Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Proposed Rule Change To Address Authority To Cancel Orders When a Technical or Systems Issue Occurs and To Describe the Operation of Routing Service Error Accounts, 70517-70522 [2012-28594]
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Federal Register / Vol. 77, No. 227 / Monday, November 26, 2012 / Notices
program on a pilot basis for
approximately one year will provide
FINRA sufficient time to assess the
efficacy and utility of the program.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
FINRA does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. FINRA
believes that the proposed amendment,
which is designed to encourage
additional Professionals to test and use
Real-Time TRACE transaction data, may
promote more accurate and timely
pricing and valuations of debt securities
by members. Moreover, the pilot
program providing for a limited waiver
of the monthly fee per display
application for access to Real-Time
TRACE transaction data would not
place an unreasonable fee burden on
members and other persons (i.e.,
Professionals) that currently subscribe
to receive Real-Time TRACE transaction
data, nor confer an uncompetitive
benefit to Professionals taking advantage
of the pilot program, in that the fee
waiver would be available for a very
limited period (i.e, 31 days or less), and
the financial impact of such a pilot
program on Professionals would be de
minimis. In addition, the proposed rule
change does not place a burden on
competition in that the financial benefit
of the fee waiver would be available in
general to all Professionals. Any
Professional that tests data products
during a free trial would be eligible for
and would benefit from the concurrent
FINRA fee waiver, subject to the
proscriptions against a Professional
obtaining multiple free trials previously
described.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 12 and paragraph (f)(2) of Rule
19b–4 thereunder.13 At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
12 15
13 17
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(2).
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public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–FINRA–2012–049 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–FINRA–2012–049. 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, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of FINRA. 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–FINRA–
PO 00000
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70517
2012–049 and should be submitted on
or before December 17, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–28524 Filed 11–23–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68262; File No. SR–CBOE–
2012–108]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Proposed Rule
Change To Address Authority To
Cancel Orders When a Technical or
Systems Issue Occurs and To
Describe the Operation of Routing
Service Error Accounts
November 19, 2012.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on
November 8, 2012, the Chicago Board
Options Exchange, Incorporated (the
‘‘Exchange’’ or ‘‘CBOE’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is proposing to amend
its rules to (i) address the authority of
the Exchange to cancel orders (or release
routing-related orders) when a technical
or systems issue occurs; and (ii)
describe the operation of an Exchange
error account(s) and routing broker error
account(s), which may be used to
liquidate unmatched executions that
may occur in the provision of the
Exchange’s routing service. 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’s
Public Reference Room.
14 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of
and basis for the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
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1. Purpose
The purpose of the proposed rule
change is to adopt new Rule 6.6A to
address the authority of the Exchange to
cancel orders (or release routing-related
orders) when a technical or systems
issue occurs and to adopt new Rule
6.14C to describe the operation of an
Exchange error account(s)(‘‘Exchange
Error Account(s)’’) and routing broker
error account(s), which may be used to
liquidate unmatched executions that
may occur in the provision of the
Exchange’s routing service.
By way of background, the Exchange
operates a ‘‘hybrid’’ style system of
trading that allows automatic executions
to occur electronically and open outcry
trades to occur on the floor of the
Exchange. As part of this infrastructure,
the Exchange also automatically routes
orders to other exchanges under certain
circumstances. These routing services
are provided in conjunction with one or
more routing brokers that are not
affiliated with the Exchange.4
Mechanically, when the Exchange
receives an order from a Trading Permit
Holder (‘‘TPH’’) that is held in the
Exchange system and determines to
route an order to another exchange, the
Exchange provides the routing broker
with a corresponding order and
instructions to route the order to
another exchange(s). The routing broker
then sends the corresponding order to
the other exchange.5
4 See, e.g., Rule 6.14B, Order Routing to Other
Exchanges.
5 Generally, the routing brokers route the orders
directly to other exchanges. However, it is possible
that a routing broker may route orders to another
exchange through a third-party broker-dealer. In
those cases, the third-party broker-dealer would
route the orders to the other exchange in its name,
and any executions would be submitted for
clearance and settlement in the name of the routing
broker so that any resulting positions are delivered
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In the normal course, the routing
broker reports an execution or
cancellation of the routed order back to
the Exchange. Routed orders that are
executed at another exchange are
submitted for clearance and settlement
in the name of the routing broker. The
routing broker then coordinates with the
Exchange to arrange for any resulting
securities positions to be delivered to
the TPH that submitted the original
order to the Exchange (i.e., upon receipt
of a filled execution report for the
routed order, the Exchange system pairs
the execution against the TPH’s original
order being held in the Exchange system
and reports the pairing for clearance and
settlement purposes by submitting a
non-tape, clearing only transaction).
From time to time, the Exchange
encounters situations in which it
becomes necessary to cancel orders (or
release routing-related orders) and
resolve error positions that result from
errors of the Exchange, routing brokers,
or another exchange.6
Proposed Rule 6.6A (Order
Cancellation/Release)
The Exchange proposes to adopt new
CBOE Rule 6.6A to address the
authority of the Exchange to cancel
orders when a technical or systems
issue occurs. Specifically, paragraph (a)
of the proposed rule would expressly
authorize the Exchange to cancel orders
as it deems to be necessary to maintain
fair and orderly markets if a technical or
systems issue occurs at the Exchange,7
to the routing broker upon settlement. As described
above, normally the routing broker would then
coordinate with the Exchange to arrange for any
resulting securities positions to be delivered to the
TPH that submitted the corresponding order to the
Exchange. If error positions (as defined in proposed
Rule 6.14C) result in connection with the routing
broker’s use of a third-party broker-dealer for
outbound routing, and those positions are delivered
to the routing broker through the clearance and
settlement process, those positions would be
permitted to be resolved in accordance with
proposed Rule 6.14C. If the third-party brokerdealer received error positions and the positions
were not delivered to the routing broker through the
clearance and settlement process, then the thirdparty broker-dealer would resolve those positions
itself, and the positions would not be permitted to
be resolved as set forth in proposed Rule 6.14C.
6 The examples described in this filing are not
intended to be exclusive. Proposed Rule 6.6A
would provide general authority for the Exchange
to cancel orders (or release routing-related orders)
in order to maintain fair and orderly markets when
technical or systems issues are occurring, and
proposed Rule 6.14C also would set forth the
manner in which error positions (which may occur
in the provision of the Exchange’s routing service)
may be handled by the Exchange. The proposed
rule change is not limited to addressing order
cancellation (release) or error positions resulting
only from the specific examples described in this
filing.
7 To confirm, the authority to cancel orders to
maintain fair and orderly markets under proposed
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the routing broker, or another exchange
to which an Exchange order has been
routed. Paragraph (a) would also
provide that a routing broker may only
cancel orders being routed to another
exchange based on the Exchange’s
standing or specific instructions or as
otherwise provided in the Exchange
Rules.8 Paragraph (a) would also
provide that the Exchange shall provide
notice of the cancellation to affected
Trading Permit Holders as soon as
practicable.
Paragraph (b) of the proposed rule
provides that the Exchange may also
determine to release orders being held
on the Exchange awaiting an away
exchange execution as it deems to be
necessary to maintain fair and orderly
markets if a technical or systems issues
occurs at the Exchange, a routing broker,
or another exchange to which an order
has been routed (the process for
‘‘releasing’’ orders is illustrated in more
detail below). Paragraph (c) of the
proposed rule would provide that, for
purposes of Rule 6.6A, technical or
system issues would include, without
limitation, instances where the
Exchange has not received confirmation
of an execution (or cancellation) on
another exchange from a routing broker
within a response time interval
designated by the Exchange, which
interval may not be less than three (3)
seconds.9
Rule 6.6A would apply to any technical or systems
issue at the Exchange and would include any orders
at the Exchange (i.e., the authority to cancel orders
would apply to any orders that are subject to the
Exchange’s routing service and any orders that are
not subject to the Exchange’s routing service). By
comparison, the routing service error account
provisions under proposed Rule 6.14C (discussed
below) would apply only to original and
corresponding orders that are subject to the
Exchange routing service.
