Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Relating to Stock-Option Order Handling, 17528-17532 [2015-07364]

Download as PDF 17528 Federal Register / Vol. 80, No. 62 / Wednesday, April 1, 2015 / Notices information technology. Consideration will be given to comments and suggestions submitted in writing within 60 days of this publication. Please direct your written comments to Pamela Dyson, Director/Chief Information Officer, Securities and Exchange Commission, c/o Remi PavlikSimon, 100 F Street NE., Washington, DC 20549; or send an email to: PRA_ Mailbox@sec.gov. Dated: March 27, 2015. Brent J. Fields, Secretary. [FR Doc. 2015–07462 Filed 3–31–15; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Submission for OMB Review; Comment Request Upon Written Request Copies Available From: U.S. Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE., Washington, DC 20549–2736. mstockstill on DSK4VPTVN1PROD with NOTICES New Information Collection: Supplier Diversity Business Management System; SEC File No. 270–663, OMB Control No. 3235–XXXX. Notice is hereby given that, pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.), the Securities and Exchange Commission (‘‘Commission’’) has submitted to the Office of Management and Budget a request to approve the collection of information discussed below. The Commission is required under Section 342 of the Dodd Frank Wall Street and Reform Act to develop standards and procedures for ensuring the fair inclusion of minority-owned and women-owned businesses in all of the Commission’s business activities. The Commission is also required to develop standards for coordinating technical assistance minority-owned and women-owned businesses. As part of its implementation of Section 342 of the Dodd-Frank Act, the Commission is developing a new electronic Supplier Diversity Business Management System (the System) to collect up-to-date business information and capabilities statements from diverse suppliers interested in doing business with the Commission. The information collected in the System will allow the Commission to update and more effectively manage its current internal repository of diverse suppliers. Further, the information in the System will also allow the Commission to measure the effectiveness of its technical assistance VerDate Sep<11>2014 18:37 Mar 31, 2015 Jkt 235001 and outreach efforts, and target areas where additional program efforts are necessary. Information will be collected in the System via web-based, e-filed, dynamic form-based technology. The company point of contact will complete a profile consisting of basic contact data and information on the capabilities of the business. The profile will include a series of questions, some of which are based on the data that the individual enters. Drop-down lists will be included where appropriate to increase ease of use. The information collection is voluntary. The System is scheduled to be released in May 2015. There are no costs associated with this collection. The public interface to the System will be available via a web-link provided by the agency. Estimated number of annual responses = 500 Estimated annual reporting burden = 250 hours (30 minutes per submission) On January 27, 2015, the Commission published a 60-day notice in the Federal Register (80 FR 4320) requesting public comment on the proposed collection of information. The Commission received no comments. Written comments continue to be invited on: (a) Whether this collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (b) the accuracy of the agency’s estimate of the burden imposed by the collection of information; (c) ways to enhance the quality, utility, and clarity of the information collected; and (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology. Background documentation for this information collection may be viewed at the following Web site, www.reginfo.gov. Please direct general comments to the following persons: (i) Desk Officer for the Securities and Exchange Commission, Office of Management and Budget, Room 10102, New Executive Office Building, Washington, DC 20503 or send an email to Shagufta Ahmed at Shagufta_ Ahmed@omb.eop.gov; and (ii) Pamela Dyson, Chief Information Officer, Securities and Exchange Commission, c/ o Remi Pavlik-Simon, 100 F Street NE., Washington, DC 20549 or send an email to: PRA_Mailbox@sec.gov. Comments must be submitted within 30 days of this notice. PO 00000 Frm 00143 Fmt 4703 Sfmt 4703 Dated: March 27, 2015. Brent J. Fields, Secretary. [FR Doc. 2015–07464 Filed 3–31–15; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–74590; File No. SR–CBOE– 2015–029] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Relating to Stock-Option Order Handling March 26, 2015. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on March 16, 2014, Chicago Board Options Exchange, Incorporated (the ‘‘Exchange’’ or ‘‘CBOE’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its rules regarding the handling and processing of stock-option orders on the Exchange. The text of the proposed rule change is available on the Exchange’s Web site (https://www.cboe.com/ AboutCBOE/ CBOELegalRegulatoryHome.aspx), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. 1 15 2 17 E:\FR\FM\01APN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 01APN1 Federal Register / Vol. 80, No. 62 / Wednesday, April 1, 2015 / Notices A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change mstockstill on DSK4VPTVN1PROD with NOTICES 1. Purpose The Exchange proposes to amend its rules regarding the handling and processing of stock-option orders represented in open outcry on the floor of the Exchange. Specifically, the Exchange proposes to adopt subparagraph (d) to Rule 6.48 (Contract Made on Acceptance of Bid or Offer) to extend electronic stock component routing functionality currently only available in the electronic trading environment to Public Automated Routing (‘‘PAR’’) workstation 3 users and thus, allow Trading Permit Holders (‘‘TPHs’’) or PAR Officials 4 to electronically route the stock component of a stock-option order represented in open outcry on the floor of the Exchange to an Exchangedesignated broker-dealer not affiliated with the Exchange for electronic execution at a stock trading venue directly from PAR. In addition, the Exchange proposes to amend Interpretation and Policy .06 to Rule 6.53C to require that the Clearing Trading Permit Holder (‘‘CTPHs’’) (instead of the executing TPH), on a stock-option order, enter into a brokerage agreement with one or more non-affiliated Exchange-designated broker-dealers before electronically routing the stock component a of stockoption order to an Exchange-designated broker-dealer for execution at a stocktrading venue.5 The Exchange also proposes to add cross-references to the proposed amended stock-option order handling and processing rules in the 3 The PAR workstation (‘‘PAR’’) is an Exchangeprovided order management tool for use on the Exchange’s trading floor by TPHs and PAR Officials. See Rule 6.12A; see also Rule 7.12 for a description of the responsibilities and obligations of PAR Officials. The Exchange’s order handling system allows for orders to be routed to and from PAR in accordance with TPH and Exchange order routing parameters and the Rules of the Exchange. See Rule 6.12A. 4 A PAR Official is an Exchange employee or independent contractor whom the Exchange may designate as being responsible for (i) operating the PAR workstation in a DPM trading crowd with respect to the classes of options assigned to him/ her; (ii) when applicable, maintaining the book with respect to the classes of options assigned to him/ her; and (iii) effecting proper executions of orders placed with him/her. See Rule 7.12. 5 To enter transactions on the Exchange, a TPH must either be a CTPH or must have a CTPH agree to accept financial responsibility for all of its transactions. See Rule 6.21. Every CTPH will be responsible for the clearance of Exchange transactions of a TPH that ‘‘gives up’’ the CTPH pursuant to a Letter of Authorization, Letter of Guarantee, or other authorization given by the CTPH to the executing TPH. See id. VerDate Sep<11>2014 18:37 Mar 31, 2015 Jkt 235001 Interpretations and Policies to Rules 6.45A (Priority and Allocation of Equity Option Trades on the CBOE Hybrid System) and 6.45B (Priority and Allocation of Trades in Index Options and Options on ETFs on the CBOE Hybrid System). The Exchange believes that the proposed enhanced functionalities with respect to the handling and processing of stock-option orders on PAR will promote more efficient trading and benefit market participants by eliminating intermediary manual steps currently required for open outcry stock-option order execution. Current Procedures Under Rule 1.1, a stock-option order is defined as ‘‘an order to buy or sell a stated number of units of an underlying or a related security coupled with either (a) the purchase or sale of option contract(s) on the opposite side of the market representing either the same number of units of the underlying or related security or the number of units of the underlying security necessary to create a delta neutral position or (b) the purchase or sale of an equal number of put and call option contracts, each having the same exercise price, expiration date and each representing the same number of units of stock as, and on the opposite side of the market from, the underlying or related security portion of the order.’’ 6 Stock-option orders are a popular with investors (e.g., buy-writes) and are frequently handled and processed on the Exchange. Currently, eligible stock-option orders 7 6 Rule 1.1(ii); accord Rule 6.53C(a)(2). stock-option orders must comply with the Qualified Contingent Trade Exemption under Rule 611(a) of Regulation NMS. See infra at pages 8–9. TPHs submitting such orders represent that the orders comply with the QCT Exemption. See Interpretation and Policy .06 to Rule 6.53C. Certain other eligibility requirements may also apply to stock-option orders, which may be determined by Exchange routing parameters or in accordance with the order’s terms. For example, stock-option orders must couple the stated number of units of an underlying stock or a security convertible into the underlying stock (‘‘convertible security’’) with the purchase or sale of options contract(s) on the opposite side of the market representing either (i) the same number of units of the underlying stock or convertible security, or (ii) the number of units of the underlying stock necessary to create a delta neutral position, but in no case in a ratio greater than eight-to-one (8.00), where the ratio represents the total number of units of the underlying stock or convertible security in the option leg to the total number of units of the underlying stock or convertible security in the stock leg (or such lower ratio as may be determined by the Exchange on a class-by-class basis). Only those stock-option orders with no more than the applicable number of legs, as determined by the Exchange on a class-by-class basis, are eligible for processing. See Rule 6.53C(a)(2). For electronic orders, the representing TPH must include a tied to stock indicator on each stock-option order upon systemization. See Rule 7 Eligible PO 00000 Frm 00144 Fmt 4703 Sfmt 4703 17529 may be handled and processed on the Exchange either manually in open outcry or electronically through the Hybrid Trading System.8 This proposal seeks to enhance PAR functionality to allow a third option for handling and processing of a stock-option order on the Exchange by allowing the stock component of a stock-option order executed in open outcry to be handled electronically directly from PAR by a PAR user (i.e. a floor broker or PAR Official) on the floor of the Exchange. Manual Processing Stock-option orders may be handled and processed on the Exchange in open outcry, with the stock portion of the order manually transmitted (e.g., via telephone) by the PAR user (i.e. a floor broker or PAR Official) on the floor to a broker on a stock trading venue for execution.9 Trading of a stock-option order in open outcry involves the stockoption order being represented in open outcry as a strategy order at a single net price with the option component being traded by a broker or PAR Official on the floor of the Exchange and the stock portion being manually transmitted to a broker at a stock trading venue for execution.10 Manual transmission of the stock component of a stock-option order is accomplished by placing a stock order with a broker as two paired orders with a designated limit price to be matched by the broker either on a lit stock exchange, Alternative Trading System (‘‘ATS’’), or over-the-counter. As agent, the broker is responsible for determining whether the order may be executed in accordance with all of the rules applicable to the execution of equity orders, including compliance with the applicable short sale, tradethrough, and reporting rules. In the event that the stock leg of a stock-option order cannot be executed by the broker, the stock-option order will remain on 6.53(y); see also Regulatory Circular RG12–088 (Automation of Stock-Option Strategy Orders). 