Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving a Proposed Rule Change To Address the Authority To Cancel Orders When a Technical or Systems Issue Occurs and To Describe the Operation of Routing Service Error Accounts, 2308-2310 [2013-00308]
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Federal Register / Vol. 78, No. 7 / Thursday, January 10, 2013 / Notices
19(b)(3)(A) 8 of the Act and
subparagraph (f)(2) of Rule 19b–4 9
thereunder, because it establishes a due,
fee, or other charge imposed by NYSE.
At any time within 60 days of the
filing of such 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
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
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:
wreier-aviles on DSK5TPTVN1PROD with
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–NYSE–2012–78 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–NYSE–2012–78. 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
8 15
9 17
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(2).
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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–NYSE–
2012–78 and should be submitted on or
before January 31, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.10
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–00310 Filed 1–9–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68585; File No. SR–CBOE–
2012–108]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Order Approving a
Proposed Rule Change To Address the
Authority To Cancel Orders When a
Technical or Systems Issue Occurs
and To Describe the Operation of
Routing Service Error Accounts
January 4, 2013.
I. Introduction
On November 8, 2012, the Chicago
Board Options Exchange, Incorporated
(‘‘Exchange’’ or ‘‘CBOE’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
(i) address the authority of the Exchange
to cancel orders (or release routingrelated 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
proposed rule change was published for
comment in the Federal Register on
November 26, 2012.3 The Commission
received no comment letters regarding
the proposed rule change. This order
approves the proposed rule change.
10 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Securities Exchange Act Release No. 68262
(November 19, 2012), 77 FR 70517 (November 26,
2012) (SR–CBOE–2012–108) (‘‘Notice’’).
1 15
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II. Description of the Proposal
In its proposal, the Exchange states
that it 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.4 As part of this
infrastructure, the Exchange states that
it 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.5 Mechanically, when the
Exchange receives an order from a
Trading Permit Holder 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. The routing broker
then sends the corresponding order to
the other exchange.
In its proposal, CBOE states that the
Exchange may encounter situations that
make it necessary to cancel orders (or
release routing-related orders),6 and to
resolve error positions that result from
errors of the Exchange, routing brokers,
or another exchange.7
Proposed Rule 6.6A (Order
Cancellation/Release)
New CBOE Rule 6.6A provides CBOE
with general authority 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, a
routing broker in connection with the
routing service provided under CBOE
Rule 6.14B, or another exchange to
which an Exchange order has been
routed. It also provides 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. CBOE will be
required to provide notice of the
cancellation to affected Trading Permit
Holders as soon as practicable.8
Paragraph (b) of the rule provides that
the Exchange may also determine to
release orders being held on the
4 See
Notice, 77 FR at 70518.
Notice, 77 FR at 70518 n.4, n.8, and
accompanying text.
6 See Notice, 77 FR at 70518. For examples of
some of the circumstances in which the Exchange
may decide to cancel orders, see Notice, 77 FR at
70519.
7 See Notice, 77 FR at 70518. Specifically, CBOE
Rule 6.14C defines ‘‘error positions’’ as ‘‘unmatched
trade positions that may occur in connection with
the routing service provided under Rule 6.14B’’.
For examples of some of the circumstances that
may lead to error positions, see Notice, 77 FR at
70520–21.
8 See CBOE Rule 6.6A(a).
5 See
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Federal Register / Vol. 78, No. 7 / Thursday, January 10, 2013 / Notices
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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. Paragraph (c) of the rule
provides 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.
Proposed Rule 6.14C (Routing Service
Error Accounts)
New CBOE Rule 6.14C provides that
each routing broker shall maintain, in
the name of the routing broker, one or
more accounts for the purpose of
liquidating error positions. In addition
the Exchange may also maintain, in the
name of the Exchange, one or more
Exchange error accounts (‘‘Exchange
Error Account’’) for the purposes of
liquidating error positions, subject to
the procedures prescribed in new CBOE
Rule 6.14C.
Paragraph (a) of the rule provides that
errors to which the rule applies include
any action or omission by the Exchange,
a routing broker, or another exchange to
which an Exchange order has been
routed, that results 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’’); and
that such routing errors would include,
without limitation, positions resulting
from determinations by the Exchange to
cancel or release an order pursuant to
CBOE Rule 6.6A.
