Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Relating to Orders That Are Tied to Stock, 28787-28791 [2014-11435]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 96 (Monday, May 19, 2014)]
[Notices]
[Pages 28787-28791]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-11435]



[[Page 28787]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72154; File No. SR-CBOE-2014-040]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Relating to 
Orders That Are Tied to Stock

May 13, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on April 30, 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. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposed to add rules regarding orders that are tied 
to stock. The text of the proposed rule change is provided below. 
(additions are italicized; deletions are [bracketed])
* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *

Rule 6.53. Certain Types of Orders Defined

    One or more of the following order types may be made available on a 
class-by-class basis. Certain order types may not be made available for 
all Exchange systems. The classes and/or systems for which the order 
types shall be available will be as provided in the Rules, as the 
context may indicate, or as otherwise specified via Regulatory 
Circular.
    (a)-(x) No change.
    (y) Tied to Stock Order. An order is ``tied to stock'' if, at the 
time the Trading Permit Holder representing the order on the Exchange 
receives or initiates the order, the Trading Permit Holder has 
knowledge that the order is coupled with an order(s) for the underlying 
stock or a security convertible into the underlying stock 
(``convertible security''). The representing Trading Permit Holder must 
include an indicator on each tied to stock order upon systemization, 
unless:
    (i) the order is submitted to the Exchange as part of a qualified 
contingent cross order (as defined in this Rule 6.53) through an 
Exchange-approved device;
    (ii) the order is submitted to the Exchange for electronic 
processing as a stock-option order (as defined in Rule 6.53C); or
    (iii) all of the component orders are systematized on a single 
order ticket.

An order is not ``tied to stock'' if it is not coupled with an order(s) 
for the underlying stock or convertible security at the time of receipt 
or initiation (e.g., an option order that is received or initiated to 
hedge a previously executed stock transaction, an option transaction or 
position that is hedged with a subsequently received or initiated stock 
order).

. . . Interpretations and Policies:

    .01 No change.
* * * * *

Rule 6.77. Order Service Firms

    (a)-(d) No change.
    (e) Order service firms must submit reports pursuant to Rule 15.2A 
with respect to the stock transactions it executes on behalf of market-
makers pursuant to this Rule 6.77.
* * * * *

Rule 15.2A. Reports of Execution of Stock Transactions

    In a manner and form prescribed by the Exchange, each Trading 
Permit Holder must, on the business day following the order execution 
date, report to the Exchange the following information for the executed 
stock or convertible security legs of QCC orders, stock-option orders 
and other tied to stock orders that the Trading Permit Holder executed 
on the Exchange that trading day: (a) Time of execution, (b) execution 
quantity, (c) execution price, (d) venue of execution, and (e) any 
other information requested by the Exchange. A Trading Permit Holder 
may arrange for its clearing firm to submit these reports on its 
behalf; provided that if the clearing firm does not report an executed 
stock order, the Trading Permit Holder will be responsible for 
reporting the information.

. . . Interpretation and Policies:

    .01 The Exchange will announce by Regulatory Circular any 
determinations, including the manner and form of the report, that it 
makes pursuant to Rule 15.2A.
    .02 A Trading Permit Holder (or its clearing firm) does not need to 
report information pursuant to Rule 15.2A with respect to (a) stock-
option orders (as defined in Rule 6.53C) submitted to the Exchange for 
electronic processing or (b) stock or convertible security orders 
entered into an Exchange-approved device.
    .03 A Market-Maker (or its clearing firm) may include the 
information required by Rule 15.2A in the equity reports submitted to 
the Exchange pursuant to Rule 8.9(b).
    .04 If a tied to stock order executed at multiple options 
exchanges, a Trading Permit Holder (or its clearing firm) may report to 
the Exchange the information pursuant to Rule 15.2A for the entire 
stock or convertible security component(s) rather than the portion of 
the stock or convertible security component(s) applicable to the 
portion of the order that executed at the Exchange.
    .05 In lieu of the time of execution pursuant to Rule 15.2A(a), the 
Exchange may accept the time of the trade report if that time is 
generally within 90 seconds of the time of execution.
* * * * *
    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
    The Exchange proposes to add rules regarding orders that are tied 
to stock, which include a proposed definition of tied to stock orders 
and a related reporting requirement.
Tied to Stock Orders
    The Exchange proposes to add a definition of a tied to stock order 
as

