Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving a Proposed Rule Change Relating to Orders That Are Tied to Stock, 49123-49127 [2014-19582]
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Federal Register / Vol. 79, No. 160 / Tuesday, August 19, 2014 / Notices
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[FR Doc. 2014–19707 Filed 8–15–14; 11:15 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72839; File No. SR–CBOE–
2014–040]
For the Commission, by the Division of
Investment Management, under delegated
authority.
Kevin M. O’Neill,
Deputy Secretary.
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Order Approving a
Proposed Rule Change Relating to
Orders That Are Tied to Stock
[FR Doc. 2014–19583 Filed 8–18–14; 8:45 am]
August 13, 2014.
BILLING CODE 8011–01–P
I. Introduction
SECURITIES AND EXCHANGE
COMMISSION
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Sunshine Act Meeting
Notice is hereby given, pursuant to
the provisions of the Government in the
Sunshine Act, Public Law 94–409, that
the Securities and Exchange
Commission will hold a Closed Meeting
on Thursday, August 21, 2014 at 2 p.m.
Commissioners, Counsel to the
Commissioners, the Secretary to the
Commission, and recording secretaries
will attend the Closed Meeting. Certain
staff members who have an interest in
the matters also may be present.
The General Counsel of the
Commission, or her designee, has
certified that, in her opinion, one or
more of the exemptions set forth in 5
U.S.C. 552b(c)(3), (5), (7), 9(B) and (10)
and 17 CFR 200.402(a)(3), (5), (7), 9(ii)
and (10), permit consideration of the
scheduled matter at the Closed Meeting.
Commissioner Gallagher, as duty
officer, voted to consider the items
listed for the Closed Meeting in closed
session.
The subject matter of the Closed
Meeting will be:
Institution and settlement of injunctive
actions;
Institution settlement of administrative
proceedings;
adjudicatory matters; and
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On April 30, 2014, the Chicago Board
Options Exchange, Incorporated (the
‘‘Exchange’’ or ‘‘CBOE’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’), pursuant to
Section 19(b)(1) of the Securities
Exchange Act of 1934 (the ‘‘Act’’) 1 and
Rule 19b–4 thereunder,2 a proposed rule
change regarding option orders that are
tied to an order(s) for the underlying
stock or a security convertible into the
underlying stock. The proposed rule
change was published for comment in
the Federal Register on May 19, 2014.3
The Commission received two comment
letters regarding the proposed rule
change.4 On June 25, 2014, the
Exchange extended the time for
Commission action to August 4, 2014.
On July 15, 2014, the Exchange
submitted a letter responding to the
comment letters.5 The Commission
received an additional comment letter
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 72154
(May 13, 2014), 79 FR 28787 (‘‘Notice’’).
4 See letters to Elizabeth M. Murphy, Secretary,
Commission, from James Ongena, Senior Vice
President and General Counsel, Chicago Stock
Exchange, dated June 9, 2014 (‘‘CHX Letter’’);
Manisha Kimmel, Managing Director, Financial
Information Forum, dated June 13, 2014 (‘‘FIF
Letter I’’).
5 See letter to Elizabeth M. Murphy, Secretary,
Commission, from Laura G. Dickman, Senior
Attorney, CBOE, dated July 15, 2014 (‘‘CBOE Letter
I’’).
2 17
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49123
on July 18, 2014.6 On July 31, 2014, the
Exchange extended the time for
Commission action to August 15, 2014.
On August 6, 2014, the Exchange
submitted a second response letter.7
This order approves the proposed rule
change.
II. Description of the Proposal
The Exchange proposes to define a
‘‘Tied to Stock Order’’ and establish
reporting requirements for Tied to Stock
Orders. Specifically, the Exchange
proposes that an order is tied to stock
(and is, therefore, a Tied to Stock Order)
if, at the time the Trading Permit Holder
(‘‘TPH’’) representing the order on the
Exchange receives or initiates the order,
the TPH 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’’).8
The Exchange notes that a TPH must
have knowledge of the non-option order
for an order to meet the definition of a
Tied to Stock Order.9 As an example,
the Exchange states that if a TPH 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
TPH is not required to mark the order
as a Tied to Stock Order.10 Accordingly,
the Exchange states that routing brokers
do not need to take any steps to require
non-TPH clients to identify orders as
Tied to Stock Orders.11
6 See letter to Elizabeth M. Murphy, Secretary,
Commission, Manisha Kimmel, Managing Director,
Financial Information Forum, dated July 18, 2014
(‘‘FIF Letter II’’).
7 See letter to Elizabeth M. Murphy, Secretary,
Commission, from Laura G. Dickman, Senior
Attorney, CBOE, dated August 6, 2014 (‘‘CBOE
Letter II’’).
8 See proposed CBOE Rule 6.53(y). CBOE notes
that Tied to Stock Orders may be simple or complex
orders and may be part of, among other things, buywrite strategies, married put strategies, delta neutral
strategies, contingent strategies, and other stockoption trading strategies with definitive option
orders and stock orders. See Notice, supra note 3,
at 28788.
9 See Notice, supra note 3, at 28788.
10 See id.
11 See id. The Exchange notes, however, that
where a routing client is a TPH, and that client
separates a related stock order (or is aware of a
separate non-option order) prior to submitting the
option order to the routing broker, the TPH client
has the responsibility to mark the order as a Tied
to Stock Order, and the routing broker would not
have any ‘‘re-marking’’ obligation. See id.
Nevertheless, the Exchange states that where a
routing broker populates order information for
orders and either elects to route 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 mark the
order as a Tied to Stock Order. See id. at 28788–
89.
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In the Notice, the Exchange states that
an order is a Tied to Stock Order only
if it is part of a trading strategy coupled
with at least one non-option component,
which trading strategy comprised a
single investment decision for which
the investor has the intent of execution
of these orders at or near the same
time.12 The Exchange further states that
an option order that is received or
initiated to hedge a previously executed
stock transaction is not a Tied to Stock
Order.13 In such a case, the Exchange
states the option order is a separate and
subsequent investment decision based
on an existing stock position, without
the necessary intent for execution of the
option order at or near the same time as
a non-option order.14
Under the proposal, TPHs
representing Tied to Stock Orders must
include an indicator on each such order
upon systemization unless: (1) The
order is submitted to the Exchange as
part of a qualified contingent cross 15
(‘‘QCC’’) order through an Exchangeapproved device; 16 (2) the order is
submitted to the Exchange for electronic
processing as a stock-option order; 17 (3)
all of the component orders (including
both option and stock or convertible
security components) are systematized
on a single order ticket.18
CBOE proposes certain reporting
requirements for Tied to Stock Orders.
Specifically, the Exchange proposes to
adopt CBOE Rule 15.2A, which
provides that, in a manner and form
prescribed by the Exchange,19 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
12 See
Notice, supra note 3, at 28789.
id.
14 See id. Similarly, the Exchange states that an
option transaction or position that is hedged with
a subsequently received or initiated stock order
would not be a Tied to Stock Order. See id.