Paragraph (b) of the rule provides
that, generally, each routing broker will
use its own error account to liquidate
error positions. In certain
circumstances, however, the Exchange
may use an Exchange Error Account. In
particular, in instances where the
routing broker is unable to use its own
error account (e.g., due to a technical,
systems, or other issue that prevents the
routing broker from doing so) 9 or where
the 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 use an
Exchange Error Account. The Exchange
states that in making such a
determination to use an Exchange Error
Account, the Exchange would consider
9 See
Notice, 77 FR at 70519.
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whether it 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.10
Pursuant to paragraph (c), the
Exchange will not be permitted to
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. In other words, the Exchange
may not accept from a Trading Permit
Holder positions that are delivered to
the Trading Permit Holder through the
clearance and settlement process, even
if those positions may have been the
result of an error.11
To the extent a routing broker uses its
own account to liquidate error
positions, paragraph (d) of new CBOE
Rule 6.14 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
shall establish and enforce policies and
procedures reasonably designed to (i)
adequately restrict the flow of
confidential and proprietary
information associated with the
liquidation of the error position in
accordance with Rule 6.14B,12 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.13
10 See
Notice, 77 FR at 70520.
Notice, 77 FR at 70520 n.17. This provision
would not apply if the Exchange incurred a position
to settle a Trading Permit Holder purchase, as the
Trading Permit Holder did not yet have a position
in its account as a result of the purchase at the time
of the Exchange’s action. See id.
12 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.
13 17 CFR 240.17a–4.
11 See
PO 00000
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Fmt 4703
Sfmt 4703
2309
Paragraph (e) of the rule provides that,
to the extent an Exchange Error Account
is used 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 a third-party
broker-dealer and shall not attempt to
exercise any influence or control over
the timing or methods of such trading.14
Such a third-party broker-dealer may
include a routing broker not affiliated
with the Exchange. Paragraph (e) also
provides 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) provides 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 used 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.15
III. Discussion and Commission’s
Findings
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of
Section 6(b) of the Act 16 and the rules
and regulations thereunder applicable to
a national securities exchange.17 In
particular, the Commission finds that
the proposed rule change is consistent
with Section 6(b)(5) of the Act,18 which
requires, among other things, that the
rules of a national securities exchange
be designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
14 This provision is not intended to preclude the
Exchange from providing the third-party brokerdealer 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-dealer to treat all orders
as ‘‘not held’’ and to attempt to minimize any
market impact on the price of the option being
traded.
15 17 CFR 240.17a–1.
16 15 U.S.C. 78f(b).
17 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
18 15 U.S.C. 78f(b)(5).
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Federal Register / Vol. 78, No. 7 / Thursday, January 10, 2013 / Notices
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest; and are not designed to
permit unfair discrimination between
customers, issuers, brokers, or dealers.
In addition, the Commission believes
the proposed rule change is consistent
with Section 11A(a)(1)(C) of the Act 19
in that it seeks to assure economically
efficient execution of securities
transactions.
The Commission recognizes that
technical or systems issues may occur,
and believes that CBOE Rule 6.6A, in
allowing CBOE to cancel or release
orders affected by technical or systems
issues, should provide a reasonably
efficient means for CBOE to handle such
orders, and appears reasonably designed
to permit CBOE to maintain fair and
orderly markets.20
The Commission also believes that
allowing the Exchange to resolve error
positions through the use of error
accounts maintained by its routing
brokers or the Exchange itself pursuant
to the procedures set forth in the rule,
and as described above, is consistent
with the Act. The Commission notes
that the rule establishes criteria for
determining which positions are error
positions to which the rule applies, and
the procedures for the handling of such
positions. In particular, the Commission
notes that CBOE Rule 6.14C only
applies to error positions that result
from the Exchange’s routing service, and
that such positions shall be liquidated
by the routing broker or the Exchange,
as applicable, as soon as practicable.21
In this regard, the Commission believes
that the new rule appears reasonably
designed to further just and equitable
principles of trade and the protection of
investors and the public interest, and to
help prevent unfair discrimination, in
that it should help assure the handling
19 15
U.S.C. 78k–1(a)(1)(C).
Commission notes that CBOE states it
believes that allowing the Exchange to cancel or
release orders under such circumstances would
allow the Exchange to maintain fair and orderly
markets, and that CBOE Rule 6.14C is designed
ensure full trade certainty for market participants
and avoid disrupting the clearance and settlement
process. See Notice, 77 FR at 70521. The
Commission also notes that CBOE states that a
decision to cancel or release orders due to a
technical or systems issue is not equivalent to the
Exchange declaring self-help against a routing
destination pursuant to Rule 611 of Regulation
NMS. See 17 CFR 242.611(b). See also Notice, 77
FR at 70519 n.9.
