Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Proposed Rule Change Related to CBSX To Address Authority To Cancel Orders When a Technical or Systems Issue Occurs and To Describe the Operation of Routing Service Error Accounts, 70511-70515 [2012-28595]
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Federal Register / Vol. 77, No. 227 / Monday, November 26, 2012 / 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–BATS–2012–044. 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
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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
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December 17, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.33
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–28525 Filed 11–23–12; 8:45 am]
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
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[Release No. 34–68265; File No. SR–CBOE–
2012–109]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Proposed Rule
Change Related to CBSX 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 16, 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
CBOE Stock Exchange, LLC (‘‘CBSX,’’
CBOE’s stock execution facility) to
cancel orders (or release routing-related
orders) when a technical or systems
issue occurs; and (ii) describe the
operation of a CBSX error account(s)
and routing broker error account(s),
which may be used to liquidate
unmatched executions that may occur
in the provision of CBSX’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.
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.
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
2 15
33 17
CFR 200.30–3(a)(12).
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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 52.3A to
address the authority of CBSX to cancel
orders (or release routing-related orders)
when a technical or systems issue
occurs and to adopt new Rule 52.10A to
describe the operation of a CBSX Error
Account(s) (‘‘CBSX Error Account(s)’’)
and routing broker error account(s),
which may be used to liquidate
unmatched executions that may occur
in the provision of CBSX’s routing
service.
By way of background, CBSX operates
a system of trading that allows
automatic executions to occur
electronically. As part of this
infrastructure, CBSX also automatically
routes orders to other trading centers
under certain circumstances. These
routing services are provided in
conjunction with one or more routing
brokers that are not affiliated with
CBSX.4 Mechanically, when CBSX
receives an order from a Trading Permit
Holder (‘‘TPH’’) that is held in CBSX
system and determines to route an order
to another trading center, CBSX
provides the routing broker with a
corresponding order and instructions to
route the order to another trading
center(s). The routing broker then sends
the corresponding order to the other
trading center.5
4 See, e.g., Rule 52.10, Order Routing to Other
Trading Centers.
5 Generally, the routing brokers route the orders
directly to other trading centers. However, it is
possible that a routing broker may route orders to
another trading center through a third-party brokerdealer. In those cases, the third-party broker-dealer
would route the orders to the other trading center
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 CBSX to arrange for any
resulting securities positions to be delivered to the
TPH that submitted the corresponding order to
CBSX. If error positions (as defined in proposed
Rule 52.10A) 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 52.10A. 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 position
Continued
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Federal Register / Vol. 77, No. 227 / Monday, November 26, 2012 / Notices
In the normal course, the routing
broker reports an execution or
cancellation of the routed order back to
CBSX. Routed orders that are executed
at another trading center are submitted
for clearance and settlement in the name
of the routing broker. The routing broker
then coordinates with CBSX to arrange
for any resulting securities positions to
be delivered to the TPH that submitted
the original order to CBSX (i.e., upon
receipt of a filled execution report for
the routed order, the CBSX system pairs
the execution against the TPH’s original
order being held in the CBSX system
and reports the pairing for clearance and
settlement purposes by submitting a
non-tape, clearing only transaction).
From time to time, CBSX encounters
situations in which it becomes
necessary to cancel orders (or release
routing-related orders) and resolve error
positions that result from errors of
CBSX, routing brokers, or another
trading center.6
Proposed Rule 52.3A (Order
Cancellation/Release)
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The Exchange proposes to adopt new
Rule 52.3A to address the authority of
CBSX to cancel orders when a technical
or systems issue occurs. Specifically,
paragraph (a) of the proposed rule
would expressly authorize CBSX to
cancel orders as it deems to be
necessary to maintain fair and orderly
markets if a technical or systems issue
occurs at CBSX,7 the routing broker, or
another trading center to which a CBSX
order has been routed. Paragraph (a)
would also provide that a routing broker
may only cancel orders being routed to
another trading center based on CBSX’s
standing or specific instructions or as
otherwise provided in the Exchange
itself, and the positions would not be permitted to
be resolved as set forth in proposed Rule 52.10A.
6 The examples described in this filing are not
intended to be exclusive. Proposed Rule 52.3A
would provide general authority for CBSX 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
52.10A also would set forth the manner in which
error positions (which may occur in the provision
of CBSX’s routing service) may be handled by
CBSX. 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
Rule 52.3A would apply to any technical or systems
issue at CBSX and would include orders at CBSX
(i.e., the authority to cancel orders would apply to
any orders that are subject to CBSX’s routing service
and any orders that are not subject to CBSX’s
routing service). By comparison, the routing service
error account provisions under proposed Rule
52.10A (discussed below) would apply only to
original and corresponding orders that are subject
to CBSX’s routing service.