15 See CBOE Rule 6.53(u) (defining QCC order).
16 The Exchange notes that the Floor Broker
Workstation and PULSe workstation would
currently be the only Exchange-approved devices
for this proposal. See Notice, supra note 3, at n.5.
17 See CBOE Rule 6.53C(a)(2) (defining a stockoption order).
18 See proposed CBOE Rule 6.53(y)(i)–(iii).
19 The Exchange proposes to announce by
Regulatory Circular any determinations, including
the manner and form of the report it makes
pursuant to CBOE Rule 15.2A. See proposed CBOE
Rule 15.2A, Interpretation and Policies .01. The
Commission notes that the Exchange issued
Regulatory Circular RG14–110, detailing the
proposed technical specifications of CBOE Rule
15.2A. See CBOE Regulatory Circular RG14–110.
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13 See
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execution, (b) execution quantity, (c)
execution price, (d) venue of execution,
and (e) any other information requested
by the Exchange.20 Under the proposal,
TPHs may arrange for their clearing firm
to submit these reports on their behalf;
provided that, if the clearing firm does
not report an executed stock order, the
TPHs would be responsible for reporting
the information.21
Notwithstanding the forgoing, the
Exchange proposes that TPHs do not
need to report information pursuant to
CBOE Rule 15.2A with respect to: (a)
Stock-option orders submitted to the
Exchange for electronic processing, or
(b) stock or convertible security orders
entered into an Exchange-approved
device.22 The Exchange also proposes
that market-makers (or their clearing
firms) may include the information
required by CBOE Rule 15.2A in the
equity reports submitted pursuant to
existing CBOE Rule 8.9(b).23 For Tied to
Stock Orders that are executed on
multiple options exchanges, the
Exchange proposes that TPHs (or their
respective clearing firms) may report to
the Exchange the information required
by CBOE 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.24 Finally, the Exchange
proposes that, in lieu of the time of
execution information required under
proposed CBOE 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.25
The purpose of the proposed rule
change, according to the Exchange, is to
enhance the Exchange’s ability to
effectively monitor and conduct
surveillance of its market and TPHs
relevant cross-market trading activity
with respect to stock orders for which
the execution information is not
electronically captured by the
20 See proposed CBOE Rule 15.2A (Reports of
Execution of Stock Transactions).
21 See id. The Exchange also proposes to amend
CBOE Rule 6.77 governing order service firms to
provide that order service firms must submit reports
pursuant to CBOE Rule 15.2A with respect to the
stock transactions they execute on behalf of marketmakers pursuant to CBOE Rule 6.77. See proposed
CBOE Rule 6.77(e). The Exchange notes that order
service firms are TPHs (and thus would already be
subject to proposed CBOE Rule 15.2A), but believes
it is helpful to include all the requirements
applicable to order service firms in a single
Exchange rule. See Notice, supra note 3, at 28790.
22 See proposed CBOE Rule 15.2A, Interpretation
and Policies .02.
23 See id. at Interpretation and Policies .03.
24 See id. at Interpretation and Policies .04.
25 See id. at Interpretation and Policies .05.
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Exchange’s current audit trail.26 The
Exchange 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.27 By
improving the Exchange’s ability to tie
an executed non-option leg to its
corresponding option order, the
Exchange believes the proposed rule
change will help the Exchange surveil
such orders for compliance with
applicable rules such as Regulation
SHO 28 or front-running rules.29 The
Exchange further believes that the
proposed rule change will substantially
decrease both the Exchange’s and TPHs’
administrative burden in the long-term,
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.30
The Exchange proposes to 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 of the
proposed rule change, with such
implementation date occurring no later
than 180 days following the effective
date.31
III. Summary of Comments and CBOE’s
Response
As previously noted, the Commission
received a total of three comment
letters, from two commenters, on the
proposal.32 One commenter supported
the proposed rule change.33 The other
commenter expressed concerns and
requested more information about
implementing the proposed rule
change.34 CBOE submitted two letters
responding to the comments.35
The first commenter, a national
securities exchange, expressed support
for the Exchange’s proposal.36 The
26 See Notice, supra note 3, at 28790. The
Exchange notes that while the Consolidated Audit
Trail (‘‘CAT’’) will eventually capture the stock
transaction information that is the subject of this
proposal, the Exchange believes that the
implementation of CAT may be several year away
and that the Exchange should continue to enhance
its audit trail when it identifies opportunities to do
so. See id. See also 17 CFR 242.613 (Consolidated
Audit Trail).
27 See Notice, supra note 3, at 28790.
28 17 CFR 242.200 et seq.
29 See Notice, supra note 3, at 28790.
30 See id.
31 See id.
32 See supra notes 4 and 6.
33 See CHX Letter, supra note 4.
34 See FIF Letter I and FIF Letter II, supra notes
4 and 6.
35 See supra notes 5 and 7.
36 See CHX Letter, supra note 4, at 1.
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commenter, while broadly in support of
the proposal, noted that it does not
believe that the proposal sufficiently
addresses the complex task of
identifying and linking the often
numerous component trades of Tied to
Stock Orders executed on different
markets.37 To this end, the commenter
suggested that it would be willing, in
coordination with other market
participants, to mark every execution for
components of a Tied to Stock Order
that was submitted to the commenter’s
exchange with a unique stock leg trade
identifier and to make such information
readily available to its own members
and other market participants.38 In
response, the Exchange stated that it
welcomes the opportunity to coordinate
with other exchanges to create further
enhancements and regulatory
efficiencies, but noted that such efforts
would take time to implement, and the
Exchange believes it is necessary to
proceed with this proposal.39
The second commenter, an industry
group, submitted two comment letters
expressing concerns relating to the
implementation of the proposed rule
change and requesting more information
from the Exchange on such
implementation.40 The first comment
letter requested that the Exchange
release the reporting specifications for
the proposed rule change.41 The
commenter expressed concern that,
without knowing the technical
specifications for the proposed rule
change, it would be difficult to
accurately estimate the amount of time
and effort that would be required of
market participants affected by the
proposed rule change to implement the
proposal.42 In response, the Exchange
directed the commenter to a regulatory
circular that included technical
specifications in the form of proposed
data reporting specifications for reports
of the non-option components of Tied to
Stock Orders.43 The Exchange also
stated that it would announce the
proposed implementation date of the
reporting requirements no later than 90
days following the effective date of the
proposed rule change, which
implementation date would be no later
than 180 days following the effective
date of the proposed rule change. The
Exchange stated it believes this
implementation schedule would
37 See
id.
id.
39 See CBOE Letter I, supra note 5, at 2.
40 See FIF Letter I, supra note 4, and FIF Letter
II, supra note 6.
41 See FIF Letter I, supra note 4, at 2.
42 See id.
43 See CBOE Letter I, supra note 5. See also CBOE
Regulatory Circular RG14–110.