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Rule 6.53(y). Proposed paragraph (y) provides that an order is tied to 
stock if, at the time the Trading Permit Holder representing the order 
on the Exchange receives the order (if the order is a customer order) 
or initiates the order (if the order is a proprietary order), has 
knowledge that the order is coupled with an order(s) for the underlying 
stock or a security convertible into the underlying stock 
(``convertible security'' and, together with underlying stock, ``non-
option''). Tied to stock orders may be simple or complex orders and may 
be part of, among other things, buy-write strategies, married put 
strategies, delta neutral strategies, contingent strategies and other 
stock-option trading strategies with definitive option orders and stock 
orders.
    The representing Trading Permit Holder must include an indicator on 
each tied to stock order upon systemization unless:
     The order is submitted to the Exchange as part of a 
qualified contingent cross (``QCC'') \3\ order through an Exchange-
approved device;
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    \3\ A QCC order is an order to buy (sell) at least 1,000 
standard option contracts or 10,000 mini-option contracts that is 
identified as being part of a qualified contingent trade coupled 
with a contra-side order to sell (buy) an equal number of contracts. 
These orders may only be entered in the standard increments 
applicable to simple orders in the options class under Rule 6.42. 
For purposes of this order type, a ``qualified contingent trade'' is 
a transaction consisting of two or more component orders, executed 
as agent or principal, where: (a) At least one component is an NMS 
stock, as defined in Rule 600 of Regulation NMS under the Act; (b) 
all components are effected with a product or price contingency that 
either has been agreed to by all the respective counterparties or 
arranged for by a broker-dealer as principal or agent; (c) the 
execution of one component is contingent upon the execution of all 
other components at or near the same time; (d) the specific 
relationship between the component orders (e.g., the spread between 
the prices of the component orders) is determined by the time the 
contingent order is placed; (e) the component orders bear a 
derivative relationship to one another, represent different classes 
of shares of the same issuer, or involve the securities of 
participants in mergers or with intentions to merge that have been 
announced or cancelled; and (f) the transaction is fully hedged 
(without regard to any prior existing position) as a result of other 
components of the contingent trade. QCC orders may execute without 
exposure provided the execution is not at the same price as a public 
customer order resting in the electronic book and is at or between 
the national best bid or offer. A QCC order will be cancelled if it 
cannot be executed. See Rule 6.53(u).
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     the order is submitted to the Exchange for electronic 
processing as a stock-option order;\4\ or
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    \4\ A ``stock-option order'' is an order buy or sell a stated 
number of units of any underlying stock or convertible security 
coupled with the purchase or sale of options contract(s) on the 
opposite side of the market representing either (i) the same number 
of units of the underlying stock necessary to create a delta neutral 
position, but in no case in a ratio greater than eight-to-one, where 
the ratio represents the total number of units of the underlying 
stock or convertible security in the option leg to the total number 
of the underlying stock or convertible security in the stock leg (or 
such lower ratio as may be determined by the Exchange on a class-by-
class basis) [sic]. Only those stock-option orders with no more than 
the applicable number of legs, as determined by the Exchange on a 
class-by-class basis, are eligible for processing. See Rule 
6.53C(a)(2).
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     all components of the trading strategy of which the order 
is a part, including the non-option orders, are systematized on a 
single order ticket.
    The purpose of the indicator is to enhance the Exchange's audit 
trail. The Exchange believes there are circumstances in which investors 
do not submit to or systematize at the Exchange the non-option 
component(s) of trading strategies with the related option 
component(s). Instead, they separately submit the non-option 
component(s) for execution, such as to a broker or directly to another 
