Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Granting Approval of Proposed Rule Change, as Modified by Amendment No. 1, Relating to Trading Ahead of Customer Orders and Best Execution and Interpositioning Requirements, 26828-26832 [2013-10876]
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Federal Register / Vol. 78, No. 89 / Wednesday, May 8, 2013 / Notices
may have because of its affiliation with
the Exchange to its advantage.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act, as amended.
Permanent approval of the current pilot
program does not raise any issues of
intra-market competition because it
involves inbound routing from an
affiliated exchange. Nor does it result in
a burden on competition among
exchanges, because there are many
competing options exchanges that
provide routing services, including
through an affiliate.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
All submissions should refer to File
Number SR–Phlx–2013–42. 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
a.m. and 3 p.m. Copies of the filing will
also be available for inspection and
copying at the principal office of the
Exchange. All comments received will
be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–Phlx–
2013–42 and should be submitted on or
before May 29, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Kevin M. O’Neill,
Deputy Secretary.
IV. Solicitation of Comments
[FR Doc. 2013–10873 Filed 5–7–13; 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:
BILLING CODE 8011–01–P
Electronic Comments
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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 Exchange consents,
the Commission shall: (a) By order
approve or disapprove such proposed
rule change, or (b) institute proceedings
to determine whether the proposed rule
change should be disapproved.
• 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–Phlx–2013–42 on the
subject line.
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Order Granting Approval
of Proposed Rule Change, as Modified
by Amendment No. 1, Relating to
Trading Ahead of Customer Orders
and Best Execution and
Interpositioning Requirements
Paper Comments
May 2, 2013.
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
I. Introduction
On March 5, 2013, Chicago Board
Options Exchange, Incorporated
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SECURITIES AND EXCHANGE
COMMISSION
Release No. 34–69504; File No. SR–CBOE–
2013–027]
15 17
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(‘‘CBOE’’ or ‘‘Exchange’’) 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
adopt CBOE Rules 53.2 (Prohibition
Against Trading Ahead of Customer
Orders) and 53.8 (Best Execution and
Interpositioning). The proposed rule
change was published for comment in
the Federal Register on March 21,
2013.3 On April 12, 2013, CBOE filed
Amendment No. 1 to the proposed rule
change.4 The Commission did not
receive any comments on the proposed
rule change. This order approves the
proposed rule change, as modified by
Amendment No. 1.
II. Description of Proposed Rule Change
The Exchange proposes to amend
Rule 53.2 of the CBSX Rules, which
governs the treatment of customer
orders and prohibits a CBSX Trading
Permit Holder from proprietarily trading
ahead of a customer order, and to adopt
Rule 53.8 in the CBSX Rules to govern
Trading Permit Holders’ best execution
and interpositioning requirements. The
Exchange represented that the proposed
rule change is consistent with Financial
Industry Regulatory Authority
(‘‘FINRA’’) Rules 5320 (Prohibition
Against Trading Ahead of Customer
Orders) 5 and 5310 (Best Execution and
Interpositioning),6 respectively, in the
Consolidated FINRA Rulebook.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 69146
(March 15, 2013); 78 FR 17454 (‘‘Notice’’).
4 See Amendment No. 1 dated April 12, 2013.
Amendment No. 1 corrected minor errors in the
rule text of proposed Rules 53.2 and 53.8. Because
Amendment No. 1 is technical in nature, it is not
subject to notice and comment.
5 See Securities Exchange Act Release No. 63895
(February 11, 2011), 76 FR 9386 (February 17, 2011)
(SR–FINRA–2009–090) (order approving FINRA
Rule 5320, ‘‘Prohibition Against Trading Ahead of
Customer Orders’’). Other exchanges have adopted
substantially similar rules prohibiting trading ahead
of customer orders. See, e.g., Securities Exchange
Act Release No. 64418 (May 6, 2011), 76 FR 27735
(May 12, 2011) (SR–CHX–2011–008) (notice of
filing and immediate effectiveness of proposed rule
change of Chicago Stock Exchange, Inc. to adopt
customer order protection language consistent with
FINRA Rule 5320); Securities Exchange Act Release
No. 65165 (August 18, 2011), 76 FR 53009 (August
24, 2011) (SR–NYSEAmex–2011–059) (notice of
filing and immediate effectiveness of proposed rule
change of NYSE Amex LLC (now known as NYSE
MKT LLC) to adopt customer order protection
language that is substantially the same as FINRA
Rule 5320); and Securities Exchange Act Release
No. 65166 (August 18, 2011), 76 FR 53012 (August
24, 2011) (SR–NYSEArca–2011–057) (notice of
filing and immediate effectiveness of proposed rule
change of NYSE Arca, Inc. to adopt customer order
protection language that is substantially the same as
FINRA Rule 5320).
6 See Securities Exchange Act Release No. 65895
(December 5, 2011), 76 FR 77042 (December 9,
2 17
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Rule 53.2—Prohibition Against Trading
Ahead of Customer Orders
The proposed rule change would
replace in its entirety the text of current
Rule 53.2 and add a number of
exceptions. Proposed Rule 53.2 includes
customer order protection language that
states if a Trading Permit Holder holds
an order in an equity security from its
own customer or a customer of another
broker-dealer, the Trading Permit
Holder is prohibited from trading that
security on the same side of the market
for its own account at a price that would
satisfy the customer order. The
proposed rule change states that this
prohibition does not apply if a Trading
Permit Holder, who has traded
proprietarily ahead of a customer order,
immediately thereafter executes the
customer order up to the size and at the
same or better price at which it traded
for its own account. In other words, in
the event that a Trading Permit Holder
trades ahead of an unexecuted customer
order at a price that is equal to or better
than the unexecuted customer order on
the CBSX System, the Trading Permit
Holder is required to execute the
customer order at the price received by
the Trading Permit Holder or better;
otherwise the Trading Permit Holder
will be in violation of improperly
trading ahead of the customer order.7
The proposed rule change also would
establish the minimum amount of price
improvement necessary for a Trading
Permit Holder to execute an order on a
proprietary basis when holding an
unexecuted limit order.8
The Exchange proposes to establish
that a Trading Permit Holder must have
written procedures in place governing
the execution and priority of all pending
orders that is consistent with proposed
Rule 53.2 and the best execution
requirements of proposed Rule 53.8 and
must ensure that these procedures are
applied consistently.
In furtherance of ensuring customer
order protection, the proposed rule
2011) (SR–FINRA–2011–052) (order approving
FINRA Rule 5310, ‘‘Best Execution and
Interpositioning’’). Other exchanges have similar
best execution and interpositioning rules. See, e.g.,
NASDAQ Stock Market LLC Rule 2320 (Best
Execution and Interpositioning) and IM–2320; and
NASDAQ OMX PHLX LLC Rule 764 (Best
Execution and Interpositioning).
7 For example, if a Trading Permit Holder buys
100 shares of a security at $10 per share while
holding customer limit orders in the same security
to buy at $10 per share equaling, in aggregate, 1000
shares, the Trading Permit Holder is required to fill
100 shares of the customer limit orders at $10 per
share or better.