38 See
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provide TPHs with sufficient time to
comply with the proposed rule
change.44
Following the public release of the
technical specifications relating to the
proposed rule change, the second
commenter expressed additional
concerns about the implementation of
the proposal.45 Specifically, the
commenter believed that the technology
build for market participants affected by
the proposed rule change will be
significant.46 The commenter noted a
number of differences with, and
additional information requested by, the
technical specifications to the proposed
rule change as compared to CBOE’s
existing equity reporting format for
market makers under current CBOE
Rule 8.9(b).47
In response to the second commenter,
the Exchange stated that the proposed
rule change will enhance CBOE’s audit
trail, particularly with respect to crossmarket trading activity.48 While the
proposed reporting requirement may
impose upfront costs on Trading Permit
Holders, the Exchange asserted that this
is offset by the future benefits provided
by the proposed rule filing.49 Currently,
Exchange surveillances monitor Trading
Permit Holders’ cross-market trading
activity.50 If the surveillances detect a
potential violation, the Exchange
receives an alert, at which point the
Exchange investigates the trading
activity.51 In connection with these
efforts, the Exchange often requests
transaction information on an ad hoc
basis from Trading Permit Holders.52
According to the Exchange, this is both
costly and time-consuming for Trading
Permit Holders, as well as the Exchange,
due to the inconsistent format of the
information submitted and the manual
processing of such information.53
Regularly, after receiving this
information, the Exchange determines
that there is a reasonable basis to
conclude that no further action is
warranted with respect to that
surveillance alert.54 The Exchange
stated its belief that the information it
will receive through the proposed stock
reports, in connection with the tied to
stock indicator, will significantly reduce
the number of ad hoc requests it must
44 See
CBOE Letter I, supra note 5, at 1–2.
FIF Letter II, supra note 6.
46 See id. at 2.
47 See id. at 2–6. See also, supra note 23 and
accompanying text.
48 See CBOE Letter II, supra note 7 at 2.
49 See id.
50 See id. at 3.
51 See id.
52 See id.
53 See CBOE Letter II, supra note 7 at 3.
54 See id.
45 See
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49125
make from Trading Permit Holders, as it
will already have the stock transaction
information necessary to make a similar
determination with respect that
surveillance alert.55
In response to the second
commenter’s concern about the
technical specifications required by the
proposed rule change, the Exchange
stated that it currently permits Clearing
Trading Permit Holders (or MarketMakers to the extent a Clearing Trading
Permit Holder does not report a trade on
behalf of a Market-Maker) to submit
CBOE Rule 8.9(b) Reports in one of two
different formats (currently, each
Clearing Trading Permit Holder may
determine which format to use).56 The
gap analysis that FIF performed was
done with the ‘‘older format’’ for CBOE
Rule 8.9(b) reports, while the proposed
stock reporting format is substantially
similar to the ‘‘newer format.’’ 57 CBOE
pointed out that it is in the process of
migrating the reports from the older
format to the newer format and intends
to phase out the older format, and the
proposed stock reporting requirement is
based on the newer format (which in the
future will be the required format for
CBOE Rule 8.9(b) reports).58
The Exchange stated that it is
reviewing FIF’s questions regarding
some of the elements of the proposed
stock reporting format and, if it deems
necessary to provide additional detail
regarding those and other elements, may
issue another Regulatory Circular.59 The
Exchange emphasized, however, that
while the proposed reporting
requirement format includes more fields
than the older format of CBOE Rule
8.9(b) reports, neither proposed CBOE
Rule 15.2A, Interpretation and Policy
.03 nor Regulatory Circular RG 14–110
requires Trading Permit Holders to
include those additional fields on CBOE
Rule 8.9(b) reports to the extent MarketMakers rely on proposed Interpretation
and Policy .03 to satisfy the proposed
stock reporting requirement.60
Therefore, regardless of whether a
Market Maker (or its Clearing Trading
Permit Holder) uses the older format or
newer format for CBOE Rule 8.9(b)
reports, those reports will satisfy the
proposed stock reporting requirement
even though they may not include all of
the data elements set forth in Regulatory
Circular RG 14–110.61 According to the
Exchange, to the extent CBOE Rule
55 See
id.
id. at 1.
57 See id. at 2.
58 See id.
59 See CBOE Letter II, supra note 7 at 2.
60 See id.
61 See id.
56 See
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8.9(b) reports include information for all
stock transactions of Market Makers,
Market Makers will have no additional
requirements under proposed CBOE
Rule 15.2A.62
The Exchange acknowledged that
while other Trading Permit Holders that
are not subject to CBOE Rule 8.9(b) may
have to perform system work to comply
with proposed CBOE Rule 15.2A, this
work will likely overlap with system
work related to reports required by
CBOE Rule 17.2, Interpretation and
Policy .04.63 CBOE reiterated that it will
accept feedback from Trading Permit
Holders regarding the timing of the
implementation date, but the Exchange
believed the proposed time frame
provides Trading Permit Holders that
need to perform system work to be able
to comply with the proposed rule
change with sufficient time to do so.64
The second commenter also argued
that there are an insignificant number of
transactions that would qualify as Tied
to Stock Orders that would justify the
time and costs of implementing the
proposed rule change.65 While the
Exchange acknowledged that it does not
know the exact volume of tied to stock
transactions, the Exchange stated that its
self-regulatory obligations require it to
monitor all types of trading activity,
including order types that may
represent a smaller amount of the
Exchange’s volume.66 The Exchange
stated that it has identified an area in
which it can enhance its audit trail, and
the proposed rule change is intended to
implement that enhancement.67 While it
may cover an area that involves a
62 See
id.
id.
64 See id.
65 See FIF Letter II, supra note 6, at 7. The
commenter also noted that the Exchange already
has reporting requirements with respect to QCC
orders, and questioned the need for this proposed
rule change, which, in the commenter’s view,
would only incrementally improve the Exchange’s
audit trail. See id. at 7. The Exchange responded
that while Regulatory Circular 13–102 does include
a reporting requirement for QCC transactions, the
proposed rule change will supersede that
requirement upon implementation to achieve the
enhancements described above. The Exchange
stated that it expects the ‘‘extensive implementation
effort’’ referenced by FIF to ultimately be required
for other regulatory reporting requirements to
which all Trading Permit Holders will be subject
under CBOE Rule 17.2, Interpretation and Policy
.04, as well as the transition from the older format
to newer format of CBOE Rule 8.9(b) Reports. In
addition, the Exchange stated that it expects any
implementation effort to be offset by the ability of
Market-Makers (through their Clearing Trading
Permit Holders if they so choose) to satisfy the
proposed stock reporting requirement through
CBOE Rule 8.9(b) Reports (whether the older or
newer format is used) and fewer costly and timeconsuming ad hoc requests for information. See
CBOE Letter II, supra note 7, at 4.