21 See CBOE Rule 6.14C.
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20 The
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of error positions will be based on clear
and objective criteria, and that the
resolution of those positions will occur
promptly through a transparent process.
The Commission is also concerned
about the potential for misuse of
confidential and proprietary
information. The Commission notes that
CBOE or a routing broker, as applicable,
will establish and enforce policies and
procedures reasonably designed to (1)
adequately restrict the flow of
confidential and proprietary
information associated with the
liquidation of the error positions, and
(2) in the case of liquidations by a
routing broker, prevent the use of
information associated with other orders
subject to the routing services when
making determinations regarding the
liquidation of error positions.22
Furthermore, to the extent the Exchange
uses an Exchange Error Account to
liquidate error positions, 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.23 The
Commission believes that these
requirements should help mitigate the
Commission’s concerns. In particular,
the Commission believes that these
requirements should help assure that
none of CBOE, its routing brokers, or
any third-party broker-dealer is able to
misuse confidential or proprietary
information obtained in connection
with the liquidation of error positions
for its own benefit. The Commission
also notes that routing brokers would be
required to make and keep records
associated with the liquidation of
routing broker error positions 24 and
CBOE would be required to make and
keep records to document all
determinations to treat positions as error
positions under this Rule (whether or
not an Exchange Error Account is used
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.25
Finally, the Commission notes that
the proposed procedures for canceling
orders and the handling of error
positions are consistent with procedures
the Commission has approved for other
exchanges.26
22 See
CBOE Rules 6.14C(d)(i); 6.14C(e)(ii).
CBOE Rule 6.14C(e)(i).
24 See CBOE Rule 6.14C(d)(ii).
25 See CBOE Rule 6.14C(e)(iii).
26 See, e.g., Securities Exchange Act Release Nos.
67281 (June 27, 2012), 77 FR 39543 (July 3, 2012)
23 See
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Fmt 4703
Sfmt 4703
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,27 that the
proposed rule change (SR–CBOE–2012–
108) be, and it hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.28
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–00308 Filed 1–9–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68582; File No. SR–Phlx–
2012–146]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Relating to
Strategy Caps
January 4, 2013.
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 December
21, 2012, NASDAQ OMX PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) 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 the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to amend rule
text related to fee caps applicable to
certain strategies on Multiply Listed
Options in Section II, entitled ‘‘Equity
Options Fees.’’ 3
The text of the proposed rule change
is available on the Exchange’s Web site
at https://
nasdaqomxphlx.cchwallstreet.com/, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
(SR–NASDAQ–2012–057); 66963 (May 10, 2012),
77 FR 28919 (May 16, 2012) (SR–NYSEArca–2012–
22); 67010 (May 17, 2012), 77 FR 30564 (May 23,
2012) (SR–EDGX–2012–08); and 67011 (May 17,
2012), 77 FR 30562 (May 23, 2012) (SR–EDGA–
2012–09).
27 15 U.S.C. 78s(b)(2).
28 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Section II Equity Options fees include options
overlying equities, ETFs, ETNs and indexes which
are Multiply Listed.
E:\FR\FM\10JAN1.SGM
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]]>Agencies
[Federal Register Volume 78, Number 7 (Thursday, January 10, 2013)]
[Notices]
[Pages 2308-2310]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-00308]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68585; File No. SR-CBOE-2012-108]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Approving a Proposed Rule Change To Address the
Authority To Cancel Orders When a Technical or Systems Issue Occurs and
To Describe the Operation of Routing Service Error Accounts
January 4, 2013.
I. Introduction
On November 8, 2012, the Chicago Board Options Exchange,
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change 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 proposed rule change
was published for comment in the Federal Register on November 26,
2012.\3\ The Commission received no comment letters regarding the
proposed rule change. This order approves the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 68262 (November 19,
2012), 77 FR 70517 (November 26, 2012) (SR-CBOE-2012-108)
(``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposal
In its proposal, the Exchange states that it 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.\4\ As part of this infrastructure, the Exchange states that
it 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.\5\ Mechanically, when the Exchange receives an order from a
Trading Permit Holder 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. The routing broker then sends the
corresponding order to the other exchange.
---------------------------------------------------------------------------
\4\ See Notice, 77 FR at 70518.
\5\ See Notice, 77 FR at 70518 n.4, n.8, and accompanying text.