8 As discussed above, the Exchange uses nonaffiliated routing brokers to provide the routing
services. These routing brokers are also not facilities
of the Exchange. For all routing services, the
Exchange determines the logic that provides when,
how and where orders are routed away to other
exchanges. The routing broker receives the routing
instructions from the Exchange to route orders to
other exchanges and to report executions back to
the Exchange. The routing broker cannot change the
terms of an order or the routing instructions, nor
does the routing broker have any discretion about
where to route an order. See Rule 6.14B(c), (e) and
(f). Under paragraph (a) to proposed Rule 6.6A, the
decision to take action with respect to orders
affected by a technical or systems issue shall be
made by the Exchange. Depending on where those
orders are located, a routing broker would be
permitted to initiate a cancellation of an order(s)
pursuant to the Exchange’s standing or specific
instructions or as otherwise provided in the
Exchange Rules (e.g., the Exchange’s standing
instructions might provide, among other things, that
the routing broker could initiate the cancellation of
orders if the routing broker is experiencing
technical or systems issues routing orders to an
away exchange).
9 A determination by the Exchange to cancel or
release orders may not cause the Exchange to
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The examples set forth below describe
some of the circumstances in which the
Exchange may decide to cancel (or
release) orders.
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Example 1: If a routing broker or another
exchange experiences a technical or systems
issue that results in the Exchange or routing
broker not receiving responses to immediateor-cancel (‘‘IOC’’) orders sent to the other
exchange, and that issue is not resolved in a
timely manner, then the Exchange may seek
to cancel the routed orders affected by the
issue.10 For instance, if a routing broker
experiences a connectivity issue affecting the
manner in which it sends and receives order
messages to or from another exchange, it may
be unable to receive timely execution or
cancellation reports from the other exchange,
and Exchange may consequently seek to
cancel the affected routed orders (e.g., by
calling the routing broker and instructing the
routing broker to attempt to cancel the
orders) or perhaps the routing broker may
initiate the cancellation of the affected routed
orders pursuant to a standing or specific
instruction from the Exchange. In these
circumstances, the Exchange would also
attempt to release the initial orders submitted
by TPHs.11
Example 2: If the Exchange does not
receive confirmation of an execution (or
cancellation) of an IOC order sent to another
exchange from a routing broker within a
designated response time interval of three (3)
seconds, then an automated system feature
will release the initial order being held by the
Exchange.12 The Exchange would also
declare self-help against the other exchange
pursuant to paragraph (b)(1) of Rule 6.81, Order
Protection. If the Exchange determines to cancel or
release orders, as applicable, under proposed Rule
6.6A but does not declare self-help against that
other exchange, the Exchange would continue to be
subject to the trade-through requirements in Rule
6.81 with respect to that exchange.
10 In a normal situation (i.e., one in which a
technical or systems issue does not exist), the
Exchange should receive an immediate response
back from the routing broker reporting any
executions or cancellations from the other
exchange, and would then pass the resulting fill or
cancellation onto the TPH. If, after submitting an
order for which a corresponding order has been
routed to another exchange, a TPH sends an
instruction to cancel the original order, the
cancellation is held by the Exchange until a
response is received from the routing broker on the
corresponding order. For instance, if the other
exchange executes the corresponding order, the
execution would be passed onto the TPH and the
cancellation instruction on the TPH’s original order
would be disregarded.
11 Once an initial order is released, any
cancellation that a TPH submitted to the Exchange
on the initial order during such a situation would
be honored. If a TPH did not submit a cancellation
to the Exchange, however, that initial order would
remain ‘‘live’’ and thus be eligible for execution or
posting on the Exchange, and the Exchange would
not treat any execution of the initial order or any
subsequent routed order related to that initial order
as an error (unless, of course, the order was itself
subject to another technical or systems issue or any
away exchange processing exceeded the applicable
response time interval).
12 This routing risk management feature would
serve as one means for the Exchange to efficiently
determine if there is a technical or system issue
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attempt to cancel the routed order in these
circumstances.13
Example 3: If the Exchange experiences a
systems issue, the Exchange may take steps
to cancel and/or release all outstanding
orders affected by the issue (which orders
occurring. The feature, and the system functionality
used to operate the feature, is generally modeled
after a process that was utilized by the Exchange
under the former Options Intermarket Linkage Plan
(the ‘‘Old Linkage Plan’’). Under the Old Linkage
Plan, an eligible market maker that sent a ‘‘principal
acting as agent order’’ (referred to as a ‘‘P/A Order’’)
through the linkage and who did not receive a reply
from the away exchange within 30 seconds was able
to reject any response received thereafter purporting
to report a total or partial execution of that order.
Over time, the time frame in which an away
exchange was required to respond was ultimately
reduced to 3 seconds. See, e.g., Securities Exchange
Act Release Nos. 43086 (July 28, 2000), 65 FR 48023
(August 4, 2000)(order approving Options
Intermarket Linkage Plan submitted by the
American Stock Exchange LLC, Chicago Board
Options Exchange, Inc., and International Securities
Exchange LLC) and 57238 (January 30, 2008), 73 FR
6748 (February 5, 2008) (order approving joint
amendment no. 25 to the Plan for the Purpose of
Creating and Operating an Intermarket Option
Linkage Relating to Response Time for Certain
Orders Sent Through the Linkage). The Old Linkage
Plan was replaced by the Options Order Protection
and Locked/Crossed Markets Plan (the ‘‘Distributive
Options Linkage Plan’’) in 2009. See Securities
Exchange Act Release No. 60405 (July 30, 2009), 74
FR 39362 (August 6, 2009)(order approving the
National Market System Plan relating to Options
Order Protection and Locked/Crossed Markets
submitted by the Chicago Board Options Exchange,
Incorporated, International Securities Exchange,
LLC, The NASDAQ Stock Market LLC, NASDAQ
OMX BX, Inc., NASDAQ OMX PHLX, Inc., NYSE
Amex LLC, and NYSE Arca, Inc.). Although there
is no longer a similar provision for P/A Orders and
away exchange response times under the
Distributive Options Linkage Plan, the Exchange
still has system functionality that tracks response
times for orders routed to away exchanges. The
primary distinction between the process under the
Old Linkage Plan and the process described in the
current proposed rule change is that, instead of
rejecting an execution report back to the away
exchange, an execution report received after the
TPH’s order is released would be considered an
error and subject to the Exchange Error Account
procedures discussed below. The Exchange views
having this ability to release orders that are queued
waiting for a responsive execution/cancel report for
a corresponding order from an away exchange as an
important risk management feature. Because the
markets are highly automated, the Exchange would
normally expect to receive a response to an order
routed through the routing service within
milliseconds after it is sent. If a response is not
received in a timely manner, it generally is an
indication of a system problem with the other
exchange, the routing broker(s) or the Exchange. In
addition, especially in fast-moving markets like the
options market, the Exchange believes allowing for
the release of a TPH’s related original order due to
an untimely response will provide an opportunity
for the transmittal of responses while also allowing
the Exchange’s TPHs to address and execute orders
pending on the Exchange in a timely manner. The
Exchange believes this contributes to the
Exchange’s ability to maintain fair and orderly
markets.
13 It is possible that attempts to cancel the routed
orders may not succeed. If the Exchange receives an
execution report on the order that had been routed
to an away exchange, then the unmatched
execution would be considered an ‘‘error position’’
under proposed Rule 6.14C.