trading venue, which prevents the Exchange from knowing that it relates 
to an order(s) that executed on the Exchange. For example, suppose a 
Trading Permit Holder receives a stock-option strategy from a customer 
to buy 10,000 shares of stock XYZ and buy 100 XYZ puts. The Trading 
Permit Holder submits the put order to CBOE for execution but requests 
that a broker at the New York Stock Exchange (``NYSE'') execute the 
stock order. In this case, the Trading Permit Holder must include the 
tied to stock indicator on the XYZ put order. If the Trading Permit 
Holder had instead submitted the option and stock orders to CBOE as a 
stock-option order, then no indicator would have been required. The 
indicator will alert the Exchange of any non-option order that is part 
of a trading strategy for which the option order executed on the 
Exchange.
    The proposed rule excludes from the requirement to include the 
indicator for tied to stock orders upon systemization the situation in 
the first bullet above because devices used for order submissions may 
be modified to automatically apply the tied to stock indicator to QCC 
orders after systemization, in which case the representing Trading 
Permit Holder would not also need to add the indicator to those orders 
upon systemization.\5\ With respect to the situation in the second and 
third bullets above (for which no indicator is required), the stock or 
convertible security component(s) is systematized at the Exchange with 
the option component, so the Exchange is already aware that these 
orders include a stock or convertible security component(s). Thus, the 
Exchange does not believe it is necessary to require Trading Permit 
Holders to add the ``tied to stock'' marking to these orders to 
indicate the stock components for audit trail purposes.
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    \5\ Currently, the Floor Broker Workstation (``FBW'') and PULSe 
workstation would be the only Exchange-approved devices for this 
proposed rule. If additional devices (whether provided by the 
Exchange or a third party) are modified to automatically apply the 
tied to stock indicator to QCC orders when those orders are 
submitted to the Exchange, then the Exchange may ``approve'' those 
devices for purposes of this exclusion.
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    As the proposed definition indicates, a Trading Permit Holder must 
have knowledge of the non-option order. In the example above, the 
customer instructed the Trading Permit Holder to execute a stock-option 
strategy (buy 10,000 shares of stock XYZ and buy 100 XYZ puts) and thus 
had knowledge of the stock component at the time it received the order 
from the customer. Thus, the Trading Permit Holder must mark the put 
order as tied to stock when it systematizes the order.\6\ However, 
assume the customer gave the put order to the Trading Permit Holder and 
separately called another broker at NYSE to execute the stock order 
(but never told the Trading Permit Holder about the related stock 
order), the Trading Permit Holder would have no knowledge of the stock 
component and thus would not be required to include the tied to stock 
marking.
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    \6\ Similar reasoning applies if the Trading Permit Holder had 
developed the trading strategy for its proprietary account.
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    The marking obligation falls on the representing Trading Permit 
Holder. If a Trading Permit Holder is a routing broker and receives an 
option order with no knowledge of a related stock component submitted 
separately for execution, then the routing broker is not required to 
include the tied to stock indicator. Thus, routing brokers do not need 
to take any steps to require non-Trading Permit Holder clients to 
identify orders as tied to stock. If a routing client is a Trading 
Permit Holder, and that Trading Permit Holder client separates the 
stock order (or is aware of a separate non-option order) prior to 
submitting the option order to the routing broker (who ultimately sends 
the order to the Exchange), the Trading Permit Holder client has the 
responsibility to include the tied to stock marking (the order would 
already be marked when received by the routing broker, so the routing 
broker would have no ``re-marking'' obligation). However, while routing 
brokers generally do not populate order information, the Exchange 
believes they do in certain circumstances. In the event a routing 
broker does populate order information and either elects to route

