves the best
net price bid or offer of the stock-option orders resting in COB).
These limitations on the frequency of COA auctions due to the re-COA
feature are intended to address system efficiency and effectiveness
considerations, such as limiting repeated initiations of COA auctions
(and related messaging) when there are flickering quotes. Once the re-
COA feature is initiated for a resting order, all other aspects of the
COA process described in Rule 6.53C would apply unchanged. The Exchange
believes this re-COA feature facilitates the orderly execution of
stock-option orders by providing an automated opportunity for price
improvement to (and execution of) resting orders priced near the
current market, similar to what a TPH might seek to do if the TPH were
representing a stock-option order in open outcry (or just entering an
order initially into COB).
---------------------------------------------------------------------------
\24\ This feature will apply regardless of whether the stock-
option order was subject to COA before it was booked in COB. See
note 19, supra.
\25\ Determinations by the Exchange regarding the classes where
the re-COA feature is activated and related tick distance and
frequency parameters will be announced to TPHs via Regulatory
Circular.
---------------------------------------------------------------------------
The following example illustrates the operation of this proposed
system functionality:
Example 5: Assume that the acceptable tick distance to re-COA is
2 ticks ($0.02). Also assume the frequency for the re-COA feature is
limited to once every 15 seconds (the interval timer) for 1
interval. Under this setting, only 1 re-COA auctions [sic] could be
triggered--the original re-COA auction.\26\ No further auctions
would be triggered until the sleep timer expires, and only then if a
quote update which is received AFTER the sleep timer expires would
result in the order being within 2 ticks of the derived net market.
Assume the sleep timer is set at 60 minutes. Assume the current
derived net market is $8.85-$9.15. If a stock-option order resting
in the COB is priced at a net credit price of $8.88, the stock-
option order is not marketable and is priced inside the derived net
market by 3 ticks. If subsequently the individual leg prices are
updated such that the current derived net market for the strategy
moves to a net price of $8.86-$9.14 the resting order priced at a
net credit price of $8.88 would trigger the re-COA feature and
initiate the re-COA auction process (as the order is now priced
within 2 ticks of the derived net market). If there are no
responses, the order would be placed back in COB. The resting order
would not initiate the re-COA feature again until the 60-minute
sleep timer has expired, and only then if a quote update received
AFTER the 60-minute sleep timer expires would result in the order
being within 2 ticks of the derived net market.
---------------------------------------------------------------------------
\26\ In a prior rule change filing, the Exchange provided an
example indicating that if the setting for the interval timer was
once every 15 seconds for 1 interval, then a total of 2 re-COA
auctions would occur during the interval--the original re-COA
auction and a second re-COA auction after the expiration of the 15-
second interval timer. See Securities Exchange Act Release No. 65939
(December 12, 2011), 76 FR 78708 (December 19, 2011)(SR-CBOE-2011-
119). However, the Exchange notes that only one re-COA auction will
occur under these settings. Therefore, Example 5 above is intended
to update the previous example and provide a more detailed
illustration of the interval timer.
---------------------------------------------------------------------------
If the number of attempts was set to a value greater than 1
(assume 2 for the below discussion), when the 15-second interval
timer expires, the order would be eligible to initiate the re-COA
feature again if the current market moves after the expiration of
the timer and the order meets the tick distance parameter (the order
would not automatically initiate the re-COA feature after the
expiration of the interval timer; instead there must be an update to
the current market after the expiration of the interval timer and
the order must meet the tick distance parameter for the system to
re-COA again). For example, if after the end of the 15-second
interval timer the derived net market moves to $8.87-$9.13 (or, for
example, if the derived market moves back to $8.85-$9.15 and then,
after the end of the 15-second interval timer moves back again to
$8.86-$9.14), then the resting complex order would again initiate
the re-COA feature. If there are no responses, the order would be
placed back in COB. The cycle is complete. Now that the resting
order has been subject to COA 2 times since it was booked in COB,
the 60-minute sleep timer will begin and the resting order will not
be eligible for the re-COA feature again until the sleep timer
expires and there is a quote update after that timer expires that is
within the tick distance parameter. All timers would be reset
anytime there is a price change at the top of the COB. For example,
if five minutes into the sleep interval a second stock-option order
is entered to rest in COB at a price of $8.87 ($0.01 better than the
original resting order priced at $8.88), the original resting order
would no longer be at the top of the COB and subject to the re-COA
feature. The timers would reset and the second complex order (which
now represents the top of the COB) would be subject to the re-COA
process. If, for example, the second order subsequently trades
(constituting a price change at the top of the COB), the original
order would be at the top of the COB again and could become subject
to the re-COA feature again.
Other Changes Related to Stock-Option Orders
The fifth purpose of this proposed rule change is to make certain
other changes to generally reorganize and simplify the rule text
pertaining to stock-option orders. As noted above, the current priority
rules for stock-option orders for COB are contained in four locations--
paragraphs (b), (c) and (f) of Interpretation and Policy .06 to Rule
6.53C. Similarly, the current priority rules for stock-option orders
processed through COA are contained in three locations--paragraphs (b),
(d) and (f) of
[[Page 10032]]
Interpretation and Policy .06 of Rule 6.53C. The Exchange is proposing
to eliminate paragraph (e)(which provides that the N-second group timer
\27\ for executions by market participants against orders in the COB
shall not be in effect for stock-option orders) and to combine it with
paragraph (c)(which also addresses executions against the COB). The
Exchange is proposing to eliminate paragraph (f) (which relates to
stock-option orders with more than one option leg) and to simplify and
combine it with paragraph (b) (which relates to stock-option orders
with one option leg). The Exchange is also proposing various other
miscellaneous changes, such as revising the text to consistently use
the term ``stock-option order(s)'' with no capitalization and to use
the phrase ``not be accepted'' to replace various references to
``rejected.''