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70519
may include orders that may or may not be
subject to routing services). The Exchange
would also attempt to cancel any routed
orders related to the TPHs’ initial orders, if
applicable, in these circumstances.14
Proposed Rule 6.14C (Routing Service
Error Accounts)
Proposed Rule 6.14C would provide
that each routing broker shall maintain,
in the name of the routing broker, one
or more accounts for the purpose of
liquidating unmatched trade positions
that may occur in connection with the
away exchange routing service provided
under Rule 6.14B (‘‘error positions’’).15
In addition, the Exchange may also
maintain, in the name of the Exchange,
one or more Exchange Error Accounts
for the purpose of liquidating error
positions in the circumstances
described below.
Paragraph (a) of the proposed rule
would provide that errors to which the
rule would apply include any action or
omission by the Exchange, a routing
broker, or another exchange to which an
Exchange order has been routed, either
of which result in an unmatched trade
position due to the execution of an
original or corresponding order that is
subject to the away market routing
service and for which there is no
corresponding order to pair with the
execution (each a ‘‘routing error’’). Such
routing errors would include, without
limitation, positions resulting from
determinations by the Exchange to
cancel or release an order pursuant to
proposed Rule 6.6A (as described
above).
Paragraph (b) of the proposed rule
would provide that, generally, each
routing broker will utilize its own error
account to liquidate error positions.
However, in certain circumstances, the
Exchange may utilize an Exchange Error
Account. In particular, in instances
where the routing broker is unable to
utilize its own error account (e.g., due
to a technical, systems or other issue
that prevents the routing broker from
doing so) or where the an error is due
to a technical or systems issue at the
Exchange, the Exchange may (but would
not be required to) determine it is
appropriate to utilize an Exchange Error
14 It is possible that attempts to cancel the routed
orders may not succeed. If the Exchange receives an
execution report on the order that had been routed
to an away exchange, then the unmatched
execution would be considered an ‘‘error position’’
under proposed Rule 6.14C.
15 The Exchange notes that, in connection with
providing routing services, routing brokers
currently may utilize their own error accounts to
liquidate error positions. The Exchange believes it
is reasonable and not inappropriate to address
routing errors through the error account of a routing
broker because, among other reasons, it is the
executing broker associated with these transactions.
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Account. In making such a
determination to utilize an Exchange
Error Account, the Exchange would
consider whether is has sufficient time,
information and capabilities considering
the market circumstances to determine
that an error is due to such
circumstances and whether the
Exchange can address the error.
The Exchange believes it is reasonable
and appropriate to address routing
errors through the error account of a
routing broker in the manner proposed
because, among other reasons, it is the
executing broker associated with these
transactions. The Exchange also believes
that having the flexibility to determine
to utilize an Exchange Error Account in
the limited circumstances described
above allows for administrative
convenience and contributes to the
Exchange’s ability to maintain a fair and
orderly market.16 From a TPH
perspective, there would be no impact
resulting from the decision to use an
Exchange Error Account or the routing
broker’s error account to liquidate the
error position in these circumstances.
By definition, an error position in an
Exchange Error Account would only
include unmatched trades due to a
routing error. In that regard, paragraph
(c) of the proposed rule would provide
that the Exchange shall not accept any
positions in an Exchange Error Account
from an account of a Trading Permit
Holder or permit any Trading Permit
Holder to transfer any positions from
the Trading Permit Holder’s account to
an Exchange Error Account.17
To the extent a routing broker utilizes
its own account to liquidate error
16 The Exchange notes that any profit/loss from
liquidating the error positions would belong to the
Exchange (when an Exchange Error Account is
utilized) or the routing broker (when the routing
broker’s error account is utilized). However, all or
any portion of such profits/losses may be subject to
certain contractual obligations pursuant to the
routing service agreement between the Exchange
and the routing broker (e.g., used to offset certain
contractual obligations).
17 The Exchange may address error positions
under the proposed rule that are caused by the
errors noted above, but the Exchange may not
accept from a TPH positions that are delivered to
the TPH through the clearance and settlement
process, even if those positions may have been the
result of an error. This would not apply, however,
to situations like the one described below in which
the Exchange incurred a position to settle a TPH
purchase, as the TPH did not yet have a position
in its account as a result of the purchase at the time
of the Exchange’s action, i.e., the Exchange’s action
was necessary for the purchase to settle into the
TPH’s account. Moreover, to the extent a TPH
receives positions in connection with an error or
other technical or systems issue, the TPH may seek
to rely on other Exchange Rules such as Rule 6.7,
Exchange Liability, if it experiences a loss. For
example, Rule 6.7 provides TPHs with the ability
to file claims for negligent acts or omissions of
Exchange employees or for the failure of its systems
or facilities.
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positions, paragraph (d) of the proposed
rule provides that the routing broker
shall liquidate the error positions as
soon as practicable. The routing broker
could determine to liquidate the
position itself or have a third party
broker-dealer liquidate the position on
the routing broker’s behalf. Paragraph
(d) also provides that the routing broker
establish and enforce policies and
procedures reasonably designed to (i)
adequately restrict the flow confidential
and proprietary information associated
with the liquidation of the error position
in accordance with Rule 6.14B,18 and
(ii) prevent the use of information
associated with other orders subject to
the routing services when making
determinations regarding the liquidation
of error positions. In addition,
paragraph (d) provides that the routing
broker shall make and keep records
associated with the liquidation of such
routing broker error positions and shall
maintain such records in accordance
with Rule 17a–4 under the Act.19
Paragraph (e) of the proposed rule
would provide that, to the extent an
Exchange Error Account is utilized to
liquidate error positions, the Exchange
shall liquidate the error positions as
soon as practicable. In liquidating error
positions in an Exchange Error Account,
the Exchange shall provide complete
time and price discretion for the trading
to liquidate error positions in an
Exchange Error Account to a third-party
broker-dealer and shall not attempt to
exercise any influence or control over
the timing or methods of such trading.20
Such a third-party broker-dealer may
include a routing broker not affiliated
with the Exchange. Paragraph (e) would
also provide that the Exchange shall
establish and enforce policies and
procedures reasonably designed to
adequately restrict the flow of
confidential and proprietary
information between the Exchange and
the third-party broker-dealer associated
18 Rule 6.14B(b) provides that the Exchange shall
establish and maintain procedures and internal
controls reasonably designed to adequately restrict
the flow of confidential and proprietary information
between the Exchange and the routing broker, and
any other entity, including any affiliate of the
routing broker, and, if the routing broker or any of
its affiliates engages in any other business activities
other than providing routing services to the
Exchange, between the segment of the routing
broker or affiliate that provides the other business
activities and the segment of the routing broker that
provides the routing services.
19 17 CFR 240.17a–4.
20 This provision is not intended to preclude the
Exchange from providing the third-party broker
with standing instructions with respect to the
manner in which it should handle all error account
transactions. For example, the Exchange might
instruct the broker to treat all orders as ‘‘not held’’
and to attempt to minimize any market impact on
the price of the option being traded.
PO 00000
Frm 00109
Fmt 4703
Sfmt 4703
with the liquidation of the error
positions. Finally, paragraph (e) would
provide that the Exchange shall make
and keep records to document all
determinations to treat positions as error
positions under the rule (whether or not
an Exchange Error Account is utilized to
liquidate such error positions), as well
as records associated with the
liquidation of Exchange Error Account
error positions through a third-party
broker-dealer, and shall maintain such
records in accordance with Rule 17a–1
under the Act.21
Examples of such error positions due
to a routing error may include, without
limitation, the following:
Example 4: Error positions may result from
routed orders that the Exchange or a routing
broker attempts to cancel but that are
executed before the other exchange receives
the cancellation message or that are executed
because the other exchange is unable to
process the cancellation message. Using the
situation described in Example 1 above,
assume the Exchange seeks to release the
initial orders being held by the Exchange
because it is not receiving timely execution
or cancellation reports from another
exchange. In such a situation, although the
Exchange would attempt to direct the routing
broker to cancel the routed corresponding
orders, the routing broker may still receive
executions from the other exchange after
connectivity is restored, which would not
then be allocated to TPHs because of the
earlier decision to release the affected initial
orders. Instead, the routing broker would
post the positions into its account and
resolve the positions in the manner described
above. Alternatively, if the routing broker is
unable to resolve the positions (or if the error
position is due to a system or technical issue
on the Exchange), the Exchange may
determine to post the positions into an
Exchange Error Account and resolve the
positions in the manner described above.