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Rules.8 Paragraph (a) would also
provide that CBSX shall provide notice
of the cancellation to affected Trading
Permit Holders as soon as practicable.
Paragraph (b) of the proposed rule
provides that CBSX may also determine
to release orders being held on CBSX
awaiting another trading center
execution as it deems to be necessary to
maintain fair and orderly markets if a
technical or systems issues occurs at
CBSX, a routing broker, or another
trading center 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 52.10A, technical or system issues
would include, without limitation,
instances where CBSX has not received
confirmation of an execution (or
cancellation) on another trading center
from a routing broker within a response
time interval designated by CBSX,
which interval may not be less than
three (3) seconds.9
The examples set forth below describe
some of the circumstances in which
CBSX may decide to cancel (or release)
orders.
Example 1: If a routing broker or another
trading center experiences a technical or
systems issue that results in CBSX or routing
broker not receiving responses to immediateor-cancel (‘‘IOC’’) orders sent to the other
trading center, and that issue is not resolved
in a timely manner, then CBSX may seek to
cancel the routed orders affected by the
issue.10 For instance, if a routing broker
8 As discussed above, CBSX uses non-affiliated
routing brokers to provide the routing services.
These routing brokers are also not facilities of
CBSX. As provider of the routing services, CBSX
determines the logic that determines when, how
and where orders are routed away to other trading
centers. See Rule 52.10.01(b). Under paragraph (a)
to proposed Rule 52.10A, the decision to take action
with respect to orders affected by a technical or
systems issue shall be made by CBSX. Depending
on where those orders are located, a routing broker
would be permitted to initiate a cancellation of an
order(s) pursuant to CBSX’s standing or specific
instructions or as otherwise provided in the
Exchange Rules (e.g., CBSX’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 trading center).
9 Such a situation may not cause CBSX to declare
self-help against the other trading center pursuant
to Rule 611 of Regulation NMS. If CBSX determines
to cancel or release orders, as applicable, under
proposed Rule 52.3A(a) but does not declare selfhelp against that other trading center, CBSX would
continue to be subject to the trade-through
requirements in Rule 611 with respect to that
trading center.
10 In a normal situation (i.e., one in which a
technical or systems issue does not exist), CBSX
should receive an immediate response back from
the routing broker reporting any executions or
cancellations from the other trading center, 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
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experiences a connectivity issue affecting the
manner in which it sends and receives order
messages to or from another trading center,
it may be unable to receive timely execution
or cancellation reports from the other trading
center, and CBSX 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 CBSX. In these
circumstances, CBSX would also attempt to
release the initial orders submitted by
TPHs.11
Example 2: If CBSX does not receive
confirmation of an execution (or
cancellation) of an IOC order sent to another
trading center 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 CBSX.12 CBSX would also attempt to
cancel the routed order in these
circumstances.13
trading center, a TPH sends an instruction to cancel
the original order, the cancellation is held by CBSX
until a response is received from the routing broker
on the corresponding order. For instance, if the
other trading center 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 CBSX on the
initial order during such a situation would be
honored. If a TPH did not submit a cancellation to
CBSX, however, that initial order would remain
‘‘live’’ and thus be eligible for execution or posting
on CBSX, and CBSX 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 other trading
center processing exceeded the applicable response
time interval).
12 See existing paragraph (a) to Rule 52.7,
Sweeping and Trading Through Away Markets,
which provides, in relevant part, that ‘‘[i]n the
event that CBSX does not receive any response at
all to an outbound Intermarket Sweep Order, and
assuming that no system errors have been detected,
CBSX will issue a cancellation at the expiration of
the expiration delay timer on the Intermarket
Sweep Order. This action will release the
corresponding order that had been suspended on
the CBSX Book pending the response to the
Intermarket Sweep Order, and the released order
will re-aggress the CBSX Book (including the
generation of Intermarket Sweep Orders to other
away markets, if necessary).’’
In conjunction with this rule change, CBSX is
proposing to amend Rule 52.7 to provide that, ‘‘[in]
the event that CBSX does not receive any response
at all to an outbound Intermarket Sweep Order, at
the expiration of the response time interval, CBSX
will release the corresponding order that had been
suspended on the CBSX Book pending the response
to the Intermarket Sweep Order in accordance with
Rule 52.3A, and the released order will re-aggress
the CBSX Book (including the generation of
Intermarket Sweep Orders to other away markets,
if necessary).’’ See proposed changes to Rule
52.7(a).
