Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of Amendment Nos. 1 and 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To Adopt Extended Trading Hours for SPX and VIX, 72044-72049 [2014-28475]
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Federal Register / Vol. 79, No. 233 / Thursday, December 4, 2014 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73704; File No. SR–CBOE–
2014–062]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of
Amendment Nos. 1 and 2 and Order
Granting Accelerated Approval of a
Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2, To Adopt
Extended Trading Hours for SPX and
VIX
November 28, 2014.
I. Introduction
On August 26, 2014, Chicago Board
Options Exchange, Incorporated (the
‘‘Exchange’’ or ‘‘CBOE’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) a proposed rule
change pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2 to
establish a separate early morning
trading session specifically for options
on the S&P 500 Index (‘‘SPX’’) and
CBOE Volatility Index (‘‘VIX’’). The
proposed rule change was published for
comment in the Federal Register on
September 12, 2014.3 On October 24,
2014, CBOE filed Amendment No. 1 to
the proposed rule change and also
granted the Commission an extension of
time to consider its proposal to
November 3, 2014.4 On October 31,
2014, CBOE granted the Commission an
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1 15
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 73017
(September 8, 2014), 79 FR 54758 (September 12,
2014) (‘‘Notice’’).
4 CBOE filed Amendment No. 1 to the proposed
rule change to (i) amend the requirements for
foreign Trading Permit Holders to ensure, in part,
that foreign Trading Permit Holders will be able to
provide the Exchange with information, including
their books and records; (ii) clarify why VIX index
values will not be calculated and disseminated
during Extended Trading Hours; (iii) clarify that
CBOE will make available the number of Trading
Permits during Extended Trading Hours to comply
with Section 6(c)(4) of the Act; (iv) represent that
the Exchange will establish procedures to ensure
that Trading Permit Holders only utilize clearing
brokers that are authorized by OCC for clearing
during Extended Trading Hours; (v) represent that
CBOE’s systems are designed to prohibit
unauthorized access; and (vi) correct an internal
cross-reference in proposed CBOE Rule
6.1A(e)(iii)(B). See Amendment No. 1 to File No.
SR–CBOE–2014–062, dated October 24, 2014
(‘‘Amendment No. 1’’). To promote transparency of
its proposed amendment, when CBOE filed
Amendment No. 1 with the Commission, it also
submitted Amendment No. 1 as a comment letter
to the file, which the Commission posted on its
Web site and placed in the public comment file for
SR–CBOE–2014–062. The Exchange also posted a
copy of its Amendment No. 1 on its Web site at
https://www.cboe.com/publish/RuleFilingsSEC/SRCBOE-2014-062.a1.pdf when it filed the
amendment with the Commission.
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additional extension of time until
November 24, 2014. On November 21,
2014, CBOE filed Amendment No. 2 to
the proposed rule change and also
granted the Commission a further
extension of time to consider its
proposal to December 3, 2014.5 The
Commission received no substantive
comments on the proposal.6 The
Commission is publishing this notice to
solicit comments on Amendment Nos. 1
and 2 from interested persons and is
approving the proposed rule change, as
modified by Amendment Nos. 1 and 2,
on an accelerated basis.
II. Description of the Proposed Rule
Change, as Modified by Amendment
Nos. 1 and 2 7
Currently, transactions in index
options may be effected on the
Exchange generally between 8:30 a.m.
and 3:15 p.m.,8 Monday through Friday
(‘‘Regular Trading Hours’’). CBOE has
proposed to adopt rules that will allow
it to conduct a separate, fully-electronic
trading session from 2:00 a.m. to 8:15
a.m. Monday through Friday (‘‘Extended
Trading Hours’’) for SPX and VIX, two
index options that are exclusively-listed
on CBOE. According to the Exchange, it
is proposing Extended Trading Hours to
meet demand from investors who want
to trade these two products outside of
Regular Trading Hours.9
Under the proposal, Extended Trading
Hours will be a separate trading session
from Regular Trading Hours and there
will be no carryover from one trading
session to the other and no interaction
between Extended Trading Hours and
5 CBOE filed Amendment No. 2 to the proposed
rule change to delete proposed rule text in Exhibit
5 and delete related parts in the purpose and
statutory basis sections of its Form 19b–4
submission, as well as Exhibit 1 and Item 8 in the
Form 19b–4 (each as amended by Amendment No.
1), all of which related to the removal of proposed
requirements that would have applied to foreign
Trading Permit Holders. See Amendment No. 2 to
File No. SR–CBOE–2014–062, dated November 21,
2014 (‘‘Amendment No. 2’’). To promote
transparency of its proposed amendment, when
CBOE filed Amendment No. 2 with the
Commission, it also submitted Amendment No. 2 as
a comment letter to the file, which the Commission
posted on its Web site and placed in the public
comment file for SR–CBOE–2014–062. The
Exchange also posted a copy of its Amendment No.
2 on its Web site at https://www.cboe.com/publish/
RuleFilingsSEC/SR-CBOE-2014-062.a2.pdf when it
filed the amendment with the Commission.
6 See infra notes 4 and 5 (noting that when CBOE
submitted each Amendment to its proposal, it also
submitted them as a comment letter to the file to
promote the broad dissemination of its
Amendments).
7 A full description of the proposed rule change
can be found in the Notice. See Notice, supra note
3.
8 See CBOE Rule 24.6. All times in this order refer
to Chicago time.
9 See Notice, supra note 3 at 54758.
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Regular Trading Hours.10 Extended
Trading Hours will operate using
separate Exchange servers 11 and
hardware from those used during
Regular Trading Hours.12 Accordingly,
the electronic order book used during
Regular Trading Hours will not be
connected to the electronic order book
used during Extended Trading Hours,
and orders and quotes will not interact
between the two sessions.13 Rather, all
orders will be cancelled at the end of
each Extended Trading Hours session.14
During Extended Trading Hours, all
Exchange rules will apply, except as set
forth in proposed CBOE Rule 6.1A
(Extended Trading Hours), and except
for CBOE rules that by their terms are
inapplicable during Extended Trading
Hours.15 For example, since all trading
during Extended Trading Hours will be
electronic on the Hybrid Trading
System,16 all CBOE rules relating to
open outcry trading and the Hybrid 3.0
System will be inapplicable to Extended
Trading Hours.17 However, CBOE rules
relating to business conduct, doing
business with the public, due diligence,
and best execution will apply during
Extended Trading Hours.18
Access. As is true during Regular
Trading Hours, only authorized Trading
Permit Holders, their nominees, and
their associated persons will be able to
access CBOE’s electronic trading
system.19 However, trading privileges
will be separate and distinct for
10 See
id.
11 Bandwidth
packets will be sold separately for
Regular Trading Hours and Extended Trading
Hours. See id. at 54766. Also, while the same
telecommunications lines may be used for both
Regular and Extended Trading Hours, those lines
will be connected to a separate application server
at the Exchange to trade during Extended Trading
Hours. See id. at note 45.
12 See id. at 54758.
13 See id. at 54759.
14 See id. at 54763.
15 See proposed CBOE Rule 6.1A(a).
16 According to the Exchange, SPX currently
trades on the Hybrid 3.0 trading platform during
Regular Trading Hours (except that the weekly SPX
series trade on the Hybrid trading platform during
Regular Trading Hours). Pursuant to proposed Rule
6.1A(b), SPX will trade on the Hybrid trading
platform (and not the Hybrid 3.0 trading platform)
during Extended Trading Hours and thus will trade
pursuant to rules applicable to the Hybrid trading
platform (rather than the Hybrid 3.0 trading
platform) during Extended Trading Hours. See
Notice, supra note 3 at note 18.
17 See id. at 54759.
18 See id. at note 13.
19 See id. at 54760. This requirement will apply
to any non-U.S. based person seeking access to the
Extended Trading Hours session. Persons that are
not Trading Permit Holders, such as employees of
affiliates of Trading Permit Holders located outside
of the United States, will not have direct access to
the Exchange, and thus their orders and quotes
must be submitted to the Exchange through a
Trading Permit Holder, subject to applicable laws,
rules, and regulations. See id. at note 59.
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Extended Trading Hours. In other
words, a broker-dealer that is not
currently a CBOE member, as well as a
current CBOE Trading Permit Holder
(for Regular Trading Hours) will both
need to obtain a separate Extended
Trading Hours Trading Permit if they
want to trade during CBOE’s new
Extended Trading Hours session.20 The
separate nature of access for the two
trading sessions means that Trading
Permit Holders will need to use separate
log-ins for Extended versus Regular
Trading Hours.21 In this respect, CBOE’s
systems will be designed to prevent
unauthorized access by persons not
eligible to trade on CBOE during the
Extended Trading Hours session.22
Market Makers. CBOE’s proposal
contemplates participation from Market
Makers in the Extended Trading Hours
session. To be eligible, Market Makers
will need to obtain a separate Extended
Trading Hours Trading Permit and also
will need to request a separate
appointment during Extended Trading
Hours.23 During Extended Trading
Hours, Market Makers will be required
to maintain continuous electronic
quotes in 60% of the non-adjusted
options series of the Market Maker’s
appointed classes that expire in less
than nine months for 90% of the time
when the Market Maker is quoting in a
class.24 In addition, the Exchange’s
proposal gives it the authority to
determine to have no bid/ask
differential requirement in the Extended
Trading Hours session.25 Further,
Market Makers generally will be able to
use the same Exchange functionality
during Extended Trading Hours that is
available to them during Regular
Trading Hours. For example, Market
Makers may elect to use a quote risk
monitor (‘‘QRM’’) mechanism during
20 See proposed CBOE Rule 6.1A(d). The
Exchange represents that it will make available a
sufficient number of Trading Permits during
Extended Trading Hours to comply with Section
6(c)(4) of the Act. See Amendment No. 1, supra
note 4. The Exchange intends to set the initial limit
of Extended Trading Hours Trading Permits at 900
Market Maker Trading Permits and 150 Electronic
Access Trading Permits (the same total number as
available during Regular Trading Hours). See id.