Example 5: Error positions may result from
an order processing issue at another
exchange. For instance, if another exchange
experienced a systems problem that affects
its order processing, it may transmit back a
message purporting to cancel a routed order,
but then subsequently submit an execution of
that same order for clearance and settlement.
In such a situation, the Exchange would not
then allocate the execution to the TPH
because of the earlier cancellation message
from the other exchange. Instead, the routing
broker would post the positions into its
account and resolve the positions in the
manner described above. Alternatively, if the
routing broker is unable to resolve the
positions, the Exchange may determine to
post the positions into an Exchange Error
Account and resolve the positions in the
manner described above.
Example 6: Error positions may result if a
routing broker receives an execution report
from another exchange but does not receive
clearing instructions for the execution from
the other exchange. For instance, assume that
21 17
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a TPH sends the Exchange an order to buy
10 ABC option contracts, which causes the
routing broker to send an order to another
exchange that is subsequently executed,
cleared and closed out by that other
exchange, and the execution is ultimately
communicated back to the TPH. On the next
trading day (T+1), if the other exchange does
not providing clearing instructions for that
execution, the Exchange/routing broker
would still be responsible for settling that
TPH’s purchase and therefore would be left
with open positions.22 Instead, the routing
broker would post the positions into its
account and resolve the positions in the
manner described above. Alternatively, if the
routing broker is unable to resolve the
positions, the Exchange may determine to
post the positions into an Exchange Error
Account and resolve the positions in the
manner described above.
Example 7: Error positions may result from
a technical or systems issue that causes
orders to be executed in the name of a
routing broker in connection with its routing
services function that are not related to any
corresponding initial orders of TPHs. As a
result, the Exchange would not be able to
assign any positions resulting from such an
issue to TPHs. Instead, the routing broker
would post the positions into its account and
resolve the positions in the manner described
above. Alternatively, if the routing broker is
unable to resolve the positions, the Exchange
may determine to post the positions into an
Exchange Error Account and resolve the
positions in the manner described above.23
mstockstill on DSK4VPTVN1PROD with NOTICES
In each of the circumstances
described above, the Exchange and its
routing broker may not learn about an
error position until T+1. For instance,
the Exchange and its routing broker may
not learn about an error position until
either (i) during the clearing process
when a routing destination has
submitted to The Options Clearing
Corporation (‘‘OCC’’) a transaction for
clearance and settlement for which the
Exchange/routing broker never received
an execution confirmation, or (ii) when
another exchange does not recognize a
transaction submitted by a routing
broker to OCC for clearance and
settlement. Moreover, the affected TPHs’
trade may not be nullified absent
express authority under Exchange
Rules.24 As such, the Exchange believes
that use of a routing broker error
account (or an Exchange Error Account,
as applicable) to liquidate the error
positions that may occur in these
22 To the extent that a loss is incurred in covering
the position, the routing broker (on behalf of the
Exchange or itself) may submit a reimbursement
claim to that other exchange.
23 To the extent such positions are not related to
the routing broker’s function as an Exchange
routing broker (i.e., originating with the Exchange),
the Exchange would not post such positions to an
Exchange Error Account. The routing broker would
resolve the error positions itself.
24 See, e.g., Rule 6.25, Nullification and
Adjustment of Options Transactions.
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16:24 Nov 23, 2012
Jkt 229001
circumstances is reasonable and
appropriate in these circumstances.
2. Statutory Basis
The proposed rule change is
consistent with Section 6(b) of the Act 25
in general and furthers the objectives of
Section 6(b)(5) of the Act 26 in
particular, which requires that the rules
of an exchange be designed to promote
just and equitable principles of trade, to
prevent fraudulent and manipulative
acts, to remove impediments to and to
perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest. The
Exchange believes that this proposed
rule change is in keeping with those
principles since the Exchange’s ability
to cancel and release orders during a
technical or systems issue and to
maintain an Exchange Error Account
facilitates the smooth and efficient
operation of the market. Specifically,
the Exchange believes that allowing the
Exchange to cancel and release orders
during a technical or systems issue (and
permitting its routing brokers to cancel
orders pursuant to standing or specific
instructions or as otherwise permitted
under Exchange Rules) would allow the
Exchange to maintain fair and orderly
markets. Moreover, the Exchange
believes that allowing a routing broker
to assume error positions in its own
account(s) to liquidate those positions
(or allowing the Exchange to assume
error positions in an Exchange Error
Account to liquidate those positions in
instances where a routing broker is
unable to do so or where the routing
error is due to a technical or systems
issue at Exchange) subject to the
conditions set forth in proposed Rule
6.14C would be the least disruptive
means to address these errors. Overall,
the proposed new rule is designed to
ensure full trade certainty to market
participants and to avoid disrupting the
clearance and settlement process. The
proposed new rule is also designed to
provide a consistent methodology for
handling error positions in a manner
that does not discriminate among TPHs.
The proposed new rule is also
consistent with Section 6 of the Act
insofar as it would require the Exchange
(and its routing brokers, as applicable)
to establish controls to restrict the flow
of any confidential information
associated with the liquidation of error
positions.
25 15
26 15
PO 00000
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
Frm 00110
Fmt 4703
Sfmt 4703
70521
B. Self-Regulatory Organization’s
Statement on Burden on Competition
CBOE does not believe that the
proposed rule change will impose any
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposal.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
the proposed rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
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–2012–108 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–2012–108. 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
E:\FR\FM\26NON1.SGM
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Federal Register / Vol. 77, No. 227 / Monday, November 26, 2012 / Notices
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, on business days
between the hours of 10 a.m. and 3 p.m.,
located at 100 F Street NE., Washington,
DC 20549–1090. Copies of the filing will
also be available for inspection and
copying at the principal office of the
Exchange. All comments received will
be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–CBOE–
2012–108 and should be submitted on
or before December 17, 2012.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend its
Price List to change the monthly fees for
the use of ports. The text of the
proposed rule change is available on the
Exchange’s Web site at www.nyse.com,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.27
Kevin M. O’Neill,
Deputy Secretary.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[FR Doc. 2012–28594 Filed 11–23–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68261; File No. SR–
NYSEMKT–2012–64]
Self-Regulatory Organizations; NYSE
MKT LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Change the Monthly
Fees for the Use of Ports
mstockstill on DSK4VPTVN1PROD with NOTICES
November 19, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that, on
November 6, 2012, NYSE MKT LLC (the
‘‘Exchange’’ or ‘‘NYSE MKT’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
27 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
VerDate Mar<15>2010
16:24 Nov 23, 2012
Jkt 229001
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
1. Purpose
The Exchange proposes to amend its
Price List to change the monthly fees for
the use of ports that provide
connectivity to the Exchange’s trading
systems (i.e., ports for entry of orders
and/or quotes (‘‘order/quote entry
ports’’)) and to implement a fee for ports
that allow for the receipt of ‘‘drop
copies’’ of order or transaction
information (‘‘drop copy ports’’ and,
together with order/quote entry ports,
‘‘ports’’).3
Order/Quote Entry Ports
The Exchange currently makes order/
quote entry ports available for
connectivity to its trading systems and
charges $300 per port pair per month for
up to five pairs of ports, then $1,500 per
month for each additional five pairs of
ports.4
3 Firms receive confirmations of their orders and
receive execution reports via the order/quote entry
port that is used to enter the order or quote. A ‘‘drop
copy’’ contains redundant information that a firm
chooses to have ‘‘dropped’’ to another destination
(e.g., to allow the firm’s back office and/or
compliance department, or another firm—typically
the firm’s clearing broker—to have immediate
access to the information). Such drop copies can
only be sent via a drop copy port. Drop copy ports
cannot be used to enter orders and/or quotes.
