Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change, as Modified by Amendment 1, To Amend Its Rules Related to Complex Orders, 13359-13364 [2014-05071]
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Federal Register / Vol. 79, No. 46 / Monday, March 10, 2014 / Notices
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and expenses incurred by ETP Holders
in determining the revenues and costs
associated with its activity on the
Exchange.
Moreover, the Exchange believes that
offering rebates to ETP Holders
removing liquidity in securities priced
at $1.00 or greater will incentivize more
such liquidity-takers to trade on the
Exchange, which will in turn provide
greater opportunities for liquidity
providers to experience a better
execution quality. Improvement in
execution quality should, the Exchange
posits, lead to a greater number of
market participants seeking to access
the liquidity on the NSX Book, which
would inure to the benefit of all ETP
Holders seeking greater and better
execution opportunities. In this regard,
the Exchange believes that proposed
amendments to the Fee Schedule meet
the test of an equitable allocation of
reasonable dues and fees under Section
6(b)(4) as well as promoting just and
equitable principles of trade and
operating to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system under Section 6(b)(5).
The Exchange submits that its
proposal to eliminate the Explanatory
Endnotes of the Fee Schedule,
numbered (1) through (14) inclusive, in
certain instances moving the
information contained in an
Explanatory Endnote to the text of the
relevant section of the Fee Schedule and
in others deleting the Endnote because
the accompanying sections of the Fee
Schedule have been deleted, is
consistent with Section 6(b)(5) of the
Act. The Exchange is proposing these
amendments to add greater clarity and
transparency to the Fee Schedule
which, it believes will be enhanced by
deleting obsolete references and moving
relevant retained Endnote text to the
accompanying section of the Fee
Schedule. The Exchange submits that
these amendments are consistent with
Section 6(b)(5) in that they promote just
and equitable principles of trade and
operate to protect investors and the
public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Exchange Act.
The proposed rule change seeks to
adopt a fee and rebate structure, certain
aspects of which are already in use by
CBSX, and it will apply to all ETP
Holders irrespective of the mode of
order interaction used to access the
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Exchange. The Exchange submits that,
given that it previously had separate fee
and rebate programs for executions
occurring through Auto Ex Mode and
Order Delivery Mode, moving to a single
schedule for transaction fees and rebates
for both modes of order interaction
should impose no burden on
competition. Moreover, the proposed
changes will, the Exchange believes,
operate to enhance rather than burden
competition by aspiring to increase
liquidity and improve execution quality
on the Exchange through reasonable and
equitably allocated economic
incentives.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has neither solicited
nor received written comments on the
proposed rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The proposed rule change has taken
effect upon filing pursuant to Section
19(b)(3)(A)(ii) of the Act 21 and
subparagraph (f)(2) of Rule 19b–4.22
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:
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–NSX–2014–05 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–NSX–2014–05. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of 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–NSX–
2014–05 and should be submitted on or
before March 31, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–05030 Filed 3–7–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–71648; File No. SR–CBOE–
2014–017]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of a
Proposed Rule Change, as Modified by
Amendment 1, To Amend Its Rules
Related to Complex Orders
March 5, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
23 17
21 15
U.S.C. 78s(b)(3)(A)(ii).
22 17 CFR 240.19b–4.
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CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 79, No. 46 / Monday, March 10, 2014 / Notices
notice is hereby given that on February
19, 2014, Chicago Board Options
Exchange, Incorporated (the ‘‘Exchange’’
or ‘‘CBOE’’) filed with the Securities
and Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. On March 3,
2014, the Exchange filed Amendment
No. 1 to the proposed rule change. 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 its
rules related to complex orders. The text
of the proposed rule change is provided
below.
(additions are italicized; deletions are
[bracketed])
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Chicago Board Options Exchange,
Incorporated Rules
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Rule 6.53C. Complex Orders on the Hybrid
System
(a) Definition: No change.
(b) Types of Complex Orders: No change.
(c) Complex Order Book
No change.
(d) Process for Complex Order RFR
Auction: Prior to routing to the COB or once
on PAR, eligible complex orders may be
subject to an automated request for responses
(‘‘RFR’’) auction process.
(i) For purposes of paragraph (d):
(1) ‘‘COA’’ is the automated complex order
RFR auction process.
(2) A ‘‘COA-eligible order’’ means a
complex order that, as determined by the
Exchange on a class-by-class basis, is eligible
for a COA considering the order’s
marketability (defined as a number of ticks
away from the current market), size, complex
order type (as defined in paragraphs (a) and
(b) above) and complex order origin types (as
defined in subparagraph (c)(i) above).
Complex orders processed through a COA
may be executed without consideration to
prices of the same complex orders that might
be available on other exchanges.
(ii) Initiation of a COA: On receipt of (1)
a COA-eligible order with two legs and
request from the Trading Permit Holder
representing the order or the PAR operator
handling the order, as applicable, that it be
COA’d or (2) a complex order with three or
more legs, regardless of the order’s routing
parameters or handling instructions (except
for orders routed for manual handling), the
[Exchange]System will send an RFR message
to all Trading Permit Holders who have
elected to receive RFR messages.
Notwithstanding clause (2) of this
subparagraph (ii), the System will reject back
to a Trading Permit Holder any complex
order with three or more legs that includes
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a request pursuant to Interpretation and
Policy .04 that the order not COA. Any
complex order with three or more legs on
PAR will COA even if the PAR operator
requests that the order not COA. The RFR
message will identify the component series,
the size and side of the market of the COAeligible order and any contingencies, if
applicable.
(iii)–(ix) No change.
. . . Interpretations and Policies:
.01–.09 No change.
.10 Execution of Complex Orders in Hybrid
3.0 Classes: For each class trading on the
Hybrid 3.0 Platform, the Exchange may
determine to not allow marketable complex
orders entered into COB and/or COA to
automatically execute against individual
quotes residing in the EBook. The Exchange
also may determine for each class trading on
the Hybrid 3.0 Platform to not allow leg
orders to be generated pursuant to paragraph
(c)(iv) for complex orders resting in the COB.
The allocation of such marketable complex
orders against orders residing in the EBook
and other complex orders shall be based on
the best net price(s) and, at the same net
price, multiple orders will be allocated as
provided in paragraphs (c) and/or (d) in the
Rule, as applicable, subject to the following:
(a)–(d) No change.
(e) On receipt of any COA-eligible order,
the Exchange will send an RFR message to
all Trading Permit Holders who have elected
to receive RFR messages. The RFR message
will identify the component series, the size
and side of the market of the COA-eligible
order and any contingencies, if applicable.
.11–.12 No change.
*
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The text of the proposed rule change
is also available on the Exchange’s Web
site (https://www.cboe.com/AboutCBOE/
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange 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. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Under Rule 8.18, CBOE offers MarketMakers that are obligated to provide and
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maintain continuous electronic quotes
in an option class the Quote Risk
Monitor Mechanism (‘‘QRM’’), which is
functionality to help Market-Makers
manage their quotes and related risk.
Market-Makers with appointments in
classes that trade on the Exchange’s
Hybrid Trading System (the ‘‘System’’) 3
must, among other things, provide and
maintain continuous electronic quotes
in a specified percentage of series in
each class for a specified percentage of
time.4 To comply with this requirement,
each Market-Maker may use its own
proprietary quotation and risk
management system to determine the
prices and sizes at which it quotes. In
addition, each Market-Maker may use
QRM.