8 The ‘‘Hybrid Trading System’’ refers to (i) the Exchange’s trading platform that allows MarketMakers to submit electronic quotes in their appointed classes and (ii) any connectivity to the foregoing trading platform that is administered by or on behalf of the Exchange, such as a communications hub. References to ‘‘Hybrid,’’ ‘‘Hybrid System,’’ or ‘‘Hybrid Trading System’’ in the Exchange’s Rules include all platforms unless otherwise provided by rule. 9 TPHs are required to comply with the Qualified Contingent Trade (‘‘QCT’’) Exemption of Rule 611(a) of Regulation NMS with respect to the execution of stock-option orders. See Interpretation and Policy .06 to Rule 6.53C. 10 See Securities and Exchange Release No. 34– 66394 (February 14, 2012), 77 FR 10026 (February 21, 2012) (Notice of Filing of a Proposed Rule Change Related to Stock-Option Processing) (SR– CBOE–2012–005); see also Rules 6.45A(b) and 6.45B(b). E:\FR\FM\01APN1.SGM 01APN1 17530 Federal Register / Vol. 80, No. 62 / Wednesday, April 1, 2015 / Notices PAR or, at the order entry firm’s discretion, to the order entry firm’s booth.11 Stock-option orders have historically been handled and processed in open outcry on the Exchange. The Exchange continues to allow TPHs to manually execute stock-option orders in this manner.12 Electronic Processing Stock-option orders may also be handled electronically on the Exchange, with the stock portion of the order being electronically transmitted by the Exchange to a non-affiliated third party Exchange-designated broker-dealer for execution at an away stock trading venue.13 Generally, the stock component of a stock-option order is transmitted to an Exchange-designated broker-dealer 14 as two paired orders with a designated limit price after the Exchange’s trading system has determined that a stock-option order is executable at the designated net price. Once transmitted to the Exchangedesignated broker-dealer, the Exchangedesignated broker dealer acts as agent for the stock leg of the stock-option order and is responsible for the proper execution, trade reporting, and submission to clearing of the stock trade. Specifically, the Exchangedesignated broker-dealer will be responsible for determining whether the orders may be executed in accordance with all of the rules applicable to the execution of equity orders, including compliance with the applicable short sale, trade-through, and reporting rules. In the event that the stock component of a stock-option order cannot be executed by the Exchange-designated broker- mstockstill on DSK4VPTVN1PROD with NOTICES 11 See Interpretation and Policy .06 to Rule 6.53C(b)(1). 12 See Interpretation and Policy .06 to Rule 6.53C. 13 See Interpretation and Policy .06 to Rule 6.53C (Complex Orders on the Hybrid System); see also Securities and Exchange Release No. 34–66759 (April 6, 2012), 77 FR 22027 (April 12, 2012) (Order Approving a Proposed Rule Change Relating to Stock-Option Orders) (SR–CBOE–2012–005); Securities and Exchange Release No. 34–66394 (February 14, 2012), 77 FR 10026 (February 21, 2012) (Notice of Filing of a Proposed Rule Change Related to Stock-Option Processing) (SR–CBOE– 2012–005); Securities and Exchange Release No. 34–56903 (December 5, 2007), 72 FR 70356 (December 11, 2007) (Order Approving Proposed Rule Change, as Modified by Amendment No. 1, Relating to Stock-Option Orders) (SR–CBOE–2007– 068). 14 Currently, ConvergEx Execution Services, LLC (‘‘ConvergEx’’) is the only Exchange-designated broker-dealer that the Exchange uses for executions of stock components of stock-option orders on away stock trading venues. The Exchange, however, may require TPHs to enter into a brokerage agreement with one or more Exchange-designated brokerdealers that are not affiliated with the Exchange to electronically execute the stock component of the stock-option order at a stock trading venue. See Interpretation and Policy .06 to Rule 6.53C. VerDate Sep<11>2014 18:37 Mar 31, 2015 Jkt 235001 dealer, the stock-option order execution will be nullified and parties to the trade will be notified by the Exchange.15 Currently, TPHs that wish to participate in electronic stock-option order processing must enter into a customer agreement with one or more designated broker-dealer that is not affiliated with the Exchange.16 In addition, to be eligible for electronic processing, TPHs must validate that they have executed a brokerage agreement with an Exchange-designated broker-dealer in order to obtain activation of stock-option order entry functionality on the Floor Broker Workstation (‘‘FBW’’).17 TPHs may only submit complex orders with a stock component for electronic processing if such orders comply with the Qualified Contingent Trade (‘‘QCT’’) Exemption of Rule 611(a) of Regulation NMS.18 A QCT is a transaction consisting of two or more component orders, executed as agent or principal, that satisfies the six elements enumerated in the Commission’s Order exempting QCTs from the requirements of 611(a), which requires trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent trade-throughs. TPHs submitting stock-option orders for electronic processing must represent that the orders’ terms comply with the QCT Exemption of Rule 611(a) of Regulation NMS.19 Proposed Rule Changes The Exchange proposes to introduce enhanced PAR functionality that would allow TPHs and PAR Officials to route 15 See generally id. [sic]; see also Rule 6.25(a)(3). Interpretation and Policy .06 to Rule 6.53C; see also Regulatory Circular RG12–088 (Automation of Stock-Option Strategy Orders). 17 FBW is a system for electronically entering and electronically managing orders on the floor of the Exchange. FBW is a third-party facility of the Exchange supplied and managed by LiquidPoint, LLC. 18 See 17 CFR 242.611(a); Rule 6.53C.06(a); see also Securities and Exchange Release No. 34–57620 (April 4, 2008), 73 FR 19271 (April 9, 2008) (Order Modifying the Exemption for Qualified Contingent Trades from Rule 611(a) of Regulation NMS under the Securities Exchange Act of 1934); Securities Exchange Act Release No. 34–54389 (August 31, 2006), 71 FR 52829 (September 7, 2006) (Order Granting an Exemption for Qualified Contingent Trades from Rule 611(a) of Regulation NMS under the Securities Exchange Act of 1934). 19 See Interpretation and Policy .06(a) to Rule 6.53C. In addition, the Exchange has built certain checks into the Hybrid Trading System to validate certain aspects of compliance with the QCT Exemption of Rule 611(a) of Regulation NMS for stock-option orders. Those QCT validating checks are described in SR–CBOE–2012–005. See Securities and Exchange Release No. 34–66394 (February 14, 2012), 77 FR 10026 (February 21, 2012) (Notice of Filing of a Proposed Rule Change Related to Stock-Option Processing) (SR–CBOE– 2012–005). 16 See PO 00000 Frm 00145 Fmt 4703 Sfmt 4703 the stock portion of a stock-option order directly to an Exchange-designated broker-dealer for electronic execution at a stock trading facility. Under proposed Rule 6.48(d), TPHs and PAR Officials would be able to transmit stock portions of stock-option orders represented in open outcry directly from PAR to an Exchange-designated broker-dealer not affiliated with the Exchange for electronic execution at a stock trading venue. Thus, rather than executing stock orders manually via telephone, PAR users would be able to electronically send the stock portion of the stockoption order from PAR directly to an Exchange-designated broker-dealer for immediate execution at a stock trading venue. The Exchange notes that this functionality (electronic stock component order routing, processing, and handling), is already in use for electronic stock-option orders submitted into the Hybrid Trading System. The Exchange is merely proposing to extend this functionality to stock-option orders handled on the floor of the Exchange. The Exchange believes this added functionality will support more efficient stock-option order execution, streamline the steps required for open outcry stockoption order trading, and enhance the Exchange’s audit trail by creating a more robust record of the stock component of stock option order executions on the floor of the Exchange. Proposed Rule 6.48(d) would also provide that stock portions of stockoption orders represented in open outcry may be routed to a designated broker-dealer not affiliated with the Exchange for electronic execution at a stock trading venue as single orders or as paired orders (including with orders transmitted from separate PAR workstations). Consistent with current practices, the Exchange-designated broker-dealer would be responsible for the proper execution, trade reporting, and submission to clearing of the stock trade that is part of the stock-option order. Stock-option order executions for which the stock portion of the order could not be executed at the designated price would be nullified and the parties to the trade would be notified by the Exchange.20 In addition, consistent with current Interpretation and Policy .06(a) to Rule 6.53C, TPHs’ compliance with the Qualified Contingent Trade (‘‘QCT’’) Exemption of Rule 611(a) of Regulation NMS would continue to be required for stock-option orders where the stock component of the stock-option order is routed from PAR to an Exchangedesignated broker-dealer not affiliated with the Exchange for electronic 20 See E:\FR\FM\01APN1.SGM Rule 6.25(a)(3). 