---------------------------------------------------------------------------
In its proposal, CBOE states that the Exchange may encounter
situations that make it necessary to cancel orders (or release routing-
related orders),\6\ and to resolve error positions that result from
errors of the Exchange, routing brokers, or another exchange.\7\
---------------------------------------------------------------------------
\6\ See Notice, 77 FR at 70518. For examples of some of the
circumstances in which the Exchange may decide to cancel orders, see
Notice, 77 FR at 70519.
\7\ See Notice, 77 FR at 70518. Specifically, CBOE Rule 6.14C
defines ``error positions'' as ``unmatched trade positions that may
occur in connection with the routing service provided under Rule
6.14B''.
For examples of some of the circumstances that may lead to error
positions, see Notice, 77 FR at 70520-21.
---------------------------------------------------------------------------
Proposed Rule 6.6A (Order Cancellation/Release)
New CBOE Rule 6.6A provides CBOE with general authority 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, a routing
broker in connection with the routing service provided under CBOE Rule
6.14B, or another exchange to which an Exchange order has been routed.
It also provides 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. CBOE will
be required to provide notice of the cancellation to affected Trading
Permit Holders as soon as practicable.\8\
---------------------------------------------------------------------------
\8\ See CBOE Rule 6.6A(a).
---------------------------------------------------------------------------
Paragraph (b) of the rule provides that the Exchange may also
determine to release orders being held on the
[[Page 2309]]
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. Paragraph (c) of the rule
provides 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.
Proposed Rule 6.14C (Routing Service Error Accounts)
New CBOE Rule 6.14C provides that each routing broker shall
maintain, in the name of the routing broker, one or more accounts for
the purpose of liquidating error positions. In addition the Exchange
may also maintain, in the name of the Exchange, one or more Exchange
error accounts (``Exchange Error Account'') for the purposes of
liquidating error positions, subject to the procedures prescribed in
new CBOE Rule 6.14C.
Paragraph (a) of the rule provides that errors to which the rule
applies include any action or omission by the Exchange, a routing
broker, or another exchange to which an Exchange order has been routed,
that results 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''); and that such routing errors would include, without
limitation, positions resulting from determinations by the Exchange to
cancel or release an order pursuant to CBOE Rule 6.6A.
Paragraph (b) of the rule provides that, generally, each routing
broker will use its own error account to liquidate error positions. In
certain circumstances, however, the Exchange may use an Exchange Error
Account. In particular, in instances where the routing broker is unable
to use its own error account (e.g., due to a technical, systems, or
other issue that prevents the routing broker from doing so) \9\ or
where the 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 use an Exchange Error Account. The Exchange states that
in making such a determination to use an Exchange Error Account, the
Exchange would consider whether it 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.\10\
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\9\ See Notice, 77 FR at 70519.
\10\ See Notice, 77 FR at 70520.
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Pursuant to paragraph (c), the Exchange will not be permitted to
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. In other words, the Exchange may not accept from a
Trading Permit Holder positions that are delivered to the Trading
Permit Holder through the clearance and settlement process, even if
those positions may have been the result of an error.\11\
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\11\ See Notice, 77 FR at 70520 n.17. This provision would not
apply if the Exchange incurred a position to settle a Trading Permit
Holder purchase, as the Trading Permit Holder did not yet have a
position in its account as a result of the purchase at the time of
the Exchange's action. See id.
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To the extent a routing broker uses its own account to liquidate
error positions, paragraph (d) of new CBOE Rule 6.14 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 shall establish and enforce policies and
procedures reasonably designed to (i) adequately restrict the flow of
confidential and proprietary information associated with the
liquidation of the error position in accordance with Rule 6.14B,\12\
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.\13\
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\12\ 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.
\13\ 17 CFR 240.17a-4.
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Paragraph (e) of the rule provides that, to the extent an Exchange
Error Account is used 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 a third-
party broker-dealer and shall not attempt to exercise any influence or
control over the timing or methods of such trading.\14\ Such a third-
party broker-dealer may include a routing broker not affiliated with
the Exchange. Paragraph (e) also provides 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.
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\14\ This provision is not intended to preclude the Exchange
from providing the third-party broker-dealer 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-dealer to treat all orders as ``not held'' and
to attempt to minimize any market impact on the price of the option
being traded.
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Finally, paragraph (e) provides 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
used 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.\15\
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\15\ 17 CFR 240.17a-1.
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III. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of Section 6(b) of the Act
\16\ and the rules and regulations thereunder applicable to a national
securities exchange.\17\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Act,\18\
which requires, among other things, that the rules of a national
securities exchange be designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of
[[Page 2310]]
trade, to foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in securities, to remove impediments to
and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest; and are not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers. In addition, the Commission
believes the proposed rule change is consistent with Section
11A(a)(1)(C) of the Act \19\ in that it seeks to assure economically
efficient execution of securities transactions.