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the non-option order of a trading strategy separately for execution (or 
has knowledge of a separate non-option component), then the routing 
broker must include the tied to stock indicator on the option order.
    An order is not tied to stock if it is not coupled with an order(s) 
for the non-option order at the time of receipt or initiation. An order 
is tied to stock only if part of a trading strategy coupled with at 
least one non-option component, which trading strategy comprised of a 
single investment decision for which the investor has the intent of 
execution of these orders at or near the same time. For example, an 
option order that is received or initiated to hedge a previously 
executed stock transaction is not tied to stock. The option order is a 
separate and subsequent investment decision based on an existing stock 
position; thus, there is no intent for execution of the option order at 
or near the same time as a stock order. Similarly, an option 
transaction or position that is hedged with a subsequently received or 
initiated stock order is not tied to stock. The decision to submit the 
stock order was a subsequent investment decision based on an existing 
option position. Thus, a Trading Permit Holder does not need to include 
a tied to stock indicator on option orders that hedge currently held 
positions (whether in options or non-options). Similarly, a Trading 
Permit Holder does not need to go back and add the indicator to a 
previously executed option order for which it later submits a stock 
order to offset the option position. For example, if a Market-Maker has 
a current option position (i.e., an option quote or order has already 
executed), and then submits a stock order to hedge that option 
position, the original option order is not tied to the subsequent stock 
order and does not require a tied to stock indicator. The Exchange does 
not require identification of these types of hedging strategies for 
audit trail purposes. Trading Permit Holders only need to include the 
tied to stock indicator on orders that are coupled with non-option 
orders as part of a trading strategy comprised of a single investment 
decision for which the intent is to have all components execute at or 
near the same time.
Reporting Requirement
    The proposed rule change adopts Rule 15.2A, which provides that in 
a manner and form prescribed by the Exchange, each Trading Permit 
Holder must, on the business day following the order execution date, 
report to the Exchange the following information for the executed stock 
or convertible security legs of QCC orders, stock-option orders and 
other tied to stock orders that the Trading Permit Holder executed on 
the Exchange that trading day: (a) Time of execution, (b) execution 
quantity, (c) execution price, (d) venue of execution, and (e) any 
other information requested by the Exchange. The proposed rule change 
also allows a Trading Permit Holder to arrange for its clearing firm to 
submit these reports on its behalf; provided that if the clearing firm 
does not report an executed stock order, the Trading Permit Holder will 
be responsible for reporting the information. Allowing clearing firms 
to report the information to the Exchange provides Trading Permit 
Holders with flexibility in the event that clearing firms are better-
positioned to report the information.\7\ However, the ultimate 
responsibility lies with the executing Trading Permit Holder (who would 
also have the responsibility to report the option transaction 
information).
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    \7\ The Exchange provides Market-Makers with similar flexibility 
in Rule 8.9(b) with respect to equity trade reports.
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    Proposed Interpretation and Policy .01 provides that the Exchange 
will designate by Regulatory Circular any determinations \8\ that it 
makes under Rule 15.2A, including the manner and form in which Trading 
Permit Holders should submit these reports to the Exchange.
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    \8\ This includes the implementation date of the reporting 
requirement and any updates or changes to any determinations made by 
the Exchange.
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    Proposed Interpretation and Policy .02 provides that Trading Permit 
Holders do not need to report information pursuant to Rule 15.2A with 
respect (a) stock-option orders submitted to the Exchange for 
electronic processing (such as to the complex order book (COB), the 
complex order auction (COA) or the automated improvement mechanism 
(AIM)) or (b) stock or convertible security orders entered into an 
Exchange-approved device. Because the Exchange routes for execution 
through a routing broker to stock exchanges or trading centers the 
stock components of these orders, the Exchange will already have access 
to the transaction information for the stock components of stock-option 
orders submitted to the Exchange for electronic processing. With 
respect to stock or convertible legs that are entered into an Exchange-
approved device, the Exchange is able to receive the applicable data 
for these orders and thus does not need to also receive the data 
directly from Trading Permit Holders.\9\
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    \9\ The Exchange will announce by Regulatory Circular which 
devices provided by the Exchange (e.g., FBW, PULSe) will be 
``Exchange-approved'' for purposes of this rule. The Exchange will 
also announce by Regulatory Circular how other devices may become 
approved for purposes of this rule.
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    Proposed Interpretation and Policy .03 provides that a Market-Maker 
(or its clearing firm, if applicable) may include the information 
required by proposed Rule 15.2A in the equity reports it must already 
submit to the Exchange pursuant to Rule 8.9(b). Allowing Market-Makers 
to combine these reports will eliminate potential duplicate reports.
    Proposed Interpretation and Policy .04 provides that if a tied to 
stock order executed at multiple options exchanges, a Trading Permit 
Holder (or its clearing firm, as applicable) may report to the exchange 
the information pursuant to Rule 15.2A for the entire stock or 
convertible security component(s) rather than the portion applicable to 
the portion of the order that executed at the Exchange. The Exchange 
believes this flexibility is appropriate given the potential for 
executions in multiple markets. For example, suppose a Trading Permit 
Holder sells 100 calls on XYZ, 20 of which execute at CBOE, and 
contemporaneously purchases 10,000 shares of XYX. CBOE appreciates the 
difficulty in identifying the 2,000 shares of XYZ that ``relate'' to 
the 20 options sold at CBOE. The proposed rule change will provide the 
Exchange with the information it needs while minimizing the burden on 
Trading Permit Holders.
    Proposed Interpretation and Policy .05 provides that in lieu of 
time of execution, the Exchange may accept the time of the trade report 
for the non-option transaction if that time is generally within 90 
seconds of the time of execution. This timing is consistent with Rule 
6.51, which requires Trading Permit Holders to report option 
transaction information within 90 seconds of execution. The time of the 
trade report, if it is generally within this 90-second time frame,\10\ 
will provide the Exchange with sufficient information for surveillance 
purposes while providing Trading Permit Holders with flexibility if 
they determine that the trade report time is easier to provide than 
trade execution time.
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    \10\ Under Rule 6.51, a pattern or practice of late reporting 
options transactions without exceptional circumstances may be 
considered conduct inconsistent with just and equitable principles 
of trades. Similarly, the Exchange may not accept this substitute 
information for non-option transactions from Trading Permit Holders 
that exhibit such a pattern or practice of late reporting, as 
regular late reporting times would not provide the Exchange with the 
information necessary to conduct its surveillances.
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    The Exchange is responsible for regulating its markets and Trading