8 See proposed Rule 53.2, Interpretation and
Policy .05. For example, for customer limit orders
priced greater than or equal to $1.00, the minimum
amount of price improvement required would be
$0.01.
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change clarifies Trading Permit Holder
obligations in handling marketable
customer orders. In meeting these
obligations, a Trading Permit Holder
must make every effort to execute a
marketable customer order that it
receives fully and promptly. A Trading
Permit Holder that is holding a
customer order that is marketable and
has not been immediately executed
must make every effort to cross the
order with any other order received by
the Trading Permit Holder on the other
side of the market up to the size of such
order at a price that is no less than the
best bid and no greater than the best
offer at the time that the subsequent
order is received by the Trading Permit
Holder and that is consistent with the
terms of the orders. In the event that a
Trading Permit Holder is holding
multiple orders on both sides of the
market that have not been executed, the
Trading Permit Holder must make every
effort to cross or otherwise execute these
orders in a manner that is reasonable
and consistent with the objectives of the
proposed rule change and with the
terms of the orders. A Trading Permit
Holder can satisfy the crossing
requirement by contemporaneously
buying from the seller and selling to the
buyer at the same price.9
Large Orders and Institutional Accounts
Exception 10
One exception to the prohibition on
trading ahead of customer orders
permits Trading Permit Holders to
negotiate terms and conditions on the
acceptance of certain large-sized orders
(orders of 10,000 shares or more and
greater than or equal to $100,000 in
value) or orders from institutional
accounts.11 These terms and conditions
will permit Trading Permit Holders to
continue to trade alongside or ahead of
these customer orders if the customer
agrees. A Trading Permit Holder will be
permitted to trade a security on the
same side of the market for its own
account at a price that will satisfy a
customer order provided that the
Trading Permit Holder provides clear
and comprehensive written disclosure
9 See proposed Rule 53.2, Interpretation and
Policy .06.
10 See proposed Rule 53.2, Interpretation and
Policy .01.
11 Proposed Rule 53.2, Interpretation and Policy
.01 defines ‘‘institutional account’’ as an account of:
(a) A bank, savings and loan association, insurance
company, or registered investment company; (b) an
investment adviser registered either with the
Commission under Section 203 of the Investment
Advisers Act of 1940 or with a state securities
commission (or any agency or office performing like
functions); or (c) any other entity (whether a natural
person, corporation, partnership, trust, or
otherwise) with total assets of at least $50 million.
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to each customer at account opening
and annually thereafter that: (1)
Discloses that the Trading Permit
Holder may trade proprietarily at prices
that would satisfy the customer order,
and (2) provides the customer with a
meaningful opportunity to opt in to the
Rule 53.2 protections with respect to all
or any portion of its order(s).
If a customer does not opt in to the
Rule 53.2 protections with respect to all
or any portion of its order(s), the
Trading Permit Holder may reasonably
conclude that the customer has
consented to the Trading Permit Holder
trading a security on the same side of
the market for its own account at a price
that will satisfy the customer’s order.12
In lieu of providing written disclosure
to customers at account opening and
annually thereafter, proposed Rule 53.2
will permit Trading Permit Holders to
provide clear and comprehensive oral
disclosure to, and obtain consent from,
a customer on an order-by-order basis,
provided that the Trading Permit Holder
documents who provided that consent
and that the consent evidences the
customer’s understanding of the terms
and conditions of the order. In addition,
where a customer has opted in to the
Rule 53.2 protections, a Trading Permit
Holder may still obtain consent on an
order-by-order basis to trade ahead of or
along with an order from that customer,
provided that the Trading Permit Holder
documents who provided the consent
and that the consent evidences the
customer’s understanding of the terms
and conditions of the order.13
No-Knowledge Exception 14
The Exchange also proposes to add a
‘‘no-knowledge’’ exception to CBSX’s
12 As is always the case, customers retain the right
to withdraw consent at any time. Therefore, a
Trading Permit Holder’s reasonable conclusion that
a customer has consented to the Trading Permit
Holder trading along with the customer’s order is
subject to further instruction and modification from
the customer.
13 While a Trading Permit Holder organization
relying on this or any exception must be able to
proffer evidence of its eligibility for and compliance
with the exception, the Exchange believes that
when obtaining consent on an order-by-order basis,
Trading Permit Holders must, at a minimum,
document not only the terms and conditions of the
order (e.g., the relative price and size of the
allocated order/percentage split with the customer),
but also the identity of the person at the customer
who approved the trade-along request. For example,
the identity of the person must be noted in a
manner that will enable subsequent contact with
that person if a question as to the consent arises
(i.e., first names only, initials, and nicknames will
not suffice). A ‘‘trade along’’ request would be when
a Trading Permit Holder asks to trade for his/her
proprietary account while simultaneously holding
and working a customer order in that same stock.
14 See proposed Rule 53.2, Interpretation and
Policy .02.
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customer order protection rule. This
proposed exception will allow a
proprietary trading unit of a Trading
Permit Holder organization to continue
trading in a proprietary capacity and at
prices that will satisfy customer orders
that are being held by another, separate
trading unit at the Trading Permit
Holder organization. The ‘‘noknowledge’’ exception will be
applicable with respect to NMS stocks,
as defined in Rule 600 of SEC
Regulation NMS. In order to avail itself
of the ‘‘no-knowledge’’ exception, a
Trading Permit Holder organization will
first be required to implement and
utilize an effective system of internal
controls (such as appropriate
information barriers) that operate to
prevent the proprietary trading unit
from obtaining knowledge of the
customer orders that are held at a
separate trading unit. For example, in
the case of a CBSX Broker 15 that
conducts both a proprietary and agency
brokerage business and has
implemented and utilized an effective
system of internal controls, the ‘‘walled
off’’ proprietary desk(s) of the CBSX
Broker will be permitted to trade at
prices that will satisfy the customer
orders held by the agency brokerage
desk without any requirement that these
proprietary executions trigger an
obligation to fill pending customer
orders at the same price. The ‘‘noknowledge’’ exception will also apply to
a Trading Permit Holder organization’s
market-making unit.
A Trading Permit Holder organization
that structures its order handling
practices in NMS stocks to permit its
proprietary and/or market-making desk
to trade at prices that will satisfy
customer orders held by a separate
trading unit must disclose in writing to
its customers, at account opening and
annually thereafter, a description of the
manner in which customer orders are
handled by the Trading Permit Holder
and the circumstances under which the
Trading Permit Holder may trade
proprietarily at its market-making desk
at prices that will satisfy the customer
order. This proposed disclosure may be
combined with the disclosure and
negative consent statement permitted in
connection with the proposed large
order and institutional account
exceptions.
If a Trading Permit Holder intends to
rely on the no-knowledge exception by
implementing information barriers,
those information barriers must (1)
provide for the organizational
separation of a Trading Permit Holder’s
15 A ‘‘CBSX Broker’’ is a Trading Permit Holder
who enters orders as an agent. See Rule 50.3(5).