As noted in Example 2 above, if the
corresponding initial order is released, CBSX would
also attempt to cancel the routed order (e.g., by
calling the routing broker and instructing the
routing broker to attempt to cancel the orders).
13 It is possible that attempts to cancel the routed
orders may not succeed. If CBSX receives an
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Example 3: If CBSX experiences a systems
issue, CBSX 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). CBSX would also attempt to cancel
any routed orders related to the TPHs’ initial
orders, if applicable, in these
circumstances.14
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Proposed Rule 52.10A (Routing Service
Error Accounts)
Proposed Rule 52.10A 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
another trading center routing service
provided under Rule 52.10 (‘‘error
positions’’).15 In addition, CBSX may
also maintain, in the name of CBSX, one
or more CBSX 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 CBSX, a routing broker, or
another trading center to which a CBSX
order has been routed, either of which
result in an unmatched trade position
due to the execution of an 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 CBSX to cancel or
release an order pursuant to proposed
Rule 52.3A (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,
CBSX may utilize a CBSX 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 [sic] error is
execution report on the order that had been routed
to another trading center, then the unmatched
execution would be considered an ‘‘error position’’
under proposed Rule 52.10A.
14 It is possible that attempts to cancel the routed
orders may not succeed. If CBSX receives an
execution report on the order that had been routed
to another trading center, then the unmatched
execution would be considered an ‘‘error position’’
under proposed Rule 52.10A.
15 CBSX notes that, in connection with providing
routing services, routing brokers currently may
utilize their own error accounts to liquidate error
positions. CBSX 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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due to a technical or systems issue at
CBSX, CBSX may (but would not be
required to) determine it is appropriate
to utilize a CBSX Error Account. In
making such a determination to utilize
a CBSX Error Account, CBSX would
consider whether is [sic] has sufficient
time, information and capabilities
considering the market circumstances to
determine that an error is due to such
circumstances and whether CBSX can
address the error.
CBSX 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. CBSX also believes that
having the flexibility to determine to
utilize a CBSX Error Account in the
limited circumstances described above
allows for administrative convenience
and contributes to CBSX’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 a CBSX Error Account or the routing
broker’s error account to liquidate the
error position in these circumstances.
By definition, an error position in a
CBSX Error Account would only
include unmatched trades due to a
routing error. In that regard, paragraph
(c) of the proposed rule would provide
that CBSX shall not accept any positions
in a CBSX 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 a CBSX Error
Account.17
16 The Exchange notes that any profit/loss from
liquidating the error positions would belong to
CBSX (when a CBSX 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 CBSX and the routing
broker (e.g., used to offset certain contractual
obligations).
17 CBSX may address error positions under the
proposed rule that are caused by the errors noted
above, but CBSX 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 CBSX 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 CBSX’s action, i.e., CBSX’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 50.6,
Liability and Legal Proceedings, if it experiences a
loss. For example, Rule 50.6, which cross-references
Rule 6.7, Exchange Liability, provides TPHs with
the ability to file claims for negligent acts or
omissions of CBSX employees or for the failure of
its systems or facilities.
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70513
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 52.10,18 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 a
CBSX Error Account is utilized to
liquidate error positions, CBSX shall
liquidate the error positions as soon as
practicable. In liquidating error
positions in a CBSX Error Account,
CBSX shall provide complete time and
price discretion for the trading to
liquidate error positions in a CBSX 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 thirdparty broker-dealer may include a
routing broker not affiliated with CBSX.
Paragraph (e) would also provide that
CBSX shall establish and enforce
policies and procedures reasonably
designed to adequately restrict the flow
of confidential and proprietary
information between CBSX and the
third-party broker-dealer associated
18 Rule 52.10.01(c) provides that CBSX will
establish and maintain procedures and internal
controls reasonably designed to adequately restrict
the flow of confidential and proprietary information
between CBSX and the routing broker (referred to
in the rule as the ‘‘Technology Provider’’), and, to
the extent the routing broker reasonably receives
confidential and proprietary information, that
adequately restrict the use of such information by
the routing broker to legitimate business purposes
necessary for the licensing of routing technology.
19 17 CFR 240.17a–4.
20 This provision is not intended to preclude
CBSX 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, CBSX might instruct the
broker to treat all orders as ‘‘not held’’ and to
attempt to minimize any market impact on the price
of the stock being traded.