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Permit Holders. To carry out its regulatory responsibilities, the 
Exchange needs to have sufficient trade data to effectively monitor 
cross-market trading activity, assist with investigations of potential 
violations of federal securities laws and Exchange rules, and perform 
market reconstructions or other analysis necessary to understand 
trading activity. CBOE currently requires Trading Permit Holders to 
submit various execution data in real-time or daily to help the 
Exchange monitor trading activity.\11\ The Exchange believes that as 
use of electronic, interconnected markets continues to increase, access 
to additional cross-market order information, specifically information 
regarding stock trades tied to stock orders, would enhance the 
Exchange's ability to monitor this trading activity and therefore allow 
it to more effectively fulfill its regulatory responsibilities.\12\
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    \11\ See, e.g., Rules 4.13 (requires Trading Permit Holders to 
submit reports to the Exchange related to position limits); 6.24 
(which requires Trading Permit Holders to systemize certain order 
information); 6.51 (requires Trading Permit Holders to report to the 
Exchange certain information regarding transactions on and off the 
Exchange); 8.9 (requires Clearing Trading Permit Holders to report 
to the Exchange executed orders by Market-Makers for the purchase or 
sale of equity securities, as well as opening and closing positions 
in those securities); 15.2 (requires Trading Permit Holders to 
submit to the Exchange a daily report of all transactions); and 15.3 
(requires Trading Permit Holders, upon request of the Exchange, to 
submit a report of the total uncovered short positions in each 
option contract class); see also Rule 15.1, Interpretation and 
Policy .01.
    \12\ The Consolidated Audit Trail (``CAT'') highlights the need 
for self-regulatory organizations to have access to cross-market 
activity. While CBOE appreciates that CAT will capture this stock 
transaction information when implemented, the Exchange believes that 
the implementation of CAT may be several years away and that it 
should continue to enhance its audit trail when it identifies 
opportunities to do so, particularly when the enhancements will 
reduce the long-term costs and burdens on both the Exchange and 
Trading Permit Holders.
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    The Exchange believes the additional information it will receive 
pursuant to proposed Rule 15.2A (including information from orders 
service firms) will enhance its ability to effectively monitor and 
conduct surveillance of the CBOE market and its Trading Permit Holders 
with respect to stock orders whose execution information is not 
electronically captured by its audit trail, and their relevant cross-
market trading activity, and thus to detect and investigate illegal 
activity in a more timely fashion. The Exchange also believes that the 
proposed rule change will improve its ability to conduct more timely 
and accurate trading analyses, market reconstructions, complex 
enforcement inquiries or investigations, and inspections and 
examinations. The proposed marking of tied to stock orders will greatly 
improve the Exchange's ability to tie an executed non-option leg to the 
applicable option order and thus the Exchange's ability to conduct 
surveillances related to these orders, such as surveillances for 
compliance with Regulation SHO and frontrunning rules.
    The Exchange believes the proposed rule change to mark tied to 
stock orders will place minimal additional burden on Trading Permit 
Holders, because the indicator will merely be adding one additional 
notation when entering a tied to stock order. The Exchange also 
believes the proposed rule change to report to the Exchange information 
regarding stock trades will place minimal additional burden on Trading 
Permit Holders, as the Exchange believes Trading Permit Holders keep 
records of their stock transaction information and, to the extent stock 
executions occur on registered exchanges, must report stock transaction 
to stock exchanges. Additionally, as discussed above, Exchange rules 
already require Trading Permit Holders to systemize or report various 
types of information regarding their orders and transactions to the 
Exchange. Further, while Trading Permit Holders may need to perform 
systems work to allow for the indicator, the Exchange believes that 
this proposed rule change will substantially decrease Trading Permit 
Holders' administrative burden in the long-term, in addition to the 
Exchange's administrative burden, in having to otherwise manually 
gather this cross-market information and tie non-option legs to option 
orders in connection with the Exchange's regulatory duties.
    Order service firms,\13\ which are Trading Permit Holders, will be 
subject to the reporting requirements set forth in proposed Rule 15.2A 
with respect to stock transactions that they execute on behalf of 
market-makers on the floor of the Exchange. The proposed rule change 
adds paragraph (e) to Rule 6.77 to include this reporting requirement, 
as the Exchange believes that including all requirements applicable to 
order service firms in a single Exchange rule will benefit these firms.
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    \13\ Order service firms are regular Trading Permit Holder 
organizations that are registered with the Exchange for the purpose 
of taking orders for the purchase or sale of stocks or commodity 
futures contracts (and options thereon) from market-makers on the 
floor of the Exchange and forwarding such orders for execution. Rule 
6.77(a).
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    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.\14\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \15\ 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) \16\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ Id.
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    In particular, the Exchange believes the proposed rule change will 
significantly aid the Exchange's efforts to prevent fraudulent and 
manipulative acts and practices with respect to tied to stock orders, 
because it will greatly improve the Exchange's ability to tie executed 
non-option legs to the applicable option orders that were separately 
submitted for execution. This, along with the additional stock 
transaction information that the Exchange will receive pursuant to 
proposed Rule 15.2A, will provide the Exchange with information that 
will permit CBOE to more efficiently and effectively conduct its 
regulatory surveillances of CBOE trading activity and cross-market 
trading activity, such as surveillances to ensure compliance with 
Regulation SHO and frontrunning rules. Because the proposed rule change 
will enhance the Exchange's surveillance of cross-market trading 
activity, the Exchange believes the proposed rule change will also 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system. In addition, the Exchange believes 
the proposed rule change will promote just