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trading unit that holds customer orders
and a proprietary trading unit; (2)
ensure that one trading unit does not
exert influence over the other trading
unit; (3) ensure that information relating
to each trading unit’s stock positions,
trading activities, and clearing and
margin arrangements is not improperly
shared (except with persons in senior
management who are involved in
exercising general managerial oversight
of one or both entities); (4) require each
trading unit to maintain separate books
and records (and separate financial
accounting); (5) require each trading
unit to separately meet all required
capital requirements; (6) ensure the
confidentiality of each trading unit’s
book as provided by Exchange rules;
and (7) ensure that any other material,
non-public information (e.g.,
information related to any business
transactions between a trading unit and
an issuer or any research reports or
recommendations issued by the trading
unit) is not made improperly available
to the other trading unit in any manner
that will allow that trading unit to take
undue advantage of that information
while trading on CBSX. A Trading
Permit Holder will be required to
submit the proposed information
barriers in writing to the Exchange upon
request.
The proposed rule change requires
Trading Permit Holders that intend to
rely on the no-knowledge exception by
implementing information barriers to
have ‘‘appropriate’’ information barriers.
The Exchange stated its belief that
including these specific information
barrier requirements will clarify for
Trading Permit Holders the types of
information barriers that will be deemed
appropriate information barriers and
thus better allow Trading Permit
Holders to rely on this exception. The
Exchange noted that its surveillance
procedures will continue to include a
review of all orders for compliance with
the prohibition on trading ahead of
customer orders, and part of that review
will include review of Trading Permit
Holders’ information barriers to
determine whether they are sufficient
for Trading Permit Holders to avail
themselves of the no-knowledge
exception for each applicable order.
These requirements regarding
information barriers are substantially
similar to those set forth in CBOE Rule
54.8, which includes special provisions
for trading commodity-based trust
shares on CBSX, except that the
proposed rule change provides that
information barriers must be submitted
upon request while CBOE Rule 54.8
provides that information barriers must
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be submitted and approved in advance.
The Exchange stated its belief that it is
appropriate and efficient to request from
a Trading Permit Holder its information
barriers as part of its surveillance
procedures with respect to the customer
order protection rule.
ISO Exception16
The proposed rule change also
clarifies that a Trading Permit Holder
will be exempt from the obligation to
execute a customer order in a manner
consistent with CBSX’s customer order
protection rule with regard to trading for
its own account that is the result of an
intermarket sweep order routed in
compliance with Regulation NMS
(‘‘ISO’’) 17 where the customer order is
received after the Trading Permit Holder
routed the ISO. Where a Trading Permit
Holder routes an ISO to facilitate a
customer order and that customer has
consented to not receiving the better
prices obtained by the ISO, the Trading
Permit Holder also will be exempt with
respect to any trading for its own
account that is the result of the ISO with
respect to the consenting customer’s
order.
Odd Lot and Bona Fide Error
Transaction Exception 18
The Exchange proposes applying an
exception for a firm’s proprietary trade
that (1) offsets a customer odd lot order
(i.e., an order less than one round lot,
which is typically 100 shares); or (2)
corrects a bona fide error. With respect
to bona fide errors, Trading Permit
Holder will be required to demonstrate
and document the basis upon which a
transaction meets the bona fide error
exception. For purposes of this
proposed Rule, the definition of a ‘‘bona
fide error’’ is as defined in Regulation
NMS’s exemption for error correction
transactions.19
Trading Outside Normal Market
Hours 20
The proposed rule change will
expand CBSX’s customer order
protection requirements to apply at all
times that a customer order is
executable by the Trading Permit
Holder, even outside the period of
normal market hours. Thus, customers
16 See proposed Rule 53.2, Interpretation and
Policy .03.
17 17 CFR 242.600(b)(30)(ii).
18 See proposed Rule 53.2, Interpretation and
Policy .04.
19 See Securities Exchange Act Release No. 55884
(June 8, 2007), 72 FR 32926 (June 14, 2007) (Order
Exempting Certain Error Correction Transactions
from Rule 611 of Regulation NMS under the
Securities Exchange Act of 1934).
20 See proposed Rule 53.2, Interpretation and
Policy .07.
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will have the benefit of the customer
order protection rules at all times where
such order is executable by the Trading
Permit Holder, subject to any applicable
exceptions. This exception will apply to
those Trading Permit Holders that
accept customer orders after normal
market hours.
Rule 53.8—Best Execution and
Interpositioning
The Exchange also proposes to adopt
a new rule to govern Trading Permit
Holders’ best execution and
interpositioning requirements. Proposed
Rule 53.8(a)(1) will require a Trading
Permit Holder or person associated with
a Trading Permit Holder, in any
transaction for or with a customer or a
customer of another broker-dealer, to
use ‘‘reasonable diligence’’ to ascertain
the best market for a security and to buy
or sell in that market so that the
resultant price to the customer is as
favorable as possible under prevailing
market conditions. The proposed rule
identifies five factors that are among
those to be considered in determining
whether the Trading Permit Holder or
person associated with a Trading Permit
Holder has used reasonable diligence:
(1) The character of the market for the
security;
(2) the size and type of transaction;
(3) the number of markets checked;
(4) the accessibility of the quotation;
and
(5) the terms and conditions of the
order as communicated to the Trading
Permit Holder or person associated with
the Trading Permit Holder.
Proposed Rule 53.8(a)(2) relates to
interpositioning and prohibits a Trading
Permit Holder or person associated with
a Trading Permit Holder, in any
transaction for or with a customer or a
customer of another broker-dealer, from
interjecting a third party between the
Trading Permit Holder or person
associated with a Trading Permit Holder
and the best market for the subject
security in a manner inconsistent with
the best execution requirements in
subparagraph (a)(1) of proposed Rule
53.8.
Proposed Rule 53.8 also includes
provisions related to the use of a
broker’s broker, the staffing of order
rooms, and the application of the best
execution requirements to other parties.
Proposed paragraph (b) provides that
when a Trading Permit Holder cannot
execute directly with a market but must
employ a broker’s broker or some other
means in order to ensure an execution
advantageous to the customer, the
burden of showing the acceptable
circumstances for doing so is on the
Trading Permit Holder. Proposed
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paragraph (c) provides that failure to
maintain or adequately staff a
department assigned to execute
customers’ orders cannot be considered
justification for executing away from the
best available market; nor can
channeling orders through a third party
as reciprocation for service or business
operate to relieve a Trading Permit
Holder of its obligations under proposed
Rule 53.8. Proposed paragraph (d)
provides that a Trading Permit Holder
through which an order is channeled
and that knowingly is a party to an
arrangement whereby the initiating
Trading Permit Holder has not fulfilled
its obligations under Rule 53.8 will also
be deemed to have violated Rule 53.8.
Proposed paragraph (e) provides that the
obligations in paragraphs (a) through (d)
apply when the Trading Permit Holder
acts as agent for the account of its
customer as well as when transactions
are executed as principal.