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with the liquidation of the error
positions. Finally, paragraph (e) would
provide that CBSX shall make and keep
records to document all determinations
to treat positions as error positions
under the rule (whether or not a CBSX
Error Account is utilized to liquidate
such error positions), as well as records
associated with the liquidation of CBSX
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 CBSX or a routing broker
attempts to cancel but that are executed
before the other trading center receives the
cancellation message or that are executed
because the other trading center is unable to
process the cancellation message. Using the
situation described in Example 1 above,
assume CBSX seeks to release the initial
orders being held by CBSX because it is not
receiving timely execution or cancellation
reports from another trading center. In such
a situation, although CBSX would attempt to
direct the routing broker to cancel the routed
orders, the routing broker may still receive
executions from the other trading center 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 CBSX), CBSX may determine to post the
positions into a CBSX Error Account and
resolve the positions in the manner described
above.
Example 5: Error positions may result from
an order processing issue at another trading
center. For instance, if another trading center
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, CBSX would not then
allocate the execution to the TPH because of
the earlier cancellation message from the
other trading center. 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, CBSX may determine to post the
positions into a CBSX 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 trading center but does not
receive clearing instructions for the
execution from the other trading center. For
instance, assume that a TPH sends CBSX an
order to buy 100 shares of ABC stock, which
21 17
CFR 240.17a–1.
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causes the routing broker to send an order to
another trading center that is subsequently
executed, cleared and closed out by that
other trading center, and the execution is
ultimately communicated back to the TPH.
On the next trading day (T+1), if the other
trading center does not providing clearing
instructions for that execution, CBSX/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, CBSX may determine to post the
positions into a CBSX 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, CBSX 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, CBSX may
determine to post the positions into a CBSX
Error Account and resolve the positions in
the manner described above.23
In each of the circumstances
described above, CBSX and its routing
broker may not learn about an error
position until T+1. For instance, CBSX
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
DTCC a transaction for clearance and
settlement for which CBSX/routing
broker never received an execution
confirmation, or (ii) when another
trading center does not recognize a
transaction submitted by a routing
broker to DTCC for clearance and
settlement. Moreover, the affected TPHs’
trade may not be nullified absent
express authority under Exchange
Rules.24 As such, CBSX believes that
use of a routing broker error account (or
a CBSX Error Account, as applicable), to
liquidate the error positions that may
occur in these circumstances is
reasonable and appropriate in these
circumstances.
22 To
the extent that a loss is incurred in covering
the position, the routing broker (on behalf of CBSX
or itself) may submit a reimbursement claim to that
other trading center.
23 To the extent such positions are not related to
the routing broker’s function as a CBSX routing
broker (i.e., originating with CBSX), CBSX would
not post such positions to a CBSX Error Account.
The routing broker would resolve the error
positions itself.
24 See, e.g., Rule 52.4, Clearly Erroneous Policy.
PO 00000
Frm 00103
Fmt 4703
Sfmt 4703
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. CBSX
believes that this proposed rule change
is in keeping with those principles since
CBSX’s ability to cancel and release
orders during a technical or systems
issue and to maintain a CBSX Error
Account facilitates the smooth and
efficient operation of the market.
Specifically, CBSX believes that
allowing CBSX 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 CBSX to maintain fair and orderly
markets. Moreover, CBSX believes that
allowing a routing broker to assume
error positions in its own account(s) to
liquidate those positions (and allowing
CBSX to assume error positions in a
CBSX 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 CBSX) subject to the
conditions set forth in proposed Rule
52.10A 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 CBSX (and
its routing brokers, as applicable) to
establish controls to restrict the flow of
any confidential information associated
with the liquidation of error positions.
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.
25 15
26 15
E:\FR\FM\26NON1.SGM
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
26NON1
Federal Register / Vol. 77, No. 227 / Monday, November 26, 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
the proposed rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
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–
2012–109 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
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–28595 Filed 11–23–12; 8:45 am]
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
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68255; File No. SR–FINRA–
2012–049]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Establish a Limited
Waiver of the TRACE Professional
Real-Time Data Display Fee on a Pilot
Basis
Paper Comments
mstockstill on DSK4VPTVN1PROD with NOTICES
• 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–2012–109 on the
subject line.
November 19, 2012.
• 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–2012–109. 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
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 7, 2012, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by FINRA. FINRA has
designated the proposed rule change as
‘‘establishing or changing a due, fee or
other charge’’ under Section
19(b)(3)(A)(ii) of the Act 3 and Rule 19b–
4(f)(2) thereunder,4 which renders the
proposal effective upon receipt of this
VerDate Mar<15>2010
16:24 Nov 23, 2012
Jkt 229001
27 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b–4(f)(2).