21 See Notice, supra note 3 at 54765.
22 See Amendment No. 1, supra note 4.
23 See proposed CBOE Rule 6.1A(e). For Extended
Trading Hours, the appointment cost for VIX will
be 0.5 and for SPX it also will be 0.5. Each Extended
Trading Hours Trading Permit will have an
appointment credit of 1.0 (the same as a Regular
Trading Hours Trading Permit), so at the launch of
Extended Trading Hours, a Market Maker will only
need to hold one Extended Trading Hours Trading
Permit if it wants to quote in both SPX and VIX
during Extended Trading Hours. See Notice, supra
note 3 at 54760. See also proposed CBOE Rule
6.1A(e)(i).
24 See proposed CBOE Rule 6.1A(e)(ii).
25 See id.
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Extended Trading Hours. Although, a
Market Maker that elects to use QRM for
both Regular Trading Hours and
Extended Trading Hours will need to
establish parameters separately for each
trading session (even though a Market
Maker may elect to use the same
parameters for both trading sessions or
use QRM for one trading session and not
the other).26
LMMs. The Exchange also may
approve one or more Market Makers to
act as Lead Market Makers (‘‘LMMs’’) in
each class during Extended Trading
Hours.27 Unlike Regular Trading Hours,
however, LMMs will only be required to
comply with the continuous quoting
obligations and other obligations
applicable to regular Market Makers in
their assigned classes.28 Consequently,
LMMs will not be entitled to receive a
participation entitlement in the
Extended Hours Session.29 However, if
an LMM meets specific performance
criteria during a month, it will be
eligible to receive a specified monetary
incentive from CBOE. Specifically, if an
LMM: (1) Provides continuous
electronic quotes in at least the lesser of
99% of the non-adjusted series or 100%
of the non-adjusted series minus one
call-put pair in an Extended Trading
Hours allocated class (excluding intraday add-on series on the day during
which such series are added for trading)
during Extended Trading Hours in a
given month and (2) ensures an opening
of the same percentage of series by 2:05
a.m. for at least 90% of the trading days
during Extended Trading Hours in a
given month, the LMM will be eligible
to receive a rebate for that month in an
amount set forth in the Exchange Fees
Schedule.30 For purposes of this
heightened continuous quoting
standard, an LMM will be deemed to
have provided continuous electronic
quotes during Extended Trading Hours
if the LMM provides electronic twosided quotes for 90% of the time in
Extended Trading Hours in a given
month.31
26 See
proposed CBOE Rule 8.18.
proposed CBOE Rule 6.1A(e)(iii)(A).
28 See proposed CBOE Rule 6.1A(e)(iii)(B).
29 See, e.g., CBOE Rules 6.45B and 8.15B
(concerning participation entitlements).
30 CBOE’s adoption of any such rebate will be
subject to the rule filing process of Section 19 of
the Act. CBOE is not proposing any rebate in this
current proposal.
31 See proposed CBOE Rule 6.1A(e)(iii)(C).
Because the heightened quoting standard for LMMs
in the Extended Hours Trading session is applicable
only to a fee rebate and not a participation
entitlement, the monthly measuring period is
separate and distinct from the heightened quoting
standard in the Regular Trading Hours session,
which is measured on a daily basis. See Notice,
supra note 3 at 54762.
27 See
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72045
Trading. During Extended Trading
Hours, the Exchange proposes to limit
the available order types that may be
entered into the system. Specifically, in
recognition of the expected reduced
liquidity, higher volatility, and wider
spreads during Extended Trading Hours,
the Exchange will not allow market
orders, market-on-close orders, stop
orders, and good-til-cancelled orders.32
Otherwise, order processing during
Extended Trading Hours will operate in
the same manner as it does for Regular
Trading Hours and there will be no
change to ranking, display, or allocation
algorithms rules.33 Moreover, there will
be no change between Regular and
Extended Trading Hours in regards to
the processes for clearing, settlement,
exercise, and expiration.34 In addition,
the Exchange will report the best bid
and offer and executed trades to the
Options Price Reporting Authority
(‘‘OPRA’’) during Extended Trading
Hours in the same manner that it reports
that information to OPRA during
Regular Trading Hours.35
The Exchange also may halt trading
during Extended Trading Hours in the
interests of a fair and orderly market
largely in the same manner that it can
during Regular Trading Hours.36 For
32 See Notice, supra note 3 at 54763. See also
proposed CBOE Rule 6.1A(f).
33 See Notice, supra note 3 at 54765. The
Exchange also intends to activate the complex order
auction and the automated improvement
mechanism (‘‘AIM’’) auction during Extended
Trading Hours. These auctions will operate in the
same manner as they do during Regular Trading
Hours, except with respect to AIM, the requirement
that three Market Makers must be quoting to initiate
an AIM auction will not apply during Extended
Trading Hours. See id. at note 43.
34 See Notice, supra note 3 at 54765. According
to the Exchange, the Options Clearing Corporation
has stated that it will be able to clear and settle all
transactions and handle exercises of options during
Extended Trading Hours. See id. at note 48. In
addition, the Exchange has represented that it will
work with OCC to establish procedures in
connection with on-boarding Trading Permit
Holders to ensure that Extended Trading Hours
Trading Permit Holders only utilize clearing brokers
that are properly authorized by OCC for operating
during Extended Trading Hours. See Amendment
No. 1, supra note 4.
35 See Notice, supra note 3 at 54765. The operator
of OPRA has informed CBOE that it intends to add
a modifier to the disseminated information during
Extended Trading Hours. See id. at note 57. The
Exchange also will disseminate Extended Trading
Hours data through its proprietary data feed in the
same format and manner that it distributes data
during Regular Trading Hours. See id. at 54765.
Any fees to be charged by CBOE for the Extended
Trading Hours proprietary data feed will be subject
to a separate fee change filing. See id. at note 49.
36 See proposed CBOE Rule 24.7(d). Further,
clearly erroneous trade breaks during Extended
Trading Hours will be processed in the same
manner as Regular Trading Hours, except that
during Extended Trading Hours, only two Exchange
Officials that are members of the Exchange’s staff
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example, if there was a marketwide
trading halt at the end of the prior
trading day, CBOE could consider that
as an ‘‘unusual condition’’ in
determining whether to halt trading
during the following day’s Extended
Trading Hours session.37 Separately,
CBOE proposed to amend its trade halt
rule to provide that it also may consider
whether trading in related futures has
been halted as a factor in determining
whether to halt trading in an option.38
Surveillance and Disclosures. The
Exchange has represented that it will
perform all necessary surveillance
coverage and will have appropriately
trained and qualified regulatory and
operations staff in place during
Extended Trading Hours to satisfy its
regulatory obligations and administer
the Extended Trading Hours session in
real time.39 In addition, because of the
differences in the nature of the market
and trading between Regular and
Extended Trading Hours, CBOE will
require Trading Permit Holders to
disclose to customers that trading
during Extended Trading Hours may
involve material risks, including, in
part, the possibility of lower liquidity,
higher volatility, and lack of an updated
underlying index or portfolio value,40
will be necessary to make such a determination. See
Notice, supra note 3 at 54765.
37 See Notice, supra note 3 at 54766; and
proposed CBOE Rule 24.7(d). Also, under the
proposed rule change, CBOE will not have to
consider during Extended Trading Hours existing
factors that are not applicable to the Extended
session, such as (i) the extent to which trading is
not occurring in the stocks or options underlying
the index; (ii) the current calculation of the index
derived from the current market prices of the stocks
is not available; (iii) the ‘‘current index level’’ for
a volatility index is not available or the cash (spot)
value for a volatility index is not available; and (iv)
the extent to which the rotation has been completed
or other factors regarding the status of the rotation,
in determining whether to halt trading during
Extended Trading Hours. See Notice, supra note 3
at note 53; and proposed CBOE Rule 24.7(d).
38 See proposed CBOE Rule 24.7, Interpretation
and Policies .01. Currently, CBOE’s rule allows it
to consider the activation of price limits on futures
exchanges when determining whether to halt
trading in an index options. The proposed change
will allow CBOE to consider any halt in futures
trading, including halts called in situations other
than in response to the activation of a price limit.
See Notice, supra note 3 at 54765.
39 See Notice, supra note 3 at 54765 and 54767.
40 CBOE is the index calculator for the VIX.
According to CBOE, the accuracy of the calculation
for VIX indicative (or spot) values depends upon
the quality of bid and offer quotes for constituent
SPX option series. CBOE is unsure whether the SPX
option quotes displayed during Extended Trading
Hours will be sufficient to calculate accurate and
meaningful VIX indicative quote values during
Extended Hours. Accordingly, CBOE has
determined to not calculate VIX spot values during
Extended Trading Hours. See Amendment No. 1,
supra note 4. However, as the Exchange and market
participants gain experience with the Extended
Trading Hours session and if activity and market
maker participation increases, the Commission
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17:23 Dec 03, 2014
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prior to accepting an order from a
customer for execution during Extended
Trading Hours.41 The Exchange also
will distribute a Regulatory Circular
detailing, among other things, some of
the risks of trading during Extended
Trading Hours.42
III. Discussion and Commission
Findings
After careful consideration, the
Commission finds that the proposed
rule change, as modified by Amendment
Nos. 1 and 2, is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
a national securities exchange.43 In
particular, the Commission finds that
the proposed rule change, as amended,
is consistent with Section 6(b)(5) of the
Act,44 which requires, among other
things, 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. While no other options
exchange is currently open for trading
outside of Regular Trading Hours, the
Commission notes that it has previously
approved extended trading hours in the
cash equities markets.45
The proposed rule change, as
modified by Amendment Nos. 1 and 2,
will allow investors additional trading
opportunities to trade in two CBOE
exclusively-listed products outside of
CBOE’s current Regular Trading Hours.