01APN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 80, No. 62 / Wednesday, April 1, 2015 / Notices execution at a stock trading venue selected by the Exchange-designated broker-dealer. The Exchange also proposes to amend Interpretation and Policy .06(a) to Rule 6.53C. Under current Interpretation and Policy .06(a) to Rule 6.53C, the stock portion of a stock-option order cannot be processed automatically unless the executing TPH has entered into a brokerage agreement with one or more Exchange-designated broker-dealers that are not affiliated with the Exchange that can electronically execute the equity order on a stock trading venue. The Exchange proposes to change Interpretation and Policy .06 to Rule 6.53C to provide that the Trading Permit Holder shall give up a Clearing Trading Permit Holder previously identified to, and processed by the Exchange as a Designated Give Up for that Trading Permit Holder in accordance with Rule 6.21 and which has entered into a brokerage agreement with one or more Exchange-designated broker-dealers that are not affiliated with the Exchange to electronically execute the stock component of the stock-option order at a stock trading venue selected by the Exchange-designated broker-dealer on behalf of the Trading Permit Holder. The Exchange believes that the proposed rule change would bring Interpretation and Policy .06(a) to Rule 6.53C in line with the Exchange’s give up rules in Rule 6.21. All trades are finalized not when they are executed, but when they clear. It is the CTPH, not the order entry TPH that guarantees authorization of a trade and accepts financial responsibility for all Exchange transactions made by the executing TPH. Because the CTPH is the party guaranteeing the transaction, the Exchange believes that it is reasonable to require that the CTPH enter into a brokerage agreement with an Exchangedesignated broker-dealer not affiliated with the Exchange in order to route the stock portion of a stock-option order for electronic processing rather than requiring an executing TPH (that may be acting as agent or broker) to enter into such an agreement on the CTPH’s behalf. Consistent with Rule 6.21, the CTPH should be responsible for order handling and processing requirements for trades that it guarantees.21 Furthermore, under current Interpretation and Policy .06(a) to Rule 6.53C, the stock portion of a stockoption order cannot be processed 21 See Rule 6.21; see also Securities and Exchange Release No. 34–72668 (July 24, 2014), 79 FR 44229 (July 30, 2014) (Order Granting Approval of a Proposed Rule Change Relating to the Give Up of a Clearing Trading Permit Holder) (SR–CBOE– 2014–048). VerDate Sep<11>2014 18:37 Mar 31, 2015 Jkt 235001 automatically unless the executing TPH has entered into a brokerage agreement with one or more Exchange-designated broker-dealers that are not affiliated with the Exchange that can electronically execute the equity order on a stock trading venue. Accordingly, even when acting as agent or broker, a TPH cannot submit the stock portion of a stock-option order for electronic processing unless the TPH has entered into a brokerage agreement with an Exchange-designated broker-dealer that is not affiliated with the Exchange. The Exchange believes that current Interpretation and Policy .06(a) has a chilling effect on market activity because it prohibits TPHs from entering orders when acting as a broker for the account of a CTPH or a CTPH customer account. Brokers that represent a stockoption order merely as an executing agent rather than on behalf of their own customers may be less willing to enter into a brokerage agreement with one or more Exchange-designated brokerdealers and accept counterparty risk for a one-time fee. On the other hand, a CTPH that submits such an order to a floor broker on behalf of its own customer and has already accepted counterparty risk on behalf of its customer as clearing agent and would likely enter such a brokerage agreement willing as it would extend counterparty risk current parameters.22 Accordingly, the Exchange proposes to amend Interpretation and Policy .06(a) to Rule 6.53C to provide that TPHs shall give up a CTPH previously identified to, and processed by the Exchange as a Designated Give Up in accordance with Rule 6.21 and which has entered into a brokerage agreement with one or more Exchange-designated broker-dealers that are not affiliated with the Exchange to electronically execute the stock portion of the stockoption order at a stock trading venue selected by the Exchange-designated broker-dealer.23 22 Notably, CTPHs have indicated support this proposal. The Exchange believes that the proposed rule change will allow for more efficient handling and processing of stock-option orders on the Exchange and that adoption of the proposal would remove impediments to, and perfect the mechanisms, of a national market system across stock and options trading venues. 23 Validations of the required brokerage agreements between CTPHs and an Exchangedesignated broker-dealer would be conducted by the Exchange. Access to electronic processing of stock option orders would be systematically limited to those CTPHs identified as having a brokerage agreement with an Exchange-designated brokerdealer in place. In addition further validation will be ensured through market participant identifiers provided by CTPHs. MPIDs are firm identifiers issued by the NASDAQ Market Center for electronic securities order processing. All electronic stock PO 00000 Frm 00146 Fmt 4703 Sfmt 4703 17531 The Exchange also proposes to change Interpretation and Policy .06 to Rule 6.53C to provide that stock-option orders may be executed against other electronic stock-option orders rather than state that such orders may be executed against other stock-option orders through the COB or COA. This change reflects the fact that such orders may be subjected to the Automated Improvement Mechanism (‘‘AIM’’) as well as executed through the COB or COA. Finally, the Exchange proposes conforming administrative changes to the Rules to include the language describing these functionality enhancements in Rules 6.45A and 6.45B. The proposed administrative changes would provide reference to this new technology within the priority rules for stock-option orders. Thus, these administrative changes merely add clarity to the Rules regarding the functionality available to TPHs on PAR. 2. Statutory Basis The Exchange believes the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to the Exchange and, in particular, the requirements of Section 6(b) of the Act.24 Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 25 requirements that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitation transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. Additionally, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 26 requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. In particular, the Exchange believes the proposed rule change removes impediments to and perfects the mechanism of a free and open market by eliminating steps involved in stockoption order execution on the Exchange which allows for more efficient trading. option order messages sent to the Exchange must contain an MPID. The Exchange’s designed brokerdealer would also use MPIDs to process and clear the stock component of electronically executed stock option orders. 24 15 U.S.C. 78f(b). 25 15 U.S.C. 78f(b)(5). 26 Id. E:\FR\FM\01APN1.SGM 01APN1 mstockstill on DSK4VPTVN1PROD with NOTICES 17532 Federal Register / Vol. 80, No. 62 / Wednesday, April 1, 2015 / Notices By allowing PAR users to route the stock portion of a stock-option order to a broker at a stock trading venue directly from PAR, the Exchange is attempting to allow stock-option orders to be matched faster and more efficiently. Creating a more streamlined approach to the execution of stockoption orders allows for less complicated and, thus, less confusing trading on the Exchange. In addition, as a consequence, the proposed rule change will promote more liquidity on the national market system by allowing TPHs to more easily use stock-option orders and more quickly send stock leg portions of complex order to stock trading venues for execution. The Exchange also believes that the proposed rule would enhance the Exchange’s audit trail by creating a more robust record of the stock component of stock option order executions on the floor of the Exchange. The Exchange also believes that the proposed changes to Interpretation and Policy .06 to Rule 6.53C to provide that the Trading Permit Holder shall give up a Clearing Trading Permit Holder previously identified to, and processed by the Exchange as a Designated Give Up for that Trading Permit Holder in accordance with Rule 6.21 and which has entered into a brokerage agreement with one or more Exchange-designated broker-dealers that are not affiliated with the Exchange to electronically execute the stock component of the stock-option order at a stock trading venue selected by the Exchangedesignated broker-dealer on behalf of the Trading Permit Holder would help create a more robust market for stockoption orders and protect investors interests consistent with the Act. The Exchange believes that the proposed rule change would bring Interpretation and Policy .06(a) to Rule 6.53C in line with the Exchange’s give up rules in Rule 6.21. Consistent with Rule 6.21, the CTPH should be responsible for order handling and processing requirements for trades that it guarantees. The proposed amendments are reasonable and provide certainty that a CTPH will always be responsible for a trade, which protects investors and the public interest. Finally, the Exchange believes that the proposed change to Interpretation and Policy .06 to Rule 6.53C providing that stock-option orders may be executed against other electronic stockoption orders and the proposed amendments to Rules 6.45A and 6.45B would add additional clarity and transparency to the Rules. The Exchange continues to evaluate its Rules to add additional clarity and transparency VerDate Sep<11>2014 18:37 Mar 31, 2015 Jkt 235001 whenever possible. The Exchange believes that its efforts to clarify the Rules are in the interests of market participants and the general public and that providing added transparency in the Rules is consistent with the Act. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. Specifically, the Exchange already offers such orders and is merely introducing new functionality to execute such orders. Thus, the Exchange does not believe that the proposed changes will pose a burden on intramarket competition or intermarket competition as these orders are already available on the Exchange. The functionality is available to all TPHs that choose to enter into the necessary agreements with the Exchange designated broker-dealer that is not affiliated with the Exchange. To the contrary, the Exchange believes that the proposed rule change will relieve any burden on, or otherwise promote, competition as it allows for market participants to more quickly execute stock-option orders via the Exchange’s Hybrid System. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange neither solicited nor received written comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission will: A. by order approve or disapprove such proposed rule change, or B. institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: PO 00000 Frm 00147 Fmt 4703 Sfmt 9990 Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– CBOE–2015–029 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–CBOE–2015–029. 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 also will be available for inspection and copying at the principal offices of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–CBOE– 2015–029, and should be submitted on or before April 22, 2015. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.27 Brent J. Fields, Secretary. [FR Doc. 2015–07364 Filed 3–31–15; 8:45 am] BILLING CODE 8011–01–P 27 17 E:\FR\FM\01APN1.SGM CFR 200.30–3(a)(12). 01APN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 80, Number 62 (Wednesday, April 1, 2015)]
[Notices]
[Pages 17528-17532]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-07364]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74590; File No. SR-CBOE-2015-029]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Relating to 
Stock-Option Order Handling