A Market-Maker’s risk in a class is not
limited to the risk in a single series of
that class. Rather, a Market-Maker is
generally actively quoting in multiple
classes, and each class may comprise
hundreds or thousands of individual
series. The System automatically
executes orders against a MarketMaker’s quotes in accordance with the
Exchange’s priority and allocation
rules.5 As a result, a Market-Maker has
exposure and risk in all series in which
it is quoting in each of its appointed
classes. QRM is an optional
functionality that helps Market-Makers,
and TPH organizations with which a
Market-Maker is associated, limit this
overall exposure and risk.
Specifically, if a Market-Maker elects
to use QRM, the System will cancel a
Market-Maker’s quotes in all series in an
appointed class if certain parameters the
Market-Maker establishes are triggered.
Market-Makers may set the following
QRM parameters (Market-Makers may
set none, some or all of these
parameters):
• a maximum number of contracts for
that class (the ‘‘contract limit’’) and a
specified rolling time period in seconds
within which such contract limit is to
3 The System is a trading platform that allows
automatic executions to occur electronically and
open outcry trades to occur on the floor of the
Exchange. To operate in this ‘‘hybrid’’ environment,
the Exchange has a dynamic order handling system
that has the capability to route orders to the trade
engine for automatic execution and book entry, to
Trading Permit Holder and PAR Official
workstations located in the trading crowds for
manual handling, and/or to other order
management terminals generally located in booths
on the trading floor for manual handling. Where an
order is routed for processing by the Exchange order
handling system depends on various parameters
configured by the Exchange and the order entry
firm itself.
4 See Rules 8.7(d)(ii)(iv) (Market-Makers), 8.13(d)
(Preferred Market-Makers), 8.15A(b)(i) (Lead
Market-Makers) and 8.85(a)(i) (Designated Primary
Market-Makers).
5 See Rules 6.45A, 6.45B and 6.53C.
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be measured (the ‘‘measurement
interval’’);
• a maximum cumulative percentage
(which is the sum of the percentages of
the original quoted size of each side of
each series that trade) (the ‘‘cumulative
percentage limit’’) that the MarketMaker is willing to trade within a
specified measurement interval; or
• a maximum number of series for
which either side of the quote is fully
traded (the ‘‘number of series fully
traded’’) within a specified
measurement interval.
If the Exchange determines the
Market-Maker has traded more than the
contract limit or cumulative percentage
limit, or has traded at least the number
of series fully traded, of a class during
the specified measurement interval, the
System will cancel all of the MarketMaker’s electronic quotes in that class
(and any other cases with the same
underlying security) until the MarketMaker refreshes those quotes (a ‘‘QRM
Incident’’). A Market-Maker, or TPH
organization with which the MarketMaker is associated, may also specify a
maximum number of QRM Incidents
that may occur on an Exchange-wide
basis during a specified measurement
interval. If the Exchange determines that
a Market-Maker or TPH Organization, as
applicable, has reached its QRM
Incident limit during the specified
measurement interval, the System will
cancel all of the Market-Maker’s or TPH
Organization’s quotes, as applicable,
and the Market-Maker’s orders resting in
the book in all classes and prevent the
Market-Maker and TPH organization
from sending additional quotes or
orders to the Exchange until the earlier
to occur of (1) the Market-Maker or TPH
organization reactivates this ability or
(2) the next trading day.
The purpose of the QRM functionality
is to allow Market-Makers to provide
liquidity across most series in their
appointed classes without being at risk
of executing the full cumulative size of
all their quotes before being given
adequate opportunity to adjust their
quotes. For example, if a Market-Maker
can enter quotes with a size of 25
contracts in 100 series of class ABC, its
potential exposure is 2,500 contracts in
ABC. To mitigate the risk of having all
2,500 contracts in ABC execute without
the opportunity to evaluate its positions,
the Market-Maker may elect to use
QRM. If the Market-Maker elects to use
the contract limit functionality and sets
the contract limit at 100 and the
measurement interval at five seconds for
ABC, the System will automatically
cancel the Market-Maker’s quotes in all
series of ABC if 100 or more contracts
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in series of ABC execute during any
five-second period.
To assure that all quotations are firm
for their full size, the System performs
the parameter calculations after an
execution against a Market-Maker’s
quote occurs. For example, using the
same parameters in class ABC as above,
if a Market-Maker has executed a total
of 95 contracts in ABC within the
previous three seconds, a quote in a
series of ABC with a size of 25 contracts
continues to be firm for all 25 contracts.
An incoming order in that series could
execute all 25 contracts of that quote,
and, following the execution, the total
size parameter would add 25 contracts
to the previous total of 95 for a total of
120 contracts executed in ABC. Because
the total size executed within the
previous five seconds now exceeds the
100 contract limit for ABC, the System
would, following the execution,
immediately cancel all of the MarketMaker’s quotes in series of ABC. The
Market-Maker would then enter new
quotes for series in ABC. Thus, QRM
limits the amount by which a MarketMaker’s executions in a class may
exceed its contract limit to the largest
size of its quote in a single series of the
class (or 25 in this example).
The Exchange proposes to amend
Rule 6.53C regarding complex orders to
limit a potential source of unintended
Market-Maker risk related to how the
System calculates risk parameters under
Rule 8.18 when complex orders leg into
the market.6 As discussed above, by
checking the risk parameters following
each execution in a series, the risk
parameters allow a Market-Maker to
provide liquidity across multiple series
of a class without being at risk of
executing the full cumulative size of all
its quotes. This is not the case, however,
when a complex order legs into the
regular market (i.e. the market for
individual, or simple, orders). Because
6 Rule 6.53C(c)(ii)(1) provides that complex
orders in the complex order book (‘‘COB’’) may
execute against individual orders or quotes in the
book provided the complex order can be executed
in full (or a permissible ratio) by the orders and
quotes in the book. Rule 6.53C(d)(v)(1) provides
that orders that are eligible for the complex order
auction (‘‘COA’’) may trade with individual orders
and quotes in the book provided the COA-eligible
order can be executed in full (or a permissible ratio)
by the orders and quotes in the book. COA is an
automated request for responses (‘‘RFR’’) auction
process. Upon initiation of a COA, the Exchange
sends an RFR message to all Trading Permit Holders
who have elected to receive RFR messages, which
RFR message identifies the series, size and side of
the market of the COA-eligible order and any
contingencies. Eligible market participants may
submit responses during a response time interval.
At the conclusion of the response time interval,
COA-eligible orders are allocated in accordance
with Rule 6.53C(d)(v), including against individual
orders and quotes in the book.
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the execution of each leg of a complex
order is contingent on the execution of
the other legs, the execution of all the
legs in the regular market is processed
as a single transaction, not as a series of
individual transactions.
For example, if market participants
enter into the System individual orders
to buy 25 contracts for the Jan 30 call,
Jan 35 call, Jan 40 call and Jan 45 call
in class ABC, the System processes each
order as it is received and calculates the
Market-Makers parameters in class ABC
following the execution of each 25contract call. However, if a market
participant enters into the System a
complex order to buy all four of these
strikes in class ABC 25 times, which
complex order executes against bids and
offers for the individual series (i.e. legs
into the market), the System will
calculate the Market-Maker’s parameters
in class ABC following the execution of
all 100 contracts. If the Market-Maker
had set the same parameters in class
ABC as discussed above (100-contract
limit with five-second measurement
interval) and had executed 95 contracts
in class ABC within the previous three
seconds, the amount by which the next
transaction might exceed 100 is limited
to the largest size of its quote in a single
series of the class. In that example, since
the largest size of the Market-Maker’s
quotes in any series was 25 contracts,
the Market-Maker could not have
exceeded the 100-contract limit by more
than 20 contracts (95 + 25 = 120).