Proposed Rule 53.8 includes several
Interpretations and Policies to provide
additional guidance and clarity
regarding Trading Permit Holders’
obligations with respect to the best
execution and interpositioning
requirements. Proposed Interpretation
and Policy .01 reinforces a Trading
Permit Holder’s duty to make every
effort to execute a marketable customer
order that it receives fully and
promptly. Proposed Interpretation and
Policy .02 defines the term ‘‘market’’ for
the purposes of proposed Rule 53.8.21
Proposed Interpretation and Policy
.03 addresses broker-dealers that are
executing a customer’s order against the
Trading Permit Holder’s quote. It
provides that a Trading Permit Holder’s
duty to provide best execution in any
transaction ‘‘for or with a customer of
another broker-dealer’’ does not apply
in instances when another broker-dealer
is simply executing a customer order
against the Trading Permit Holders’
quote. The duty to provide best
execution to customer orders received
from other broker-dealers arises only
when an order is routed from the
broker-dealer to the Trading Permit
Holder for the purpose of order
21 For purposes of proposed Rule 53.8 and the
accompanying Interpretations and Policies, the term
‘‘market’’ or ‘‘markets’’ is to be construed broadly,
and it encompasses a variety of different venues,
including, but not limited to, market centers that
are trading a particular security. This expansive
interpretation is meant to both inform brokerdealers as to the breadth of the scope of venues that
must be considered in the furtherance of their best
execution obligations and to promote fair
competition among broker-dealers, exchange
markets, and markets other than exchange markets,
as well as any other venue that may emerge, by not
mandating that certain trading venues have less
relevance than others in the course of determining
a firm’s best execution obligations.
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26831
handling and execution. This
clarification is intended to draw a
distinction between those situations in
which the Trading Permit Holder is
acting solely as the buyer or seller in
connection with orders presented by a
broker-dealer against the Trading Permit
Holder’s quote, as opposed to those
circumstances in which the Trading
Permit Holder is accepting order flow
from another broker-dealer for the
purpose of facilitating the handling and
execution of such orders.
Proposed Interpretation and Policy
.04 provides that when a Trading Permit
Holder cannot execute directly with a
market but must employ a broker’s
broker or some other means in order to
ensure an execution advantageous to the
customer, the burden of showing the
acceptable circumstances for doing so is
on the Trading Permit Holder. Examples
of acceptable circumstances are where a
customer’s order is crossed with another
firm that has a corresponding order on
the other side, or where the identity of
the firm, if known, would likely cause
undue price movements adversely
affecting the cost or proceeds to the
customer.
Proposed Interpretation and Policy
.05 addresses the fact that markets for
securities differ dramatically and
provides additional guidance regarding
a Trading Permit Holder’s best
execution obligations when handling an
order involving any security for which
there is limited pricing information or
other quotations available. The
Interpretation and Policy emphasizes
that Trading Permit Holders must be
especially diligent with respect to best
execution obligations where there is
limited quotation or other pricing
information available regarding the
security that is the subject of the order
and requires Trading Permit Holders to
have written policies and procedures in
place to address the steps the Trading
Permit Holder will take to determine the
best interdealer market for such a
security in the absence of multiple
quotations or pricing information and to
document how they have complied with
those policies and procedures. The
Interpretation and Policy specifically
notes that, when handling orders for
these securities, Trading Permit Holders
should generally seek out other sources
of pricing information or potential
liquidity, which may include obtaining
quotations from other sources (e.g.,
other firms that the Trading Permit
Holder previously has traded within the
security). For example, in many
instances, particularly in the context of
equity securities with limited quotation
information available, contacting other
broker-dealers may be necessary to
E:\FR\FM\08MYN1.SGM
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26832
Federal Register / Vol. 78, No. 89 / Wednesday, May 8, 2013 / Notices
comply with a Trading Permit Holder’s
best execution obligations.
When placing an order with a Trading
Permit Holder, customers may
specifically instruct the Trading Permit
Holder to route the order to a particular
market for execution.22 Proposed
Interpretation and Policy .06 addresses
situations where the customer has, on
an unsolicited basis, specifically
instructed the Trading Permit Holder to
route that customer’s order to a
particular market for execution.23 Under
those circumstances, the Trading Permit
Holder will not be required to make a
best execution determination beyond
that specific instruction; however, the
Interpretation and Policy mandates that
Trading Permit Holders process that
customer’s order promptly and in
accordance with the terms of the order.
The Interpretation and Policy also
makes clear that where a customer has
directed the Trading Permit Holder to
route an order to another specific
broker-dealer that is also a Trading
Permit Holder, the exception will not
apply to the receiving Trading Permit
Holder to which the order was
directed.24
Proposed Interpretation and Policy
.07 codifies a Trading Permit Holder’s
obligation when it undertakes a regular
and rigorous review of execution quality
likely to be obtained from different
market centers. These obligations are set
forth and explained in various
Commission releases and NASD Notices
to Members.25
organization.26 In particular, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act,27 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
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
The Commission believes that the
proposed rule change is designed to
protect customer orders by establishing
requirements governing the trading
ahead of customer orders by member
firms and governing best execution and
interpositioning with respect to the
handling of customer orders. By CBOE
aligning its customer protection rules
with those of FINRA and other
exchanges,28 the Commission believes
that the proposed rule change will help
reduce the complexity of the customer
order protection rules for those CBOE
firms that also are subject to the
customer protection rules of FINRA and
other exchanges. Furthermore, the
Commission believes that the proposed
rules will help assure the protection of
customer orders without imposing
undue regulatory costs on industry
participants.
III. Commission’s Findings
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,29 that the
proposed rule change (SR–CBOE–2013–
027), as modified by Amendment No. 1,
be, and hereby is, approved.
After careful review of the proposed
rule change the Commission finds that
the proposed rule change, as modified
by Amendment No. 1, is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to self-regulatory
mstockstill on DSK4VPTVN1PROD with NOTICES
22 When
the order is for an NMS security, these
orders are often referred to as ‘‘directed orders.’’ See
17 CFR 242.600(b)(19). Of note, directed orders are
excluded from the order routing statistics required
to be produced under Rule 606 of SEC Regulation
NMS. See 17 CFR 242.606.
23 The Interpretation and Policy also clarifies that
a Trading Permit Holder’s best execution
obligations extend to all customer orders and is
intended to avoid the potential misimpression that
the paragraph limits the scope of the rule’s
requirements.
24 For example, if a customer of Trading Permit
Holder Firm A directs Trading Permit Holder Firm
A to route an order to Trading Permit Holder Firm
B, Trading Permit Holder Firm B will continue to
have best execution obligations to that customer
order received from Trading Permit Holder Firm A.
25 See, e.g., Securities Exchange Act Release No.
37619A (September 6, 1996), 61 FR 48290
(September 12, 1996) and NASD Notice to Members
01–22 (April 2001).
VerDate Mar<15>2010
17:56 May 07, 2013
Jkt 229001
IV. Conclusion
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.30
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–10876 Filed 5–7–13; 8:45 am]
BILLING CODE 8011–01–P
26 In approving this proposal, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
27 15 U.S.C. 78f(b)(5).