March 26, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on March 16, 2014, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules regarding the handling and 
processing of stock-option orders on the Exchange. The text of the 
proposed rule change is available on the Exchange's Web site (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's 
Office of the Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

[[Page 17529]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend its rules regarding the handling and 
processing of stock-option orders represented in open outcry on the 
floor of the Exchange. Specifically, the Exchange proposes to adopt 
subparagraph (d) to Rule 6.48 (Contract Made on Acceptance of Bid or 
Offer) to extend electronic stock component routing functionality 
currently only available in the electronic trading environment to 
Public Automated Routing (``PAR'') workstation \3\ users and thus, 
allow Trading Permit Holders (``TPHs'') or PAR Officials \4\ to 
electronically route the stock component of a stock-option order 
represented in open outcry on the floor of the Exchange to an Exchange-
designated broker-dealer not affiliated with the Exchange for 
electronic execution at a stock trading venue directly from PAR. In 
addition, the Exchange proposes to amend Interpretation and Policy .06 
to Rule 6.53C to require that the Clearing Trading Permit Holder 
(``CTPHs'') (instead of the executing TPH), on a stock-option order, 
enter into a brokerage agreement with one or more non-affiliated 
Exchange-designated broker-dealers before electronically routing the 
stock component a of stock-option order to an Exchange-designated 
broker-dealer for execution at a stock-trading venue.\5\ The Exchange 
also proposes to add cross-references to the proposed amended stock-
option order handling and processing rules in the Interpretations and 
Policies to Rules 6.45A (Priority and Allocation of Equity Option 
Trades on the CBOE Hybrid System) and 6.45B (Priority and Allocation of 
Trades in Index Options and Options on ETFs on the CBOE Hybrid System). 
The Exchange believes that the proposed enhanced functionalities with 
respect to the handling and processing of stock-option orders on PAR 
will promote more efficient trading and benefit market participants by 
eliminating intermediary manual steps currently required for open 
outcry stock-option order execution.
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    \3\ The PAR workstation (``PAR'') is an Exchange-provided order 
management tool for use on the Exchange's trading floor by TPHs and 
PAR Officials. See Rule 6.12A; see also Rule 7.12 for a description 
of the responsibilities and obligations of PAR Officials. The 
Exchange's order handling system allows for orders to be routed to 
and from PAR in accordance with TPH and Exchange order routing 
parameters and the Rules of the Exchange. See Rule 6.12A.
    \4\ A PAR Official is an Exchange employee or independent 
contractor whom the Exchange may designate as being responsible for 
(i) operating the PAR workstation in a DPM trading crowd with 
respect to the classes of options assigned to him/her; (ii) when 
applicable, maintaining the book with respect to the classes of 
options assigned to him/her; and (iii) effecting proper executions 
of orders placed with him/her. See Rule 7.12.
    \5\ To enter transactions on the Exchange, a TPH must either be 
a CTPH or must have a CTPH agree to accept financial responsibility 
for all of its transactions. See Rule 6.21. Every CTPH will be 
responsible for the clearance of Exchange transactions of a TPH that 
``gives up'' the CTPH pursuant to a Letter of Authorization, Letter 
of Guarantee, or other authorization given by the CTPH to the 
executing TPH. See id.
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Current Procedures
    Under Rule 1.1, a stock-option order is defined as ``an order to 
buy or sell a stated number of units of an underlying or a related 
security coupled with either (a) the purchase or sale of option 
contract(s) on the opposite side of the market representing either the 
same number of units of the underlying or related security or the 
number of units of the underlying security necessary to create a delta 
neutral position or (b) the purchase or sale of an equal number of put 
and call option contracts, each having the same exercise price, 
expiration date and each representing the same number of units of stock 
as, and on the opposite side of the market from, the underlying or 
related security portion of the order.'' \6\ Stock-option orders are a 
popular with investors (e.g., buy-writes) and are frequently handled 
and processed on the Exchange. Currently, eligible stock-option orders 
\7\ may be handled and processed on the Exchange either manually in 
open outcry or electronically through the Hybrid Trading System.\8\ 
This proposal seeks to enhance PAR functionality to allow a third 
option for handling and processing of a stock-option order on the 
Exchange by allowing the stock component of a stock-option order 
executed in open outcry to be handled electronically directly from PAR 
by a PAR user (i.e. a floor broker or PAR Official) on the floor of the 
Exchange.
---------------------------------------------------------------------------