However, with respect to the complex
order with four legs 25 times, the next
transaction against the Market-Maker’s
quotes potentially could be as large as
100 contracts (depending upon whether
there are other market participants at
the same price), creating the potential in
this example for the Market-Maker to
exceed the 100-contract limit by 95
contracts (95 + 100 = 195) instead of 20
contracts.
As this example demonstrates, legging
of complex orders into the regular
market presents higher risk to MarketMakers than executing their quotes
against individual orders entered in
multiple series of a class in the regular
market, because it may result in MarketMakers exceeding their risk parameters
by a greater number of contracts. This
risk is directly proportional to the
number of legs associated with a
complex order. Market-Makers have
expressed concerns to the Exchange
regarding this risk.
To address this Market-Maker risk,
the Exchange proposes to require all
complex orders with three or more legs
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to COA prior to entering the COB.7
Under Rule 6.53C(d)(i)(2), the Exchange
may determine on a class-by-class
which complex orders are eligible for
COA, including by complex order type
and origin type.8 Rule 6.53C(d)(ii)
provides that the Exchange will initiate
a COA on receipt of a COA-eligible
order and request from the Trading
Permit Holder representing the order
that it be COA’d. The Exchange
proposes to amend Rule 6.53C(d)(ii) to
provide that the System9 will initiate a
COA on receipt of (1) a COA-eligible
order with two legs and request from the
Trading Permit Holder representing the
order that it be COA’d or (2) a complex
order with three or more legs, regardless
of the order’s routing parameters (e.g.,
request to route directly to COB, all-ornone order, immediate-or-cancel) or
handling instructions (except for orders
routed for manual handling).10 Thus, all
complex orders in Hybrid classes with
three or more legs will automatically
COA (other than those routed for
manual handling) prior to entering the
COB where they can leg into the
market.11 Additionally, the Exchange
proposes to amend Rule 6.53C(d)(ii) to
provide that notwithstanding proposed
clause (2) described above, the System
will reject back to a Trading Permit
Holder any complex order with three or
more legs that includes a request
pursuant to Interpretation and Policy
7 This proposed change applies to Hybrid classes
only, and not Hybrid 3.0 classes. The Exchange
does not believe the risk discussed in this rule filing
is present in Hybrid 3.0 classes. The proposed rule
change amends Rule 6.53C, Interpretation and
Policy .10 to indicate that complex orders in Hybrid
3.0 classes, regardless of the number of legs, will
COA in the same manner they currently do.
8 Currently, in all Hybrid classes, customer, firm
and broker-dealer complex orders are eligible for
COA, and all complex order types except for
immediate-or-cancel (‘‘IOC’’) orders are eligible for
COA in all Hybrid classes. Additionally, only
marketable orders and ‘‘tweeners’’ (limit orders
bettering the same side of the derived net market)
are eligible for COA. For Hybrid 3.0 classes (i.e.
SPX), all complex order types (including IOC
orders) are eligible for COA, but only customer
complex orders are eligible for COA. See Regulatory
Circulars RG06–73, RG08–38 and RG08–97.
9 The proposed rule change amends the language
to say that the System will send the RFR message
rather than the Exchange. Because the System will
automatically send the RFR message when the
conditions set forth in Rule 6.53C(d)(ii) are met, the
Exchange believes using the term ‘‘System’’ in the
rule text is appropriate.
10 The Exchange notes that if a complex order
with three or more legs contains an instruction to
route for manual handling, such as to PAR, and
through such manual handling routes to the COB,
the proposed rule change provides that order will
COA prior to entry on the COB, even if the PAR
operator requests that the order not COA.
11 The Exchange notes that this automatic COA
applies only to complex orders and not stock-option
orders.
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.04 that the order not COA.12 This will
prevent a Trading Permit Holder from
using a routing parameter request to not
COA a complex order with three or
more legs to bypass the protection
provided by the automatic COA
functionality proposed in this filing
while providing the Trading Permit
Holder with an opportunity to
reconsider how to handle the complex
order.
The Exchange notes that
approximately 90% of complex orders
submitted to the Exchange have only
two legs. Additionally, as discussed
above, orders in Hybrid classes of all
order types except IOC orders and all
order origin codes except Market-Maker
and away market-maker orders are
currently COA-eligible.13 Currently, all
Trading Permit Holders have requested
that all of their COA-eligible orders in
Hybrid classes process through COA
upon entry into the System. Thus, the
proposed rule change will only impact
a small percentage of complex orders
that enter into the System, as a large
percentage of complex orders entered
into the System are only two legs or
already COA prior to execution. The
Exchange also notes that complex orders
with three or more legs will still have
opportunities for execution through
COA or on the COB if they do not
execute at the end of the COA
(including execution with the leg
markets). The Exchange notes that the
rules contain provisions that prevent the
execution of complex orders that might
otherwise be executable.14 Thus, the
Exchange believes that requiring
complex orders with three or more legs
to COA prior to entering COB and
legging into the regular market does not
create any unusual circumstances for
the System. The Exchange believes that
the potential risk to Market-Makers in
the regular market of allowing orders
with three or more legs to directly enter
COB and leg into the market far
outweighs the potential benefit of
continuing to allow COA to be
12 Rule 6.53C, Interpretation and Policy .04
provides that Trading Permit Holders routing
complex orders directly to the COB may request
that the complex orders be COA’d on a class-byclass basis and Trading Permit Holders with resting
complex orders on PAR may request that complex
orders be COA’d on an order-by-order basis. As
discussed above, the Exchange intends to propose
in a separate rule filing to amend Interpretation and
Policy .04 to allow Trading Permit Holders to
request that complex orders not COA on an orderby-order basis, in addition to a class-by-class basis.
13 See supra note 8.
14 See, e.g., Rules 6.45A(a) and 6.45B(a) (priority
overlays, such as public customer) and Rule 6.53C,
Interpretation and Policy .08 (price check
parameters).
PO 00000
Frm 00091
Fmt 4703
Sfmt 4703
voluntary for a limited number of
orders.
The Exchange believes that requiring
complex orders in Hybrid classes with
three or more legs to COA prior to
entering COB and legging into the
market will discourage market
participants from continuing to enter
the ‘‘complex orders’’ that expose
Market-Makers to the risk described
above. Those ‘‘complex orders’’ that
primarily create this risk are generally
IOC complex orders (which are the only
order type that currently does not COA
in Hybrid classes) with a large number
of legs that generally execute
immediately against prices in the leg
markets, which do not appear to have
investment strategies similar to
traditional complex orders but instead
are specifically designed to circumvent
QRM settings. The proposed rule change
eliminates the possibility of immediate
executions of these ‘‘complex orders.’’
Market participants may still enter these
‘‘complex orders.’’ However, if they do,
the ‘‘complex orders’’ will COA, which
COA will allow Market-Makers to
become aware of these ‘‘complex
orders’’ and have adequate opportunity
to react accordingly, including to adjust
their quotes to avoid circumvention of
their QRM settings. If a Market-Maker
receives an RFR for a COA for one of
these ‘‘complex orders’’ in one of its
appointed Hybrid classes, and the
Market-Maker believes the order may
execute against its quotes and cause
executions that significantly exceed its
contract limit in that class, the MarketMaker may adjust its quotes as it deems
necessary to reduce its risk exposure
prior to the ‘‘complex order’’ legging
into the market and being presented to
the Market-Maker for execution. The
Exchange believes the proposed rule
change will allow Market-Makers to
better manage their risk in their
appointments, as it will reduce the risk
of these ‘‘complex orders’’ causing
executions that significantly exceed
Market-Makers’ risk parameters. The
Exchange believes this reduced risk will
encourage Market-Makers to quote
larger size, which will increase liquidity
and enhance competition in those
classes.