The hours of CBOE’s proposed
Extended Trading Hours roughly
coincide with the regular trading hours
expects CBOE to reevaluate this decision and
consider disseminating a VIX index value if and
when quoting activity becomes sufficient to allow
CBOE to calculate accurate and meaningful VIX
index values during the Extended Trading Hours
session.
41 See proposed CBOE Rule 6.1A(j).
42 See Notice, supra note 3 at 54764.
43 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
44 15 U.S.C. 78f(b)(5).
45 See e.g., Securities Exchange Act Release Nos.
29237 (May 24, 1991), 56 FR 24853 (May 31, 1991)
(SR–NYSE–90–52 and SR–NYSE–90–53) (approving
an off-hours trading facility on a pilot basis); 42004
(October 13, 1999), 64 FR 56548 (October 20, 1999)
(SR–CHX–99–16) (approving extended trading
hours on a pilot basis); and 56985 (December 18,
2007), 72 FR 73388 (December 27, 2007) (SR–
NASDAQ–2007–098) (approving the trading of
certain securities outside of regular market hours).
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Fmt 4703
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in Europe, and therefore CBOE’s
proposal may be of particular interest to
traders located in non-U.S. jurisdictions.
At the same time, CBOE has proposed
certain limitations and protections on
access and trading during Extended
Trading Hours that are designed to
promote just and equitable principles of
trade and foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities.
For example, as discussed above, only
authorized Trading Permit Holders,
their nominees, and their associated
persons will be able to access the CBOE
trading system during Extended Trading
Hours, and CBOE’s system is designed
to allow CBOE to restrict unauthorized
access to its systems in Extended
Trading Hours.46 Specifically, CBOE is
requiring a new class of trading permits
for Extended Trading Hours with their
own unique log-in ID, and only persons
in possession of those credentials will
have access to CBOE’s systems to trade
during Extended Trading Hours.
Moreover, consistent with fostering
cooperation and coordination with
persons engaged in clearing and settling
transactions in securities, CBOE has
represented that it will work with OCC
to establish procedures in connection
with on-boarding Extended Trading
Hours permit holders to ensure that
Trading Permit Holders only utilize
clearing brokers that have been properly
authorized by OCC for operating during
Extended Trading Hours.47 This process
is designed to help assure the orderly
functioning of the clearing process in
Extended Trading Hours by avoiding
any risk associated with a CBOE permit
holder trading through a clearing broker
during Extended Trading Hours if such
clearing broker does not, in OCC’s
opinion, meet OCC’s standards for
clearing outside of regular trading
hours.
In addition, as discussed above, all of
CBOE’s rules, with certain exceptions,
will continue to apply during Extended
Trading Hours. These rules, among
other things, prohibit Trading Permit
Holders from engaging in acts or
practices inconsistent with just and
equitable principles of trade, making
any willful or material
misrepresentation or omission in any
46 The Commission notes that in order to be a
Trading Permit Holder, an individual or
organization must be, in part, registered as a broker
or dealer pursuant to Section 15 of the Act or be
associated with a Trading Permit Holder
organization that is registered as a broker or dealer
pursuant to Section 15 of the Act. See CBOE Rules
3.2 and 3.3.
47 See Amendment No. 1, supra note 4.
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application, report, or other
communication to the Exchange or the
OCC, and from effecting or inducing the
purchase, sale, or exercise of any
security for the purpose of manipulating
the price or activity of the security,48 as
well as impose best execution
requirements and prohibit trading ahead
of customer orders.49 In addition, the
Exchange has represented that it will
revise its surveillance procedures to
incorporate transactions that occur and
orders and quotations that are submitted
during Extended Trading Hours and
perform all necessary surveillance
coverage during Extended Trading
Hours.50 Importantly, CBOE has
represented that it will have a sufficient
number of appropriately qualified staff
on-site and otherwise available as
necessary during Extended Trading
Hours to provide support and handle
any operations and regulatory issues
that may arise.51 CBOE’s represented
commitment to adequately staff its
operations during Extended Trading
Hours is important to assure the
integrity of CBOE’s operations during
those early morning hours and
necessary to assure that CBOE is able to
carry out and enforce its rules during
this session, including rules relating to
trading halts and obvious error trades,
as well as thoroughly monitor trading
and the operations of its trading
systems. Accordingly, the Commission
believes that CBOE has designed its
Extended Trading Hours session to
promote just and equitable principles of
trade and prevent fraudulent and
manipulative acts and practices to the
same extent that its Regular Trading
Hours session has been so designed.
The Commission also believes that
CBOE’s disclosure requirement that
obligates members to make certain
written disclosures to customers
regarding material trading risks that may
exist during Extended Trading Hours is
consistent with the protection of
investors.52 Specifically, Trading Permit
Holders will be required to make certain
disclosures to customers regarding the
risk of lower liquidity, higher volatility,
48 See Chapter IV (Business Conduct) of CBOE’s
rules.
49 See CBOE Rules 53.2 (Prohibition Against
Trading Ahead of Customer Orders) and 53.8 (Best
Execution and Interpositioning). The Commission
notes that CBOE Rule 53.2, Interpretations and
Policies .07, specifically provides that Trading
Permit Holders may limit the life of a customer
order to the period of normal market hours.
However, if the customer and Trading Permit
Holder agree to the processing of the customer’s
order outside normal market hours, the protections
of the rule will apply to that customer’s order for
the entirety of the agreed upon executable time.
50 See Notice, supra note 3 at 54765 and 54767.
51 See id.
52 See proposed CBOE Rule 6.1A(j).
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and wider spreads during Extended
Trading Hours as compared to Regular
Trading Hours.53 The Commission
believes that such disclosures should
help ensure that customers are
reasonably informed about the specific
risks associated with trading in the noncore market before they decide to
submit their first order in the Extended
Trading Hours session. Further, these
requirements are designed to mitigate,
to the extent possible, the likelihood of
investor confusion regarding the
significant differences between the
character of the market typical of
Regular and Extended Trading Hours
sessions.
The Commission further believes that
CBOE’s proposal to use a fully
electronic trading platform during
Extended Trading Hours that shares
most of the functionality of its Hybrid
System is reasonable. As discussed
above, CBOE will use separate servers
and hardware for the Extended Trading
Hours session and the two sessions will
not be linked or otherwise interact with
each other. Nevertheless, according to
the Exchange, orders will be processed
in the same manner during Extended
Trading Hours as Regular Trading Hours
and there will be no changes to the
ranking, display, or allocation algorithm
rules.54 CBOE also explained that there
will be no changes to the processes for
clearing, settlement, exercise, and
expiration.55 The Commission believes
that maintaining separate infrastructure
for the two separate trading systems is
designed to protect the resiliency of the
Regular Trading Hours session. Further,
utilizing the existing trading and
clearing process for the Extended
Trading Hours session that CBOE uses
for its electronic trading during Regular
Trading Hours should facilitate the
ability of CBOE members to trade in the
new session on terms and with
functionality that is familiar to them.
However, there will be some
differences during Extended Trading
Hours, such as returning certain kickedout orders to a Trading Permit Holder in
lieu of routing such order to PAR, and
limiting the types of orders available for
electronic processing to avoid the use of
market orders or any order that could
convert into a market order. The
Commission believes these differences
reflect that the character of trading
during Extended Trading Hours will
likely differ from typical trading during
Regular Trading Hours, including the
likelihood of reduced liquidity, higher
53 See
id.
Notice, supra note 3 at 54758.
55 See id. at 54765.
54 See
PO 00000
Frm 00068
Fmt 4703
Sfmt 4703
72047
volatility, and wider spreads during
Extended Trading Hours.
Furthermore, CBOE has proposed to
provide for Market Makers during
Extended Trading Hours. Any Market
Maker that elects to have an
appointment during Extended Trading
Hours will be subject to the same
general quoting obligations as are
applicable during Regular Trading
Hours, though CBOE may determine not
to impose bid/ask differential
requirements during Extended Trading
Hours.56
CBOE also has provided for Lead
Market Makers, though the Commission
notes that LMMs will not be entitled to
a participation entitlement in Extended
Trading Hours. However, LMMs that
satisfy a heightened quoting standard
during a month will be eligible to
receive a rebate from CBOE for that
month.57 The Commission believes that
CBOE’s proposed LMM incentive
program during Extended Trading
Hours is designed to encourage twosided liquidity during Extended Trading
Hours and, to the extent it is successful,
may contribute to the maintenance of
fair and orderly markets during
Extended Trading Hours. To the extent
that CBOE is successful in encouraging
active participation of Market Makers
and LMMs during Extended Trading
Hours, then CBOE may be able to help
address some of the risks inherent in a
non-core hours trading session,
including the risks of reduced liquidity,
higher volatility, and wider markets.
Therefore, the proposal’s provision for
Market Makers and LMMs during the
Extended Trading Hours session is
consistent with the protection of
investors and the public interest as well
as the promotion of fair and orderly
markets.
The Commission also believes that
CBOE’s proposed changes to its trading
halt rule are consistent with the Act and
designed to promote fair and orderly
markets. The Commission notes that the
Exchange will consider halting trading
during Extended Trading Hours in the
interests of a fair and orderly market in
the same manner that it could halt
trading during Regular Trading Hours.