28 See notes 5 and 6 supra.
29 15 U.S.C. 78s(b)(2).
30 17 CFR 200.30–3(a)(12).
PO 00000
Frm 00086
Fmt 4703
Sfmt 4703
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–69495; File No. SR–FICC–
2013–04]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Notice of
Filing of Proposed Rule Change to the
Government Securities Division Rules
and the Mortgage-Backed Securities
Division Clearing Rules in Connection
With the Implementation of the Foreign
Account Tax Compliance Act (FATCA)
May 2, 2013.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on April 22, 2013, the Fixed Income
Clearing Corporation (‘‘FICC’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II and III below, which Items
have been substantially prepared by
FICC. The Commission is publishing
this notice to solicit comments on the
proposed rule change from interested
persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
The proposed rule changes consist of
modifications to the Rulebook of the
Government Securities Division
(‘‘GSD’’) and the Clearing Rules of the
Mortgage-Backed Securities Division
(‘‘MBSD’’) (collectively, the ‘‘Rules’’) of
FICC in connection with
implementation of sections 1471
through 1474 of the Internal Revenue
Code of 1986, as amended, that were
enacted as part of the Foreign Account
Tax Compliance Act, and the Treasury
Regulations or other official
interpretations thereunder (collectively
‘‘FATCA’’).
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission,
FICC 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. FICC has prepared
summaries, set forth in sections A, B
and C below, of the most significant
aspects of such statements.3
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 The Commission has modified the text of the
summaries prepared by the clearing agency.
2 17
E:\FR\FM\08MYN1.SGM
08MYN1
]]>Agencies
[Federal Register Volume 78, Number 89 (Wednesday, May 8, 2013)]
[Notices]
[Pages 26828-26832]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-10876]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Release No. 34-69504; File No. SR-CBOE-2013-027]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Granting Approval of Proposed Rule Change, as
Modified by Amendment No. 1, Relating to Trading Ahead of Customer
Orders and Best Execution and Interpositioning Requirements
May 2, 2013.
I. Introduction
On March 5, 2013, Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``Exchange'') 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 adopt CBOE Rules 53.2
(Prohibition Against Trading Ahead of Customer Orders) and 53.8 (Best
Execution and Interpositioning). The proposed rule change was published
for comment in the Federal Register on March 21, 2013.\3\ On April 12,
2013, CBOE filed Amendment No. 1 to the proposed rule change.\4\ The
Commission did not receive any comments on the proposed rule change.
This order approves the proposed rule change, as modified by Amendment
No. 1.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 69146 (March 15,
2013); 78 FR 17454 (``Notice'').
\4\ See Amendment No. 1 dated April 12, 2013. Amendment No. 1
corrected minor errors in the rule text of proposed Rules 53.2 and
53.8. Because Amendment No. 1 is technical in nature, it is not
subject to notice and comment.
---------------------------------------------------------------------------
II. Description of Proposed Rule Change
The Exchange proposes to amend Rule 53.2 of the CBSX Rules, which
governs the treatment of customer orders and prohibits a CBSX Trading
Permit Holder from proprietarily trading ahead of a customer order, and
to adopt Rule 53.8 in the CBSX Rules to govern Trading Permit Holders'
best execution and interpositioning requirements. The Exchange
represented that the proposed rule change is consistent with Financial
Industry Regulatory Authority (``FINRA'') Rules 5320 (Prohibition
Against Trading Ahead of Customer Orders) \5\ and 5310 (Best Execution
and Interpositioning),\6\ respectively, in the Consolidated FINRA
Rulebook.
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 63895 (February 11,
2011), 76 FR 9386 (February 17, 2011) (SR-FINRA-2009-090) (order
approving FINRA Rule 5320, ``Prohibition Against Trading Ahead of
Customer Orders''). Other exchanges have adopted substantially
similar rules prohibiting trading ahead of customer orders. See,
e.g., Securities Exchange Act Release No. 64418 (May 6, 2011), 76 FR
27735 (May 12, 2011) (SR-CHX-2011-008) (notice of filing and
immediate effectiveness of proposed rule change of Chicago Stock
Exchange, Inc. to adopt customer order protection language
consistent with FINRA Rule 5320); Securities Exchange Act Release
No. 65165 (August 18, 2011), 76 FR 53009 (August 24, 2011) (SR-
NYSEAmex-2011-059) (notice of filing and immediate effectiveness of
proposed rule change of NYSE Amex LLC (now known as NYSE MKT LLC) to
adopt customer order protection language that is substantially the
same as FINRA Rule 5320); and Securities Exchange Act Release No.
65166 (August 18, 2011), 76 FR 53012 (August 24, 2011) (SR-NYSEArca-
2011-057) (notice of filing and immediate effectiveness of proposed
rule change of NYSE Arca, Inc. to adopt customer order protection
language that is substantially the same as FINRA Rule 5320).
\6\ See Securities Exchange Act Release No. 65895 (December 5,
2011), 76 FR 77042 (December 9, 2011) (SR-FINRA-2011-052) (order
approving FINRA Rule 5310, ``Best Execution and Interpositioning'').
Other exchanges have similar best execution and interpositioning
rules. See, e.g., NASDAQ Stock Market LLC Rule 2320 (Best Execution
and Interpositioning) and IM-2320; and NASDAQ OMX PHLX LLC Rule 764
(Best Execution and Interpositioning).
---------------------------------------------------------------------------
[[Page 26829]]
Rule 53.2--Prohibition Against Trading Ahead of Customer Orders
The proposed rule change would replace in its entirety the text of
current Rule 53.2 and add a number of exceptions. Proposed Rule 53.2
includes customer order protection language that states if a Trading
Permit Holder holds an order in an equity security from its own
customer or a customer of another broker-dealer, the Trading Permit
Holder is prohibited from trading that security on the same side of the
market for its own account at a price that would satisfy the customer
order. The proposed rule change states that this prohibition does not
apply if a Trading Permit Holder, who has traded proprietarily ahead of
a customer order, immediately thereafter executes the customer order up
to the size and at the same or better price at which it traded for its
own account. In other words, in the event that a Trading Permit Holder
trades ahead of an unexecuted customer order at a price that is equal
to or better than the unexecuted customer order on the CBSX System, the
Trading Permit Holder is required to execute the customer order at the
price received by the Trading Permit Holder or better; otherwise the
Trading Permit Holder will be in violation of improperly trading ahead
of the customer order.\7\ The proposed rule change also would establish
the minimum amount of price improvement necessary for a Trading Permit
Holder to execute an order on a proprietary basis when holding an
unexecuted limit order.\8\
---------------------------------------------------------------------------
\7\ For example, if a Trading Permit Holder buys 100 shares of a
security at $10 per share while holding customer limit orders in the
same security to buy at $10 per share equaling, in aggregate, 1000
shares, the Trading Permit Holder is required to fill 100 shares of
the customer limit orders at $10 per share or better.
\8\ See proposed Rule 53.2, Interpretation and Policy .05. For
example, for customer limit orders priced greater than or equal to
$1.00, the minimum amount of price improvement required would be
$0.01.