4 See Securities Exchange Act Release No. 63072
(October 7, 2010), 75 FR 64368 (October 19, 2010)
(SR–NYSEAmex–2010–97) (the port fee ‘‘Adopting
Release’’). See also Securities Exchange Act Release
PO 00000
Frm 00111
Fmt 4703
Sfmt 4703
The Exchange proposes to change the
current methodology for order/quote
entry port billing, such that order/quote
entry ports would be charged on a per
port basis, without billing in groups of
five and without requiring that ports be
in pairs.5 More specifically, the
Exchange proposes to charge $200 per
port per month for order/quote entry
ports, which are currently charged $300
per pair per month for activity on NYSE
MKT; 6 provided, however, that (i) users
of the Exchange’s Risk Management
Gateway service (‘‘RMG’’) would not be
charged for order/quote entry ports if
such ports are designated as being used
for RMG purposes, and (ii) Designated
Market Makers (‘‘DMMs’’) would not be
charged for order/quote entry ports that
connect to the Exchange via the DMM
Gateway.7
Two methods are available to DMMs
to connect to the Exchange: DMM
Gateway and CCG. The two methods are
quite distinct, however. Only DMMs
may utilize the DMM Gateway, and they
may only use DMM Gateway when
No. 66104 (January 5, 2012), 77 FR 1771 (January
11, 2012) (SR–NYSEAmex–2011–107) (the port fee
‘‘Amending Release’’). For example, the current fee
for six pairs of ports would be $3,000 total per
month (i.e., $1,500 total for the first five pairs and
$1,500 for the sixth pair). The fee would remain
$3,000 for pairs seven through 10. The fee would
increase by $1,500, to $4,500 total, for pairs 11
through 15.
5 The Exchange stated in the Adopting Release
that the port fee is charged per participant. The
Exchange later clarified that ‘‘per participant’’
means per member organization for purposes of the
port fees. See Amending Release, at 1772. The
proposed fee change would change the current
methodology such that ports would not be charged
on a per member organization basis. Accordingly,
reference to per member organization would be
removed from the Price List related to port fees.
6 The Exchange has a Common Customer Gateway
(‘‘CCG’’) that accesses the equity trading systems
that it shares with its affiliates, New York Stock
Exchange LLC (‘‘NYSE’’) and NYSE Arca, Inc.
(‘‘NYSE Arca’’), and all ports connect to the CCG.
See, e.g., Securities Exchange Act Release No.
64543 (May 25, 2011), 76 FR 31667 (June 1, 2011)
(SR–NYSEAmex–2011–20). All NYSE MKT member
organizations are also NYSE member organizations
and, accordingly, a member organization utilizes its
ports for activity on both NYSE and/or NYSE MKT
and is charged port fees based on the total number
of ports connected to the CCG, whether the ports
are used to quote and trade on NYSE, NYSE MKT,
and/or both, because those trading systems are
integrated. The NYSE Arca trading platform is not
integrated in the same manner. Therefore, it does
not share its ports with NYSE or NYSE MKT.
7 Since the Adopting Release, the Exchange has
not charged DMMs for order/quote entry ports that
have connected to the Exchange via the DMM
Gateway. Since 2011, when DMMs first became able
to enter orders through CCG, DMM order/quote
entry ports connected to the Exchange via the CCG
have been, and currently are, charged port fees in
accordance with the Price List. DMMs can elect to
use the DMM Gateway, the CCG, or both for their
connectivity to the Exchange. However, the DMM
Gateway must be used for certain DMM-specific
functions that relate to the DMM’s role on the
Exchange and the obligations attendant therewith.
E:\FR\FM\26NON1.SGM
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]]>Agencies
[Federal Register Volume 77, Number 227 (Monday, November 26, 2012)]
[Notices]
[Pages 70517-70522]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-28594]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68262; File No. SR-CBOE-2012-108]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Proposed Rule Change To Address Authority To
Cancel Orders When a Technical or Systems Issue Occurs and To Describe
the Operation of Routing Service Error Accounts
November 19, 2012.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on November 8, 2012, the Chicago Board Options Exchange,
Incorporated (the ``Exchange'' or ``CBOE'') filed with the Securities
and Exchange Commission (the ``Commission'') the proposed rule change
as described in Items I and II below, which Items have been prepared by
the self-regulatory organization. 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\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing to amend its rules to (i) address the
authority of the Exchange to cancel orders (or release routing-related
orders) when a technical or systems issue occurs; and (ii) describe the
operation of an Exchange error account(s) and routing broker error
account(s), which may be used to liquidate unmatched executions that
may occur in the provision of the Exchange's routing service. 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's Public Reference Room.
[[Page 70518]]
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to adopt new Rule 6.6A
to address the authority of the Exchange to cancel orders (or release
routing-related orders) when a technical or systems issue occurs and to
adopt new Rule 6.14C to describe the operation of an Exchange error
account(s)(``Exchange Error Account(s)'') and routing broker error
account(s), which may be used to liquidate unmatched executions that
may occur in the provision of the Exchange's routing service.
By way of background, the Exchange operates a ``hybrid'' style
system of trading that allows automatic executions to occur
electronically and open outcry trades to occur on the floor of the
Exchange. As part of this infrastructure, the Exchange also
automatically routes orders to other exchanges under certain
circumstances. These routing services are provided in conjunction with
one or more routing brokers that are not affiliated with the
Exchange.\4\ Mechanically, when the Exchange receives an order from a
Trading Permit Holder (``TPH'') that is held in the Exchange system and
determines to route an order to another exchange, the Exchange provides
the routing broker with a corresponding order and instructions to route
the order to another exchange(s). The routing broker then sends the
corresponding order to the other exchange.\5\
---------------------------------------------------------------------------
\4\ See, e.g., Rule 6.14B, Order Routing to Other Exchanges.
\5\ Generally, the routing brokers route the orders directly to
other exchanges. However, it is possible that a routing broker may
route orders to another exchange through a third-party broker-
dealer. In those cases, the third-party broker-dealer would route
the orders to the other exchange in its name, and any executions
would be submitted for clearance and settlement in the name of the
routing broker so that any resulting positions are delivered to the
routing broker upon settlement. As described above, normally the
routing broker would then coordinate with the Exchange to arrange
for any resulting securities positions to be delivered to the TPH
that submitted the corresponding order to the Exchange. If error
positions (as defined in proposed Rule 6.14C) result in connection
with the routing broker's use of a third-party broker-dealer for
outbound routing, and those positions are delivered to the routing
broker through the clearance and settlement process, those positions
would be permitted to be resolved in accordance with proposed Rule
6.14C. If the third-party broker-dealer received error positions and
the positions were not delivered to the routing broker through the
clearance and settlement process, then the third-party broker-dealer
would resolve those positions itself, and the positions would not be
permitted to be resolved as set forth in proposed Rule 6.14C.
---------------------------------------------------------------------------
In the normal course, the routing broker reports an execution or
cancellation of the routed order back to the Exchange. Routed orders
that are executed at another exchange are submitted for clearance and
settlement in the name of the routing broker. The routing broker then
coordinates with the Exchange to arrange for any resulting securities
positions to be delivered to the TPH that submitted the original order
to the Exchange (i.e., upon receipt of a filled execution report for
the routed order, the Exchange system pairs the execution against the
TPH's original order being held in the Exchange system and reports the
pairing for clearance and settlement purposes by submitting a non-tape,
clearing only transaction).