CBOE’s proposed amendment to the
trading halt rule to allow it to consider
a halt in trading in related futures
contracts is a reasonable additional
56 As noted above, Market Makers will not have
to satisfy the open outcry quoting obligations since
all trading during Extended Trading Hours will be
electronic. See proposed CBOE Rule 6.1A(e)(ii).
57 The Commission notes that the Exchange will
need to submit a proposed rule change pursuant to
Section 19(b) of the Act if and when it seeks to add
such a rebate for LMMs to the Exchange’s fee
schedule.
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Federal Register / Vol. 79, No. 233 / Thursday, December 4, 2014 / Notices
factor and consistent with the existing
factors under the rule that allows CBOE
to consider the activation of price limits
in the futures markets.58
In addition, the Commission finds
that the proposed rule change, as
amended, is consistent with Section
11A(a)(1)(C) of the Act.59 Congress
found in those provisions that it is in
the public interest and appropriate for
the protection of investors and the
maintenance of fair and orderly markets
to assure the availability to brokers,
dealers, and investors of information
with respect to quotations for and
transactions in securities, and to assure
the practicability of brokers executing
investors’ orders in the best market. The
proposed rule change is designed to
accomplish these objectives by ensuring
that the Exchange will report its best bid
and offer and executed trades to OPRA
during Extended Trading Hours in the
same manner that they are reported
during Regular Trading Hours,60 thereby
providing public transparency of
activity in the Extended Trading Hours
market.
IV. Solicitation of Comments on
Amendment Nos. 1 and 2
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether Amendment Nos. 1
and 2 are consistent with the Act.
Comments may be submitted by any of
the following methods:
mstockstill on DSK4VPTVN1PROD with NOTICES
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 No. SR–
CBOE–2014–062 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File No.
SR–CBOE–2014–062. 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
58 See proposed CBOE Rule 24.7, Interpretations
and Policies .01.
59 15 U.S.C. 78k–1(a)(1)(C).
60 See Notice, supra note 3 at 54765. See also
supra note 35 (noting that OPRA intends to add a
modifier to Extended Trading Hours quotes and
trades).
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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 such
filing will also be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File No. SR–CBOE–
2014–062 and should be submitted on
or before December 26, 2014.
V. Accelerated Approval of Proposed
Rule Change as Modified by
Amendment Nos. 1 and 2
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment Nos. 1 and 2,
prior to the thirtieth day after the date
of publication of notice of Amendment
Nos. 1 and 2 in the Federal Register.
The Commission notes that, in addition
to filing Amendment Nos. 1 and 2 with
the Commission, CBOE also submitted
Amendment No. 1 and 2 as comments
to the file, which the Commission
promptly posted on its Web site on
October 27, 2014 and November 21,
2014, respectively, in order to promote
public availability and accessibility of
the Amendments. The Commission
notes that it did not receive any
comments on CBOE’s initial proposal or
on either Amendment Nos. 1 or 2 prior
to the date of this order.
In Amendment No. 1, the Exchange
made several discrete changes to its
proposal to provide additional clarity
and further legal support for why its
proposal is consistent with the Act. In
particular, CBOE represented that it will
establish procedures with OCC to
ensure that Trading Permit Holders only
utilize clearing brokers that have been
authorized by OCC to clear during
Extended Trading Hours.61 Further,
CBOE clarified that it will be able to
prohibit an unauthorized user from
accessing the trading system during
61 See
PO 00000
Amendment No. 1, supra note 4.
Frm 00069
Fmt 4703
Sfmt 4703
Extended Trading Hours.62 CBOE also
represented that it will comply with the
provisions of Section 6(c)(4) of the Act
in making Trading Permits available
during Extended Trading Hours by
authorizing a total of 1,050 total permits
for the Extended Trading Hours
session.63 Finally, CBOE provided
additional support to justify its decision
to not disseminate VIX values during
Extended Trading Hours.64 As the index
calculator for VIX, CBOE explained that
it does not currently know whether SPX
options quotes (on which the VIX index
is calculated) displayed in Extended
Trading Hours will be sufficient to
calculate an accurate and meaningful
VIX indicative value in the same
manner as what typically occurs during
Regular Trading Hours. CBOE further
pledged to reconsider the issue in the
future and reassess whether trading in
the Extended Trading Hours session
rises to a sufficient level that is capable
of supporting the calculation of accurate
and meaningful VIX indicative values.
The Commission believes that these
proposed changes in Amendment No. 1
are reasonable and clarify the
application and operation of CBOE’s
original proposal in a manner that is
materially consistent with the scope of
what CBOE originally proposed and
what the Commission noticed for public
comment in the Federal Register.
In addition, in Amendment No. 1,
CBOE revised its proposed rules
regarding foreign Trading Permit
Holders and access from foreign
jurisdictions. However, in Amendment
No. 2 CBOE withdrew those proposed
rule changes. The Commission believes
that those proposed changes were
incidental to the Exchange’s core
proposal to adopt an Extended Trading
Hours session for SPX and VIX, and that
their deletion from the proposal does
not raise any concerns with the
remainder of the proposal. If, in the
future, CBOE decides to revisit its rules
applicable to foreign Trading Permit
Holders, it would need to submit a
proposed rule change filing pursuant to
Section 19(b) of the Act.65
Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2)
of the Act, to approve the proposed rule
change, as modified by Amendment
Nos. 1 and 2, on an accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,66 that the
62 See
id.
id.
64 See id.
65 15 U.S.C. 78s(b).
66 15 U.S.C. 78s(b)(2).
63 See
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Federal Register / Vol. 79, No. 233 / Thursday, December 4, 2014 / Notices
proposed rule change, as modified by
Amendment Nos. 1 and 2, (SR–CBOE–
2014–062), be, and it hereby is,
approved on an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.67
Brent J. Fields,
Secretary.
[FR Doc. 2014–28475 Filed 12–3–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73702; File No. SR–BX–
2014–048]
Self-Regulatory Organizations;
NASDAQ OMX BX, Inc.; Order Granting
Approval to Proposed Rule Change To
Establish the Retail Price Improvement
Program on a Pilot Basis Expiring
Twelve Months From the Date of
Implementation
November 28, 2014.
I. Introduction
On October 17, 2014, The NASDAQ
OMX BX Stock Market LLC (the
‘‘Exchange’’ or ‘‘BX’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
establish a Retail Price Improvement
(‘‘RPI’’) Program (the ‘‘Program’’) on a
pilot basis for a period of 12 months
from the date of implementation, if
approved. The proposed rule change
was published for comment in the
Federal Register on October 29, 2014.3
The Commission did not receive any
comments on the proposed rule change.
In connection with the proposal, the
Exchange requested exemptive relief
from Rule 612 of Regulation NMS,4
which, among other things, prohibits a
national securities exchange from
accepting or ranking orders priced
greater than $1.00 per share in an
increment smaller than $0.01.5 On
67 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 73410
(October, 23, 2014), 79 FR 64447 (SR–BX–2014–
048) (‘‘Notice’’).
4 17 CFR 242.612 (‘‘Sub-Penny Rule’’).
5 See Letter from Jeffrey Davis, Deputy General
Counsel, NASDAQ OMX BX, Inc., to Brent J. Fields,
Secretary, Commission, dated October 10, 2014
(‘‘Request for Sub-Penny Rule Exemption’’). The
Request for Sub-Penny Rule Exemption was
submitted contemporaneously with the Exchange’s
original filing for this proposed rule change, which
was filed on October 10, 2014. Because that filing
did not comply with the rules of the Commission
mstockstill on DSK4VPTVN1PROD with NOTICES
1 15
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17:23 Dec 03, 2014
Jkt 235001
October 10, 2014, the Exchange
submitted a letter requesting that the
staff of the Division of Trading and
Markets not recommend any
enforcement action under Rule 602 of
Regulation NMS based on the
Exchange’s and its Members’
participation in the Program.6
This order approves the proposed rule
change and grants the exemption from
the Sub-Penny Rule sought by the
Exchange in relation to the proposed
rule change.
II. Description of the Proposal
The Exchange is proposing a 12month pilot program to attract
additional retail order flow to the
Exchange, while also providing the
potential for price improvement to retail
order flow. The Program would be
limited to trades occurring at prices
equal to or greater than $1.00 per share.7
All Regulation NMS securities traded on
the Exchange would be eligible for
inclusion in the Program.
Under the Program, a new class of
market participants called Retail
Member Organizations (‘‘RMOs’’) 8
would be eligible to submit certain retail
order flow (‘‘Retail Orders’’) to the
Exchange. All Exchange Members
would be permitted to provide potential
price improvement for Retail Orders in
the form of designated non-displayed
interest, called a Retail Price
Improvement Order (‘‘RPI Order’’ or
‘‘RPI interest’’), that is priced more
aggressively than the Protected National
Best Bid or Offer (‘‘Protected NBBO’’) 9
relating to the required form of a filing on Form
19b-4, it was rejected.
6 See Letter from Jeffrey Davis, Deputy General
Counsel, NASDAQ OMX BX, Inc., to Stephen
Luparello, Director, Division of Trading and
Markets, Commission, dated October 10, 2014. This
letter was submitted contemporaneously with the
Exchange’s original filing for this proposed rule
change, which was filed on October 10, 2014. As
noted above, that filing was rejected because it did
not comply with the rules of the Commission
relating to the required form of a filing on Form
19b–4.
7 The Exchange notes that certain orders
submitted to the Program designated as eligible to
interact with liquidity outside of the Program—
Type 2 Retail Orders, discussed below—could
execute at prices below $1.00 if they do in fact
execute against liquidity outside of the Program.