    \6\ Rule 1.1(ii); accord Rule 6.53C(a)(2).
    \7\ Eligible stock-option orders must comply with the Qualified 
Contingent Trade Exemption under Rule 611(a) of Regulation NMS. See 
infra at pages 8-9. TPHs submitting such orders represent that the 
orders comply with the QCT Exemption. See Interpretation and Policy 
.06 to Rule 6.53C. Certain other eligibility requirements may also 
apply to stock-option orders, which may be determined by Exchange 
routing parameters or in accordance with the order's terms. For 
example, stock-option orders must couple the stated number of units 
of an underlying stock or a security convertible into the underlying 
stock (``convertible security'') with the purchase or sale of 
options contract(s) on the opposite side of the market representing 
either (i) the same number of units of the underlying stock or 
convertible security, or (ii) the number of units of the underlying 
stock necessary to create a delta neutral position, but in no case 
in a ratio greater than eight-to-one (8.00), where the ratio 
represents the total number of units of the underlying stock or 
convertible security in the option leg to the total number of units 
of the underlying stock or convertible security in the stock leg (or 
such lower ratio as may be determined by the Exchange on a class-by-
class basis). Only those stock-option orders with no more than the 
applicable number of legs, as determined by the Exchange on a class-
by-class basis, are eligible for processing. See Rule 6.53C(a)(2). 
For electronic orders, the representing TPH must include a tied to 
stock indicator on each stock-option order upon systemization. See 
Rule 6.53(y); see also Regulatory Circular RG12-088 (Automation of 
Stock-Option Strategy Orders).
    \8\ The ``Hybrid Trading System'' refers to (i) the Exchange's 
trading platform that allows Market-Makers to submit electronic 
quotes in their appointed classes and (ii) any connectivity to the 
foregoing trading platform that is administered by or on behalf of 
the Exchange, such as a communications hub. References to 
``Hybrid,'' ``Hybrid System,'' or ``Hybrid Trading System'' in the 
Exchange's Rules include all platforms unless otherwise provided by 
rule.
---------------------------------------------------------------------------