66 See CBOE Letter II, supra note 7, at 4.
67 See id.
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63 See
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smaller transaction volume, the
Exchange believed the enhancement is
reasonable and appropriate to assist in
its efforts to monitor that area for
potential violations of federal rules and
regulations and Exchange rules.68
The second commenter also expressed
concerns that floor brokers, whom the
commenter believes will be significantly
impacted by the proposed rule change,
may not fully understand the details of
the proposal.69 The Exchange
responded that the rule filing states that
each Trading Permit Holder must
comply with the proposed reporting
requirement for the executed stock or
convertible security legs of ‘‘tied to
stock orders that the Trading Permit
Holder executed on the Exchange that
trading day’’ (emphasis added).70 This
includes Trading Permit Holders that
act as floor brokers.71
The second commenter expressed
support for the other comment letter in
favor of the proposed rule change that
offered to work in coordination with
other market participants to further
enhance all market participants’ ability
to link disparate components of Tied to
Stock Orders executed across various
exchanges and marketplaces.72 The
Exchange stated that it welcomes the
opportunity to coordinate with other
exchanges to identify methods that may
create further enhancements and
regulatory efficiencies with respect to
such activity.73 However, the Exchange
asserted that this type of cooperative
effort would take time to implement.74
The Exchange noted that its current
proposal identifies an opportunity to
enhance CBOE’s audit trail in the shortterm, and it is necessary to proceed with
the rule filing as proposed.75 To the
extent there is an industry-wide effort to
identity further opportunities for
enhancements in the future, the
Exchange stated that it will gladly
cooperate with such an effort and
further modify its rules as appropriate
in coordination with such an effort.76
Finally, the second commenter urged
the Commission to consider requiring
the release of specifications prior to rule
adoption in order to allow for a more
comprehensive evaluation of the
implementation impact of rulemaking as
part of the comment period process.77
CBOE responded to these concerns by
68 See
id.
FIF Letter II, supra note 6, at 7.
70 See CBOE Letter II, supra note 7, at 4.
71 See id.
72 See FIF Letter II, supra note 6, at 7.
73 See CBOE Letter II, supra note 7 at 4.
74 See id.
75 See id.
76 See id.
77 See FIF Letter II, supra note 6, at 8.
69 See
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stating that the proposed rule change is
consistent with current and
longstanding practice of announcing the
form and manner of reporting
requirements by Regulatory Circular to
accommodate the technical detail of and
regular changes to these formats.78 The
Exchange believed that it generally
provides sufficient implementation time
for changes to reporting formats to
accommodate Trading Permit Holders
and will continue to do so.79 According
to the Exchange, technology is
constantly changing, and the Exchange
regularly evaluates ways in which it
may improve reporting formats to both
its and Trading Permit Holders’
benefits.80 When the Exchange
identifies such improvements, it
releases updates to the format.81 If
exchanges were required to submit the
form and manner of reporting
requirements for Commission approval,
the frequency with which they would
need to seek this approval would render
any benefits of improved formats
moot.82 The Exchange stated that it
appreciates any feedback on reporting
formats for its releases, whether it is the
initial format or an update to the
existing format.83 However, like other
rules, the proposed rule change
provides the Exchange with authority to
issue and modify the reporting format
by Regulatory Circular.84
IV. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange.85 In particular, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act,86 which requires,
among other things, that the rules of a
national securities exchange be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest. The
78 See
CBOE Letter II, supra note 7, at 3.
id.
80 See id.
81 See id.
82 See id.
83 See id.
84 See CBOE Letter II, supra note 7, at 3–4.
85 In approving this proposal, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
86 15 U.S.C. 78f(b)(5).
79 See
E:\FR\FM\19AUN1.SGM
19AUN1
Federal Register / Vol. 79, No. 160 / Tuesday, August 19, 2014 / Notices
Commission believes that the stated
objective of the proposal—to obtain
sufficient trade data to effectively
monitor cross-market trading activity—
would further the purposes of the Act.
Specifically, by better enabling the
Exchange to surveil for compliance with
Regulation SHO and frontrunning rules,
the proposal is reasonably designed to
help prevent fraudulent and
manipulative acts and practices and to
protect investors and the public interest.
The Commission notes that the
proposed rule change also allows for a
TPH to arrange for its clearing firm to
report Tied to Stock Orders on its
behalf. The Commission also notes that
the Exchange has stated that regardless
of whether a Market Maker (or its
Clearing Trading Permit Holder) uses
the older format or newer format for
CBOE Rule 8.9(b) reports, those reports
will satisfy the proposed stock reporting
requirement even though they may not
include all of the data elements set forth
in Regulatory Circular RG 14–110.
According to the Exchange, to the extent
CBOE Rule 8.9(b) reports include
information for all stock transactions of
Market Makers, Market Makers will
have no additional requirements under
proposed Rule 15.2A. Under the
proposed rule change, the Commission
believes that it would be reasonable for
the Exchange to anticipate a reduction
in the number of ad hoc requests it must
make from Trading Permit Holders, as
the proposed rule change is designed to
provide the Exchange with the nonoption transaction information
necessary to make a ‘‘no further action
is warranted’’ determination with
respect to a particular surveillance alert.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,87 that the
proposed rule change (SR–CBOE–2014–
040) is approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.88
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–19582 Filed 8–18–14; 8:45 am]
tkelley on DSK3SPTVN1PROD with NOTICES
BILLING CODE 8011–01–P
87 15
88 17
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
VerDate Mar<15>2010
16:30 Aug 18, 2014
Jkt 232001
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72831; File No. SR–
NASDAQ–2014–077]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Relating to
Rebates and Fees in Penny and NonPenny Pilot Options
August 13, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on July 30,
2014, The NASDAQ Stock Market LLC
(‘‘NASDAQ’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I and II below, which Items
have been prepared by NASDAQ. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
NASDAQ proposes to modify Chapter
XV, entitled ‘‘Options Pricing,’’ at
Section 2 governing pricing for
NASDAQ members using the NASDAQ
Options Market (‘‘NOM’’), NASDAQ’s
facility for executing and routing
standardized equity and index options.
Specifically, NOM proposes to: (i)
Amend the Customer 3 Fee for
Removing Liquidity in Penny Pilot
Options; 4 (ii) amend certain Penny Pilot
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 The term ‘‘Customer’’ applies to any transaction
that is identified by a Participant for clearing in the
Customer range at The Options Clearing
Corporation (‘‘OCC’’) which is not for the account
of broker or dealer or for the account of a
‘‘Professional’’ (as that term is defined in Chapter
I, Section 1(a)(48)).