From time to time, the Exchange encounters situations in which it
becomes necessary to cancel orders (or release routing-related orders)
and resolve error positions that result from errors of the Exchange,
routing brokers, or another exchange.\6\
---------------------------------------------------------------------------
\6\ The examples described in this filing are not intended to be
exclusive. Proposed Rule 6.6A would provide general authority for
the Exchange to cancel orders (or release routing-related orders) in
order to maintain fair and orderly markets when technical or systems
issues are occurring, and proposed Rule 6.14C also would set forth
the manner in which error positions (which may occur in the
provision of the Exchange's routing service) may be handled by the
Exchange. The proposed rule change is not limited to addressing
order cancellation (release) or error positions resulting only from
the specific examples described in this filing.
---------------------------------------------------------------------------
Proposed Rule 6.6A (Order Cancellation/Release)
The Exchange proposes to adopt new CBOE Rule 6.6A to address the
authority of the Exchange to cancel orders when a technical or systems
issue occurs. Specifically, paragraph (a) of the proposed rule would
expressly authorize the Exchange to cancel orders as it deems to be
necessary to maintain fair and orderly markets if a technical or
systems issue occurs at the Exchange,\7\ the routing broker, or another
exchange to which an Exchange order has been routed. Paragraph (a)
would also provide that a routing broker may only cancel orders being
routed to another exchange based on the Exchange's standing or specific
instructions or as otherwise provided in the Exchange Rules.\8\
Paragraph (a) would also provide that the Exchange shall provide notice
of the cancellation to affected Trading Permit Holders as soon as
practicable.
---------------------------------------------------------------------------
\7\ To confirm, the authority to cancel orders to maintain fair
and orderly markets under proposed Rule 6.6A would apply to any
technical or systems issue at the Exchange and would include any
orders at the Exchange (i.e., the authority to cancel orders would
apply to any orders that are subject to the Exchange's routing
service and any orders that are not subject to the Exchange's
routing service). By comparison, the routing service error account
provisions under proposed Rule 6.14C (discussed below) would apply
only to original and corresponding orders that are subject to the
Exchange routing service.
\8\ As discussed above, the Exchange uses non-affiliated routing
brokers to provide the routing services. These routing brokers are
also not facilities of the Exchange. For all routing services, the
Exchange determines the logic that provides when, how and where
orders are routed away to other exchanges. The routing broker
receives the routing instructions from the Exchange to route orders
to other exchanges and to report executions back to the Exchange.
The routing broker cannot change the terms of an order or the
routing instructions, nor does the routing broker have any
discretion about where to route an order. See Rule 6.14B(c), (e) and
(f). Under paragraph (a) to proposed Rule 6.6A, the decision to take
action with respect to orders affected by a technical or systems
issue shall be made by the Exchange. Depending on where those orders
are located, a routing broker would be permitted to initiate a
cancellation of an order(s) pursuant to the Exchange's standing or
specific instructions or as otherwise provided in the Exchange Rules
(e.g., the Exchange's standing instructions might provide, among
other things, that the routing broker could initiate the
cancellation of orders if the routing broker is experiencing
technical or systems issues routing orders to an away exchange).
---------------------------------------------------------------------------
Paragraph (b) of the proposed rule provides that the Exchange may
also determine to release orders being held on the Exchange awaiting an
away exchange execution as it deems to be necessary to maintain fair
and orderly markets if a technical or systems issues occurs at the
Exchange, a routing broker, or another exchange to which an order has
been routed (the process for ``releasing'' orders is illustrated in
more detail below). Paragraph (c) of the proposed rule would provide
that, for purposes of Rule 6.6A, technical or system issues would
include, without limitation, instances where the Exchange has not
received confirmation of an execution (or cancellation) on another
exchange from a routing broker within a response time interval
designated by the Exchange, which interval may not be less than three
(3) seconds.\9\
---------------------------------------------------------------------------
\9\ A determination by the Exchange to cancel or release orders
may not cause the Exchange to declare self-help against the other
exchange pursuant to paragraph (b)(1) of Rule 6.81, Order
Protection. If the Exchange determines to cancel or release orders,
as applicable, under proposed Rule 6.6A but does not declare self-
help against that other exchange, the Exchange would continue to be
subject to the trade-through requirements in Rule 6.81 with respect
to that exchange.
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[[Page 70519]]
The examples set forth below describe some of the circumstances in
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which the Exchange may decide to cancel (or release) orders.
Example 1: If a routing broker or another exchange experiences a
technical or systems issue that results in the Exchange or routing
broker not receiving responses to immediate-or-cancel (``IOC'')
orders sent to the other exchange, and that issue is not resolved in
a timely manner, then the Exchange may seek to cancel the routed
orders affected by the issue.\10\ For instance, if a routing broker
experiences a connectivity issue affecting the manner in which it
sends and receives order messages to or from another exchange, it
may be unable to receive timely execution or cancellation reports
from the other exchange, and Exchange may consequently seek to
cancel the affected routed orders (e.g., by calling the routing
broker and instructing the routing broker to attempt to cancel the
orders) or perhaps the routing broker may initiate the cancellation
of the affected routed orders pursuant to a standing or specific
instruction from the Exchange. In these circumstances, the Exchange
would also attempt to release the initial orders submitted by
TPHs.\11\
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\10\ In a normal situation (i.e., one in which a technical or
systems issue does not exist), the Exchange should receive an
immediate response back from the routing broker reporting any
executions or cancellations from the other exchange, and would then
pass the resulting fill or cancellation onto the TPH. If, after
submitting an order for which a corresponding order has been routed
to another exchange, a TPH sends an instruction to cancel the
original order, the cancellation is held by the Exchange until a
response is received from the routing broker on the corresponding
order. For instance, if the other exchange executes the
corresponding order, the execution would be passed onto the TPH and
the cancellation instruction on the TPH's original order would be
disregarded.
\11\ Once an initial order is released, any cancellation that a
TPH submitted to the Exchange on the initial order during such a
situation would be honored. If a TPH did not submit a cancellation
to the Exchange, however, that initial order would remain ``live''
and thus be eligible for execution or posting on the Exchange, and
the Exchange would not treat any execution of the initial order or
any subsequent routed order related to that initial order as an
error (unless, of course, the order was itself subject to another
technical or systems issue or any away exchange processing exceeded
the applicable response time interval).
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Example 2: If the Exchange does not receive confirmation of an
execution (or cancellation) of an IOC order sent to another exchange
from a routing broker within a designated response time interval of
three (3) seconds, then an automated system feature will release the
initial order being held by the Exchange.\12\ The Exchange would
also attempt to cancel the routed order in these circumstances.\13\
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\12\ This routing risk management feature would serve as one
means for the Exchange to efficiently determine if there is a
technical or system issue occurring. The feature, and the system
functionality used to operate the feature, is generally modeled
after a process that was utilized by the Exchange under the former
Options Intermarket Linkage Plan (the ``Old Linkage Plan''). Under
the Old Linkage Plan, an eligible market maker that sent a
``principal acting as agent order'' (referred to as a ``P/A Order'')
through the linkage and who did not receive a reply from the away
exchange within 30 seconds was able to reject any response received
thereafter purporting to report a total or partial execution of that
order. Over time, the time frame in which an away exchange was
required to respond was ultimately reduced to 3 seconds. See, e.g.,
Securities Exchange Act Release Nos. 43086 (July 28, 2000), 65 FR
48023 (August 4, 2000)(order approving Options Intermarket Linkage
Plan submitted by the American Stock Exchange LLC, Chicago Board
Options Exchange, Inc., and International Securities Exchange LLC)
and 57238 (January 30, 2008), 73 FR 6748 (February 5, 2008) (order
approving joint amendment no. 25 to the Plan for the Purpose of
Creating and Operating an Intermarket Option Linkage Relating to
Response Time for Certain Orders Sent Through the Linkage). The Old
Linkage Plan was replaced by the Options Order Protection and
Locked/Crossed Markets Plan (the ``Distributive Options Linkage
Plan'') in 2009. See Securities Exchange Act Release No. 60405 (July
30, 2009), 74 FR 39362 (August 6, 2009)(order approving the National
Market System Plan relating to Options Order Protection and Locked/
Crossed Markets submitted by the Chicago Board Options Exchange,
Incorporated, International Securities Exchange, LLC, The NASDAQ
Stock Market LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX, Inc., NYSE
Amex LLC, and NYSE Arca, Inc.). Although there is no longer a
similar provision for P/A Orders and away exchange response times
under the Distributive Options Linkage Plan, the Exchange still has
system functionality that tracks response times for orders routed to
away exchanges. The primary distinction between the process under
the Old Linkage Plan and the process described in the current
proposed rule change is that, instead of rejecting an execution
report back to the away exchange, an execution report received after
the TPH's order is released would be considered an error and subject
to the Exchange Error Account procedures discussed below. The
Exchange views having this ability to release orders that are queued
waiting for a responsive execution/cancel report for a corresponding
order from an away exchange as an important risk management feature.