1 15
PO 00000
Frm 00104
Fmt 4703
Sfmt 4703
70515
filing by the Commission. 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
FINRA is proposing to amend FINRA
Rule 7730(c) to establish a pilot program
to provide a limited waiver of the
Professional Real-Time Data Display Fee
of $60 to access Real-Time Trade
Reporting and Compliance Engine
(‘‘TRACE’’) transaction data in
connection with certain free trials of
data products. In addition, FINRA
proposes technical amendments to Rule
7730(c) and related statements in the fee
chart to use a single term, ‘‘display
application,’’ to describe uniformly a
software program that interrogates and
displays TRACE data and allows a
person to access TRACE data.
The text of the proposed rule change
is available on FINRA’s Web site at
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Pursuant to FINRA Rule
7730(c)(1)(A), FINRA charges a
Professional $60 per month, per display
application per Data Set 5 (‘‘display
5 A Data Set is each of the FINRA databases,
which currently include the Real-Time TRACE
transaction data disseminated by FINRA for
corporate bonds and Agency Debt Securities (as
defined in Rule 6710(l)). Effective November 12,
2012, FINRA will add the Data Set for Asset-Backed
Securities, when dissemination of Agency-Pass
Through Mortgage-Backed Securities traded To Be
Announced begins. See Securities Exchange Act
Release No. 66829 (April 18, 2012), 77 FR 24748
(April 25, 2012) (SEC Approval Order regarding
dissemination of Agency-Pass Through MortgageBacked Securities traded To Be Announced (TBA)),
Regulatory Notice 12–26 (May 2012) and Regulatory
Notice 12–48 (November 2012).
E:\FR\FM\26NON1.SGM
26NON1
]]>Agencies
[Federal Register Volume 77, Number 227 (Monday, November 26, 2012)]
[Notices]
[Pages 70511-70515]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-28595]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68265; File No. SR-CBOE-2012-109]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Proposed Rule Change Related to CBSX 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 16, 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 CBOE Stock Exchange, LLC (``CBSX,'' CBOE's stock execution
facility) to cancel orders (or release routing-related orders) when a
technical or systems issue occurs; and (ii) describe the operation of a
CBSX error account(s) and routing broker error account(s), which may be
used to liquidate unmatched executions that may occur in the provision
of CBSX'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.
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 52.3A
to address the authority of CBSX to cancel orders (or release routing-
related orders) when a technical or systems issue occurs and to adopt
new Rule 52.10A to describe the operation of a CBSX Error Account(s)
(``CBSX Error Account(s)'') and routing broker error account(s), which
may be used to liquidate unmatched executions that may occur in the
provision of CBSX's routing service.
By way of background, CBSX operates a system of trading that allows
automatic executions to occur electronically. As part of this
infrastructure, CBSX also automatically routes orders to other trading
centers under certain circumstances. These routing services are
provided in conjunction with one or more routing brokers that are not
affiliated with CBSX.\4\ Mechanically, when CBSX receives an order from
a Trading Permit Holder (``TPH'') that is held in CBSX system and
determines to route an order to another trading center, CBSX provides
the routing broker with a corresponding order and instructions to route
the order to another trading center(s). The routing broker then sends
the corresponding order to the other trading center.\5\
---------------------------------------------------------------------------
\4\ See, e.g., Rule 52.10, Order Routing to Other Trading
Centers.
\5\ Generally, the routing brokers route the orders directly to
other trading centers. However, it is possible that a routing broker
may route orders to another trading center through a third-party
broker-dealer. In those cases, the third-party broker-dealer would
route the orders to the other trading center 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 CBSX to
arrange for any resulting securities positions to be delivered to
the TPH that submitted the corresponding order to CBSX. If error
positions (as defined in proposed Rule 52.10A) 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
52.10A. 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 position itself, and the positions would
not be permitted to be resolved as set forth in proposed Rule
52.10A.
---------------------------------------------------------------------------
[[Page 70512]]
In the normal course, the routing broker reports an execution or
cancellation of the routed order back to CBSX. Routed orders that are
executed at another trading center are submitted for clearance and
settlement in the name of the routing broker. The routing broker then
coordinates with CBSX to arrange for any resulting securities positions
to be delivered to the TPH that submitted the original order to CBSX
(i.e., upon receipt of a filled execution report for the routed order,
the CBSX system pairs the execution against the TPH's original order
being held in the CBSX system and reports the pairing for clearance and
settlement purposes by submitting a non-tape, clearing only
transaction).