The Exchange notes that the proposed
rule change does not impact the
allocation of complex orders or relieve
Market-Makers of their obligations to
provide continuous electronic quotes
under the Exchange Rules or to provide
‘‘firm’’ quotes pursuant to CBOE Rule
8.51 or Rule 602 of Regulation NMS.
The proposed rule change also
amends Rule 6.53C(d)(ii) to provide that
PAR operators handling an order may
request that a COA-eligible order be
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emcdonald on DSK67QTVN1PROD with NOTICES
COA’d. Currently, Rule 6.53C(d)(ii)
states that a Trading Permit Holder
representing an order may request that
the order be COA’d. However, other
parts of the rules provide that orders
resting on PAR may also COA.15 The
introductory language to Rule 6.53C(d)
also states that complex orders may be
subject to COA once on PAR. Currently,
the part of the rule regarding initiation
of a COA states that Trading Permit
Holders may initiate a COA. In order to
have more consistency within the rules,
the Exchange believes that it is
appropriate to include in the part of the
rule that describes the initiation of a
COA that orders on PAR may be
submitted to COA by the PAR operator,
in addition to orders submitted directly
to the System by Trading Permit
Holders.
The Exchange will announce the
implementation date of the proposed
rule change in a Regulatory Circular to
be published no later than 90 days
following the effective date. The
implementation date will be no later
than 180 days following the effective
date.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the Act
and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.16 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 17 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of 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.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 18 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the Exchange believes it
is reasonable to require complex orders
in Hybrid classes with three or more
15 See, e.g., Rule 6.53C, Interpretation and Policy
.04(a) (which states that Trading Permit Holders
with resting complex orders on PAR may request
that complex orders be COA’d).
16 15 U.S.C. 78f(b).
17 15 U.S.C. 78f(b)(5).
18 Id.
VerDate Mar<15>2010
18:00 Mar 07, 2014
Jkt 232001
legs to COA. In this respect, the
Exchange notes that the vast majority of
complex orders in Hybrid classes
consist of only two legs, and the
majority of complex orders already COA
upon entry into the System—those
orders will be unaffected by this
proposed rule change. The proposed
rule change will essentially only impact
the complex orders in Hybrid classes
with three or more legs that are
currently not eligible for COA (many of
which the Exchange believes do not
have investment strategies of traditional
complex orders). The Exchange believes
this impact is minimal, as these orders
will still have opportunities for
execution through a COA, in the COB,
or in the leg markets following the end
of the COA. Further, the Exchange
believes that the potential risk of not
requiring these orders to COA prior to
entering the COB and legging into the
market limits the amount of liquidity
that Market-Makers are willing to
provide in the regular market. In
particular, Market-Makers may reduce
the size of their quotations in the regular
market because of the presence of these
‘‘complex orders’’ that are designed to
circumvent QRM and risk the execution
of the cumulative size of MarketMakers’ quotations across multiple
series without Market-Makers’ being
aware of these ‘‘complex orders’’ or
having an opportunity to adjust their
quotes. Accordingly, the Exchange
believes that reducing Market-Maker
risk in the regular market by requiring
complex orders in Hybrid classes with
three or more legs to COA will benefit
investors by encouraging additional
liquidity in the regular market. This
potential benefit to investors far exceeds
any perceived detriment to requiring
certain ‘‘complex’’ orders to COA prior
to potential interaction with the leg
markets. The Exchange also believe it is
appropriate to reject any complex orders
with three or more legs for which a
Trading Permit Holder does not include
a COA request, and to automatically
COA any complex order with three or
more legs on PAR even if the PAR
operator requests that the order not
COA, because a Trading Permit Holder
or PAR operator, as applicable, would
otherwise be able to bypass this MarketMaker protection.
The Exchange also believes the
proposed rule change to require all
complex orders with three or more legs
to COA is consistent with the
requirement that Market-Makers’ quotes
be firm under Rule 602 of Regulation
NMS.19 The proposed rule change does
19 Rule 602(b)(2) obligates a Market-Maker to
execute any order to buy or sell a subject security
PO 00000
Frm 00092
Fmt 4703
Sfmt 4703
13363
not relieve Market-Makers of their
obligation to provide ‘‘firm’’ quotes. If a
complex order in a Hybrid class with
three or more legs goes through COA
and then legs into the market for
execution upon completion of the COA,
at which point the complex order would
execute against a Market-Maker’s quotes
based on priority rules, the MarketMaker must execute its quotes against
the order at its then-published bid or
offer up to its published quote size, even
if such execution would cause the
Market-Maker to significantly exceed its
risk parameters. However, as discussed
above, prior to the end of COA (and thus
prior to a complex order legging into the
market), a Market-Maker may adjust its
published quotes to manage its risk in
a class as it deems necessary, including
to prevent executions that would exceed
its risk parameters. In this case, the firm
quote rule does not obligate the MarketMaker to execute its quotes against the
complex order at the quote price and
size that was published when the order
entered the System and initiated the
COA. Rather, the Market-Maker’s firm
quote obligation applies only to its
disseminated quote at the time an order
is presented to the Market-Maker for
execution, which presentation does not
occur until the System processes the
order against the leg markets after
completion of the COA.20 Thus, the
presented to it by another broker or dealer or any
other person belonging to a category of persons with
whom the Market-Maker customarily deals, at a
price at least as favorable to the buyer or sell as the
Market-Maker’s published bid or offer in any
amount up to its published quotation size. Rule
602(b)(3) provides that no Market-Maker is
obligated to execute a transaction for any subject
security to purchase or sell that subject security in
an amount greater than its revised quotation size if,
prior to the presentation of an order for the
purchase or sale of a subject security, the MarketMaker communicated to the Exchange a revised
quotation size. Similarly, no Market-Maker is
obligated to execute a transaction for any subject
security if, before the order sought to be executed
is presented, the Market-Maker has communicated
to the Exchange a revised bid or offer. CBOE Rule
8.51 imposes a similar obligation (Market-Maker
must sell (buy) at least the established number of
contracts at the offer (bid) which is displayed when
the Market-Maker receives a buy (sell) order at the
trading station where the reported security is
located for trading; however, no Market-Maker is
obligated to execute a transaction for a listed option
when, prior to the presentation of an order to sell
(buy) to the Market-Maker, the Market-Maker has
communicated to the Exchange a revised quote).
20 See Staff Legal Bulletin No. 16, Transaction in
Listed Options Under Exchange Act Rule 11Ac1–1,
U.S. Securities and Exchange Commission, Division
of Market Regulation, January 20, 2004 (‘‘Scenario
3: When an Order is ‘‘Presented’’ . . . If an
individual market maker generates its own
quotations . . . and exchange systems route
incoming orders to the responsible broker-dealer
with priority, when is an order presented to a
responsible broker-dealer? Response: . . . . When
each market maker is the responsible broker-dealer
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Federal Register / Vol. 79, No. 46 / Monday, March 10, 2014 / Notices
proposed rule change is consistent with
the firm quote rule.
The Exchange believes that the
proposed rule change to provide that
PAR operators handling an order may
request a COA for a COA-eligible order
is consistent with the Act because the
Exchange rules already allow orders on
PAR to be submitted to COA, as
described above. This proposed rule
change merely includes this ability in
the rule provision that describes how a
COA may be initiated to more
completely and accurately describe the
circumstances in which an order may
COA.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
emcdonald on DSK67QTVN1PROD with NOTICES
The Exchange neither solicited nor
received comments on the proposed
rule change.
with respect to its own quote, an order is presented
to it when received by the market maker from the
exchange system.’’). When a complex order is
processing through COA, the order is still in the
System and has not yet been presented to a broker
or dealer (including a Market-Maker) for execution.