8 An RMO would be a Member (or a division
thereof) that has been approved by the Exchange to
submit Retail Orders. See Proposed BX Rule 4780.
A ‘‘Member’’ is any registered broker or dealer that
has been admitted to membership in the Exchange.
See BX Rule 0120(i).
9 The terms Protected Bid and Protected Offer are
defined in Rule 600(b)(57) of Regulation NMS. 17
CFR 242.600(b)(57). The Exchange represents that,
generally, the Protected Bid and Protected Offer,
and the national best bid (‘‘NBB’’) and national best
offer (‘‘NBO,’’ together with the NBB, the ‘‘NBBO’’),
will be the same. However, it further represents that
a market center is not required to route to the NBB
or NBO if that market center is subject to an
PO 00000
Frm 00070
Fmt 4703
Sfmt 4703
72049
by at least $0.001 per share. When RPI
interest priced at least $0.001 per share
better than the Protected Bid or
Protected Offer for a particular security
is available in the Exchange’s system
(the ‘‘System’’), the Exchange would
disseminate an identifier, known as the
Retail Liquidity Identifier, indicating
that such interest exists. A Retail Order
would interact, to the extent possible,
with available contra-side RPI Orders
and other price improving liquidity.10
Types of Orders and Identifier
A Retail Order would be an agency or
riskless principal 11 order that originates
from a natural person and is submitted
to the Exchange by an RMO, provided
that no change is made to the terms of
the order with respect to price (except
in the case of a market order being
changed to a marketable limit order) or
side of market and provided that the
order does not originate from a trading
algorithm or any other computerized
methodology. A Retail Order is an
Immediate or Cancel Order. As
discussed in greater detail below, Retail
Orders may be designated as Type 1 or
Type 2. Retail Orders, regardless of
Type, may be entered in sizes that are
odd lots, rounds lots, or mixed lots.
An RPI Order would be non-displayed
liquidity on the Exchange that is priced
better than the Protected NBBO by at
exception under Regulation NMS Rule 611(b)(1) or
if such NBB or NBO is otherwise not available for
an automatic execution. In such case, the Exchange
states that the Protected NBBO would be the bestpriced protected bid or offer to which a market
center must route interest pursuant to Rule 611 of
Regulation NMS.
10 As explained further below, the Exchange has
proposed two types of Retail Orders, one of which
could execute against other contra-side interest if it
was not completely filled by contra-side RPI
Interest or other price-improving liquidity. All
Retail Orders would first execute against available
contra-side RPI Orders or other price-improving
liquidity. Any remaining portion of the Retail Order
would then either cancel, be executed as an
immediate-or-cancel order, or be routed to another
market for execution, depending on the type of
Retail Order. The Exchange notes that other price
improving liquidity may include, but is not limited
to: Booked non-displayed orders with a limit price
that is more aggressive than the then-current NBBO;
midpoint-pegged orders (which are by definition
non-displayed and priced more aggressively than
the NBBO); non-displayed orders pegged to the
NBBO with an aggressive offset, as defined in
Proposed BX Rule 4780(a)(4) as Other Price
Improving Contra-Side Interest. Orders that do not
constitute other price improving liquidity include,
but are not limited to: Orders with a time-in-force
instruction of IOC; displayed orders; limit orders
priced less aggressively than the NBBO.
11 In order to qualify as a ‘‘Retail Order,’’ a
‘‘riskless principal’’ order must satisfy the criteria
set forth in FINRA Rule 5320.03. RMOs that submit
riskless principal orders as Retail Orders must
maintain supervisory systems to reconstruct such
orders in a time-sequenced manner, and the RMOs
must submit reports contemporaneous with the
execution of the facilitated orders that identify such
trades as riskless principal.
E:\FR\FM\04DEN1.SGM
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]]>Agencies
[Federal Register Volume 79, Number 233 (Thursday, December 4, 2014)]
[Notices]
[Pages 72044-72049]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-28475]
[[Page 72044]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73704; File No. SR-CBOE-2014-062]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of Amendment Nos. 1 and 2 and Order
Granting Accelerated Approval of a Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2, To Adopt Extended Trading Hours for SPX and VIX
November 28, 2014.
I. Introduction
On August 26, 2014, Chicago Board Options Exchange, Incorporated
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``Commission'') a proposed rule change pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (the
``Act''),\1\ and Rule 19b-4 thereunder,\2\ to establish a separate
early morning trading session specifically for options on the S&P 500
Index (``SPX'') and CBOE Volatility Index (``VIX''). The proposed rule
change was published for comment in the Federal Register on September
12, 2014.\3\ On October 24, 2014, CBOE filed Amendment No. 1 to the
proposed rule change and also granted the Commission an extension of
time to consider its proposal to November 3, 2014.\4\ On October 31,
2014, CBOE granted the Commission an additional extension of time until
November 24, 2014. On November 21, 2014, CBOE filed Amendment No. 2 to
the proposed rule change and also granted the Commission a further
extension of time to consider its proposal to December 3, 2014.\5\ The
Commission received no substantive comments on the proposal.\6\ The
Commission is publishing this notice to solicit comments on Amendment
Nos. 1 and 2 from interested persons and is approving the proposed rule
change, as modified by Amendment Nos. 1 and 2, on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 73017 (September 8,
2014), 79 FR 54758 (September 12, 2014) (``Notice'').
\4\ CBOE filed Amendment No. 1 to the proposed rule change to
(i) amend the requirements for foreign Trading Permit Holders to
ensure, in part, that foreign Trading Permit Holders will be able to
provide the Exchange with information, including their books and
records; (ii) clarify why VIX index values will not be calculated
and disseminated during Extended Trading Hours; (iii) clarify that
CBOE will make available the number of Trading Permits during
Extended Trading Hours to comply with Section 6(c)(4) of the Act;
(iv) represent that the Exchange will establish procedures to ensure
that Trading Permit Holders only utilize clearing brokers that are
authorized by OCC for clearing during Extended Trading Hours; (v)
represent that CBOE's systems are designed to prohibit unauthorized
access; and (vi) correct an internal cross-reference in proposed
CBOE Rule 6.1A(e)(iii)(B). See Amendment No. 1 to File No. SR-CBOE-
2014-062, dated October 24, 2014 (``Amendment No. 1''). To promote
transparency of its proposed amendment, when CBOE filed Amendment
No. 1 with the Commission, it also submitted Amendment No. 1 as a
comment letter to the file, which the Commission posted on its Web
site and placed in the public comment file for SR-CBOE-2014-062. The
Exchange also posted a copy of its Amendment No. 1 on its Web site
at https://www.cboe.com/publish/RuleFilingsSEC/SR-CBOE-2014-062.a1.pdf when it filed the amendment with the Commission.
\5\ CBOE filed Amendment No. 2 to the proposed rule change to
delete proposed rule text in Exhibit 5 and delete related parts in
the purpose and statutory basis sections of its Form 19b-4
submission, as well as Exhibit 1 and Item 8 in the Form 19b-4 (each
as amended by Amendment No. 1), all of which related to the removal
of proposed requirements that would have applied to foreign Trading
Permit Holders. See Amendment No. 2 to File No. SR-CBOE-2014-062,
dated November 21, 2014 (``Amendment No. 2''). To promote
transparency of its proposed amendment, when CBOE filed Amendment
No. 2 with the Commission, it also submitted Amendment No. 2 as a
comment letter to the file, which the Commission posted on its Web
site and placed in the public comment file for SR-CBOE-2014-062. The
Exchange also posted a copy of its Amendment No. 2 on its Web site
at https://www.cboe.com/publish/RuleFilingsSEC/SR-CBOE-2014-062.a2.pdf when it filed the amendment with the Commission.
\6\ See infra notes 4 and 5 (noting that when CBOE submitted
each Amendment to its proposal, it also submitted them as a comment
letter to the file to promote the broad dissemination of its
Amendments).
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change, as Modified by Amendment
Nos. 1 and 2 \7\
---------------------------------------------------------------------------
\7\ A full description of the proposed rule change can be found
in the Notice. See Notice, supra note 3.
---------------------------------------------------------------------------
Currently, transactions in index options may be effected on the
Exchange generally between 8:30 a.m. and 3:15 p.m.,\8\ Monday through
Friday (``Regular Trading Hours''). CBOE has proposed to adopt rules
that will allow it to conduct a separate, fully-electronic trading
session from 2:00 a.m. to 8:15 a.m. Monday through Friday (``Extended
Trading Hours'') for SPX and VIX, two index options that are
exclusively-listed on CBOE. According to the Exchange, it is proposing
Extended Trading Hours to meet demand from investors who want to trade
these two products outside of Regular Trading Hours.\9\
---------------------------------------------------------------------------
\8\ See CBOE Rule 24.6. All times in this order refer to Chicago
time.
\9\ See Notice, supra note 3 at 54758.
---------------------------------------------------------------------------
Under the proposal, Extended Trading Hours will be a separate
trading session from Regular Trading Hours and there will be no
carryover from one trading session to the other and no interaction
between Extended Trading Hours and Regular Trading Hours.\10\ Extended
Trading Hours will operate using separate Exchange servers \11\ and
hardware from those used during Regular Trading Hours.\12\ Accordingly,
the electronic order book used during Regular Trading Hours will not be
connected to the electronic order book used during Extended Trading
Hours, and orders and quotes will not interact between the two
sessions.\13\ Rather, all orders will be cancelled at the end of each
Extended Trading Hours session.\14\
---------------------------------------------------------------------------
\10\ See id.
\11\ Bandwidth packets will be sold separately for Regular
Trading Hours and Extended Trading Hours. See id. at 54766. Also,
while the same telecommunications lines may be used for both Regular
and Extended Trading Hours, those lines will be connected to a
separate application server at the Exchange to trade during Extended
Trading Hours. See id. at note 45.