From time to time, CBSX encounters situations in which it becomes
necessary to cancel orders (or release routing-related orders) and
resolve error positions that result from errors of CBSX, routing
brokers, or another trading center.\6\
---------------------------------------------------------------------------
\6\ The examples described in this filing are not intended to be
exclusive. Proposed Rule 52.3A would provide general authority for
CBSX 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 52.10A also would set forth
the manner in which error positions (which may occur in the
provision of CBSX's routing service) may be handled by CBSX. 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 52.3A (Order Cancellation/Release)
The Exchange proposes to adopt new Rule 52.3A to address the
authority of CBSX to cancel orders when a technical or systems issue
occurs. Specifically, paragraph (a) of the proposed rule would
expressly authorize CBSX to cancel orders as it deems to be necessary
to maintain fair and orderly markets if a technical or systems issue
occurs at CBSX,\7\ the routing broker, or another trading center to
which a CBSX order has been routed. Paragraph (a) would also provide
that a routing broker may only cancel orders being routed to another
trading center based on CBSX's standing or specific instructions or as
otherwise provided in the Exchange Rules.\8\ Paragraph (a) would also
provide that CBSX 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 52.3A would apply to any
technical or systems issue at CBSX and would include orders at CBSX
(i.e., the authority to cancel orders would apply to any orders that
are subject to CBSX's routing service and any orders that are not
subject to CBSX's routing service). By comparison, the routing
service error account provisions under proposed Rule 52.10A
(discussed below) would apply only to original and corresponding
orders that are subject to CBSX's routing service.
\8\ As discussed above, CBSX uses non-affiliated routing brokers
to provide the routing services. These routing brokers are also not
facilities of CBSX. As provider of the routing services, CBSX
determines the logic that determines when, how and where orders are
routed away to other trading centers. See Rule 52.10.01(b). Under
paragraph (a) to proposed Rule 52.10A, the decision to take action
with respect to orders affected by a technical or systems issue
shall be made by CBSX. Depending on where those orders are located,
a routing broker would be permitted to initiate a cancellation of an
order(s) pursuant to CBSX's standing or specific instructions or as
otherwise provided in the Exchange Rules (e.g., CBSX'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 trading center).
---------------------------------------------------------------------------
Paragraph (b) of the proposed rule provides that CBSX may also
determine to release orders being held on CBSX awaiting another trading
center execution as it deems to be necessary to maintain fair and
orderly markets if a technical or systems issues occurs at CBSX, a
routing broker, or another trading center 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 52.10A, technical or system issues would include,
without limitation, instances where CBSX has not received confirmation
of an execution (or cancellation) on another trading center from a
routing broker within a response time interval designated by CBSX,
which interval may not be less than three (3) seconds.\9\
---------------------------------------------------------------------------
\9\ Such a situation may not cause CBSX to declare self-help
against the other trading center pursuant to Rule 611 of Regulation
NMS. If CBSX determines to cancel or release orders, as applicable,
under proposed Rule 52.3A(a) but does not declare self-help against
that other trading center, CBSX would continue to be subject to the
trade-through requirements in Rule 611 with respect to that trading
center.
---------------------------------------------------------------------------
The examples set forth below describe some of the circumstances in
which CBSX may decide to cancel (or release) orders.
Example 1: If a routing broker or another trading center
experiences a technical or systems issue that results in CBSX or
routing broker not receiving responses to immediate-or-cancel
(``IOC'') orders sent to the other trading center, and that issue is
not resolved in a timely manner, then CBSX 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
trading center, it may be unable to receive timely execution or
cancellation reports from the other trading center, and CBSX 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 CBSX. In these
circumstances, CBSX would also attempt to release the initial orders
submitted by TPHs.\11\
---------------------------------------------------------------------------
\10\ In a normal situation (i.e., one in which a technical or
systems issue does not exist), CBSX should receive an immediate
response back from the routing broker reporting any executions or
cancellations from the other trading center, 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
trading center, a TPH sends an instruction to cancel the original
order, the cancellation is held by CBSX until a response is received
from the routing broker on the corresponding order. For instance, if
the other trading center 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 CBSX on the initial order during such a situation
would be honored. If a TPH did not submit a cancellation to CBSX,
however, that initial order would remain ``live'' and thus be
eligible for execution or posting on CBSX, and CBSX 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 other trading center processing exceeded the applicable response
time interval).