---------------------------------------------------------------------------
The Exchange proposes to establish that a Trading Permit Holder
must have written procedures in place governing the execution and
priority of all pending orders that is consistent with proposed Rule
53.2 and the best execution requirements of proposed Rule 53.8 and must
ensure that these procedures are applied consistently.
In furtherance of ensuring customer order protection, the proposed
rule change clarifies Trading Permit Holder obligations in handling
marketable customer orders. In meeting these obligations, a Trading
Permit Holder must make every effort to execute a marketable customer
order that it receives fully and promptly. A Trading Permit Holder that
is holding a customer order that is marketable and has not been
immediately executed must make every effort to cross the order with any
other order received by the Trading Permit Holder on the other side of
the market up to the size of such order at a price that is no less than
the best bid and no greater than the best offer at the time that the
subsequent order is received by the Trading Permit Holder and that is
consistent with the terms of the orders. In the event that a Trading
Permit Holder is holding multiple orders on both sides of the market
that have not been executed, the Trading Permit Holder must make every
effort to cross or otherwise execute these orders in a manner that is
reasonable and consistent with the objectives of the proposed rule
change and with the terms of the orders. A Trading Permit Holder can
satisfy the crossing requirement by contemporaneously buying from the
seller and selling to the buyer at the same price.\9\
---------------------------------------------------------------------------
\9\ See proposed Rule 53.2, Interpretation and Policy .06.
---------------------------------------------------------------------------
Large Orders and Institutional Accounts Exception \10\
---------------------------------------------------------------------------
\10\ See proposed Rule 53.2, Interpretation and Policy .01.
---------------------------------------------------------------------------
One exception to the prohibition on trading ahead of customer
orders permits Trading Permit Holders to negotiate terms and conditions
on the acceptance of certain large-sized orders (orders of 10,000
shares or more and greater than or equal to $100,000 in value) or
orders from institutional accounts.\11\ These terms and conditions will
permit Trading Permit Holders to continue to trade alongside or ahead
of these customer orders if the customer agrees. A Trading Permit
Holder will be permitted to trade a security on the same side of the
market for its own account at a price that will satisfy a customer
order provided that the Trading Permit Holder provides clear and
comprehensive written disclosure to each customer at account opening
and annually thereafter that: (1) Discloses that the Trading Permit
Holder may trade proprietarily at prices that would satisfy the
customer order, and (2) provides the customer with a meaningful
opportunity to opt in to the Rule 53.2 protections with respect to all
or any portion of its order(s).
---------------------------------------------------------------------------
\11\ Proposed Rule 53.2, Interpretation and Policy .01 defines
``institutional account'' as an account of: (a) A bank, savings and
loan association, insurance company, or registered investment
company; (b) an investment adviser registered either with the
Commission under Section 203 of the Investment Advisers Act of 1940
or with a state securities commission (or any agency or office
performing like functions); or (c) any other entity (whether a
natural person, corporation, partnership, trust, or otherwise) with
total assets of at least $50 million.
---------------------------------------------------------------------------
If a customer does not opt in to the Rule 53.2 protections with
respect to all or any portion of its order(s), the Trading Permit
Holder may reasonably conclude that the customer has consented to the
Trading Permit Holder trading a security on the same side of the market
for its own account at a price that will satisfy the customer's
order.\12\
---------------------------------------------------------------------------
\12\ As is always the case, customers retain the right to
withdraw consent at any time. Therefore, a Trading Permit Holder's
reasonable conclusion that a customer has consented to the Trading
Permit Holder trading along with the customer's order is subject to
further instruction and modification from the customer.
---------------------------------------------------------------------------
In lieu of providing written disclosure to customers at account
opening and annually thereafter, proposed Rule 53.2 will permit Trading
Permit Holders to provide clear and comprehensive oral disclosure to,
and obtain consent from, a customer on an order-by-order basis,
provided that the Trading Permit Holder documents who provided that
consent and that the consent evidences the customer's understanding of
the terms and conditions of the order. In addition, where a customer
has opted in to the Rule 53.2 protections, a Trading Permit Holder may
still obtain consent on an order-by-order basis to trade ahead of or
along with an order from that customer, provided that the Trading
Permit Holder documents who provided the consent and that the consent
evidences the customer's understanding of the terms and conditions of
the order.\13\
---------------------------------------------------------------------------
\13\ While a Trading Permit Holder organization relying on this
or any exception must be able to proffer evidence of its eligibility
for and compliance with the exception, the Exchange believes that
when obtaining consent on an order-by-order basis, Trading Permit
Holders must, at a minimum, document not only the terms and
conditions of the order (e.g., the relative price and size of the
allocated order/percentage split with the customer), but also the
identity of the person at the customer who approved the trade-along
request. For example, the identity of the person must be noted in a
manner that will enable subsequent contact with that person if a
question as to the consent arises (i.e., first names only, initials,
and nicknames will not suffice). A ``trade along'' request would be
when a Trading Permit Holder asks to trade for his/her proprietary
account while simultaneously holding and working a customer order in
that same stock.
---------------------------------------------------------------------------
No-Knowledge Exception \14\
---------------------------------------------------------------------------
\14\ See proposed Rule 53.2, Interpretation and Policy .02.
---------------------------------------------------------------------------
The Exchange also proposes to add a ``no-knowledge'' exception to
CBSX's
[[Page 26830]]
customer order protection rule. This proposed exception will allow a
proprietary trading unit of a Trading Permit Holder organization to
continue trading in a proprietary capacity and at prices that will
satisfy customer orders that are being held by another, separate
trading unit at the Trading Permit Holder organization. The ``no-
knowledge'' exception will be applicable with respect to NMS stocks, as
defined in Rule 600 of SEC Regulation NMS. In order to avail itself of
the ``no-knowledge'' exception, a Trading Permit Holder organization
will first be required to implement and utilize an effective system of
internal controls (such as appropriate information barriers) that
operate to prevent the proprietary trading unit from obtaining
knowledge of the customer orders that are held at a separate trading
unit. For example, in the case of a CBSX Broker \15\ that conducts both
a proprietary and agency brokerage business and has implemented and
utilized an effective system of internal controls, the ``walled off''
proprietary desk(s) of the CBSX Broker will be permitted to trade at
prices that will satisfy the customer orders held by the agency
brokerage desk without any requirement that these proprietary
executions trigger an obligation to fill pending customer orders at the
same price. The ``no-knowledge'' exception will also apply to a Trading
Permit Holder organization's market-making unit.
---------------------------------------------------------------------------
\15\ A ``CBSX Broker'' is a Trading Permit Holder who enters
orders as an agent. See Rule 50.3(5).
---------------------------------------------------------------------------
A Trading Permit Holder organization that structures its order
handling practices in NMS stocks to permit its proprietary and/or
market-making desk to trade at prices that will satisfy customer orders
held by a separate trading unit must disclose in writing to its
customers, at account opening and annually thereafter, a description of
the manner in which customer orders are handled by the Trading Permit
Holder and the circumstances under which the Trading Permit Holder may
trade proprietarily at its market-making desk at prices that will
satisfy the customer order. This proposed disclosure may be combined
with the disclosure and negative consent statement permitted in
connection with the proposed large order and institutional account
exceptions.
