Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Related to Floor Broker Errors and the Use of Floor Broker Error Accounts, 28021-28027 [2015-11716]
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Federal Register / Vol. 80, No. 94 / Friday, May 15, 2015 / Notices
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Date: May 12, 2015.
Martha P. Rico,
For The Board Secretary to the Board.
[FR Doc. 2015–11745 Filed 5–14–15; 8:45 am]
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[Release No. 34–74923; File No. SR–CBOE–
2015–030]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change Related to Floor Broker
Errors and the Use of Floor Broker
Error Accounts
May 11, 2015.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on April 30,
2015, Chicago Board Options Exchange,
Incorporated (the ‘‘Exchange’’ or
‘‘CBOE’’) filed with the Securities and
Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Exchange filed the
proposal as a ‘‘non-controversial’’
proposed rule change pursuant to
Section 19(b)(3)(A)(iii) of the Act 3 and
Rule 19b–4(f)(6) thereunder.4 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 seeks to update its
rules related to floor broker errors and
the use of floor broker error accounts.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(6).
2 17
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The text of the proposed rule change is
provided below.
(additions are italicized; deletions are
[bracketed])
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Chicago Board Options Exchange,
Incorporated Rules
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Rule 6.79. Floor Broker Practices
(a) Liquidation or Reduction of Error
Account Positions. For a position
obtained as a result of a bona fide error,
a floor broker may reduce or liquidate
a position in the floor broker’s error
account (‘‘error account position’’) in
accordance with this Rule, but any
profit/loss from the liquidation or
reduction belongs to the floor broker
(‘‘liquidating floor broker’’).
A liquidating floor broker may
personally represent an order that will
liquidate or reduce the broker’s error
account position (‘‘liquidation order’’);
however, a liquidating floor broker may
not cross a liquidation order with a
client’s order also represented by the
liquidating floor broker, unless the
liquidating floor broker either: (1) Prior
to executing the orders, the liquidating
floor broker informs the client of the
broker’s intention to execute the client’s
order against an order for the floor
broker’s error account and the client
does not object; (2) the liquidating floor
broker sends the liquidation order to an
unassociated broker; or (3) the
liquidating floor broker sends the
client’s order to a PAR Official. For 1
through 3 above, the client’s order must
either be displayed in the relevant order
book or announced in open outcry in
accordance with Rule 6.74. An
unassociated broker for purposes of this
rule is any broker who is not directly or
indirectly controlling, controlled by, or
under common control with the
liquidating floor broker. After a floor
broker executes a liquidation order, the
floor brokers must notify the Exchange
in a form and manner prescribed by the
Exchange via Regulatory Circular.
(b) Erroneously Executed Orders.
Orders erroneously executed (e.g.,
executing a call order as a put or a buy
order as a sell) on the Exchange must
clear in the error account of the floor
broker that executed the erroneous
order, unless the erroneously executed
orders are nullified pursuant to a
mutual agreement under Exchange
Rules. It shall be considered conduct
inconsistent with just and equitable
principals of trade and a violation of
Rule 4.1 for a floor broker to give a trade
acquired through an error to another
Trading Permit Holder or for a Trading
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Permit Holder to accept a transaction
that another Trading Permit Holder
acquired through an error. If a floor
broker discovers an order was
erroneously executed on the Exchange,
the floor broker shall proceed as follows:
(i) If a better price is available at the
time the error was discovered, the
client’s order is entitled to be executed
at the better price. If a better price is not
available, then the floor broker is
responsible at the price at which the
client’s order should have been
executed, and the floor broker shall
either: (1) Execute the order at the
available market and give the client a
‘‘difference check’’ or (2) execute the
order out of the floor broker’s error
account and notify a CBOE Official, in
a form and manner prescribed by the
Exchange and announced via
Regulatory Circular, for potential
reporting of the error account
transaction as late or out of sequence as
necessary. If executing an order out of
the floor broker’s error account will
reduce or liquidate a position in the
floor broker’s error account, the floor
broker must follow the procedures in
paragraph (a).
(c) Lost or Misplaced Market Orders.
If a floor broker fails to execute a market
order, the client’s order is entitled to an
execution on up to the size of the
disseminated bid or offer at the time the
order was received or at a better price
if it is available at the time the error is
discovered. If a better price or the price
the client’s order is entitled to is not
available at the time the error is
discovered, the floor broker shall
provide an execution in the manner
described in (b)(i) above. If the
unexecuted market order is in excess of
the disseminated bid or offer at the time
the order was received, the execution
price on the additional contracts shall
be negotiated between the floor broker
and client.