---------------------------------------------------------------------------
Example 2: If CBSX does not receive confirmation of an execution
(or cancellation) of an IOC order sent to another trading center
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 CBSX.\12\ CBSX would also attempt to
cancel the routed order in these circumstances.\13\
---------------------------------------------------------------------------
\12\ See existing paragraph (a) to Rule 52.7, Sweeping and
Trading Through Away Markets, which provides, in relevant part, that
``[i]n the event that CBSX does not receive any response at all to
an outbound Intermarket Sweep Order, and assuming that no system
errors have been detected, CBSX will issue a cancellation at the
expiration of the expiration delay timer on the Intermarket Sweep
Order. This action will release the corresponding order that had
been suspended on the CBSX Book pending the response to the
Intermarket Sweep Order, and the released order will re-aggress the
CBSX Book (including the generation of Intermarket Sweep Orders to
other away markets, if necessary).''
In conjunction with this rule change, CBSX is proposing to amend
Rule 52.7 to provide that, ``[in] the event that CBSX does not
receive any response at all to an outbound Intermarket Sweep Order,
at the expiration of the response time interval, CBSX will release
the corresponding order that had been suspended on the CBSX Book
pending the response to the Intermarket Sweep Order in accordance
with Rule 52.3A, and the released order will re-aggress the CBSX
Book (including the generation of Intermarket Sweep Orders to other
away markets, if necessary).'' See proposed changes to Rule 52.7(a).
As noted in Example 2 above, if the corresponding initial order
is released, CBSX would also attempt to cancel the routed order
(e.g., by calling the routing broker and instructing the routing
broker to attempt to cancel the orders).
\13\ It is possible that attempts to cancel the routed orders
may not succeed. If CBSX receives an execution report on the order
that had been routed to another trading center, then the unmatched
execution would be considered an ``error position'' under proposed
Rule 52.10A.
---------------------------------------------------------------------------
[[Page 70513]]
Example 3: If CBSX experiences a systems issue, CBSX 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). CBSX would also attempt to cancel any
routed orders related to the TPHs' initial orders, if applicable, in
these circumstances.\14\
---------------------------------------------------------------------------
\14\ It is possible that attempts to cancel the routed orders
may not succeed. If CBSX receives an execution report on the order
that had been routed to another trading center, then the unmatched
execution would be considered an ``error position'' under proposed
Rule 52.10A.
---------------------------------------------------------------------------
Proposed Rule 52.10A (Routing Service Error Accounts)
Proposed Rule 52.10A 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 another trading center routing service provided
under Rule 52.10 (``error positions'').\15\ In addition, CBSX may also
maintain, in the name of CBSX, one or more CBSX Error Accounts for the
purpose of liquidating error positions in the circumstances described
below.
---------------------------------------------------------------------------
\15\ CBSX notes that, in connection with providing routing
services, routing brokers currently may utilize their own error
accounts to liquidate error positions. CBSX 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.
---------------------------------------------------------------------------
Paragraph (a) of the proposed rule would provide that errors to
which the rule would apply include any action or omission by CBSX, a
routing broker, or another trading center to which a CBSX order has
been routed, either of which result in an unmatched trade position due
to the execution of an 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
CBSX to cancel or release an order pursuant to proposed Rule 52.3A (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, CBSX may utilize a
CBSX 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 [sic] error is due to a technical or systems
issue at CBSX, CBSX may (but would not be required to) determine it is
appropriate to utilize a CBSX Error Account. In making such a
determination to utilize a CBSX Error Account, CBSX would consider
whether is [sic] has sufficient time, information and capabilities
considering the market circumstances to determine that an error is due
to such circumstances and whether CBSX can address the error.
CBSX 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. CBSX also believes that having the
flexibility to determine to utilize a CBSX Error Account in the limited
circumstances described above allows for administrative convenience and
contributes to CBSX'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 a CBSX Error Account or the routing broker's
error account to liquidate the error position in these circumstances.
---------------------------------------------------------------------------
\16\ The Exchange notes that any profit/loss from liquidating
the error positions would belong to CBSX (when a CBSX 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 CBSX and the routing broker
(e.g., used to offset certain contractual obligations).