---------------------------------------------------------------------------
\27\ The ``N-second group timer'' refers to a timer that the
Exchange may establish when market participants (as defined in Rule
6.45A or 6.45B, as applicable) quotes and/or orders interact with
orders in the EBook. See Rules 6.45A(c), 6.45B(c), 6.53C.03 and
proposed changes to Rule 6.53C.06 for additional information on the
N-second timer group.
---------------------------------------------------------------------------
Complex Order Definitions
Finally, the sixth purpose of this proposed rule change is to
simplify some of the definitions contained within Rule 6.53C. By way of
background, for many years, the options exchanges have recognized that
strategies involving more than one option series or more than one
instrument associated with an underlying security are different from
regular buy and sell orders for a single series, and an order to
achieve such strategies should be defined separately. As the
sophistication of the industry as [sic] grown, so have the strategies,
and the options exchanges have regularly added new strategies to the
list of defined complex order types. The investing industry, however,
creates new, legitimate investment strategies that do not necessarily
fit into one of the narrow definitions for complex order types that the
exchanges presently use. These order types are often developed for a
particular strategy, specific to a particular issue. To attempt to
define every individual strategy, and file additional rules to
memorialize them, would be a time consuming and extremely onerous
process, and would serve only to confuse the investing public. As a
result, bona fide transactions to limit risk are not afforded the
facility of execution afforded more common complex orders.
Rule 6.53C currently defines at least ten specific complex
strategies (including stock-option order strategies). These are the
most comprehensive list of complex strategies defined in a rule set,
yet they do not cover all of the possibilities of complex orders. To
provide for greater flexibility in the design and use of complex
strategies, the Exchange proposes to eliminate specific complex order
types described in Rule 6.53C, and to adopt generic definitions.
Specifically, under the proposed new definitions, first, a complex
order will be defined as any order involving the execution of two or
more different options series in the same underlying security, for the
same account, occurring at or near the same time in a ratio that is
equal to or greater than one-to-three (.333) and less than or equal to
three-to-one (3.00) (or such lower ratio as may be determined by the
Exchange on a class-by-class basis) and for the purpose of executing a
particular investment strategy. In addition, only those complex orders
with no more than the applicable number of legs, as determined by the
Exchange on a class-by-class basis, will be eligible for electronic
processing.\28\ Second, a stock-option order will be defined is as an
order to buy or sell a stated number of units of an underlying stock or
a security convertible into the underlying stock (``convertible
security'') coupled with the purchase or sale of options contract(s) on
the opposite side of the market representing either (i) the same number
of units of the underlying stock or convertible security, or (ii) the
number of units of the underlying stock necessary to create a delta
neutral position, but in no case in a ratio greater than eight (8)
options contracts per unit of trading of the underlying stock or
convertible security established for that series by The Options
Clearing Corporation (referred to in the text as the ``Clearing
Corporation'') (or such lower ratio as may be determined by the
Exchange on a class-by-class basis). Only those stock-option orders
with no more than the applicable number of legs, as determined by the
Exchange on a class-by-class basis, will be eligible for processing.
---------------------------------------------------------------------------
\28\ Currently the rule limits the number of legs to four. See
existing Rule 6.53C(b)(iii). This limitation is proposed to be
removed. In addition, a duplicative reference to the one-to-three
ratio for complex orders in Rule 6.53C(b)(iii) is proposed to be
removed as the applicable ratio will now be included within the
proposed definitions contained in proposed Rule 6.53C(a)(1).
---------------------------------------------------------------------------
The Exchange believes adopting these generic definitions will give
investors more flexibility in creating strategies with greater
accuracy. Further, these definitions would conform with definitions
used in other exchanges' rules \29\ and is modeled after the generic
definitions approved for use for exemptions from Trade Through
Liability by the Options Linkage Authority as described in the ``Plan
For The Purpose of Creating And Operation An Intermarket Options
Linkage'' (the ``Linkage Plan'') and as provided in Exchange Rules
6.80(4) and 6.81(b)(7).
---------------------------------------------------------------------------
\29\ See, e.g., International Securities Exchange Rule 722(a).
---------------------------------------------------------------------------
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the Act
\30\ in general and furthers the objectives of Section 6(b)(5) of the
Act \31\ 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 the
proposed rule change will assist in the electronic processing of stock-
option orders by providing a more efficient mechanism for carrying out
these strategies. The Exchange also believes the proposed additional
stock-option order related price check parameters will enhance the
functionality and assist with the maintenance of fair and orderly
markets by helping to mitigate the potential risks associated with an
order drilling through multiple price points (thereby resulting in
execution at prices that are extreme and potentially erroneous). The
Exchange believes the additional changes to reorganize and simplify the
rule text will make it easier for users to read and understand the
electronic processing procedures for stock-option orders. Finally, the
Exchange believes adopting generic definitions for complex orders,
including stock-option orders, as proposed, is appropriate in that
complex orders and stock-option orders are widely recognized and
utilized by market participants and are invaluable, both as an
investment strategy and a risk management strategy. The proposed change
will provide the opportunity for a more efficient mechanism for
carrying out these strategies.
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78f(b).
\31\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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.
[[Page 10033]]
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 (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 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-2012-005 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-2012-005. 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 Web site
viewing and printing in the Commission's Public Reference Room, 100 F
Street NE., Washington, DC 20549-1090, 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 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-2012-005, and should be submitted on or before March 13, 2012.
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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-3902 Filed 2-17-12; 8:45 am]
BILLING CODE 8011-01-P