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\16\ 15 U.S.C. 78f(b).
\17\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\18\ 15 U.S.C. 78f(b)(5).
\19\ 15 U.S.C. 78k-1(a)(1)(C).
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The Commission recognizes that technical or systems issues may
occur, and believes that CBOE Rule 6.6A, in allowing CBOE to cancel or
release orders affected by technical or systems issues, should provide
a reasonably efficient means for CBOE to handle such orders, and
appears reasonably designed to permit CBOE to maintain fair and orderly
markets.\20\
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\20\ The Commission notes that CBOE states it believes that
allowing the Exchange to cancel or release orders under such
circumstances would allow the Exchange to maintain fair and orderly
markets, and that CBOE Rule 6.14C is designed ensure full trade
certainty for market participants and avoid disrupting the clearance
and settlement process. See Notice, 77 FR at 70521. The Commission
also notes that CBOE states that a decision to cancel or release
orders due to a technical or systems issue is not equivalent to the
Exchange declaring self-help against a routing destination pursuant
to Rule 611 of Regulation NMS. See 17 CFR 242.611(b). See also
Notice, 77 FR at 70519 n.9.
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The Commission also believes that allowing the Exchange to resolve
error positions through the use of error accounts maintained by its
routing brokers or the Exchange itself pursuant to the procedures set
forth in the rule, and as described above, is consistent with the Act.
The Commission notes that the rule establishes criteria for determining
which positions are error positions to which the rule applies, and the
procedures for the handling of such positions. In particular, the
Commission notes that CBOE Rule 6.14C only applies to error positions
that result from the Exchange's routing service, and that such
positions shall be liquidated by the routing broker or the Exchange, as
applicable, as soon as practicable.\21\ In this regard, the Commission
believes that the new rule appears reasonably designed to further just
and equitable principles of trade and the protection of investors and
the public interest, and to help prevent unfair discrimination, in that
it should help assure the handling of error positions will be based on
clear and objective criteria, and that the resolution of those
positions will occur promptly through a transparent process.
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\21\ See CBOE Rule 6.14C.
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The Commission is also concerned about the potential for misuse of
confidential and proprietary information. The Commission notes that
CBOE or a routing broker, as applicable, will establish and enforce
policies and procedures reasonably designed to (1) adequately restrict
the flow of confidential and proprietary information associated with
the liquidation of the error positions, and (2) in the case of
liquidations by a routing broker, prevent the use of information
associated with other orders subject to the routing services when
making determinations regarding the liquidation of error positions.\22\
Furthermore, to the extent the Exchange uses an Exchange Error Account
to liquidate error positions, 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.\23\ The Commission believes that these requirements
should help mitigate the Commission's concerns. In particular, the
Commission believes that these requirements should help assure that
none of CBOE, its routing brokers, or any third-party broker-dealer is
able to misuse confidential or proprietary information obtained in
connection with the liquidation of error positions for its own benefit.
The Commission also notes that routing brokers would be required to
make and keep records associated with the liquidation of routing broker
error positions \24\ and CBOE would be required to make and keep
records to document all determinations to treat positions as error
positions under this Rule (whether or not an Exchange Error Account is
used 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.\25\
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\22\ See CBOE Rules 6.14C(d)(i); 6.14C(e)(ii).
\23\ See CBOE Rule 6.14C(e)(i).
\24\ See CBOE Rule 6.14C(d)(ii).
\25\ See CBOE Rule 6.14C(e)(iii).
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Finally, the Commission notes that the proposed procedures for
canceling orders and the handling of error positions are consistent
with procedures the Commission has approved for other exchanges.\26\
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\26\ See, e.g., Securities Exchange Act Release Nos. 67281 (June
27, 2012), 77 FR 39543 (July 3, 2012) (SR-NASDAQ-2012-057); 66963
(May 10, 2012), 77 FR 28919 (May 16, 2012) (SR-NYSEArca-2012-22);
67010 (May 17, 2012), 77 FR 30564 (May 23, 2012) (SR-EDGX-2012-08);
and 67011 (May 17, 2012), 77 FR 30562 (May 23, 2012) (SR-EDGA-2012-
09).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\27\ that the proposed rule change (SR-CBOE-2012-108) be, and it
hereby is, approved.
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\27\ 15 U.S.C. 78s(b)(2).
\28\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-00308 Filed 1-9-13; 8:45 am]
BILLING CODE 8011-01-P