If a Trading Permit Holder intends to rely on the no-knowledge
exception by implementing information barriers, those information
barriers must (1) provide for the organizational separation of a
Trading Permit Holder's trading unit that holds customer orders and a
proprietary trading unit; (2) ensure that one trading unit does not
exert influence over the other trading unit; (3) ensure that
information relating to each trading unit's stock positions, trading
activities, and clearing and margin arrangements is not improperly
shared (except with persons in senior management who are involved in
exercising general managerial oversight of one or both entities); (4)
require each trading unit to maintain separate books and records (and
separate financial accounting); (5) require each trading unit to
separately meet all required capital requirements; (6) ensure the
confidentiality of each trading unit's book as provided by Exchange
rules; and (7) ensure that any other material, non-public information
(e.g., information related to any business transactions between a
trading unit and an issuer or any research reports or recommendations
issued by the trading unit) is not made improperly available to the
other trading unit in any manner that will allow that trading unit to
take undue advantage of that information while trading on CBSX. A
Trading Permit Holder will be required to submit the proposed
information barriers in writing to the Exchange upon request.
The proposed rule change requires Trading Permit Holders that
intend to rely on the no-knowledge exception by implementing
information barriers to have ``appropriate'' information barriers. The
Exchange stated its belief that including these specific information
barrier requirements will clarify for Trading Permit Holders the types
of information barriers that will be deemed appropriate information
barriers and thus better allow Trading Permit Holders to rely on this
exception. The Exchange noted that its surveillance procedures will
continue to include a review of all orders for compliance with the
prohibition on trading ahead of customer orders, and part of that
review will include review of Trading Permit Holders' information
barriers to determine whether they are sufficient for Trading Permit
Holders to avail themselves of the no-knowledge exception for each
applicable order. These requirements regarding information barriers are
substantially similar to those set forth in CBOE Rule 54.8, which
includes special provisions for trading commodity-based trust shares on
CBSX, except that the proposed rule change provides that information
barriers must be submitted upon request while CBOE Rule 54.8 provides
that information barriers must be submitted and approved in advance.
The Exchange stated its belief that it is appropriate and efficient to
request from a Trading Permit Holder its information barriers as part
of its surveillance procedures with respect to the customer order
protection rule.
ISO Exception\16\
---------------------------------------------------------------------------
\16\ See proposed Rule 53.2, Interpretation and Policy .03.
---------------------------------------------------------------------------
The proposed rule change also clarifies that a Trading Permit
Holder will be exempt from the obligation to execute a customer order
in a manner consistent with CBSX's customer order protection rule with
regard to trading for its own account that is the result of an
intermarket sweep order routed in compliance with Regulation NMS
(``ISO'') \17\ where the customer order is received after the Trading
Permit Holder routed the ISO. Where a Trading Permit Holder routes an
ISO to facilitate a customer order and that customer has consented to
not receiving the better prices obtained by the ISO, the Trading Permit
Holder also will be exempt with respect to any trading for its own
account that is the result of the ISO with respect to the consenting
customer's order.
---------------------------------------------------------------------------
\17\ 17 CFR 242.600(b)(30)(ii).
---------------------------------------------------------------------------
Odd Lot and Bona Fide Error Transaction Exception \18\
---------------------------------------------------------------------------
\18\ See proposed Rule 53.2, Interpretation and Policy .04.
---------------------------------------------------------------------------
The Exchange proposes applying an exception for a firm's
proprietary trade that (1) offsets a customer odd lot order (i.e., an
order less than one round lot, which is typically 100 shares); or (2)
corrects a bona fide error. With respect to bona fide errors, Trading
Permit Holder will be required to demonstrate and document the basis
upon which a transaction meets the bona fide error exception. For
purposes of this proposed Rule, the definition of a ``bona fide error''
is as defined in Regulation NMS's exemption for error correction
transactions.\19\
---------------------------------------------------------------------------
\19\ See Securities Exchange Act Release No. 55884 (June 8,
2007), 72 FR 32926 (June 14, 2007) (Order Exempting Certain Error
Correction Transactions from Rule 611 of Regulation NMS under the
Securities Exchange Act of 1934).
---------------------------------------------------------------------------
Trading Outside Normal Market Hours \20\
---------------------------------------------------------------------------
\20\ See proposed Rule 53.2, Interpretation and Policy .07.
---------------------------------------------------------------------------
The proposed rule change will expand CBSX's customer order
protection requirements to apply at all times that a customer order is
executable by the Trading Permit Holder, even outside the period of
normal market hours. Thus, customers
[[Page 26831]]
will have the benefit of the customer order protection rules at all
times where such order is executable by the Trading Permit Holder,
subject to any applicable exceptions. This exception will apply to
those Trading Permit Holders that accept customer orders after normal
market hours.
Rule 53.8--Best Execution and Interpositioning
The Exchange also proposes to adopt a new rule to govern Trading
Permit Holders' best execution and interpositioning requirements.
Proposed Rule 53.8(a)(1) will require a Trading Permit Holder or person
associated with a Trading Permit Holder, in any transaction for or with
a customer or a customer of another broker-dealer, to use ``reasonable
diligence'' to ascertain the best market for a security and to buy or
sell in that market so that the resultant price to the customer is as
favorable as possible under prevailing market conditions. The proposed
rule identifies five factors that are among those to be considered in
determining whether the Trading Permit Holder or person associated with
a Trading Permit Holder has used reasonable diligence:
(1) The character of the market for the security;
(2) the size and type of transaction;
(3) the number of markets checked;
(4) the accessibility of the quotation; and
(5) the terms and conditions of the order as communicated to the
Trading Permit Holder or person associated with the Trading Permit
Holder.
Proposed Rule 53.8(a)(2) relates to interpositioning and prohibits
a Trading Permit Holder or person associated with a Trading Permit
Holder, in any transaction for or with a customer or a customer of
another broker-dealer, from interjecting a third party between the
Trading Permit Holder or person associated with a Trading Permit Holder
and the best market for the subject security in a manner inconsistent
with the best execution requirements in subparagraph (a)(1) of proposed
Rule 53.8.
Proposed Rule 53.8 also includes provisions related to the use of a
broker's broker, the staffing of order rooms, and the application of
the best execution requirements to other parties. Proposed paragraph
(b) provides that when a Trading Permit Holder cannot execute directly
with a market but must employ a broker's broker or some other means in
order to ensure an execution advantageous to the customer, the burden
of showing the acceptable circumstances for doing so is on the Trading
Permit Holder. Proposed paragraph (c) provides that failure to maintain
or adequately staff a department assigned to execute customers' orders
cannot be considered justification for executing away from the best
available market; nor can channeling orders through a third party as
reciprocation for service or business operate to relieve a Trading
Permit Holder of its obligations under proposed Rule 53.8. Proposed
paragraph (d) provides that a Trading Permit Holder through which an
order is channeled and that knowingly is a party to an arrangement
whereby the initiating Trading Permit Holder has not fulfilled its
obligations under Rule 53.8 will also be deemed to have violated Rule
53.8. Proposed paragraph (e) provides that the obligations in
paragraphs (a) through (d) apply when the Trading Permit Holder acts as
agent for the account of its customer as well as when transactions are
executed as principal.