4 The Penny Pilot was established in March 2008
and in October 2009 was expanded and extended
through December 31, 2014. See Securities
Exchange Act Release Nos. 57579 (March 28, 2008),
73 FR 18587 (April 4, 2008) (SR–NASDAQ–2008–
026) (notice of filing and immediate effectiveness
establishing Penny Pilot); 60874 (October 23, 2009),
74 FR 56682 (November 2, 2009) (SR–NASDAQ–
2009–091) (notice of filing and immediate
effectiveness expanding and extending Penny
Pilot); 60965 (November 9, 2009), 74 FR 59292
(November 17, 2009) (SR–NASDAQ–2009–097)
(notice of filing and immediate effectiveness adding
seventy-five classes to Penny Pilot); 61455
(February 1, 2010), 75 FR 6239 (February 8, 2010)
(SR–NASDAQ–2010–013) (notice of filing and
immediate effectiveness adding seventy-five classes
to Penny Pilot); 62029 (May 4, 2010), 75 FR 25895
(May 10, 2010) (SR–NASDAQ–2010–053) (notice of
filing and immediate effectiveness adding seventyfive classes to Penny Pilot); 65969 (December 15,
2011), 76 FR 79268 (December 21, 2011) (SR–
2 17
PO 00000
Frm 00080
Fmt 4703
Sfmt 4703
49127
Options Rebates to Add Liquidity and
Non-Penny Pilot Options Fees for
Adding Liquidity applicable to Firms,5
Non-NOM Market Makers 6 and Broker
Dealers; 7 and (iii) amend NOM Market
Maker 8 Penny Pilot Options Rebates to
Add Liquidity.
While the changes proposed herein
are effective upon filing, the Exchange
has designated that the amendments be
operative on August 1, 2014.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://www.nasdaq.cchwallstreet
.com, at the principal office of the
Exchange, 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.
NASDAQ–2011–169) (notice of filing and
immediate effectiveness extension and replacement
of Penny Pilot); 67325 (June 29, 2012), 77 FR 40127
(July 6, 2012) (SR–NASDAQ–2012–075) (notice of
filing and immediate effectiveness and extension
and replacement of Penny Pilot through December
31, 2012); 68519 (December 21, 2012), 78 FR 136
(January 2, 2013) (SR–NASDAQ–2012–143) (notice
of filing and immediate effectiveness and extension
and replacement of Penny Pilot through June 30,
2013); 69787 (June 18, 2013), 78 FR 37858 (June 24,
2013) (SR–NASDAQ–2013–082); 71105 (December
17, 2013), 78 FR 77530 (December 23, 2013) (SR–
NASDAQ–2013–154) and 72244 (May 23, 2014), 79
FR 31151 (May 30, 2014) (SR–NASDAQ–2014–056).
See also NOM Rules, Chapter VI, Section 5.
5 The term ‘‘Firm’’ or (‘‘F’’) applies to any
transaction that is identified by a Participant for
clearing in the Firm range at OCC.
6 The term ‘‘Non-NOM Market Maker’’ or (‘‘O’’) is
a registered market maker on another options
exchange that is not a NOM Market Maker. A NonNOM Market Maker must append the proper NonNOM Market Maker designation to orders routed to
NOM.
7 The term ‘‘Broker-Dealer’’ or (‘‘B’’) applies to
any transaction which is not subject to any of the
other transaction fees applicable within a particular
category.
8 The term ‘‘NOM Market Maker’’ means a
Participant that has registered as a Market Maker on
NOM pursuant to Chapter VII, Section 2, and must
also remain in good standing pursuant to Chapter
VII, Section 4. In order to receive NOM Market
Maker pricing in all securities, the Participant must
be registered as a NOM Market Maker in at least one
security.
E:\FR\FM\19AUN1.SGM
19AUN1
]]>Agencies
[Federal Register Volume 79, Number 160 (Tuesday, August 19, 2014)]
[Notices]
[Pages 49123-49127]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-19582]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72839; File No. SR-CBOE-2014-040]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Approving a Proposed Rule Change Relating to Orders
That Are Tied to Stock
August 13, 2014.
I. Introduction
On April 30, 2014, the Chicago Board Options Exchange, Incorporated
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change regarding option orders that are
tied to an order(s) for the underlying stock or a security convertible
into the underlying stock. The proposed rule change was published for
comment in the Federal Register on May 19, 2014.\3\ The Commission
received two comment letters regarding the proposed rule change.\4\ On
June 25, 2014, the Exchange extended the time for Commission action to
August 4, 2014. On July 15, 2014, the Exchange submitted a letter
responding to the comment letters.\5\ The Commission received an
additional comment letter on July 18, 2014.\6\ On July 31, 2014, the
Exchange extended the time for Commission action to August 15, 2014. On
August 6, 2014, the Exchange submitted a second response letter.\7\
This order approves the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 72154 (May 13,
2014), 79 FR 28787 (``Notice'').
\4\ See letters to Elizabeth M. Murphy, Secretary, Commission,
from James Ongena, Senior Vice President and General Counsel,
Chicago Stock Exchange, dated June 9, 2014 (``CHX Letter''); Manisha
Kimmel, Managing Director, Financial Information Forum, dated June
13, 2014 (``FIF Letter I'').
\5\ See letter to Elizabeth M. Murphy, Secretary, Commission,
from Laura G. Dickman, Senior Attorney, CBOE, dated July 15, 2014
(``CBOE Letter I'').
\6\ See letter to Elizabeth M. Murphy, Secretary, Commission,
Manisha Kimmel, Managing Director, Financial Information Forum,
dated July 18, 2014 (``FIF Letter II'').
\7\ See letter to Elizabeth M. Murphy, Secretary, Commission,
from Laura G. Dickman, Senior Attorney, CBOE, dated August 6, 2014
(``CBOE Letter II'').
---------------------------------------------------------------------------
II. Description of the Proposal
The Exchange proposes to define a ``Tied to Stock Order'' and
establish reporting requirements for Tied to Stock Orders.
Specifically, the Exchange proposes that an order is tied to stock (and
is, therefore, a Tied to Stock Order) if, at the time the Trading
Permit Holder (``TPH'') representing the order on the Exchange receives
or initiates the order, the TPH 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'').\8\ The Exchange notes that a TPH
must have knowledge of the non-option order for an order to meet the
definition of a Tied to Stock Order.\9\ As an example, the Exchange
states that if a TPH 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 TPH is not required to mark the
order as a Tied to Stock Order.\10\ Accordingly, the Exchange states
that routing brokers do not need to take any steps to require non-TPH
clients to identify orders as Tied to Stock Orders.\11\
---------------------------------------------------------------------------
\8\ See proposed CBOE Rule 6.53(y). CBOE notes that 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. See Notice, supra note 3, at 28788.
\9\ See Notice, supra note 3, at 28788.
\10\ See id.
\11\ See id. The Exchange notes, however, that where a routing
client is a TPH, and that client separates a related stock order (or
is aware of a separate non-option order) prior to submitting the
option order to the routing broker, the TPH client has the
responsibility to mark the order as a Tied to Stock Order, and the
routing broker would not have any ``re-marking'' obligation. See id.
Nevertheless, the Exchange states that where a routing broker
populates order information for orders and either elects to route
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 mark the order as a Tied to Stock Order. See id.
at 28788-89.