---------------------------------------------------------------------------
By definition, an error position in a CBSX Error Account would only
include unmatched trades due to a routing error. In that regard,
paragraph (c) of the proposed rule would provide that CBSX shall not
accept any positions in a CBSX 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 a CBSX Error
Account.\17\
---------------------------------------------------------------------------
\17\ CBSX may address error positions under the proposed rule
that are caused by the errors noted above, but CBSX 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 CBSX 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
CBSX's action, i.e., CBSX'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 50.6, Liability and Legal Proceedings, if it experiences a
loss. For example, Rule 50.6, which cross-references Rule 6.7,
Exchange Liability, provides TPHs with the ability to file claims
for negligent acts or omissions of CBSX 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 52.10,\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 52.10.01(c) provides that CBSX will establish and
maintain procedures and internal controls reasonably designed to
adequately restrict the flow of confidential and proprietary
information between CBSX and the routing broker (referred to in the
rule as the ``Technology Provider''), and, to the extent the routing
broker reasonably receives confidential and proprietary information,
that adequately restrict the use of such information by the routing
broker to legitimate business purposes necessary for the licensing
of routing technology.
\19\ 17 CFR 240.17a-4.
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Paragraph (e) of the proposed rule would provide that, to the
extent a CBSX Error Account is utilized to liquidate error positions,
CBSX shall liquidate the error positions as soon as practicable. In
liquidating error positions in a CBSX Error Account, CBSX shall provide
complete time and price discretion for the trading to liquidate error
positions in a CBSX 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 CBSX. Paragraph (e) would
also provide that CBSX shall establish and enforce policies and
procedures reasonably designed to adequately restrict the flow of
confidential and proprietary information between CBSX and the third-
party broker-dealer associated
[[Page 70514]]
with the liquidation of the error positions. Finally, paragraph (e)
would provide that CBSX shall make and keep records to document all
determinations to treat positions as error positions under the rule
(whether or not a CBSX Error Account is utilized to liquidate such
error positions), as well as records associated with the liquidation of
CBSX 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 CBSX 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, CBSX might instruct the broker to treat
all orders as ``not held'' and to attempt to minimize any market
impact on the price of the stock 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
CBSX or a routing broker attempts to cancel but that are executed
before the other trading center receives the cancellation message or
that are executed because the other trading center is unable to
process the cancellation message. Using the situation described in
Example 1 above, assume CBSX seeks to release the initial orders
being held by CBSX because it is not receiving timely execution or
cancellation reports from another trading center. In such a
situation, although CBSX would attempt to direct the routing broker
to cancel the routed orders, the routing broker may still receive
executions from the other trading center 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 CBSX), CBSX
may determine to post the positions into a CBSX Error Account and
resolve the positions in the manner described above.
Example 5: Error positions may result from an order processing
issue at another trading center. For instance, if another trading
center 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, CBSX would
not then allocate the execution to the TPH because of the earlier
cancellation message from the other trading center. 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, CBSX may
determine to post the positions into a CBSX 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 trading center but does
not receive clearing instructions for the execution from the other
trading center. For instance, assume that a TPH sends CBSX an order
to buy 100 shares of ABC stock, which causes the routing broker to
send an order to another trading center that is subsequently
executed, cleared and closed out by that other trading center, and
the execution is ultimately communicated back to the TPH. On the
next trading day (T+1), if the other trading center does not
providing clearing instructions for that execution, CBSX/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, CBSX may
determine to post the positions into a CBSX 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 CBSX or itself) may
submit a reimbursement claim to that other trading center.
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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, CBSX 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, CBSX may determine to post the
positions into a CBSX 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 a CBSX routing broker (i.e., originating with
CBSX), CBSX would not post such positions to a CBSX Error Account.
The routing broker would resolve the error positions itself.
In each of the circumstances described above, CBSX and its routing
broker may not learn about an error position until T+1. For instance,
CBSX 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 DTCC a transaction for clearance and settlement for which
CBSX/routing broker never received an execution confirmation, or (ii)
when another trading center does not recognize a transaction submitted
by a routing broker to DTCC for clearance and settlement. Moreover, the
affected TPHs' trade may not be nullified absent express authority
under Exchange Rules.\24\ As such, CBSX believes that use of a routing
broker error account (or a CBSX 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 52.4, Clearly Erroneous Policy.
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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.
CBSX believes that this proposed rule change is in keeping with those
principles since CBSX's ability to cancel and release orders during a
technical or systems issue and to maintain a CBSX Error Account
facilitates the smooth and efficient operation of the market.
Specifically, CBSX believes that allowing CBSX 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 CBSX to
maintain fair and orderly markets. Moreover, CBSX believes that
allowing a routing broker to assume error positions in its own
account(s) to liquidate those positions (and allowing CBSX to assume
error positions in a CBSX 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 CBSX) subject
to the conditions set forth in proposed Rule 52.10A 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 CBSX (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.
[[Page 70515]]
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-2012-109 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-2012-109. 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, 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-2012-109 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. 2012-28595 Filed 11-23-12; 8:45 am]
BILLING CODE 8011-01-P