Because the markets are highly automated, the Exchange would
normally expect to receive a response to an order routed through the
routing service within milliseconds after it is sent. If a response
is not received in a timely manner, it generally is an indication of
a system problem with the other exchange, the routing broker(s) or
the Exchange. In addition, especially in fast-moving markets like
the options market, the Exchange believes allowing for the release
of a TPH's related original order due to an untimely response will
provide an opportunity for the transmittal of responses while also
allowing the Exchange's TPHs to address and execute orders pending
on the Exchange in a timely manner. The Exchange believes this
contributes to the Exchange's ability to maintain fair and orderly
markets.
\13\ It is possible that attempts to cancel the routed orders
may not succeed. If the Exchange receives an execution report on the
order that had been routed to an away exchange, then the unmatched
execution would be considered an ``error position'' under proposed
Rule 6.14C.
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Example 3: If the Exchange experiences a systems issue, the
Exchange may take steps to cancel and/or release all outstanding
orders affected by the issue (which orders may include orders that
may or may not be subject to routing services). The Exchange would
also attempt to cancel any routed orders related to the TPHs'
initial orders, if applicable, in these circumstances.\14\
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\14\ It is possible that attempts to cancel the routed orders
may not succeed. If the Exchange receives an execution report on the
order that had been routed to an away exchange, then the unmatched
execution would be considered an ``error position'' under proposed
Rule 6.14C.
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Proposed Rule 6.14C (Routing Service Error Accounts)
Proposed Rule 6.14C would provide that each routing broker shall
maintain, in the name of the routing broker, one or more accounts for
the purpose of liquidating unmatched trade positions that may occur in
connection with the away exchange routing service provided under Rule
6.14B (``error positions'').\15\ In addition, the Exchange may also
maintain, in the name of the Exchange, one or more Exchange Error
Accounts for the purpose of liquidating error positions in the
circumstances described below.
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\15\ The Exchange notes that, in connection with providing
routing services, routing brokers currently may utilize their own
error accounts to liquidate error positions. The Exchange believes
it is reasonable and not inappropriate to address routing errors
through the error account of a routing broker because, among other
reasons, it is the executing broker associated with these
transactions.
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Paragraph (a) of the proposed rule would provide that errors to
which the rule would apply include any action or omission by the
Exchange, a routing broker, or another exchange to which an Exchange
order has been routed, either of which result in an unmatched trade
position due to the execution of an original or corresponding order
that is subject to the away market routing service and for which there
is no corresponding order to pair with the execution (each a ``routing
error''). Such routing errors would include, without limitation,
positions resulting from determinations by the Exchange to cancel or
release an order pursuant to proposed Rule 6.6A (as described above).
Paragraph (b) of the proposed rule would provide that, generally,
each routing broker will utilize its own error account to liquidate
error positions. However, in certain circumstances, the Exchange may
utilize an Exchange Error Account. In particular, in instances where
the routing broker is unable to utilize its own error account (e.g.,
due to a technical, systems or other issue that prevents the routing
broker from doing so) or where the an error is due to a technical or
systems issue at the Exchange, the Exchange may (but would not be
required to) determine it is appropriate to utilize an Exchange Error
[[Page 70520]]
Account. In making such a determination to utilize an Exchange Error
Account, the Exchange would consider whether is has sufficient time,
information and capabilities considering the market circumstances to
determine that an error is due to such circumstances and whether the
Exchange can address the error.
The Exchange believes it is reasonable and appropriate to address
routing errors through the error account of a routing broker in the
manner proposed because, among other reasons, it is the executing
broker associated with these transactions. The Exchange also believes
that having the flexibility to determine to utilize an Exchange Error
Account in the limited circumstances described above allows for
administrative convenience and contributes to the Exchange's ability to
maintain a fair and orderly market.\16\ From a TPH perspective, there
would be no impact resulting from the decision to use an Exchange Error
Account or the routing broker's error account to liquidate the error
position in these circumstances.
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\16\ The Exchange notes that any profit/loss from liquidating
the error positions would belong to the Exchange (when an Exchange
Error Account is utilized) or the routing broker (when the routing
broker's error account is utilized). However, all or any portion of
such profits/losses may be subject to certain contractual
obligations pursuant to the routing service agreement between the
Exchange and the routing broker (e.g., used to offset certain
contractual obligations).
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By definition, an error position in an Exchange Error Account would
only include unmatched trades due to a routing error. In that regard,
paragraph (c) of the proposed rule would provide that the Exchange
shall not accept any positions in an Exchange Error Account from an
account of a Trading Permit Holder or permit any Trading Permit Holder
to transfer any positions from the Trading Permit Holder's account to
an Exchange Error Account.\17\
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\17\ The Exchange may address error positions under the proposed
rule that are caused by the errors noted above, but the Exchange may
not accept from a TPH positions that are delivered to the TPH
through the clearance and settlement process, even if those
positions may have been the result of an error. This would not
apply, however, to situations like the one described below in which
the Exchange incurred a position to settle a TPH purchase, as the
TPH did not yet have a position in its account as a result of the
purchase at the time of the Exchange's action, i.e., the Exchange's
action was necessary for the purchase to settle into the TPH's
account. Moreover, to the extent a TPH receives positions in
connection with an error or other technical or systems issue, the
TPH may seek to rely on other Exchange Rules such as Rule 6.7,
Exchange Liability, if it experiences a loss. For example, Rule 6.7
provides TPHs with the ability to file claims for negligent acts or
omissions of Exchange employees or for the failure of its systems or
facilities.
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To the extent a routing broker utilizes its own account to
liquidate error positions, paragraph (d) of the proposed rule provides
that the routing broker shall liquidate the error positions as soon as
practicable. The routing broker could determine to liquidate the
position itself or have a third party broker-dealer liquidate the
position on the routing broker's behalf. Paragraph (d) also provides
that the routing broker establish and enforce policies and procedures
reasonably designed to (i) adequately restrict the flow confidential
and proprietary information associated with the liquidation of the
error position in accordance with Rule 6.14B,\18\ and (ii) prevent the
use of information associated with other orders subject to the routing
services when making determinations regarding the liquidation of error
positions. In addition, paragraph (d) provides that the routing broker
shall make and keep records associated with the liquidation of such
routing broker error positions and shall maintain such records in
accordance with Rule 17a-4 under the Act.\19\
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\18\ Rule 6.14B(b) provides that the Exchange shall establish
and maintain procedures and internal controls reasonably designed to
adequately restrict the flow of confidential and proprietary
information between the Exchange and the routing broker, and any
other entity, including any affiliate of the routing broker, and, if
the routing broker or any of its affiliates engages in any other
business activities other than providing routing services to the
Exchange, between the segment of the routing broker or affiliate
that provides the other business activities and the segment of the
routing broker that provides the routing services.