---------------------------------------------------------------------------
[[Page 49124]]
In the Notice, the Exchange states that an order is a Tied to Stock
Order only if it is part of a trading strategy coupled with at least
one non-option component, which trading strategy comprised a single
investment decision for which the investor has the intent of execution
of these orders at or near the same time.\12\ The Exchange further
states that an option order that is received or initiated to hedge a
previously executed stock transaction is not a Tied to Stock Order.\13\
In such a case, the Exchange states the option order is a separate and
subsequent investment decision based on an existing stock position,
without the necessary intent for execution of the option order at or
near the same time as a non-option order.\14\
---------------------------------------------------------------------------
\12\ See Notice, supra note 3, at 28789.
\13\ See id.
\14\ See id. Similarly, the Exchange states that an option
transaction or position that is hedged with a subsequently received
or initiated stock order would not be a Tied to Stock Order. See id.
---------------------------------------------------------------------------
Under the proposal, TPHs representing Tied to Stock Orders must
include an indicator on each such order upon systemization unless: (1)
The order is submitted to the Exchange as part of a qualified
contingent cross \15\ (``QCC'') order through an Exchange-approved
device; \16\ (2) the order is submitted to the Exchange for electronic
processing as a stock-option order; \17\ (3) all of the component
orders (including both option and stock or convertible security
components) are systematized on a single order ticket.\18\
---------------------------------------------------------------------------
\15\ See CBOE Rule 6.53(u) (defining QCC order).
\16\ The Exchange notes that the Floor Broker Workstation and
PULSe workstation would currently be the only Exchange-approved
devices for this proposal. See Notice, supra note 3, at n.5.
\17\ See CBOE Rule 6.53C(a)(2) (defining a stock-option order).
\18\ See proposed CBOE Rule 6.53(y)(i)-(iii).
---------------------------------------------------------------------------
CBOE proposes certain reporting requirements for Tied to Stock
Orders. Specifically, the Exchange proposes to adopt CBOE Rule 15.2A,
which provides that, in a manner and form prescribed by the
Exchange,\19\ 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.\20\ Under the proposal, TPHs may arrange for their
clearing firm to submit these reports on their behalf; provided that,
if the clearing firm does not report an executed stock order, the TPHs
would be responsible for reporting the information.\21\
---------------------------------------------------------------------------
\19\ The Exchange proposes to announce by Regulatory Circular
any determinations, including the manner and form of the report it
makes pursuant to CBOE Rule 15.2A. See proposed CBOE Rule 15.2A,
Interpretation and Policies .01. The Commission notes that the
Exchange issued Regulatory Circular RG14-110, detailing the proposed
technical specifications of CBOE Rule 15.2A. See CBOE Regulatory
Circular RG14-110.
\20\ See proposed CBOE Rule 15.2A (Reports of Execution of Stock
Transactions).
\21\ See id. The Exchange also proposes to amend CBOE Rule 6.77
governing order service firms to provide that order service firms
must submit reports pursuant to CBOE Rule 15.2A with respect to the
stock transactions they execute on behalf of market-makers pursuant
to CBOE Rule 6.77. See proposed CBOE Rule 6.77(e). The Exchange
notes that order service firms are TPHs (and thus would already be
subject to proposed CBOE Rule 15.2A), but believes it is helpful to
include all the requirements applicable to order service firms in a
single Exchange rule. See Notice, supra note 3, at 28790.
---------------------------------------------------------------------------
Notwithstanding the forgoing, the Exchange proposes that TPHs do
not need to report information pursuant to CBOE Rule 15.2A with respect
to: (a) Stock-option orders submitted to the Exchange for electronic
processing, or (b) stock or convertible security orders entered into an
Exchange-approved device.\22\ The Exchange also proposes that market-
makers (or their clearing firms) may include the information required
by CBOE Rule 15.2A in the equity reports submitted pursuant to existing
CBOE Rule 8.9(b).\23\ For Tied to Stock Orders that are executed on
multiple options exchanges, the Exchange proposes that TPHs (or their
respective clearing firms) may report to the Exchange the information
required by CBOE 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.\24\ Finally, the Exchange
proposes that, in lieu of the time of execution information required
under proposed CBOE 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.\25\
---------------------------------------------------------------------------
\22\ See proposed CBOE Rule 15.2A, Interpretation and Policies
.02.
\23\ See id. at Interpretation and Policies .03.
\24\ See id. at Interpretation and Policies .04.
\25\ See id. at Interpretation and Policies .05.
---------------------------------------------------------------------------
The purpose of the proposed rule change, according to the Exchange,
is to enhance the Exchange's ability to effectively monitor and conduct
surveillance of its market and TPHs relevant cross-market trading
activity with respect to stock orders for which the execution
information is not electronically captured by the Exchange's current
audit trail.\26\ The Exchange 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.\27\ By improving the
Exchange's ability to tie an executed non-option leg to its
corresponding option order, the Exchange believes the proposed rule
change will help the Exchange surveil such orders for compliance with
applicable rules such as Regulation SHO \28\ or front-running
rules.\29\ The Exchange further believes that the proposed rule change
will substantially decrease both the Exchange's and TPHs'
administrative burden in the long-term, 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.\30\
---------------------------------------------------------------------------
\26\ See Notice, supra note 3, at 28790. The Exchange notes that
while the Consolidated Audit Trail (``CAT'') will eventually capture
the stock transaction information that is the subject of this
proposal, the Exchange believes that the implementation of CAT may
be several year away and that the Exchange should continue to
enhance its audit trail when it identifies opportunities to do so.
See id. See also 17 CFR 242.613 (Consolidated Audit Trail).
\27\ See Notice, supra note 3, at 28790.
\28\ 17 CFR 242.200 et seq.
\29\ See Notice, supra note 3, at 28790.
\30\ See id.
---------------------------------------------------------------------------
The Exchange proposes to 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 of the proposed rule change,
with such implementation date occurring no later than 180 days
following the effective date.\31\
---------------------------------------------------------------------------
\31\ See id.
---------------------------------------------------------------------------
III. Summary of Comments and CBOE's Response
As previously noted, the Commission received a total of three
comment letters, from two commenters, on the proposal.\32\ One
commenter supported the proposed rule change.\33\ The other commenter
expressed concerns and requested more information about implementing
the proposed rule change.\34\ CBOE submitted two letters responding to
the comments.\35\
---------------------------------------------------------------------------
\32\ See supra notes 4 and 6.
\33\ See CHX Letter, supra note 4.
\34\ See FIF Letter I and FIF Letter II, supra notes 4 and 6.
\35\ See supra notes 5 and 7.
---------------------------------------------------------------------------
The first commenter, a national securities exchange, expressed
support for the Exchange's proposal.\36\ The
[[Page 49125]]
commenter, while broadly in support of the proposal, noted that it does
not believe that the proposal sufficiently addresses the complex task
of identifying and linking the often numerous component trades of Tied
to Stock Orders executed on different markets.\37\ To this end, the
commenter suggested that it would be willing, in coordination with
other market participants, to mark every execution for components of a
Tied to Stock Order that was submitted to the commenter's exchange with
a unique stock leg trade identifier and to make such information
readily available to its own members and other market participants.\38\
In response, the Exchange stated that it welcomes the opportunity to
coordinate with other exchanges to create further enhancements and
regulatory efficiencies, but noted that such efforts would take time to
implement, and the Exchange believes it is necessary to proceed with
this proposal.\39\
---------------------------------------------------------------------------
\36\ See CHX Letter, supra note 4, at 1.