\12\ See id. at 54758.
\13\ See id. at 54759.
\14\ See id. at 54763.
---------------------------------------------------------------------------
During Extended Trading Hours, all Exchange rules will apply,
except as set forth in proposed CBOE Rule 6.1A (Extended Trading
Hours), and except for CBOE rules that by their terms are inapplicable
during Extended Trading Hours.\15\ For example, since all trading
during Extended Trading Hours will be electronic on the Hybrid Trading
System,\16\ all CBOE rules relating to open outcry trading and the
Hybrid 3.0 System will be inapplicable to Extended Trading Hours.\17\
However, CBOE rules relating to business conduct, doing business with
the public, due diligence, and best execution will apply during
Extended Trading Hours.\18\
---------------------------------------------------------------------------
\15\ See proposed CBOE Rule 6.1A(a).
\16\ According to the Exchange, SPX currently trades on the
Hybrid 3.0 trading platform during Regular Trading Hours (except
that the weekly SPX series trade on the Hybrid trading platform
during Regular Trading Hours). Pursuant to proposed Rule 6.1A(b),
SPX will trade on the Hybrid trading platform (and not the Hybrid
3.0 trading platform) during Extended Trading Hours and thus will
trade pursuant to rules applicable to the Hybrid trading platform
(rather than the Hybrid 3.0 trading platform) during Extended
Trading Hours. See Notice, supra note 3 at note 18.
\17\ See id. at 54759.
\18\ See id. at note 13.
---------------------------------------------------------------------------
Access. As is true during Regular Trading Hours, only authorized
Trading Permit Holders, their nominees, and their associated persons
will be able to access CBOE's electronic trading system.\19\ However,
trading privileges will be separate and distinct for
[[Page 72045]]
Extended Trading Hours. In other words, a broker-dealer that is not
currently a CBOE member, as well as a current CBOE Trading Permit
Holder (for Regular Trading Hours) will both need to obtain a separate
Extended Trading Hours Trading Permit if they want to trade during
CBOE's new Extended Trading Hours session.\20\ The separate nature of
access for the two trading sessions means that Trading Permit Holders
will need to use separate log-ins for Extended versus Regular Trading
Hours.\21\ In this respect, CBOE's systems will be designed to prevent
unauthorized access by persons not eligible to trade on CBOE during the
Extended Trading Hours session.\22\
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\19\ See id. at 54760. This requirement will apply to any non-
U.S. based person seeking access to the Extended Trading Hours
session. Persons that are not Trading Permit Holders, such as
employees of affiliates of Trading Permit Holders located outside of
the United States, will not have direct access to the Exchange, and
thus their orders and quotes must be submitted to the Exchange
through a Trading Permit Holder, subject to applicable laws, rules,
and regulations. See id. at note 59.
\20\ See proposed CBOE Rule 6.1A(d). The Exchange represents
that it will make available a sufficient number of Trading Permits
during Extended Trading Hours to comply with Section 6(c)(4) of the
Act. See Amendment No. 1, supra note 4. The Exchange intends to set
the initial limit of Extended Trading Hours Trading Permits at 900
Market Maker Trading Permits and 150 Electronic Access Trading
Permits (the same total number as available during Regular Trading
Hours). See id.
\21\ See Notice, supra note 3 at 54765.
\22\ See Amendment No. 1, supra note 4.
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Market Makers. CBOE's proposal contemplates participation from
Market Makers in the Extended Trading Hours session. To be eligible,
Market Makers will need to obtain a separate Extended Trading Hours
Trading Permit and also will need to request a separate appointment
during Extended Trading Hours.\23\ During Extended Trading Hours,
Market Makers will be required to maintain continuous electronic quotes
in 60% of the non-adjusted options series of the Market Maker's
appointed classes that expire in less than nine months for 90% of the
time when the Market Maker is quoting in a class.\24\ In addition, the
Exchange's proposal gives it the authority to determine to have no bid/
ask differential requirement in the Extended Trading Hours session.\25\
Further, Market Makers generally will be able to use the same Exchange
functionality during Extended Trading Hours that is available to them
during Regular Trading Hours. For example, Market Makers may elect to
use a quote risk monitor (``QRM'') mechanism during Extended Trading
Hours. Although, a Market Maker that elects to use QRM for both Regular
Trading Hours and Extended Trading Hours will need to establish
parameters separately for each trading session (even though a Market
Maker may elect to use the same parameters for both trading sessions or
use QRM for one trading session and not the other).\26\
---------------------------------------------------------------------------
\23\ See proposed CBOE Rule 6.1A(e). For Extended Trading Hours,
the appointment cost for VIX will be 0.5 and for SPX it also will be
0.5. Each Extended Trading Hours Trading Permit will have an
appointment credit of 1.0 (the same as a Regular Trading Hours
Trading Permit), so at the launch of Extended Trading Hours, a
Market Maker will only need to hold one Extended Trading Hours
Trading Permit if it wants to quote in both SPX and VIX during
Extended Trading Hours. See Notice, supra note 3 at 54760. See also
proposed CBOE Rule 6.1A(e)(i).
\24\ See proposed CBOE Rule 6.1A(e)(ii).
\25\ See id.
\26\ See proposed CBOE Rule 8.18.
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LMMs. The Exchange also may approve one or more Market Makers to
act as Lead Market Makers (``LMMs'') in each class during Extended
Trading Hours.\27\ Unlike Regular Trading Hours, however, LMMs will
only be required to comply with the continuous quoting obligations and
other obligations applicable to regular Market Makers in their assigned
classes.\28\ Consequently, LMMs will not be entitled to receive a
participation entitlement in the Extended Hours Session.\29\ However,
if an LMM meets specific performance criteria during a month, it will
be eligible to receive a specified monetary incentive from CBOE.
Specifically, if an LMM: (1) Provides continuous electronic quotes in
at least the lesser of 99% of the non-adjusted series or 100% of the
non-adjusted series minus one call-put pair in an Extended Trading
Hours allocated class (excluding intra-day add-on series on the day
during which such series are added for trading) during Extended Trading
Hours in a given month and (2) ensures an opening of the same
percentage of series by 2:05 a.m. for at least 90% of the trading days
during Extended Trading Hours in a given month, the LMM will be
eligible to receive a rebate for that month in an amount set forth in
the Exchange Fees Schedule.\30\ For purposes of this heightened
continuous quoting standard, an LMM will be deemed to have provided
continuous electronic quotes during Extended Trading Hours if the LMM
provides electronic two-sided quotes for 90% of the time in Extended
Trading Hours in a given month.\31\
---------------------------------------------------------------------------
\27\ See proposed CBOE Rule 6.1A(e)(iii)(A).
\28\ See proposed CBOE Rule 6.1A(e)(iii)(B).
\29\ See, e.g., CBOE Rules 6.45B and 8.15B (concerning
participation entitlements).
\30\ CBOE's adoption of any such rebate will be subject to the
rule filing process of Section 19 of the Act. CBOE is not proposing
any rebate in this current proposal.
\31\ See proposed CBOE Rule 6.1A(e)(iii)(C). Because the
heightened quoting standard for LMMs in the Extended Hours Trading
session is applicable only to a fee rebate and not a participation
entitlement, the monthly measuring period is separate and distinct
from the heightened quoting standard in the Regular Trading Hours
session, which is measured on a daily basis. See Notice, supra note
3 at 54762.
---------------------------------------------------------------------------
Trading. During Extended Trading Hours, the Exchange proposes to
limit the available order types that may be entered into the system.
Specifically, in recognition of the expected reduced liquidity, higher
volatility, and wider spreads during Extended Trading Hours, the
Exchange will not allow market orders, market-on-close orders, stop
orders, and good-til-cancelled orders.\32\ Otherwise, order processing
during Extended Trading Hours will operate in the same manner as it
does for Regular Trading Hours and there will be no change to ranking,
display, or allocation algorithms rules.\33\ Moreover, there will be no
change between Regular and Extended Trading Hours in regards to the
processes for clearing, settlement, exercise, and expiration.\34\ In
addition, the Exchange will report the best bid and offer and executed
trades to the Options Price Reporting Authority (``OPRA'') during
Extended Trading Hours in the same manner that it reports that
information to OPRA during Regular Trading Hours.\35\
---------------------------------------------------------------------------
\32\ See Notice, supra note 3 at 54763. See also proposed CBOE
Rule 6.1A(f).
\33\ See Notice, supra note 3 at 54765. The Exchange also
intends to activate the complex order auction and the automated
improvement mechanism (``AIM'') auction during Extended Trading
Hours. These auctions will operate in the same manner as they do
during Regular Trading Hours, except with respect to AIM, the
requirement that three Market Makers must be quoting to initiate an
AIM auction will not apply during Extended Trading Hours. See id. at
note 43.
\34\ See Notice, supra note 3 at 54765. According to the
Exchange, the Options Clearing Corporation has stated that it will
be able to clear and settle all transactions and handle exercises of
options during Extended Trading Hours. See id. at note 48. In
addition, the Exchange has represented that it will work with OCC to
establish procedures in connection with on-boarding Trading Permit
Holders to ensure that Extended Trading Hours Trading Permit Holders
only utilize clearing brokers that are properly authorized by OCC
for operating during Extended Trading Hours. See Amendment No. 1,
supra note 4.
\35\ See Notice, supra note 3 at 54765. The operator of OPRA has
informed CBOE that it intends to add a modifier to the disseminated
information during Extended Trading Hours. See id. at note 57. The
Exchange also will disseminate Extended Trading Hours data through
its proprietary data feed in the same format and manner that it
distributes data during Regular Trading Hours. See id. at 54765. Any
fees to be charged by CBOE for the Extended Trading Hours
proprietary data feed will be subject to a separate fee change
filing. See id. at note 49.