Only after completion of the COA, when the System
allocates the complex order for execution in
accordance with priority rules, will that order be
‘‘presented’’ to the Market-Maker for firm quote
purposes.
18:00 Mar 07, 2014
Jkt 232001
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate 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
will:
A. By order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
CBOE does not believe that the
proposed rule change will impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed rule change to require all
complex orders with three or more legs
to COA addresses concerns that MarketMakers raised to the Exchange and is
intended to reduce risk to MarketMakers that are quoting in the regular
market. CBOE believes that the
proposed rule change will promote
competition by encouraging MarketMakers to increase the size of and to
more aggressively price their quotes,
which will increase liquidity on the
Exchange. The proposed rule change
applies in the same manner to all
complex orders in Hybrid classes of
three or more legs and is intended to
reduce risk for all Market-Makers that
electronically quote in Hybrid classes.
The proposed rule change to provide
that PAR operators handling an order
may request a COA for a COA-eligible
order is consistent with current
Exchange rules and thus has no
competitive impact.
VerDate Mar<15>2010
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
offices of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–CBOE–
2014–017, and should be submitted on
or before March 31, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.21
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–05071 Filed 3–7–14; 8:45 am]
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–71642; File No. SR–FINRA–
2014–003]
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–CBOE–2014–017 on the
subject line.
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Designation
of Longer Period for Commission
Action on a Proposed Rule Change To
Amend FINRA’s Corporate Financing
Rules To Simplify and Refine the
Scope of the Rules
Paper Comments
March 4, 2014.
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–CBOE–2014–017. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549–1090 on official
business days between the hours of
On January 9, 2014, Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) 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 amend FINRA’s
corporate financing rules to simplify
and refine the scope of the rules. The
proposed rule change was published for
comment in the Federal Register on
January 29, 2014.3 To date, the
Commission has received two comment
letters on the proposal.4
Section 19(b)(2) of the Act 5 provides
that within 45 days of the publication of
notice of the filing of a proposed rule
change, or within such longer period up
PO 00000
Frm 00093
Fmt 4703
Sfmt 4703
17 CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 71372
(Jan. 23, 2014), 79 FR 4793.
4 See Letter from Suzanne Rothwell, Managing
Member, Rothwell Consulting LLC, to Elizabeth M.
Murphy, Secretary, Commission, dated February 10,
2014; Letter from Sean Davy, Managing Director,
Corporate Credits Market Division, Securities
Industries and Financial Markets Association, to
Elizabeth M. Murphy, Secretary, Commission, dated
February 18, 2014.
5 15 U.S.C. 78s(b)(2).
21
1 15
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]]>Agencies
[Federal Register Volume 79, Number 46 (Monday, March 10, 2014)]
[Notices]
[Pages 13359-13364]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-05071]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71648; File No. SR-CBOE-2014-017]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change, as Modified
by Amendment 1, To Amend Its Rules Related to Complex Orders
March 5, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\
[[Page 13360]]
notice is hereby given that on February 19, 2014, Chicago Board Options
Exchange, Incorporated (the ``Exchange'' or ``CBOE'') filed with the
Securities and Exchange Commission (the ``Commission'') the proposed
rule change as described in Items I, II, and III below, which Items
have been prepared by the Exchange. On March 3, 2014, the Exchange
filed Amendment No. 1 to the proposed rule change. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to amend its rules related to complex orders.
The text of the proposed rule change is provided below.
(additions are italicized; deletions are [bracketed])
* * * * *
Chicago Board Options Exchange, Incorporated Rules
* * * * *
Rule 6.53C. Complex Orders on the Hybrid System
(a) Definition: No change.
(b) Types of Complex Orders: No change.
(c) Complex Order Book
No change.
(d) Process for Complex Order RFR Auction: Prior to routing to
the COB or once on PAR, eligible complex orders may be subject to an
automated request for responses (``RFR'') auction process.
(i) For purposes of paragraph (d):
(1) ``COA'' is the automated complex order RFR auction process.
(2) A ``COA-eligible order'' means a complex order that, as
determined by the Exchange on a class-by-class basis, is eligible
for a COA considering the order's marketability (defined as a number
of ticks away from the current market), size, complex order type (as
defined in paragraphs (a) and (b) above) and complex order origin
types (as defined in subparagraph (c)(i) above). Complex orders
processed through a COA may be executed without consideration to
prices of the same complex orders that might be available on other
exchanges.
(ii) Initiation of a COA: On receipt of (1) a COA-eligible order
with two legs and request from the Trading Permit Holder
representing the order or the PAR operator handling the order, as
applicable, that it be COA'd or (2) a complex order with three or
more legs, regardless of the order's routing parameters or handling
instructions (except for orders routed for manual handling), the
[Exchange]System will send an RFR message to all Trading Permit
Holders who have elected to receive RFR messages. Notwithstanding
clause (2) of this subparagraph (ii), the System will reject back to
a Trading Permit Holder any complex order with three or more legs
that includes a request pursuant to Interpretation and Policy .04
that the order not COA. Any complex order with three or more legs on
PAR will COA even if the PAR operator requests that the order not
COA. The RFR message will identify the component series, the size
and side of the market of the COA-eligible order and any
contingencies, if applicable.
(iii)-(ix) No change.
. . . Interpretations and Policies:
.01-.09 No change.
.10 Execution of Complex Orders in Hybrid 3.0 Classes: For each
class trading on the Hybrid 3.0 Platform, the Exchange may determine
to not allow marketable complex orders entered into COB and/or COA
to automatically execute against individual quotes residing in the
EBook. The Exchange also may determine for each class trading on the
Hybrid 3.0 Platform to not allow leg orders to be generated pursuant
to paragraph (c)(iv) for complex orders resting in the COB. The
allocation of such marketable complex orders against orders residing
in the EBook and other complex orders shall be based on the best net
price(s) and, at the same net price, multiple orders will be
allocated as provided in paragraphs (c) and/or (d) in the Rule, as
applicable, subject to the following:
(a)-(d) No change.
(e) On receipt of any COA-eligible order, the Exchange will send
an RFR message to all Trading Permit Holders who have elected to
receive RFR messages. The RFR message will identify the component
series, the size and side of the market of the COA-eligible order
and any contingencies, if applicable.
.11-.12 No change.
* * * * *
The text of the proposed rule change is also available on the
Exchange's Web site (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange 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. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Under Rule 8.18, CBOE offers Market-Makers that are obligated to
provide and maintain continuous electronic quotes in an option class
the Quote Risk Monitor Mechanism (``QRM''), which is functionality to
help Market-Makers manage their quotes and related risk. Market-Makers
with appointments in classes that trade on the Exchange's Hybrid
Trading System (the ``System'') \3\ must, among other things, provide
and maintain continuous electronic quotes in a specified percentage of
series in each class for a specified percentage of time.\4\ To comply
with this requirement, each Market-Maker may use its own proprietary
quotation and risk management system to determine the prices and sizes
at which it quotes. In addition, each Market-Maker may use QRM.
---------------------------------------------------------------------------
\3\ The System is a trading platform that allows automatic
executions to occur electronically and open outcry trades to occur
on the floor of the Exchange. To operate in this ``hybrid''
environment, the Exchange has a dynamic order handling system that
has the capability to route orders to the trade engine for automatic
execution and book entry, to Trading Permit Holder and PAR Official
workstations located in the trading crowds for manual handling, and/
or to other order management terminals generally located in booths
on the trading floor for manual handling. Where an order is routed
for processing by the Exchange order handling system depends on
various parameters configured by the Exchange and the order entry
firm itself.