\37\ See id.
\38\ See id.
\39\ See CBOE Letter I, supra note 5, at 2.
---------------------------------------------------------------------------
The second commenter, an industry group, submitted two comment
letters expressing concerns relating to the implementation of the
proposed rule change and requesting more information from the Exchange
on such implementation.\40\ The first comment letter requested that the
Exchange release the reporting specifications for the proposed rule
change.\41\ The commenter expressed concern that, without knowing the
technical specifications for the proposed rule change, it would be
difficult to accurately estimate the amount of time and effort that
would be required of market participants affected by the proposed rule
change to implement the proposal.\42\ In response, the Exchange
directed the commenter to a regulatory circular that included technical
specifications in the form of proposed data reporting specifications
for reports of the non-option components of Tied to Stock Orders.\43\
The Exchange also stated that it would announce the proposed
implementation date of the reporting requirements no later than 90 days
following the effective date of the proposed rule change, which
implementation date would be no later than 180 days following the
effective date of the proposed rule change. The Exchange stated it
believes this implementation schedule would provide TPHs with
sufficient time to comply with the proposed rule change.\44\
---------------------------------------------------------------------------
\40\ See FIF Letter I, supra note 4, and FIF Letter II, supra
note 6.
\41\ See FIF Letter I, supra note 4, at 2.
\42\ See id.
\43\ See CBOE Letter I, supra note 5. See also CBOE Regulatory
Circular RG14-110.
\44\ See CBOE Letter I, supra note 5, at 1-2.
---------------------------------------------------------------------------
Following the public release of the technical specifications
relating to the proposed rule change, the second commenter expressed
additional concerns about the implementation of the proposal.\45\
Specifically, the commenter believed that the technology build for
market participants affected by the proposed rule change will be
significant.\46\ The commenter noted a number of differences with, and
additional information requested by, the technical specifications to
the proposed rule change as compared to CBOE's existing equity
reporting format for market makers under current CBOE Rule 8.9(b).\47\
---------------------------------------------------------------------------
\45\ See FIF Letter II, supra note 6.
\46\ See id. at 2.
\47\ See id. at 2-6. See also, supra note 23 and accompanying
text.
---------------------------------------------------------------------------
In response to the second commenter, the Exchange stated that the
proposed rule change will enhance CBOE's audit trail, particularly with
respect to cross-market trading activity.\48\ While the proposed
reporting requirement may impose upfront costs on Trading Permit
Holders, the Exchange asserted that this is offset by the future
benefits provided by the proposed rule filing.\49\ Currently, Exchange
surveillances monitor Trading Permit Holders' cross-market trading
activity.\50\ If the surveillances detect a potential violation, the
Exchange receives an alert, at which point the Exchange investigates
the trading activity.\51\ In connection with these efforts, the
Exchange often requests transaction information on an ad hoc basis from
Trading Permit Holders.\52\ According to the Exchange, this is both
costly and time-consuming for Trading Permit Holders, as well as the
Exchange, due to the inconsistent format of the information submitted
and the manual processing of such information.\53\ Regularly, after
receiving this information, the Exchange determines that there is a
reasonable basis to conclude that no further action is warranted with
respect to that surveillance alert.\54\ The Exchange stated its belief
that the information it will receive through the proposed stock
reports, in connection with the tied to stock indicator, will
significantly reduce the number of ad hoc requests it must make from
Trading Permit Holders, as it will already have the stock transaction
information necessary to make a similar determination with respect that
surveillance alert.\55\
---------------------------------------------------------------------------
\48\ See CBOE Letter II, supra note 7 at 2.
\49\ See id.
\50\ See id. at 3.
\51\ See id.
\52\ See id.
\53\ See CBOE Letter II, supra note 7 at 3.
\54\ See id.
\55\ See id.
---------------------------------------------------------------------------
In response to the second commenter's concern about the technical
specifications required by the proposed rule change, the Exchange
stated that it currently permits Clearing Trading Permit Holders (or
Market-Makers to the extent a Clearing Trading Permit Holder does not
report a trade on behalf of a Market-Maker) to submit CBOE Rule 8.9(b)
Reports in one of two different formats (currently, each Clearing
Trading Permit Holder may determine which format to use).\56\ The gap
analysis that FIF performed was done with the ``older format'' for CBOE
Rule 8.9(b) reports, while the proposed stock reporting format is
substantially similar to the ``newer format.'' \57\ CBOE pointed out
that it is in the process of migrating the reports from the older
format to the newer format and intends to phase out the older format,
and the proposed stock reporting requirement is based on the newer
format (which in the future will be the required format for CBOE Rule
8.9(b) reports).\58\
---------------------------------------------------------------------------
\56\ See id. at 1.
\57\ See id. at 2.
\58\ See id.
---------------------------------------------------------------------------
The Exchange stated that it is reviewing FIF's questions regarding
some of the elements of the proposed stock reporting format and, if it
deems necessary to provide additional detail regarding those and other
elements, may issue another Regulatory Circular.\59\ The Exchange
emphasized, however, that while the proposed reporting requirement
format includes more fields than the older format of CBOE Rule 8.9(b)
reports, neither proposed CBOE Rule 15.2A, Interpretation and Policy
.03 nor Regulatory Circular RG 14-110 requires Trading Permit Holders
to include those additional fields on CBOE Rule 8.9(b) reports to the
extent Market-Makers rely on proposed Interpretation and Policy .03 to
satisfy the proposed stock reporting requirement.\60\ Therefore,
regardless of whether a Market Maker (or its Clearing Trading Permit
Holder) uses the older format or newer format for CBOE Rule 8.9(b)
reports, those reports will satisfy the proposed stock reporting
requirement even though they may not include all of the data elements
set forth in Regulatory Circular RG 14-110.\61\ According to the
Exchange, to the extent CBOE Rule
[[Page 49126]]
8.9(b) reports include information for all stock transactions of Market
Makers, Market Makers will have no additional requirements under
proposed CBOE Rule 15.2A.\62\
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\59\ See CBOE Letter II, supra note 7 at 2.
\60\ See id.
\61\ See id.
\62\ See id.
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The Exchange acknowledged that while other Trading Permit Holders
that are not subject to CBOE Rule 8.9(b) may have to perform system
work to comply with proposed CBOE Rule 15.2A, this work will likely
overlap with system work related to reports required by CBOE Rule 17.2,
Interpretation and Policy .04.\63\ CBOE reiterated that it will accept
feedback from Trading Permit Holders regarding the timing of the
implementation date, but the Exchange believed the proposed time frame
provides Trading Permit Holders that need to perform system work to be
able to comply with the proposed rule change with sufficient time to do
so.\64\
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\63\ See id.