---------------------------------------------------------------------------
The Exchange also may halt trading during Extended Trading Hours in
the interests of a fair and orderly market largely in the same manner
that it can during Regular Trading Hours.\36\ For
[[Page 72046]]
example, if there was a marketwide trading halt at the end of the prior
trading day, CBOE could consider that as an ``unusual condition'' in
determining whether to halt trading during the following day's Extended
Trading Hours session.\37\ Separately, CBOE proposed to amend its trade
halt rule to provide that it also may consider whether trading in
related futures has been halted as a factor in determining whether to
halt trading in an option.\38\
---------------------------------------------------------------------------
\36\ See proposed CBOE Rule 24.7(d). Further, clearly erroneous
trade breaks during Extended Trading Hours will be processed in the
same manner as Regular Trading Hours, except that during Extended
Trading Hours, only two Exchange Officials that are members of the
Exchange's staff will be necessary to make such a determination. See
Notice, supra note 3 at 54765.
\37\ See Notice, supra note 3 at 54766; and proposed CBOE Rule
24.7(d). Also, under the proposed rule change, CBOE will not have to
consider during Extended Trading Hours existing factors that are not
applicable to the Extended session, such as (i) the extent to which
trading is not occurring in the stocks or options underlying the
index; (ii) the current calculation of the index derived from the
current market prices of the stocks is not available; (iii) the
``current index level'' for a volatility index is not available or
the cash (spot) value for a volatility index is not available; and
(iv) the extent to which the rotation has been completed or other
factors regarding the status of the rotation, in determining whether
to halt trading during Extended Trading Hours. See Notice, supra
note 3 at note 53; and proposed CBOE Rule 24.7(d).
\38\ See proposed CBOE Rule 24.7, Interpretation and Policies
.01. Currently, CBOE's rule allows it to consider the activation of
price limits on futures exchanges when determining whether to halt
trading in an index options. The proposed change will allow CBOE to
consider any halt in futures trading, including halts called in
situations other than in response to the activation of a price
limit. See Notice, supra note 3 at 54765.
---------------------------------------------------------------------------
Surveillance and Disclosures. The Exchange has represented that it
will perform all necessary surveillance coverage and will have
appropriately trained and qualified regulatory and operations staff in
place during Extended Trading Hours to satisfy its regulatory
obligations and administer the Extended Trading Hours session in real
time.\39\ In addition, because of the differences in the nature of the
market and trading between Regular and Extended Trading Hours, CBOE
will require Trading Permit Holders to disclose to customers that
trading during Extended Trading Hours may involve material risks,
including, in part, the possibility of lower liquidity, higher
volatility, and lack of an updated underlying index or portfolio
value,\40\ prior to accepting an order from a customer for execution
during Extended Trading Hours.\41\ The Exchange also will distribute a
Regulatory Circular detailing, among other things, some of the risks of
trading during Extended Trading Hours.\42\
---------------------------------------------------------------------------
\39\ See Notice, supra note 3 at 54765 and 54767.
\40\ CBOE is the index calculator for the VIX. According to
CBOE, the accuracy of the calculation for VIX indicative (or spot)
values depends upon the quality of bid and offer quotes for
constituent SPX option series. CBOE is unsure whether the SPX option
quotes displayed during Extended Trading Hours will be sufficient to
calculate accurate and meaningful VIX indicative quote values during
Extended Hours. Accordingly, CBOE has determined to not calculate
VIX spot values during Extended Trading Hours. See Amendment No. 1,
supra note 4. However, as the Exchange and market participants gain
experience with the Extended Trading Hours session and if activity
and market maker participation increases, the Commission expects
CBOE to reevaluate this decision and consider disseminating a VIX
index value if and when quoting activity becomes sufficient to allow
CBOE to calculate accurate and meaningful VIX index values during
the Extended Trading Hours session.
\41\ See proposed CBOE Rule 6.1A(j).
\42\ See Notice, supra note 3 at 54764.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
After careful consideration, the Commission finds that the proposed
rule change, as modified by Amendment Nos. 1 and 2, is consistent with
the requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\43\ In particular, the
Commission finds that the proposed rule change, as amended, is
consistent with Section 6(b)(5) of the Act,\44\ which requires, among
other things, 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. While no other options
exchange is currently open for trading outside of Regular Trading
Hours, the Commission notes that it has previously approved extended
trading hours in the cash equities markets.\45\
---------------------------------------------------------------------------
\43\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\44\ 15 U.S.C. 78f(b)(5).
\45\ See e.g., Securities Exchange Act Release Nos. 29237 (May
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving an off-hours trading facility on a pilot basis);
42004 (October 13, 1999), 64 FR 56548 (October 20, 1999) (SR-CHX-99-
16) (approving extended trading hours on a pilot basis); and 56985
(December 18, 2007), 72 FR 73388 (December 27, 2007) (SR-NASDAQ-
2007-098) (approving the trading of certain securities outside of
regular market hours).
---------------------------------------------------------------------------
The proposed rule change, as modified by Amendment Nos. 1 and 2,
will allow investors additional trading opportunities to trade in two
CBOE exclusively-listed products outside of CBOE's current Regular
Trading Hours. The hours of CBOE's proposed Extended Trading Hours
roughly coincide with the regular trading hours in Europe, and
therefore CBOE's proposal may be of particular interest to traders
located in non-U.S. jurisdictions. At the same time, CBOE has proposed
certain limitations and protections on access and trading during
Extended Trading Hours that are designed to promote just and equitable
principles of trade and foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities. For example, as discussed above, only authorized Trading
Permit Holders, their nominees, and their associated persons will be
able to access the CBOE trading system during Extended Trading Hours,
and CBOE's system is designed to allow CBOE to restrict unauthorized
access to its systems in Extended Trading Hours.\46\ Specifically, CBOE
is requiring a new class of trading permits for Extended Trading Hours
with their own unique log-in ID, and only persons in possession of
those credentials will have access to CBOE's systems to trade during
Extended Trading Hours. Moreover, consistent with fostering cooperation
and coordination with persons engaged in clearing and settling
transactions in securities, CBOE has represented that it will work with
OCC to establish procedures in connection with on-boarding Extended
Trading Hours permit holders to ensure that Trading Permit Holders only
utilize clearing brokers that have been properly authorized by OCC for
operating during Extended Trading Hours.\47\ This process is designed
to help assure the orderly functioning of the clearing process in
Extended Trading Hours by avoiding any risk associated with a CBOE
permit holder trading through a clearing broker during Extended Trading
Hours if such clearing broker does not, in OCC's opinion, meet OCC's
standards for clearing outside of regular trading hours.
---------------------------------------------------------------------------
\46\ The Commission notes that in order to be a Trading Permit
Holder, an individual or organization must be, in part, registered
as a broker or dealer pursuant to Section 15 of the Act or be
associated with a Trading Permit Holder organization that is
registered as a broker or dealer pursuant to Section 15 of the Act.
See CBOE Rules 3.2 and 3.3.
\47\ See Amendment No. 1, supra note 4.
---------------------------------------------------------------------------
In addition, as discussed above, all of CBOE's rules, with certain
exceptions, will continue to apply during Extended Trading Hours. These
rules, among other things, prohibit Trading Permit Holders from
engaging in acts or practices inconsistent with just and equitable
principles of trade, making any willful or material misrepresentation
or omission in any
[[Page 72047]]
application, report, or other communication to the Exchange or the OCC,
and from effecting or inducing the purchase, sale, or exercise of any
security for the purpose of manipulating the price or activity of the
security,\48\ as well as impose best execution requirements and
prohibit trading ahead of customer orders.\49\ In addition, the
Exchange has represented that it will revise its surveillance
procedures to incorporate transactions that occur and orders and
quotations that are submitted during Extended Trading Hours and perform
all necessary surveillance coverage during Extended Trading Hours.\50\
Importantly, CBOE has represented that it will have a sufficient number
of appropriately qualified staff on-site and otherwise available as
necessary during Extended Trading Hours to provide support and handle
any operations and regulatory issues that may arise.\51\ CBOE's
represented commitment to adequately staff its operations during
Extended Trading Hours is important to assure the integrity of CBOE's
operations during those early morning hours and necessary to assure
that CBOE is able to carry out and enforce its rules during this
session, including rules relating to trading halts and obvious error
trades, as well as thoroughly monitor trading and the operations of its
trading systems. Accordingly, the Commission believes that CBOE has
designed its Extended Trading Hours session to promote just and
equitable principles of trade and prevent fraudulent and manipulative
acts and practices to the same extent that its Regular Trading Hours
session has been so designed.
---------------------------------------------------------------------------
\48\ See Chapter IV (Business Conduct) of CBOE's rules.
\49\ See CBOE Rules 53.2 (Prohibition Against Trading Ahead of
Customer Orders) and 53.8 (Best Execution and Interpositioning). The
Commission notes that CBOE Rule 53.2, Interpretations and Policies
.07, specifically provides that Trading Permit Holders may limit the
life of a customer order to the period of normal market hours.
However, if the customer and Trading Permit Holder agree to the
processing of the customer's order outside normal market hours, the
protections of the rule will apply to that customer's order for the
entirety of the agreed upon executable time.
\50\ See Notice, supra note 3 at 54765 and 54767.
\51\ See id.