\19\ 17 CFR 240.17a-4.
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Paragraph (e) of the proposed rule would provide that, to the
extent an Exchange Error Account is utilized to liquidate error
positions, the Exchange shall liquidate the error positions as soon as
practicable. In liquidating error positions in an Exchange Error
Account, the Exchange shall provide complete time and price discretion
for the trading to liquidate error positions in an Exchange Error
Account to a third-party broker-dealer and shall not attempt to
exercise any influence or control over the timing or methods of such
trading.\20\ Such a third-party broker-dealer may include a routing
broker not affiliated with the Exchange. Paragraph (e) would also
provide that the Exchange shall establish and enforce policies and
procedures reasonably designed to adequately restrict the flow of
confidential and proprietary information between the Exchange and the
third-party broker-dealer associated with the liquidation of the error
positions. Finally, paragraph (e) would provide that the Exchange shall
make and keep records to document all determinations to treat positions
as error positions under the rule (whether or not an Exchange Error
Account is utilized to liquidate such error positions), as well as
records associated with the liquidation of Exchange Error Account error
positions through a third-party broker-dealer, and shall maintain such
records in accordance with Rule 17a-1 under the Act.\21\
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\20\ This provision is not intended to preclude the Exchange
from providing the third-party broker with standing instructions
with respect to the manner in which it should handle all error
account transactions. For example, the Exchange might instruct the
broker to treat all orders as ``not held'' and to attempt to
minimize any market impact on the price of the option being traded.
\21\ 17 CFR 240.17a-1.
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Examples of such error positions due to a routing error may
include, without limitation, the following:
Example 4: Error positions may result from routed orders that
the Exchange or a routing broker attempts to cancel but that are
executed before the other exchange receives the cancellation message
or that are executed because the other exchange is unable to process
the cancellation message. Using the situation described in Example 1
above, assume the Exchange seeks to release the initial orders being
held by the Exchange because it is not receiving timely execution or
cancellation reports from another exchange. In such a situation,
although the Exchange would attempt to direct the routing broker to
cancel the routed corresponding orders, the routing broker may still
receive executions from the other exchange after connectivity is
restored, which would not then be allocated to TPHs because of the
earlier decision to release the affected initial orders. Instead,
the routing broker would post the positions into its account and
resolve the positions in the manner described above. Alternatively,
if the routing broker is unable to resolve the positions (or if the
error position is due to a system or technical issue on the
Exchange), the Exchange may determine to post the positions into an
Exchange Error Account and resolve the positions in the manner
described above.
Example 5: Error positions may result from an order processing
issue at another exchange. For instance, if another exchange
experienced a systems problem that affects its order processing, it
may transmit back a message purporting to cancel a routed order, but
then subsequently submit an execution of that same order for
clearance and settlement. In such a situation, the Exchange would
not then allocate the execution to the TPH because of the earlier
cancellation message from the other exchange. Instead, the routing
broker would post the positions into its account and resolve the
positions in the manner described above. Alternatively, if the
routing broker is unable to resolve the positions, the Exchange may
determine to post the positions into an Exchange Error Account and
resolve the positions in the manner described above.
Example 6: Error positions may result if a routing broker
receives an execution report from another exchange but does not
receive clearing instructions for the execution from the other
exchange. For instance, assume that
[[Page 70521]]
a TPH sends the Exchange an order to buy 10 ABC option contracts,
which causes the routing broker to send an order to another exchange
that is subsequently executed, cleared and closed out by that other
exchange, and the execution is ultimately communicated back to the
TPH. On the next trading day (T+1), if the other exchange does not
providing clearing instructions for that execution, the Exchange/
routing broker would still be responsible for settling that TPH's
purchase and therefore would be left with open positions.\22\
Instead, the routing broker would post the positions into its
account and resolve the positions in the manner described above.
Alternatively, if the routing broker is unable to resolve the
positions, the Exchange may determine to post the positions into an
Exchange Error Account and resolve the positions in the manner
described above.
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\22\ To the extent that a loss is incurred in covering the
position, the routing broker (on behalf of the Exchange or itself)
may submit a reimbursement claim to that other exchange.
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Example 7: Error positions may result from a technical or
systems issue that causes orders to be executed in the name of a
routing broker in connection with its routing services function that
are not related to any corresponding initial orders of TPHs. As a
result, the Exchange would not be able to assign any positions
resulting from such an issue to TPHs. Instead, the routing broker
would post the positions into its account and resolve the positions
in the manner described above. Alternatively, if the routing broker
is unable to resolve the positions, the Exchange may determine to
post the positions into an Exchange Error Account and resolve the
positions in the manner described above.\23\
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\23\ To the extent such positions are not related to the routing
broker's function as an Exchange routing broker (i.e., originating
with the Exchange), the Exchange would not post such positions to an
Exchange Error Account. The routing broker would resolve the error
positions itself.
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In each of the circumstances described above, the Exchange and its
routing broker may not learn about an error position until T+1. For
instance, the Exchange and its routing broker may not learn about an
error position until either (i) during the clearing process when a
routing destination has submitted to The Options Clearing Corporation
(``OCC'') a transaction for clearance and settlement for which the
Exchange/routing broker never received an execution confirmation, or
(ii) when another exchange does not recognize a transaction submitted
by a routing broker to OCC for clearance and settlement. Moreover, the
affected TPHs' trade may not be nullified absent express authority
under Exchange Rules.\24\ As such, the Exchange believes that use of a
routing broker error account (or an Exchange Error Account, as
applicable) to liquidate the error positions that may occur in these
circumstances is reasonable and appropriate in these circumstances.
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\24\ See, e.g., Rule 6.25, Nullification and Adjustment of
Options Transactions.
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2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the Act
\25\ in general and furthers the objectives of Section 6(b)(5) of the
Act \26\ in particular, which requires that the rules of an exchange be
designed to promote just and equitable principles of trade, to prevent
fraudulent and manipulative acts, to remove impediments to and to
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
The Exchange believes that this proposed rule change is in keeping with
those principles since the Exchange's ability to cancel and release
orders during a technical or systems issue and to maintain an Exchange
Error Account facilitates the smooth and efficient operation of the
market. Specifically, the Exchange believes that allowing the Exchange
to cancel and release orders during a technical or systems issue (and
permitting its routing brokers to cancel orders pursuant to standing or
specific instructions or as otherwise permitted under Exchange Rules)
would allow the Exchange to maintain fair and orderly markets.
Moreover, the Exchange believes that allowing a routing broker to
assume error positions in its own account(s) to liquidate those
positions (or allowing the Exchange to assume error positions in an
Exchange Error Account to liquidate those positions in instances where
a routing broker is unable to do so or where the routing error is due
to a technical or systems issue at Exchange) subject to the conditions
set forth in proposed Rule 6.14C would be the least disruptive means to
address these errors. Overall, the proposed new rule is designed to
ensure full trade certainty to market participants and to avoid
disrupting the clearance and settlement process. The proposed new rule
is also designed to provide a consistent methodology for handling error
positions in a manner that does not discriminate among TPHs. The
proposed new rule is also consistent with Section 6 of the Act insofar
as it would require the Exchange (and its routing brokers, as
applicable) to establish controls to restrict the flow of any
confidential information associated with the liquidation of error
positions.
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\25\ 15 U.S.C. 78f(b).
\26\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change will impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposal.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
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-2012-108 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-2012-108. 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
[[Page 70522]]
amendments, all written statements with respect to the proposed rule
change that are filed with the Commission, and all written
communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for Web site viewing and printing in the Commission's Public
Reference Room, on business days between the hours of 10 a.m. and 3
p.m., located at 100 F Street NE., Washington, DC 20549-1090. Copies of
the filing will also be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-CBOE-2012-108 and should be submitted on or before
December 17, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-28594 Filed 11-23-12; 8:45 am]
BILLING CODE 8011-01-P