Manual Processing
    Stock-option orders may be handled and processed on the Exchange in 
open outcry, with the stock portion of the order manually transmitted 
(e.g., via telephone) by the PAR user (i.e. a floor broker or PAR 
Official) on the floor to a broker on a stock trading venue for 
execution.\9\ Trading of a stock-option order in open outcry involves 
the stock-option order being represented in open outcry as a strategy 
order at a single net price with the option component being traded by a 
broker or PAR Official on the floor of the Exchange and the stock 
portion being manually transmitted to a broker at a stock trading venue 
for execution.\10\ Manual transmission of the stock component of a 
stock-option order is accomplished by placing a stock order with a 
broker as two paired orders with a designated limit price to be matched 
by the broker either on a lit stock exchange, Alternative Trading 
System (``ATS''), or over-the-counter. As agent, the broker is 
responsible for determining whether the order may be executed in 
accordance with all of the rules applicable to the execution of equity 
orders, including compliance with the applicable short sale, trade-
through, and reporting rules. In the event that the stock leg of a 
stock-option order cannot be executed by the broker, the stock-option 
order will remain on

[[Page 17530]]

PAR or, at the order entry firm's discretion, to the order entry firm's 
booth.\11\ Stock-option orders have historically been handled and 
processed in open outcry on the Exchange. The Exchange continues to 
allow TPHs to manually execute stock-option orders in this manner.\12\
---------------------------------------------------------------------------

    \9\ TPHs are required to comply with the Qualified Contingent 
Trade (``QCT'') Exemption of Rule 611(a) of Regulation NMS with 
respect to the execution of stock-option orders. See Interpretation 
and Policy .06 to Rule 6.53C.
    \10\ See Securities and Exchange Release No. 34-66394 (February 
14, 2012), 77 FR 10026 (February 21, 2012) (Notice of Filing of a 
Proposed Rule Change Related to Stock-Option Processing) (SR-CBOE-
2012-005); see also Rules 6.45A(b) and 6.45B(b).
    \11\ See Interpretation and Policy .06 to Rule 6.53C(b)(1).
    \12\ See Interpretation and Policy .06 to Rule 6.53C.
---------------------------------------------------------------------------

Electronic Processing
    Stock-option orders may also be handled electronically on the 
Exchange, with the stock portion of the order being electronically 
transmitted by the Exchange to a non-affiliated third party Exchange-
designated broker-dealer for execution at an away stock trading 
venue.\13\ Generally, the stock component of a stock-option order is 
transmitted to an Exchange-designated broker-dealer \14\ as two paired 
orders with a designated limit price after the Exchange's trading 
system has determined that a stock-option order is executable at the 
designated net price. Once transmitted to the Exchange-designated 
broker-dealer, the Exchange-designated broker dealer acts as agent for 
the stock leg of the stock-option order and is responsible for the 
proper execution, trade reporting, and submission to clearing of the 
stock trade. Specifically, the Exchange-designated broker-dealer will 
be responsible for determining whether the orders may be executed in 
accordance with all of the rules applicable to the execution of equity 
orders, including compliance with the applicable short sale, trade-
through, and reporting rules. In the event that the stock component of 
a stock-option order cannot be executed by the Exchange-designated 
broker-dealer, the stock-option order execution will be nullified and 
parties to the trade will be notified by the Exchange.\15\
---------------------------------------------------------------------------

    \13\ See Interpretation and Policy .06 to Rule 6.53C (Complex 
Orders on the Hybrid System); see also Securities and Exchange 
Release No. 34-66759 (April 6, 2012), 77 FR 22027 (April 12, 2012) 
(Order Approving a Proposed Rule Change Relating to Stock-Option 
Orders) (SR-CBOE-2012-005); Securities and Exchange Release No. 34-
66394 (February 14, 2012), 77 FR 10026 (February 21, 2012) (Notice 
of Filing of a Proposed Rule Change Related to Stock-Option 
Processing) (SR-CBOE-2012-005); Securities and Exchange Release No. 
34-56903 (December 5, 2007), 72 FR 70356 (December 11, 2007) (Order 
Approving Proposed Rule Change, as Modified by Amendment No. 1, 
Relating to Stock-Option Orders) (SR-CBOE-2007-068).
    \14\ Currently, ConvergEx Execution Services, LLC 
(``ConvergEx'') is the only Exchange-designated broker-dealer that 
the Exchange uses for executions of stock components of stock-option 
orders on away stock trading venues. The Exchange, however, may 
require TPHs to enter into a brokerage agreement with one or more 
Exchange-designated broker-dealers that are not affiliated with the 
Exchange to electronically execute the stock component of the stock-
option order at a stock trading venue. See Interpretation and Policy 
.06 to Rule 6.53C.
    \15\ See generally id. [sic]; see also Rule 6.25(a)(3).
---------------------------------------------------------------------------