\4\ See Rules 8.7(d)(ii)(iv) (Market-Makers), 8.13(d) (Preferred
Market-Makers), 8.15A(b)(i) (Lead Market-Makers) and 8.85(a)(i)
(Designated Primary Market-Makers).
---------------------------------------------------------------------------
A Market-Maker's risk in a class is not limited to the risk in a
single series of that class. Rather, a Market-Maker is generally
actively quoting in multiple classes, and each class may comprise
hundreds or thousands of individual series. The System automatically
executes orders against a Market-Maker's quotes in accordance with the
Exchange's priority and allocation rules.\5\ As a result, a Market-
Maker has exposure and risk in all series in which it is quoting in
each of its appointed classes. QRM is an optional functionality that
helps Market-Makers, and TPH organizations with which a Market-Maker is
associated, limit this overall exposure and risk.
---------------------------------------------------------------------------
\5\ See Rules 6.45A, 6.45B and 6.53C.
---------------------------------------------------------------------------
Specifically, if a Market-Maker elects to use QRM, the System will
cancel a Market-Maker's quotes in all series in an appointed class if
certain parameters the Market-Maker establishes are triggered. Market-
Makers may set the following QRM parameters (Market-Makers may set
none, some or all of these parameters):
a maximum number of contracts for that class (the
``contract limit'') and a specified rolling time period in seconds
within which such contract limit is to
[[Page 13361]]
be measured (the ``measurement interval'');
a maximum cumulative percentage (which is the sum of the
percentages of the original quoted size of each side of each series
that trade) (the ``cumulative percentage limit'') that the Market-Maker
is willing to trade within a specified measurement interval; or
a maximum number of series for which either side of the
quote is fully traded (the ``number of series fully traded'') within a
specified measurement interval.
If the Exchange determines the Market-Maker has traded more than
the contract limit or cumulative percentage limit, or has traded at
least the number of series fully traded, of a class during the
specified measurement interval, the System will cancel all of the
Market-Maker's electronic quotes in that class (and any other cases
with the same underlying security) until the Market-Maker refreshes
those quotes (a ``QRM Incident''). A Market-Maker, or TPH organization
with which the Market-Maker is associated, may also specify a maximum
number of QRM Incidents that may occur on an Exchange-wide basis during
a specified measurement interval. If the Exchange determines that a
Market-Maker or TPH Organization, as applicable, has reached its QRM
Incident limit during the specified measurement interval, the System
will cancel all of the Market-Maker's or TPH Organization's quotes, as
applicable, and the Market-Maker's orders resting in the book in all
classes and prevent the Market-Maker and TPH organization from sending
additional quotes or orders to the Exchange until the earlier to occur
of (1) the Market-Maker or TPH organization reactivates this ability or
(2) the next trading day.
The purpose of the QRM functionality is to allow Market-Makers to
provide liquidity across most series in their appointed classes without
being at risk of executing the full cumulative size of all their quotes
before being given adequate opportunity to adjust their quotes. For
example, if a Market-Maker can enter quotes with a size of 25 contracts
in 100 series of class ABC, its potential exposure is 2,500 contracts
in ABC. To mitigate the risk of having all 2,500 contracts in ABC
execute without the opportunity to evaluate its positions, the Market-
Maker may elect to use QRM. If the Market-Maker elects to use the
contract limit functionality and sets the contract limit at 100 and the
measurement interval at five seconds for ABC, the System will
automatically cancel the Market-Maker's quotes in all series of ABC if
100 or more contracts in series of ABC execute during any five-second
period.
To assure that all quotations are firm for their full size, the
System performs the parameter calculations after an execution against a
Market-Maker's quote occurs. For example, using the same parameters in
class ABC as above, if a Market-Maker has executed a total of 95
contracts in ABC within the previous three seconds, a quote in a series
of ABC with a size of 25 contracts continues to be firm for all 25
contracts. An incoming order in that series could execute all 25
contracts of that quote, and, following the execution, the total size
parameter would add 25 contracts to the previous total of 95 for a
total of 120 contracts executed in ABC. Because the total size executed
within the previous five seconds now exceeds the 100 contract limit for
ABC, the System would, following the execution, immediately cancel all
of the Market-Maker's quotes in series of ABC. The Market-Maker would
then enter new quotes for series in ABC. Thus, QRM limits the amount by
which a Market-Maker's executions in a class may exceed its contract
limit to the largest size of its quote in a single series of the class
(or 25 in this example).
The Exchange proposes to amend Rule 6.53C regarding complex orders
to limit a potential source of unintended Market-Maker risk related to
how the System calculates risk parameters under Rule 8.18 when complex
orders leg into the market.\6\ As discussed above, by checking the risk
parameters following each execution in a series, the risk parameters
allow a Market-Maker to provide liquidity across multiple series of a
class without being at risk of executing the full cumulative size of
all its quotes. This is not the case, however, when a complex order
legs into the regular market (i.e. the market for individual, or
simple, orders). Because the execution of each leg of a complex order
is contingent on the execution of the other legs, the execution of all
the legs in the regular market is processed as a single transaction,
not as a series of individual transactions.
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\6\ Rule 6.53C(c)(ii)(1) provides that complex orders in the
complex order book (``COB'') may execute against individual orders
or quotes in the book provided the complex order can be executed in
full (or a permissible ratio) by the orders and quotes in the book.
Rule 6.53C(d)(v)(1) provides that orders that are eligible for the
complex order auction (``COA'') may trade with individual orders and
quotes in the book provided the COA-eligible order can be executed
in full (or a permissible ratio) by the orders and quotes in the
book. COA is an automated request for responses (``RFR'') auction
process. Upon initiation of a COA, the Exchange sends an RFR message
to all Trading Permit Holders who have elected to receive RFR
messages, which RFR message identifies the series, size and side of
the market of the COA-eligible order and any contingencies. Eligible
market participants may submit responses during a response time
interval. At the conclusion of the response time interval, COA-
eligible orders are allocated in accordance with Rule 6.53C(d)(v),
including against individual orders and quotes in the book.
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For example, if market participants enter into the System
individual orders to buy 25 contracts for the Jan 30 call, Jan 35 call,
Jan 40 call and Jan 45 call in class ABC, the System processes each
order as it is received and calculates the Market-Makers parameters in
class ABC following the execution of each 25-contract call. However, if
a market participant enters into the System a complex order to buy all
four of these strikes in class ABC 25 times, which complex order
executes against bids and offers for the individual series (i.e. legs
into the market), the System will calculate the Market-Maker's
parameters in class ABC following the execution of all 100 contracts.
If the Market-Maker had set the same parameters in class ABC as
discussed above (100-contract limit with five-second measurement
interval) and had executed 95 contracts in class ABC within the
previous three seconds, the amount by which the next transaction might
exceed 100 is limited to the largest size of its quote in a single
series of the class. In that example, since the largest size of the
Market-Maker's quotes in any series was 25 contracts, the Market-Maker
could not have exceeded the 100-contract limit by more than 20
contracts (95 + 25 = 120). However, with respect to the complex order
with four legs 25 times, the next transaction against the Market-
Maker's quotes potentially could be as large as 100 contracts
(depending upon whether there are other market participants at the same
price), creating the potential in this example for the Market-Maker to
exceed the 100-contract limit by 95 contracts (95 + 100 = 195) instead
of 20 contracts.
As this example demonstrates, legging of complex orders into the
regular market presents higher risk to Market-Makers than executing
their quotes against individual orders entered in multiple series of a
class in the regular market, because it may result in Market-Makers
exceeding their risk parameters by a greater number of contracts. This
risk is directly proportional to the number of legs associated with a
complex order. Market-Makers have expressed concerns to the Exchange
regarding this risk.