[[Page 28791]]

and equitable principles of trade and protect investors by allowing the 
Exchange to detect and investigate illegal activity in a more timely 
fashion and improving the Exchange's ability to conduct more timely and 
accurate trading analyses, market reconstructions, complex enforcement 
inquiries or investigations, and inspections and examinations. Finally, 
the Exchange believes that the proposed changes to Rule 6.77 will 
benefit investors by including all requirements with respect to stock 
transactions executed by orders service firms, respectively, in a 
single place within the Exchange's rules.

B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act. The proposed rule change will impose the same 
marking and reporting requirements on all Trading Permit Holders with 
respect to tied to stock orders. The Exchange believes that the 
proposed rule change does not impose any burden on intermarket 
competition not necessary or appropriate in furtherance of the purposes 
of the Act. While the proposed rule change may impose requirements with 
respect to tied to stock orders submitted to CBOE that other options 
exchanges do not, the Exchange believes that, as discussed above, any 
additional burden imposed on Trading Permit Holders by this proposed 
rule change is minimal. The Exchange believes that, while the proposed 
rule change is imposing a new marking and reporting requirement on 
Trading Permit Holders, it requires only an indicator with respect to 
the marking requirement and it provides flexibility with respect to the 
reporting requirement (such as allowing clearing firms to report the 
stock transaction information and allowing Market-Makers to combine the 
required information with reports they already provide to the Exchange) 
to minimize any additional burden. The Exchange believes Trading Permit 
Holder already have records of the non-option transaction information 
in order to satisfy other reporting requirements (such as those of 
stock exchanges). The Exchange recognizes that Trading Permit Holders 
may need to perform system work to allow for the indicator and the 
reports. However, the Exchange believes these upfront costs on Trading 
Permit Holders will offset their long-term burden associated with 
providing the Exchange with this information pursuant to individual 
requests. In addition, the Exchange believes that the flexibility 
provided within the proposed reporting rule further reduces any 
additional burdens that the rule imposes on Trading Permit Holder.
    Additionally, the proposed rule change will reduce the Exchange's 
costs associated with identifying and gathering this information. 
Currently, the Exchange is not aware of separate non-option components 
and does not have access to non-option transaction information of 
trading strategies that were not submitted to the Exchange for 
electronic processing. It must gather this information manually, which 
is time-consuming and expensive for both the Exchange and Trading 
Permit Holders. The Exchange believes the benefits that the proposed 
rule change will provide to the Exchange and Trading Permit Holders 
outweigh any minimal additional burden and upfront costs imposed on 
Trading Permit Holders.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposal.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period 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-2014-040 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2014-040. 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-CBOE-2014-040 and should be 
submitted on or before June 9, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-11435 Filed 5-16-14; 8:45 am]
BILLING CODE 8011-01-P