    Currently, TPHs that wish to participate in electronic stock-option 
order processing must enter into a customer agreement with one or more 
designated broker-dealer that is not affiliated with the Exchange.\16\ 
In addition, to be eligible for electronic processing, TPHs must 
validate that they have executed a brokerage agreement with an 
Exchange-designated broker-dealer in order to obtain activation of 
stock-option order entry functionality on the Floor Broker Workstation 
(``FBW'').\17\ TPHs may only submit complex orders with a stock 
component for electronic processing if such orders comply with the 
Qualified Contingent Trade (``QCT'') Exemption of Rule 611(a) of 
Regulation NMS.\18\ A QCT is a transaction consisting of two or more 
component orders, executed as agent or principal, that satisfies the 
six elements enumerated in the Commission's Order exempting QCTs from 
the requirements of 611(a), which requires trading centers to 
establish, maintain, and enforce written policies and procedures that 
are reasonably designed to prevent trade-throughs. TPHs submitting 
stock-option orders for electronic processing must represent that the 
orders' terms comply with the QCT Exemption of Rule 611(a) of 
Regulation NMS.\19\
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    \16\ See Interpretation and Policy .06 to Rule 6.53C; see also 
Regulatory Circular RG12-088 (Automation of Stock-Option Strategy 
Orders).
    \17\ FBW is a system for electronically entering and 
electronically managing orders on the floor of the Exchange. FBW is 
a third-party facility of the Exchange supplied and managed by 
LiquidPoint, LLC.
    \18\ See 17 CFR 242.611(a); Rule 6.53C.06(a); see also 
Securities and Exchange Release No. 34-57620 (April 4, 2008), 73 FR 
19271 (April 9, 2008) (Order Modifying the Exemption for Qualified 
Contingent Trades from Rule 611(a) of Regulation NMS under the 
Securities Exchange Act of 1934); Securities Exchange Act Release 
No. 34-54389 (August 31, 2006), 71 FR 52829 (September 7, 2006) 
(Order Granting an Exemption for Qualified Contingent Trades from 
Rule 611(a) of Regulation NMS under the Securities Exchange Act of 
1934).
    \19\ See Interpretation and Policy .06(a) to Rule 6.53C. In 
addition, the Exchange has built certain checks into the Hybrid 
Trading System to validate certain aspects of compliance with the 
QCT Exemption of Rule 611(a) of Regulation NMS for stock-option 
orders. Those QCT validating checks are described in SR-CBOE-2012-
005. See Securities and Exchange Release No. 34-66394 (February 14, 
2012), 77 FR 10026 (February 21, 2012) (Notice of Filing of a 
Proposed Rule Change Related to Stock-Option Processing) (SR-CBOE-
2012-005).
---------------------------------------------------------------------------

Proposed Rule Changes
    The Exchange proposes to introduce enhanced PAR functionality that 
would allow TPHs and PAR Officials to route the stock portion of a 
stock-option order directly to an Exchange-designated broker-dealer for 
electronic execution at a stock trading facility. Under proposed Rule 
6.48(d), TPHs and PAR Officials would be able to transmit stock 
portions of stock-option orders represented in open outcry directly 
from PAR to an Exchange-designated broker-dealer not affiliated with 
the Exchange for electronic execution at a stock trading venue. Thus, 
rather than executing stock orders manually via telephone, PAR users 
would be able to electronically send the stock portion of the stock-
option order from PAR directly to an Exchange-designated broker-dealer 
for immediate execution at a stock trading venue. The Exchange notes 
that this functionality (electronic stock component order routing, 
processing, and handling), is already in use for electronic stock-
option orders submitted into the Hybrid Trading System. The Exchange is 
merely proposing to extend this functionality to stock-option orders 
handled on the floor of the Exchange. The Exchange believes this added 
functionality will support more efficient stock-option order execution, 
streamline the steps required for open outcry stock-option order 
trading, and enhance the Exchange's audit trail by creating a more 
robust record of the stock component of stock option order executions 
on the floor of the Exchange.
    Proposed Rule 6.48(d) would also provide that stock portions of 
stock-option orders represented in open outcry may be routed to a 
designated broker-dealer not affiliated with the Exchange for 
electronic execution at a stock trading venue as single orders or as 
paired orders (including with orders transmitted from separate PAR 
workstations). Consistent with current practices, the Exchange-
designated broker-dealer would be responsible for the proper execution, 
trade reporting, and submission to clearing of the stock trade that is 
part of the stock-option order. Stock-option order executions for which 
the stock portion of the order could not be executed at the designated 
price would be nullified and the parties to the trade would be notified 
by the Exchange.\20\ In addition, consistent with current 
Interpretation and Policy .06(a) to Rule 6.53C, TPHs' compliance with 
the Qualified Contingent Trade (``QCT'') Exemption of Rule 611(a) of 
Regulation NMS would continue to be required for stock-option orders 
where the stock component of the stock-option order is routed from PAR 
to an Exchange-designated broker-dealer not affiliated with the 
Exchange for electronic

[[Page 17531]]

execution at a stock trading venue selected by the Exchange-designated 
broker-dealer.
---------------------------------------------------------------------------

    \20\ See Rule 6.25(a)(3).
---------------------------------------------------------------------------

    The Exchange also proposes to amend Interpretation and Policy 
.06(a) to Rule 6.53C. Under current Interpretation and Policy .06(a) to 
Rule 6.53C, the stock portion of a stock-option order cannot be 
processed automatically unless the executing TPH has entered into a 
brokerage agreement with one or more Exchange-designated broker-dealers 
that are not affiliated with the Exchange that can electronically 
execute the equity order on a stock trading venue. The Exchange 
proposes to change Interpretation and Policy .06 to Rule 6.53C to 
provide that the Trading Permit Holder shall give up a Clearing Trading 
Permit Holder previously identified to, and processed by the Exchange 
as a Designated Give Up for that Trading Permit Holder in accordance 
with Rule 6.21 and which has entered into a brokerage agreement with 
one or more Exchange-designated broker-dealers that are not affiliated 
with the Exchange to electronically execute the stock component of the 
stock-option order at a stock trading venue selected by the Exchange-
designated broker-dealer on behalf of the Trading Permit Holder. The 
Exchange believes that the proposed rule change would bring 
Interpretation and Policy .06(a) to Rule 6.53C in line with the 
Exchange's give up rules in Rule 6.21.
    All trades are finalized not when they are executed, but when they 
clear. It is the CTPH, not the order entry TPH that guarantees 
authorization of a trade and accepts financial responsibility for all 
Exchange transactions made by the executing TPH. Because the CTPH is 
the party guaranteeing the transaction, the Exchange believes that it 
is reasonable to require that the CTPH enter into a brokerage agreement 
with an Exchange-designated broker-dealer not affiliated with the 
Exchange in order to route the stock portion of a stock-option order 
for electronic processing rather than requiring an executing TPH (that 
may be acting as agent or broker) to enter into such an agreement on 
the CTPH's behalf. Consistent with Rule 6.21, the CTPH should be 
responsible for order handling and processing requirements for trades 
that it guarantees.\21\
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    \21\ See Rule 6.21; see also Securities and Exchange Release No. 
34-72668 (July 24, 2014), 79 FR 44229 (July 30, 2014) (Order 
Granting Approval of a Proposed Rule Change Relating to the Give Up 
of a Clearing Trading Permit Holder) (SR-CBOE-2014-048).
---------------------------------------------------------------------------