(d) Legging Multi-Part Orders. A floor
broker is not restricted from legging
multi-part orders. For the purposes of
this Rule, multi-part orders include
complex orders, stock-option orders,
and futures and option orders where
one of the legs is executed on the
Exchange. If a broker executes a leg of
a complex option order, for example,
the price of the remaining leg of the
order must be within the current
disseminated market (e.g., when a
broker executes the buy side, the price
of the sell side of the order must be at
the disseminated offer price or lower). If
a floor broker is unable to complete the
execution of an order that the floor
broker has legged, the floor broker must
either: (1) Offer the executed leg to the
client; (2) liquidate the leg and then
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offer the trade, regardless of whether it’s
a profit or loss, to the client; (3) execute
the remaining leg(s) of the order at the
available market and give the client a
‘‘difference check’’; or (4) execute the
order out of the floor broker’s error
account and notify a CBOE Official, in
a form and manner prescribed by the
Exchange and announced via
Regulatory Circular, for potential
reporting of the error account
transaction as late or out of sequence as
necessary. The floor broker must
document the time and to whom the
offer noted in (1) and (2) above was
made and retain this record. If
executing an order out of the floor
broker’s error account will reduce or
liquidate a position in the floor broker’s
error account, the floor broker must
follow the procedures in paragraph (a).
(e) Print-Throughs. A print-through on
a limit order occurs when a trade is
effected at a better price than the order’s
limit during the time that the order
should have been represented in the
crowd. The order that is ‘printedthrough’ is entitled to the number of
contracts which trade through the
order’s limit up to the number of
contracts specified in the order.
Generally, the order that is ‘printedthrough’ should be given a better price
if it is available at the time the error is
discovered. However, under certain
circumstances, such as a systems
failure, where a large number of orders
were not received or receipt was
delayed, it would not be improper for a
floor broker to execute the client’s order
at the original limit price rather than the
better price. A floor broker shall
generally proceed as follows when a
print-through has occurred:
(i) If a floor broker discovers a printthrough and a better price is available
at that time, the client’s order is entitled
to be executed at the better price. If a
better price is no longer available, then
the floor broker is responsible at the
original limit price and the floor broker
shall either: (1) Execute the order at the
available market and give the client a
‘‘difference check’’ or (2) execute the
order out of the floor broker’s error
account and notify a CBOE Official, in
a form and manner prescribed by the
Exchange and announced via
Regulatory Circular, for potential
reporting of the error account
transaction as late or out of sequence as
necessary. If executing an order out of
the floor broker’s error account will
reduce or liquidate a position in the
floor broker’s error account, the floor
broker must follow the procedures in
paragraph (a).
(ii) If a print-through occurs on the
opening, the order that is ‘printed-
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through’ is entitled to the number of
contracts which print through at the
opening price. If a better price than the
opening price is available at the time
the error is discovered, the client’s order
shall be filled at the better price; if a
better price is not available, the floor
broker shall either: (1) Execute the order
at the available market and give the
client a ‘‘difference check’’ or (2)
execute the order out of the floor
broker’s error account and notify a
CBOE Official, in a form and manner
prescribed by the Exchange and
announced via Regulatory Circular, for
potential reporting of the error account
transaction as late or out of sequence as
necessary. If executing an order out of
the floor broker’s error account will
reduce or liquidate a position in the
floor broker’s error account, the floor
broker must follow the procedures in
paragraph (a).
(f) Stopping Orders. A floor broker
may not ‘‘Stop’’ or guarantee an
execution on a client’s order the floor
broker is holding from the floor broker’s
error account because doing so would
be acting as a market-maker in violation
of Rule 8.8.
(g) Documentation of Errors and
Record Keeping Requirements. All
transactions executed for a floor
broker’s error account must be
documented. These records must be
retained for a minimum of three years,
the first two years in an easily accessible
place.
Rules adopted by the SEC under the
Securities Exchange Act of 1934 (the
‘‘Act’’) require that a floor broker keep
a copy of every order the floor broker
receives, including orders received via
hand signals or phone, and all
cancelled orders and unexecuted orders.
A floor broker may arrange to have
these records kept on the floor broker’s
behalf; however, it is still the
responsibility of the floor broker to
produce such documents upon request.
These records must be retained for a
minimum of three years, the first two
years in an easily accessible place.
Failure to do so is a violation of the Act,
SEC Rules 17a–3 and 17a–4, and CBOE
Rules 4.2 (‘‘Adherence to Law’’) and
15.1 (‘‘Maintenance, Retention and
Furnishing of Books, Records and Other
Information’’).
. . .Interpretations and Policies:
.01 A liquidating floor broker
executing a liquidation order in
accordance with this rule in the trading
crowd where the broker is active as a
floor broker is not a violation of Rule
8.8. Additionally, CBOE Rules generally
do not prohibit a floor broker from
entering into transactions on other
exchanges for the floor broker’s personal
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account in financial instruments
underlying or related to the classes in
the trading crowd where the floor broker
acts as a floor broker.
.02 Pursuant to the due diligence
provisions of Rule 6.73, a floor broker’s
agency business has priority over the
broker’s liquidation orders.