---------------------------------------------------------------------------
The Commission also believes that CBOE's disclosure requirement
that obligates members to make certain written disclosures to customers
regarding material trading risks that may exist during Extended Trading
Hours is consistent with the protection of investors.\52\ Specifically,
Trading Permit Holders will be required to make certain disclosures to
customers regarding the risk of lower liquidity, higher volatility, and
wider spreads during Extended Trading Hours as compared to Regular
Trading Hours.\53\ The Commission believes that such disclosures should
help ensure that customers are reasonably informed about the specific
risks associated with trading in the non-core market before they decide
to submit their first order in the Extended Trading Hours session.
Further, these requirements are designed to mitigate, to the extent
possible, the likelihood of investor confusion regarding the
significant differences between the character of the market typical of
Regular and Extended Trading Hours sessions.
---------------------------------------------------------------------------
\52\ See proposed CBOE Rule 6.1A(j).
\53\ See id.
---------------------------------------------------------------------------
The Commission further believes that CBOE's proposal to use a fully
electronic trading platform during Extended Trading Hours that shares
most of the functionality of its Hybrid System is reasonable. As
discussed above, CBOE will use separate servers and hardware for the
Extended Trading Hours session and the two sessions will not be linked
or otherwise interact with each other. Nevertheless, according to the
Exchange, orders will be processed in the same manner during Extended
Trading Hours as Regular Trading Hours and there will be no changes to
the ranking, display, or allocation algorithm rules.\54\ CBOE also
explained that there will be no changes to the processes for clearing,
settlement, exercise, and expiration.\55\ The Commission believes that
maintaining separate infrastructure for the two separate trading
systems is designed to protect the resiliency of the Regular Trading
Hours session. Further, utilizing the existing trading and clearing
process for the Extended Trading Hours session that CBOE uses for its
electronic trading during Regular Trading Hours should facilitate the
ability of CBOE members to trade in the new session on terms and with
functionality that is familiar to them.
---------------------------------------------------------------------------
\54\ See Notice, supra note 3 at 54758.
\55\ See id. at 54765.
---------------------------------------------------------------------------
However, there will be some differences during Extended Trading
Hours, such as returning certain kicked-out orders to a Trading Permit
Holder in lieu of routing such order to PAR, and limiting the types of
orders available for electronic processing to avoid the use of market
orders or any order that could convert into a market order. The
Commission believes these differences reflect that the character of
trading during Extended Trading Hours will likely differ from typical
trading during Regular Trading Hours, including the likelihood of
reduced liquidity, higher volatility, and wider spreads during Extended
Trading Hours.
Furthermore, CBOE has proposed to provide for Market Makers during
Extended Trading Hours. Any Market Maker that elects to have an
appointment during Extended Trading Hours will be subject to the same
general quoting obligations as are applicable during Regular Trading
Hours, though CBOE may determine not to impose bid/ask differential
requirements during Extended Trading Hours.\56\
---------------------------------------------------------------------------
\56\ As noted above, Market Makers will not have to satisfy the
open outcry quoting obligations since all trading during Extended
Trading Hours will be electronic. See proposed CBOE Rule
6.1A(e)(ii).
---------------------------------------------------------------------------
CBOE also has provided for Lead Market Makers, though the
Commission notes that LMMs will not be entitled to a participation
entitlement in Extended Trading Hours. However, LMMs that satisfy a
heightened quoting standard during a month will be eligible to receive
a rebate from CBOE for that month.\57\ The Commission believes that
CBOE's proposed LMM incentive program during Extended Trading Hours is
designed to encourage two-sided liquidity during Extended Trading Hours
and, to the extent it is successful, may contribute to the maintenance
of fair and orderly markets during Extended Trading Hours. To the
extent that CBOE is successful in encouraging active participation of
Market Makers and LMMs during Extended Trading Hours, then CBOE may be
able to help address some of the risks inherent in a non-core hours
trading session, including the risks of reduced liquidity, higher
volatility, and wider markets. Therefore, the proposal's provision for
Market Makers and LMMs during the Extended Trading Hours session is
consistent with the protection of investors and the public interest as
well as the promotion of fair and orderly markets.
---------------------------------------------------------------------------
\57\ The Commission notes that the Exchange will need to submit
a proposed rule change pursuant to Section 19(b) of the Act if and
when it seeks to add such a rebate for LMMs to the Exchange's fee
schedule.
---------------------------------------------------------------------------
The Commission also believes that CBOE's proposed changes to its
trading halt rule are consistent with the Act and designed to promote
fair and orderly markets. The Commission notes that the Exchange will
consider halting trading during Extended Trading Hours in the interests
of a fair and orderly market in the same manner that it could halt
trading during Regular Trading Hours. CBOE's proposed amendment to the
trading halt rule to allow it to consider a halt in trading in related
futures contracts is a reasonable additional
[[Page 72048]]
factor and consistent with the existing factors under the rule that
allows CBOE to consider the activation of price limits in the futures
markets.\58\
---------------------------------------------------------------------------
\58\ See proposed CBOE Rule 24.7, Interpretations and Policies
.01.
---------------------------------------------------------------------------
In addition, the Commission finds that the proposed rule change, as
amended, is consistent with Section 11A(a)(1)(C) of the Act.\59\
Congress found in those provisions that it is in the public interest
and appropriate for the protection of investors and the maintenance of
fair and orderly markets to assure the availability to brokers,
dealers, and investors of information with respect to quotations for
and transactions in securities, and to assure the practicability of
brokers executing investors' orders in the best market. The proposed
rule change is designed to accomplish these objectives by ensuring that
the Exchange will report its best bid and offer and executed trades to
OPRA during Extended Trading Hours in the same manner that they are
reported during Regular Trading Hours,\60\ thereby providing public
transparency of activity in the Extended Trading Hours market.
---------------------------------------------------------------------------
\59\ 15 U.S.C. 78k-1(a)(1)(C).
\60\ See Notice, supra note 3 at 54765. See also supra note 35
(noting that OPRA intends to add a modifier to Extended Trading
Hours quotes and trades).
---------------------------------------------------------------------------
IV. Solicitation of Comments on Amendment Nos. 1 and 2
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment Nos. 1
and 2 are 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 No. SR-CBOE-2014-062 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. SR-CBOE-2014-062. 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 such filing will also be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File No. SR-CBOE-2014-062 and should be
submitted on or before December 26, 2014.
V. Accelerated Approval of Proposed Rule Change as Modified by
Amendment Nos. 1 and 2
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment Nos. 1 and 2, prior to the thirtieth
day after the date of publication of notice of Amendment Nos. 1 and 2
in the Federal Register. The Commission notes that, in addition to
filing Amendment Nos. 1 and 2 with the Commission, CBOE also submitted
Amendment No. 1 and 2 as comments to the file, which the Commission
promptly posted on its Web site on October 27, 2014 and November 21,
2014, respectively, in order to promote public availability and
accessibility of the Amendments. The Commission notes that it did not
receive any comments on CBOE's initial proposal or on either Amendment
Nos. 1 or 2 prior to the date of this order.
In Amendment No. 1, the Exchange made several discrete changes to
its proposal to provide additional clarity and further legal support
for why its proposal is consistent with the Act. In particular, CBOE
represented that it will establish procedures with OCC to ensure that
Trading Permit Holders only utilize clearing brokers that have been
authorized by OCC to clear during Extended Trading Hours.\61\ Further,
CBOE clarified that it will be able to prohibit an unauthorized user
from accessing the trading system during Extended Trading Hours.\62\
CBOE also represented that it will comply with the provisions of
Section 6(c)(4) of the Act in making Trading Permits available during
Extended Trading Hours by authorizing a total of 1,050 total permits
for the Extended Trading Hours session.\63\ Finally, CBOE provided
additional support to justify its decision to not disseminate VIX
values during Extended Trading Hours.\64\ As the index calculator for
VIX, CBOE explained that it does not currently know whether SPX options
quotes (on which the VIX index is calculated) displayed in Extended
Trading Hours will be sufficient to calculate an accurate and
meaningful VIX indicative value in the same manner as what typically
occurs during Regular Trading Hours. CBOE further pledged to reconsider
the issue in the future and reassess whether trading in the Extended
Trading Hours session rises to a sufficient level that is capable of
supporting the calculation of accurate and meaningful VIX indicative
values. The Commission believes that these proposed changes in
Amendment No. 1 are reasonable and clarify the application and
operation of CBOE's original proposal in a manner that is materially
consistent with the scope of what CBOE originally proposed and what the
Commission noticed for public comment in the Federal Register.
---------------------------------------------------------------------------
\61\ See Amendment No. 1, supra note 4.
\62\ See id.
\63\ See id.
\64\ See id.
---------------------------------------------------------------------------
In addition, in Amendment No. 1, CBOE revised its proposed rules
regarding foreign Trading Permit Holders and access from foreign
jurisdictions. However, in Amendment No. 2 CBOE withdrew those proposed
rule changes. The Commission believes that those proposed changes were
incidental to the Exchange's core proposal to adopt an Extended Trading
Hours session for SPX and VIX, and that their deletion from the
proposal does not raise any concerns with the remainder of the
proposal. If, in the future, CBOE decides to revisit its rules
applicable to foreign Trading Permit Holders, it would need to submit a
proposed rule change filing pursuant to Section 19(b) of the Act.\65\
---------------------------------------------------------------------------
\65\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------
Accordingly, the Commission finds good cause, pursuant to Section
19(b)(2) of the Act, to approve the proposed rule change, as modified
by Amendment Nos. 1 and 2, on an accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\66\ that the
[[Page 72049]]
proposed rule change, as modified by Amendment Nos. 1 and 2, (SR-CBOE-
2014-062), be, and it hereby is, approved on an accelerated basis.
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\66\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\67\
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\67\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2014-28475 Filed 12-3-14; 8:45 am]
BILLING CODE 8011-01-P