    Furthermore, under current Interpretation and Policy .06(a) to Rule 
6.53C, the stock portion of a stock-option order cannot be processed 
automatically unless the executing TPH has entered into a brokerage 
agreement with one or more Exchange-designated broker-dealers that are 
not affiliated with the Exchange that can electronically execute the 
equity order on a stock trading venue. Accordingly, even when acting as 
agent or broker, a TPH cannot submit the stock portion of a stock-
option order for electronic processing unless the TPH has entered into 
a brokerage agreement with an Exchange-designated broker-dealer that is 
not affiliated with the Exchange. The Exchange believes that current 
Interpretation and Policy .06(a) has a chilling effect on market 
activity because it prohibits TPHs from entering orders when acting as 
a broker for the account of a CTPH or a CTPH customer account. Brokers 
that represent a stock-option order merely as an executing agent rather 
than on behalf of their own customers may be less willing to enter into 
a brokerage agreement with one or more Exchange-designated broker-
dealers and accept counterparty risk for a one-time fee. On the other 
hand, a CTPH that submits such an order to a floor broker on behalf of 
its own customer and has already accepted counterparty risk on behalf 
of its customer as clearing agent and would likely enter such a 
brokerage agreement willing as it would extend counterparty risk 
current parameters.\22\
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    \22\ Notably, CTPHs have indicated support this proposal. The 
Exchange believes that the proposed rule change will allow for more 
efficient handling and processing of stock-option orders on the 
Exchange and that adoption of the proposal would remove impediments 
to, and perfect the mechanisms, of a national market system across 
stock and options trading venues.
---------------------------------------------------------------------------

    Accordingly, the Exchange proposes to amend Interpretation and 
Policy .06(a) to Rule 6.53C to provide that TPHs shall give up a CTPH 
previously identified to, and processed by the Exchange as a Designated 
Give Up in accordance with Rule 6.21 and which has entered into a 
brokerage agreement with one or more Exchange-designated broker-dealers 
that are not affiliated with the Exchange to electronically execute the 
stock portion of the stock-option order at a stock trading venue 
selected by the Exchange-designated broker-dealer.\23\
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    \23\ Validations of the required brokerage agreements between 
CTPHs and an Exchange-designated broker-dealer would be conducted by 
the Exchange. Access to electronic processing of stock option orders 
would be systematically limited to those CTPHs identified as having 
a brokerage agreement with an Exchange-designated broker-dealer in 
place. In addition further validation will be ensured through market 
participant identifiers provided by CTPHs. MPIDs are firm 
identifiers issued by the NASDAQ Market Center for electronic 
securities order processing. All electronic stock option order 
messages sent to the Exchange must contain an MPID. The Exchange's 
designed broker-dealer would also use MPIDs to process and clear the 
stock component of electronically executed stock option orders.
---------------------------------------------------------------------------

    The Exchange also proposes to change Interpretation and Policy .06 
to Rule 6.53C to provide that stock-option orders may be executed 
against other electronic stock-option orders rather than state that 
such orders may be executed against other stock-option orders through 
the COB or COA. This change reflects the fact that such orders may be 
subjected to the Automated Improvement Mechanism (``AIM'') as well as 
executed through the COB or COA. Finally, the Exchange proposes 
conforming administrative changes to the Rules to include the language 
describing these functionality enhancements in Rules 6.45A and 6.45B. 
The proposed administrative changes would provide reference to this new 
technology within the priority rules for stock-option orders. Thus, 
these administrative changes merely add clarity to the Rules regarding 
the functionality available to TPHs on PAR.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\24\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \25\ requirements that the rules 
of an exchange be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitation transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \26\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78f(b).
    \25\ 15 U.S.C. 78f(b)(5).
    \26\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes the proposed rule change 
removes impediments to and perfects the mechanism of a free and open 
market by eliminating steps involved in stock-option order execution on 
the Exchange which allows for more efficient trading.

[[Page 17532]]

By allowing PAR users to route the stock portion of a stock-option 
order to a broker at a stock trading venue directly from PAR, the 
Exchange is attempting to allow stock-option orders to be matched 
faster and more efficiently. Creating a more streamlined approach to 
the execution of stock-option orders allows for less complicated and, 
thus, less confusing trading on the Exchange. In addition, as a 
consequence, the proposed rule change will promote more liquidity on 
the national market system by allowing TPHs to more easily use stock-
option orders and more quickly send stock leg portions of complex order 
to stock trading venues for execution. The Exchange also believes that 
the proposed rule would enhance the Exchange's audit trail by creating 
a more robust record of the stock component of stock option order 
executions on the floor of the Exchange.
    The Exchange also believes that the proposed changes to 
Interpretation and Policy .06 to Rule 6.53C to provide that the Trading 
Permit Holder shall give up a Clearing Trading Permit Holder previously 
identified to, and processed by the Exchange as a Designated Give Up 
for that Trading Permit Holder in accordance with Rule 6.21 and which 
has entered into a brokerage agreement with one or more Exchange-
designated broker-dealers that are not affiliated with the Exchange to 
electronically execute the stock component of the stock-option order at 
a stock trading venue selected by the Exchange-designated broker-dealer 
on behalf of the Trading Permit Holder would help create a more robust 
market for stock-option orders and protect investors interests 
consistent with the Act. The Exchange believes that the proposed rule 
change would bring Interpretation and Policy .06(a) to Rule 6.53C in 
line with the Exchange's give up rules in Rule 6.21. Consistent with 
Rule 6.21, the CTPH should be responsible for order handling and 
processing requirements for trades that it guarantees. The proposed 
amendments are reasonable and provide certainty that a CTPH will always 
be responsible for a trade, which protects investors and the public 
interest.
    Finally, the Exchange believes that the proposed change to 
Interpretation and Policy .06 to Rule 6.53C providing that stock-option 
orders may be executed against other electronic stock-option orders and 
the proposed amendments to Rules 6.45A and 6.45B would add additional 
clarity and transparency to the Rules. The Exchange continues to 
evaluate its Rules to add additional clarity and transparency whenever 
possible. The Exchange believes that its efforts to clarify the Rules 
are in the interests of market participants and the general public and 
that providing added transparency in the Rules is consistent with the 
Act.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. Specifically, the Exchange 
already offers such orders and is merely introducing new functionality 
to execute such orders. Thus, the Exchange does not believe that the 
proposed changes will pose a burden on intramarket competition or 
intermarket competition as these orders are already available on the 
Exchange. The functionality is available to all TPHs that choose to 
enter into the necessary agreements with the Exchange designated 
broker-dealer that is not affiliated with the Exchange. To the 
contrary, the Exchange believes that the proposed rule change will 
relieve any burden on, or otherwise promote, competition as it allows 
for market participants to more quickly execute stock-option orders via 
the Exchange's Hybrid System.

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

    The Exchange neither solicited nor received written comments on the 
proposed rule change.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. by order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2015-029 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2015-029. 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 also will be available 
for inspection and copying at the principal offices of the Exchange. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-CBOE-2015-029, 
and should be submitted on or before April 22, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-07364 Filed 3-31-15; 8:45 am]
BILLING CODE 8011-01-P

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