To address this Market-Maker risk, the Exchange proposes to require
all complex orders with three or more legs
[[Page 13362]]
to COA prior to entering the COB.\7\ Under Rule 6.53C(d)(i)(2), the
Exchange may determine on a class-by-class which complex orders are
eligible for COA, including by complex order type and origin type.\8\
Rule 6.53C(d)(ii) provides that the Exchange will initiate a COA on
receipt of a COA-eligible order and request from the Trading Permit
Holder representing the order that it be COA'd. The Exchange proposes
to amend Rule 6.53C(d)(ii) to provide that the System\9\ will initiate
a COA on receipt of (1) a COA-eligible order with two legs and request
from the Trading Permit Holder representing the order that it be COA'd
or (2) a complex order with three or more legs, regardless of the
order's routing parameters (e.g., request to route directly to COB,
all-or-none order, immediate-or-cancel) or handling instructions
(except for orders routed for manual handling).\10\ Thus, all complex
orders in Hybrid classes with three or more legs will automatically COA
(other than those routed for manual handling) prior to entering the COB
where they can leg into the market.\11\ Additionally, the Exchange
proposes to amend Rule 6.53C(d)(ii) to provide that notwithstanding
proposed clause (2) described above, the System will reject back to a
Trading Permit Holder any complex order with three or more legs that
includes a request pursuant to Interpretation and Policy .04 that the
order not COA.\12\ This will prevent a Trading Permit Holder from using
a routing parameter request to not COA a complex order with three or
more legs to bypass the protection provided by the automatic COA
functionality proposed in this filing while providing the Trading
Permit Holder with an opportunity to reconsider how to handle the
complex order.
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\7\ This proposed change applies to Hybrid classes only, and not
Hybrid 3.0 classes. The Exchange does not believe the risk discussed
in this rule filing is present in Hybrid 3.0 classes. The proposed
rule change amends Rule 6.53C, Interpretation and Policy .10 to
indicate that complex orders in Hybrid 3.0 classes, regardless of
the number of legs, will COA in the same manner they currently do.
\8\ Currently, in all Hybrid classes, customer, firm and broker-
dealer complex orders are eligible for COA, and all complex order
types except for immediate-or-cancel (``IOC'') orders are eligible
for COA in all Hybrid classes. Additionally, only marketable orders
and ``tweeners'' (limit orders bettering the same side of the
derived net market) are eligible for COA. For Hybrid 3.0 classes
(i.e. SPX), all complex order types (including IOC orders) are
eligible for COA, but only customer complex orders are eligible for
COA. See Regulatory Circulars RG06-73, RG08-38 and RG08-97.
\9\ The proposed rule change amends the language to say that the
System will send the RFR message rather than the Exchange. Because
the System will automatically send the RFR message when the
conditions set forth in Rule 6.53C(d)(ii) are met, the Exchange
believes using the term ``System'' in the rule text is appropriate.
\10\ The Exchange notes that if a complex order with three or
more legs contains an instruction to route for manual handling, such
as to PAR, and through such manual handling routes to the COB, the
proposed rule change provides that order will COA prior to entry on
the COB, even if the PAR operator requests that the order not COA.
\11\ The Exchange notes that this automatic COA applies only to
complex orders and not stock-option orders.
\12\ Rule 6.53C, Interpretation and Policy .04 provides that
Trading Permit Holders routing complex orders directly to the COB
may request that the complex orders be COA'd on a class-by-class
basis and Trading Permit Holders with resting complex orders on PAR
may request that complex orders be COA'd on an order-by-order basis.
As discussed above, the Exchange intends to propose in a separate
rule filing to amend Interpretation and Policy .04 to allow Trading
Permit Holders to request that complex orders not COA on an order-
by-order basis, in addition to a class-by-class basis.
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The Exchange notes that approximately 90% of complex orders
submitted to the Exchange have only two legs. Additionally, as
discussed above, orders in Hybrid classes of all order types except IOC
orders and all order origin codes except Market-Maker and away market-
maker orders are currently COA-eligible.\13\ Currently, all Trading
Permit Holders have requested that all of their COA-eligible orders in
Hybrid classes process through COA upon entry into the System. Thus,
the proposed rule change will only impact a small percentage of complex
orders that enter into the System, as a large percentage of complex
orders entered into the System are only two legs or already COA prior
to execution. The Exchange also notes that complex orders with three or
more legs will still have opportunities for execution through COA or on
the COB if they do not execute at the end of the COA (including
execution with the leg markets). The Exchange notes that the rules
contain provisions that prevent the execution of complex orders that
might otherwise be executable.\14\ Thus, the Exchange believes that
requiring complex orders with three or more legs to COA prior to
entering COB and legging into the regular market does not create any
unusual circumstances for the System. The Exchange believes that the
potential risk to Market-Makers in the regular market of allowing
orders with three or more legs to directly enter COB and leg into the
market far outweighs the potential benefit of continuing to allow COA
to be voluntary for a limited number of orders.
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\13\ See supra note 8.
\14\ See, e.g., Rules 6.45A(a) and 6.45B(a) (priority overlays,
such as public customer) and Rule 6.53C, Interpretation and Policy
.08 (price check parameters).
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The Exchange believes that requiring complex orders in Hybrid
classes with three or more legs to COA prior to entering COB and
legging into the market will discourage market participants from
continuing to enter the ``complex orders'' that expose Market-Makers to
the risk described above. Those ``complex orders'' that primarily
create this risk are generally IOC complex orders (which are the only
order type that currently does not COA in Hybrid classes) with a large
number of legs that generally execute immediately against prices in the
leg markets, which do not appear to have investment strategies similar
to traditional complex orders but instead are specifically designed to
circumvent QRM settings. The proposed rule change eliminates the
possibility of immediate executions of these ``complex orders.'' Market
participants may still enter these ``complex orders.'' However, if they
do, the ``complex orders'' will COA, which COA will allow Market-Makers
to become aware of these ``complex orders'' and have adequate
opportunity to react accordingly, including to adjust their quotes to
avoid circumvention of their QRM settings. If a Market-Maker receives
an RFR for a COA for one of these ``complex orders'' in one of its
appointed Hybrid classes, and the Market-Maker believes the order may
execute against its quotes and cause executions that significantly
exceed its contract limit in that class, the Market-Maker may adjust
its quotes as it deems necessary to reduce its risk exposure prior to
the ``complex order'' legging into the market and being presented to
the Market-Maker for execution. The Exchange believes the proposed rule
change will allow Market-Makers to better manage their risk in their
appointments, as it will reduce the risk of these ``complex orders''
causing executions that significantly exceed Market-Makers' risk
parameters. The Exchange believes this reduced risk will encourage
Market-Makers to quote larger size, which will increase liquidity and
enhance competition in those classes.
The Exchange notes that the proposed rule change does not impact
the allocation of complex orders or relieve Market-Makers of their
obligations to provide continuous electronic quotes under the Exchange
Rules or to provide ``firm'' quotes pursuant to CBOE Rule 8.51 or Rule
602 of Regulation NMS.
The proposed rule change also amends Rule 6.53C(d)(ii) to provide
that PAR operators handling an order may request that a COA-eligible
order be
[[Page 13363]]
COA'd. Currently, Rule 6.53C(d)(ii) states that a Trading Permit Holder
representing an order may request that the order be COA'd. However,
other parts of the rules provide that orders resting on PAR may also
COA.\15\ The introductory language to Rule 6.53C(d) also states that
complex orders may be subject to COA once on PAR. Currently, the part
of the rule regarding initiation of a COA states that Trading Permit
Holders may initiate a COA. In order to have more consistency within
the rules, the Exchange believes that it is appropriate to include in
the part of the rule that describes the initiation of a COA that orders
on PAR may be submitted to COA by the PAR operator, in addition to
orders submitted directly to the System by Trading Permit Holders.