Proposed Rule 53.8 includes several Interpretations and Policies to
provide additional guidance and clarity regarding Trading Permit
Holders' obligations with respect to the best execution and
interpositioning requirements. Proposed Interpretation and Policy .01
reinforces a Trading Permit Holder's duty to make every effort to
execute a marketable customer order that it receives fully and
promptly. Proposed Interpretation and Policy .02 defines the term
``market'' for the purposes of proposed Rule 53.8.\21\
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\21\ For purposes of proposed Rule 53.8 and the accompanying
Interpretations and Policies, the term ``market'' or ``markets'' is
to be construed broadly, and it encompasses a variety of different
venues, including, but not limited to, market centers that are
trading a particular security. This expansive interpretation is
meant to both inform broker-dealers as to the breadth of the scope
of venues that must be considered in the furtherance of their best
execution obligations and to promote fair competition among broker-
dealers, exchange markets, and markets other than exchange markets,
as well as any other venue that may emerge, by not mandating that
certain trading venues have less relevance than others in the course
of determining a firm's best execution obligations.
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Proposed Interpretation and Policy .03 addresses broker-dealers
that are executing a customer's order against the Trading Permit
Holder's quote. It provides that a Trading Permit Holder's duty to
provide best execution in any transaction ``for or with a customer of
another broker-dealer'' does not apply in instances when another
broker-dealer is simply executing a customer order against the Trading
Permit Holders' quote. The duty to provide best execution to customer
orders received from other broker-dealers arises only when an order is
routed from the broker-dealer to the Trading Permit Holder for the
purpose of order handling and execution. This clarification is intended
to draw a distinction between those situations in which the Trading
Permit Holder is acting solely as the buyer or seller in connection
with orders presented by a broker-dealer against the Trading Permit
Holder's quote, as opposed to those circumstances in which the Trading
Permit Holder is accepting order flow from another broker-dealer for
the purpose of facilitating the handling and execution of such orders.
Proposed Interpretation and Policy .04 provides that when a Trading
Permit Holder cannot execute directly with a market but must employ a
broker's broker or some other means in order to ensure an execution
advantageous to the customer, the burden of showing the acceptable
circumstances for doing so is on the Trading Permit Holder. Examples of
acceptable circumstances are where a customer's order is crossed with
another firm that has a corresponding order on the other side, or where
the identity of the firm, if known, would likely cause undue price
movements adversely affecting the cost or proceeds to the customer.
Proposed Interpretation and Policy .05 addresses the fact that
markets for securities differ dramatically and provides additional
guidance regarding a Trading Permit Holder's best execution obligations
when handling an order involving any security for which there is
limited pricing information or other quotations available. The
Interpretation and Policy emphasizes that Trading Permit Holders must
be especially diligent with respect to best execution obligations where
there is limited quotation or other pricing information available
regarding the security that is the subject of the order and requires
Trading Permit Holders to have written policies and procedures in place
to address the steps the Trading Permit Holder will take to determine
the best interdealer market for such a security in the absence of
multiple quotations or pricing information and to document how they
have complied with those policies and procedures. The Interpretation
and Policy specifically notes that, when handling orders for these
securities, Trading Permit Holders should generally seek out other
sources of pricing information or potential liquidity, which may
include obtaining quotations from other sources (e.g., other firms that
the Trading Permit Holder previously has traded within the security).
For example, in many instances, particularly in the context of equity
securities with limited quotation information available, contacting
other broker-dealers may be necessary to
[[Page 26832]]
comply with a Trading Permit Holder's best execution obligations.
When placing an order with a Trading Permit Holder, customers may
specifically instruct the Trading Permit Holder to route the order to a
particular market for execution.\22\ Proposed Interpretation and Policy
.06 addresses situations where the customer has, on an unsolicited
basis, specifically instructed the Trading Permit Holder to route that
customer's order to a particular market for execution.\23\ Under those
circumstances, the Trading Permit Holder will not be required to make a
best execution determination beyond that specific instruction; however,
the Interpretation and Policy mandates that Trading Permit Holders
process that customer's order promptly and in accordance with the terms
of the order. The Interpretation and Policy also makes clear that where
a customer has directed the Trading Permit Holder to route an order to
another specific broker-dealer that is also a Trading Permit Holder,
the exception will not apply to the receiving Trading Permit Holder to
which the order was directed.\24\
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\22\ When the order is for an NMS security, these orders are
often referred to as ``directed orders.'' See 17 CFR 242.600(b)(19).
Of note, directed orders are excluded from the order routing
statistics required to be produced under Rule 606 of SEC Regulation
NMS. See 17 CFR 242.606.
\23\ The Interpretation and Policy also clarifies that a Trading
Permit Holder's best execution obligations extend to all customer
orders and is intended to avoid the potential misimpression that the
paragraph limits the scope of the rule's requirements.
\24\ For example, if a customer of Trading Permit Holder Firm A
directs Trading Permit Holder Firm A to route an order to Trading
Permit Holder Firm B, Trading Permit Holder Firm B will continue to
have best execution obligations to that customer order received from
Trading Permit Holder Firm A.
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Proposed Interpretation and Policy .07 codifies a Trading Permit
Holder's obligation when it undertakes a regular and rigorous review of
execution quality likely to be obtained from different market centers.
These obligations are set forth and explained in various Commission
releases and NASD Notices to Members.\25\
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\25\ See, e.g., Securities Exchange Act Release No. 37619A
(September 6, 1996), 61 FR 48290 (September 12, 1996) and NASD
Notice to Members 01-22 (April 2001).
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III. Commission's Findings
After careful review of the proposed rule change the Commission
finds that the proposed rule change, as modified by Amendment No. 1, is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to self-regulatory organization.\26\
In particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\27\ 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 trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest.
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\26\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\27\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the proposed rule change is designed
to protect customer orders by establishing requirements governing the
trading ahead of customer orders by member firms and governing best
execution and interpositioning with respect to the handling of customer
orders. By CBOE aligning its customer protection rules with those of
FINRA and other exchanges,\28\ the Commission believes that the
proposed rule change will help reduce the complexity of the customer
order protection rules for those CBOE firms that also are subject to
the customer protection rules of FINRA and other exchanges.
Furthermore, the Commission believes that the proposed rules will help
assure the protection of customer orders without imposing undue
regulatory costs on industry participants.
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\28\ See notes 5 and 6 supra.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\29\ that the proposed rule change (SR-CBOE-2013-027), as modified
by Amendment No. 1, be, and hereby is, approved.
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\29\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-10876 Filed 5-7-13; 8:45 am]
BILLING CODE 8011-01-P