\64\ See id.
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The second commenter also argued that there are an insignificant
number of transactions that would qualify as Tied to Stock Orders that
would justify the time and costs of implementing the proposed rule
change.\65\ While the Exchange acknowledged that it does not know the
exact volume of tied to stock transactions, the Exchange stated that
its self-regulatory obligations require it to monitor all types of
trading activity, including order types that may represent a smaller
amount of the Exchange's volume.\66\ The Exchange stated that it has
identified an area in which it can enhance its audit trail, and the
proposed rule change is intended to implement that enhancement.\67\
While it may cover an area that involves a smaller transaction volume,
the Exchange believed the enhancement is reasonable and appropriate to
assist in its efforts to monitor that area for potential violations of
federal rules and regulations and Exchange rules.\68\
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\65\ See FIF Letter II, supra note 6, at 7. The commenter also
noted that the Exchange already has reporting requirements with
respect to QCC orders, and questioned the need for this proposed
rule change, which, in the commenter's view, would only
incrementally improve the Exchange's audit trail. See id. at 7. The
Exchange responded that while Regulatory Circular 13-102 does
include a reporting requirement for QCC transactions, the proposed
rule change will supersede that requirement upon implementation to
achieve the enhancements described above. The Exchange stated that
it expects the ``extensive implementation effort'' referenced by FIF
to ultimately be required for other regulatory reporting
requirements to which all Trading Permit Holders will be subject
under CBOE Rule 17.2, Interpretation and Policy .04, as well as the
transition from the older format to newer format of CBOE Rule 8.9(b)
Reports. In addition, the Exchange stated that it expects any
implementation effort to be offset by the ability of Market-Makers
(through their Clearing Trading Permit Holders if they so choose) to
satisfy the proposed stock reporting requirement through CBOE Rule
8.9(b) Reports (whether the older or newer format is used) and fewer
costly and time-consuming ad hoc requests for information. See CBOE
Letter II, supra note 7, at 4.
\66\ See CBOE Letter II, supra note 7, at 4.
\67\ See id.
\68\ See id.
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The second commenter also expressed concerns that floor brokers,
whom the commenter believes will be significantly impacted by the
proposed rule change, may not fully understand the details of the
proposal.\69\ The Exchange responded that the rule filing states that
each Trading Permit Holder must comply with the proposed reporting
requirement for the executed stock or convertible security legs of
``tied to stock orders that the Trading Permit Holder executed on the
Exchange that trading day'' (emphasis added).\70\ This includes Trading
Permit Holders that act as floor brokers.\71\
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\69\ See FIF Letter II, supra note 6, at 7.
\70\ See CBOE Letter II, supra note 7, at 4.
\71\ See id.
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The second commenter expressed support for the other comment letter
in favor of the proposed rule change that offered to work in
coordination with other market participants to further enhance all
market participants' ability to link disparate components of Tied to
Stock Orders executed across various exchanges and marketplaces.\72\
The Exchange stated that it welcomes the opportunity to coordinate with
other exchanges to identify methods that may create further
enhancements and regulatory efficiencies with respect to such
activity.\73\ However, the Exchange asserted that this type of
cooperative effort would take time to implement.\74\ The Exchange noted
that its current proposal identifies an opportunity to enhance CBOE's
audit trail in the short-term, and it is necessary to proceed with the
rule filing as proposed.\75\ To the extent there is an industry-wide
effort to identity further opportunities for enhancements in the
future, the Exchange stated that it will gladly cooperate with such an
effort and further modify its rules as appropriate in coordination with
such an effort.\76\
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\72\ See FIF Letter II, supra note 6, at 7.
\73\ See CBOE Letter II, supra note 7 at 4.
\74\ See id.
\75\ See id.
\76\ See id.
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Finally, the second commenter urged the Commission to consider
requiring the release of specifications prior to rule adoption in order
to allow for a more comprehensive evaluation of the implementation
impact of rulemaking as part of the comment period process.\77\ CBOE
responded to these concerns by stating that the proposed rule change is
consistent with current and longstanding practice of announcing the
form and manner of reporting requirements by Regulatory Circular to
accommodate the technical detail of and regular changes to these
formats.\78\ The Exchange believed that it generally provides
sufficient implementation time for changes to reporting formats to
accommodate Trading Permit Holders and will continue to do so.\79\
According to the Exchange, technology is constantly changing, and the
Exchange regularly evaluates ways in which it may improve reporting
formats to both its and Trading Permit Holders' benefits.\80\ When the
Exchange identifies such improvements, it releases updates to the
format.\81\ If exchanges were required to submit the form and manner of
reporting requirements for Commission approval, the frequency with
which they would need to seek this approval would render any benefits
of improved formats moot.\82\ The Exchange stated that it appreciates
any feedback on reporting formats for its releases, whether it is the
initial format or an update to the existing format.\83\ However, like
other rules, the proposed rule change provides the Exchange with
authority to issue and modify the reporting format by Regulatory
Circular.\84\
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\77\ See FIF Letter II, supra note 6, at 8.
\78\ See CBOE Letter II, supra note 7, at 3.
\79\ See id.
\80\ See id.
\81\ See id.
\82\ See id.
\83\ See id.
\84\ See CBOE Letter II, supra note 7, at 3-4.
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IV. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\85\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\86\ which
requires, among other things, that the rules of a national securities
exchange be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest. The
[[Page 49127]]
Commission believes that the stated objective of the proposal--to
obtain sufficient trade data to effectively monitor cross-market
trading activity--would further the purposes of the Act. Specifically,
by better enabling the Exchange to surveil for compliance with
Regulation SHO and frontrunning rules, the proposal is reasonably
designed to help prevent fraudulent and manipulative acts and practices
and to protect investors and the public interest.
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\85\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\86\ 15 U.S.C. 78f(b)(5).
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The Commission notes that the proposed rule change also allows for
a TPH to arrange for its clearing firm to report Tied to Stock Orders
on its behalf. The Commission also notes that the Exchange has stated
that regardless of whether a Market Maker (or its Clearing Trading
Permit Holder) uses the older format or newer format for CBOE Rule
8.9(b) reports, those reports will satisfy the proposed stock reporting
requirement even though they may not include all of the data elements
set forth in Regulatory Circular RG 14-110. According to the Exchange,
to the extent CBOE Rule 8.9(b) reports include information for all
stock transactions of Market Makers, Market Makers will have no
additional requirements under proposed Rule 15.2A. Under the proposed
rule change, the Commission believes that it would be reasonable for
the Exchange to anticipate a reduction in the number of ad hoc requests
it must make from Trading Permit Holders, as the proposed rule change
is designed to provide the Exchange with the non-option transaction
information necessary to make a ``no further action is warranted''
determination with respect to a particular surveillance alert.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\87\ that the proposed rule change (SR-CBOE-2014-040) is approved.
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\87\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\88\
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\88\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-19582 Filed 8-18-14; 8:45 am]
BILLING CODE 8011-01-P