---------------------------------------------------------------------------
\15\ See, e.g., Rule 6.53C, Interpretation and Policy .04(a)
(which states that Trading Permit Holders with resting complex
orders on PAR may request that complex orders be COA'd).
---------------------------------------------------------------------------
The Exchange will announce the implementation date of the proposed
rule change in a Regulatory Circular to be published no later than 90
days following the effective date. The implementation date will be no
later than 180 days following the effective date.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\16\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \17\ requirements that the rules
of an exchange be designed to prevent fraudulent and manipulative acts
and practices, to promote just and equitable principles of 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.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \18\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
\18\ Id.
---------------------------------------------------------------------------
In particular, the Exchange believes it is reasonable to require
complex orders in Hybrid classes with three or more legs to COA. In
this respect, the Exchange notes that the vast majority of complex
orders in Hybrid classes consist of only two legs, and the majority of
complex orders already COA upon entry into the System--those orders
will be unaffected by this proposed rule change. The proposed rule
change will essentially only impact the complex orders in Hybrid
classes with three or more legs that are currently not eligible for COA
(many of which the Exchange believes do not have investment strategies
of traditional complex orders). The Exchange believes this impact is
minimal, as these orders will still have opportunities for execution
through a COA, in the COB, or in the leg markets following the end of
the COA. Further, the Exchange believes that the potential risk of not
requiring these orders to COA prior to entering the COB and legging
into the market limits the amount of liquidity that Market-Makers are
willing to provide in the regular market. In particular, Market-Makers
may reduce the size of their quotations in the regular market because
of the presence of these ``complex orders'' that are designed to
circumvent QRM and risk the execution of the cumulative size of Market-
Makers' quotations across multiple series without Market-Makers' being
aware of these ``complex orders'' or having an opportunity to adjust
their quotes. Accordingly, the Exchange believes that reducing Market-
Maker risk in the regular market by requiring complex orders in Hybrid
classes with three or more legs to COA will benefit investors by
encouraging additional liquidity in the regular market. This potential
benefit to investors far exceeds any perceived detriment to requiring
certain ``complex'' orders to COA prior to potential interaction with
the leg markets. The Exchange also believe it is appropriate to reject
any complex orders with three or more legs for which a Trading Permit
Holder does not include a COA request, and to automatically COA any
complex order with three or more legs on PAR even if the PAR operator
requests that the order not COA, because a Trading Permit Holder or PAR
operator, as applicable, would otherwise be able to bypass this Market-
Maker protection.
The Exchange also believes the proposed rule change to require all
complex orders with three or more legs to COA is consistent with the
requirement that Market-Makers' quotes be firm under Rule 602 of
Regulation NMS.\19\ The proposed rule change does not relieve Market-
Makers of their obligation to provide ``firm'' quotes. If a complex
order in a Hybrid class with three or more legs goes through COA and
then legs into the market for execution upon completion of the COA, at
which point the complex order would execute against a Market-Maker's
quotes based on priority rules, the Market-Maker must execute its
quotes against the order at its then-published bid or offer up to its
published quote size, even if such execution would cause the Market-
Maker to significantly exceed its risk parameters. However, as
discussed above, prior to the end of COA (and thus prior to a complex
order legging into the market), a Market-Maker may adjust its published
quotes to manage its risk in a class as it deems necessary, including
to prevent executions that would exceed its risk parameters. In this
case, the firm quote rule does not obligate the Market-Maker to execute
its quotes against the complex order at the quote price and size that
was published when the order entered the System and initiated the COA.
Rather, the Market-Maker's firm quote obligation applies only to its
disseminated quote at the time an order is presented to the Market-
Maker for execution, which presentation does not occur until the System
processes the order against the leg markets after completion of the
COA.\20\ Thus, the
[[Page 13364]]
proposed rule change is consistent with the firm quote rule.
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\19\ Rule 602(b)(2) obligates a Market-Maker to execute any
order to buy or sell a subject security presented to it by another
broker or dealer or any other person belonging to a category of
persons with whom the Market-Maker customarily deals, at a price at
least as favorable to the buyer or sell as the Market-Maker's
published bid or offer in any amount up to its published quotation
size. Rule 602(b)(3) provides that no Market-Maker is obligated to
execute a transaction for any subject security to purchase or sell
that subject security in an amount greater than its revised
quotation size if, prior to the presentation of an order for the
purchase or sale of a subject security, the Market-Maker
communicated to the Exchange a revised quotation size. Similarly, no
Market-Maker is obligated to execute a transaction for any subject
security if, before the order sought to be executed is presented,
the Market-Maker has communicated to the Exchange a revised bid or
offer. CBOE Rule 8.51 imposes a similar obligation (Market-Maker
must sell (buy) at least the established number of contracts at the
offer (bid) which is displayed when the Market-Maker receives a buy
(sell) order at the trading station where the reported security is
located for trading; however, no Market-Maker is obligated to
execute a transaction for a listed option when, prior to the
presentation of an order to sell (buy) to the Market-Maker, the
Market-Maker has communicated to the Exchange a revised quote).
\20\ See Staff Legal Bulletin No. 16, Transaction in Listed
Options Under Exchange Act Rule 11Ac1-1, U.S. Securities and
Exchange Commission, Division of Market Regulation, January 20, 2004
(``Scenario 3: When an Order is ``Presented'' . . . If an individual
market maker generates its own quotations . . . and exchange systems
route incoming orders to the responsible broker-dealer with
priority, when is an order presented to a responsible broker-dealer?
Response: . . . . When each market maker is the responsible broker-
dealer with respect to its own quote, an order is presented to it
when received by the market maker from the exchange system.''). When
a complex order is processing through COA, the order is still in the
System and has not yet been presented to a broker or dealer
(including a Market-Maker) for execution. Only after completion of
the COA, when the System allocates the complex order for execution
in accordance with priority rules, will that order be ``presented''
to the Market-Maker for firm quote purposes.
---------------------------------------------------------------------------
The Exchange believes that the proposed rule change to provide that
PAR operators handling an order may request a COA for a COA-eligible
order is consistent with the Act because the Exchange rules already
allow orders on PAR to be submitted to COA, as described above. This
proposed rule change merely includes this ability in the rule provision
that describes how a COA may be initiated to more completely and
accurately describe the circumstances in which an order may COA.
B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rule change to
require all complex orders with three or more legs to COA addresses
concerns that Market-Makers raised to the Exchange and is intended to
reduce risk to Market-Makers that are quoting in the regular market.
CBOE believes that the proposed rule change will promote competition by
encouraging Market-Makers to increase the size of and to more
aggressively price their quotes, which will increase liquidity on the
Exchange. The proposed rule change applies in the same manner to all
complex orders in Hybrid classes of three or more legs and is intended
to reduce risk for all Market-Makers that electronically quote in
Hybrid classes.
The proposed rule change to provide that PAR operators handling an
order may request a COA for a COA-eligible order is consistent with
current Exchange rules and thus has no competitive impact.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate 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 will:
A. By order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-CBOE-2014-017 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2014-017. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549-1090 on official business days between the hours
of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be
available for inspection and copying at the principal offices of the
Exchange. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
CBOE-2014-017, and should be submitted on or before March 31, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-05071 Filed 3-7-14; 8:45 am]
BILLING CODE 8011-01-P