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The text of the proposed rule change
is also available on the Exchange’s Web
site (https://www.cboe.com/AboutCBOE/
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange is proposing to adopt
new Rule 6.79 to codify policies related
to floor broker errors and the use of floor
broker error accounts. The proposed
rule incorporates several aspects of
CBOE Regulatory Circular RG95–49.5 In
addition, the proposed rule will
supersede RG95–49. The Exchange
believes it would be beneficial to codify
policies related to floor broker errors
and the use of floor broker error
accounts in Exchange rules in order to
provide further detail regarding errors
and the use of error accounts.
First, with proposed Rule 6.79(a), the
Exchange proposes to clarify and amend
its policy related to a floor broker
representing orders for the floor broker’s
own error account. The general
principle is that for a position obtained
as a result of a bona fide error, a broker
may reduce or liquidate a position in
the floor broker’s error account (‘‘error
5 RG95–49 reissued Regulatory Circular RG94–44.
RG94–44 was filed with the SEC and approved on
June 1, 2014 [sic]. See SR–CBOE–93–44; Securities
Exchange Act Release No. 34–34138 (June 7, 1994),
59 FR 108. The proposed rule will supersede RG95–
49 and RG94–44.
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account position’’) in accordance with
proposed Rule 6.79, but any profit/loss
from the liquidation or reduction
belongs to the floor broker (‘‘liquidating
floor broker’’). Furthermore, a
liquidating floor broker may personally
represent an order that will liquidate or
reduce the floor broker’s error account
position (‘‘liquidation order’’). As
stated, the proposed rule does not
prohibit floor brokers from personally
representing a liquidation order, except
in limited circumstances. For example,
a liquidating floor broker may not cross
a liquidation order with a client’s
order 6 also represented by the floor
broker, unless either: (1) Prior to
executing the orders, the liquidating
floor broker informs the client of the
floor broker’s intention to execute the
client’s order against an order for the
floor broker’s error account and the
client does not object 7; (2) the
liquidating floor broker sends the
liquidation order to an unassociated
broker; 8 or (3) the liquidating floor
broker sends the client’s order to a PAR
Official.9 For 1 through 3 above, the
client’s order must either be displayed
in the relevant order book or announced
in open outcry in accordance with Rule
6.74.10 An unassociated broker for
purposes of this rule is any broker who
is not directly or indirectly controlling,
6 RG95–49 utilized the term customer. The
proposed rule replaces ‘customer’ with ‘client’ in
order to avoid confusion as to the type of ‘customer’
(i.e., retail customer, client customer, etc.) referred
to in RG95–49.
7 In order to exit an error account position, floor
brokers often solicit contra side orders. The
Exchange believes floor brokers should be able to
cross liquidating orders with those solicited orders.
In addition, the Exchange notes that client consent
is presumed only after the client has been properly
notified. The Exchange also notes that the client
may always object to the transaction, which will
prohibit the floor broker from crossing the
liquidation order with the objecting client’s order.
Additionally, notification will be made on a per
order basis.
8 The Exchange notes that sending the liquidation
order to an unassociated broker removes the
potential conflict of interest between a floor
broker’s due diligence requirements and the floor
broker’s personal interest in executing a trade for
himself. In addition, as noted below, the client’s
order is further protected by requiring the order to
either be displayed in the order book or announced
via open outcry.
9 RG95–49 utilized the term OBO’s and DPM. The
Exchange proposes to remove the reference to
OBOs, as the Exchange no longer has OBOs. The
Exchange also proposes to replace DPM with PAR
Official.
10 The Exchange believes client consent protects
clients by allowing them to determine on a per
order basis whether their interests are being served
by trading with a liquidating floor broker. The
Exchange also notes that the requirement to either
display the client’s order in the relevant order book
or announce the crossing transaction in open outcry
also serves to protect the client by ensuring the
client’s order has access to greater liquidity and
potentially better prices.
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28023
controlled by, or under common control
with the liquidating broker. In addition,
after a floor broker executes a
liquidation order, the floor brokers must
notify the Exchange in a form and
manner prescribed by the Exchange via
regulatory circular.11 The Exchange
believes the proposed method for
liquidating an error account position is
non-controversial because the
procedural requirements, especially
requiring the client’s order to either be
displayed in the relevant order book or
announced in open outcry in
accordance with Rule 6.74, help to
ensure the client’s order receives the
best possible execution price.
Next, proposed Rule 6.79(b) requires
erroneously executed orders (e.g.,
executing a call order as a put or a buy
order as a sell) to be cleared in the error
account of the floor broker that executed
the erroneous order (creating an ‘‘error
account position’’) unless the
erroneously executed orders are
nullified pursuant to a mutual
agreement under Exchange rules.12
Furthermore, it will be considered a
violation of just and equitable principles
of trade and a violation of CBOE Rule
4.1 for a floor broker to give a trade
acquired through error to another
Trading Permit Holder (‘‘TPHs’’).13 The
proposed rule also makes it a violation
of Rule 4.1 for a TPH to accept a trade
that another TPH has acquired through
an error. The Exchange believes that
maintaining a uniform process for the
handling of errors by floor brokers is
appropriate. More specifically, by not
allowing the transfer of error positions
between floor brokers and marketmakers, the Exchange is eliminating
11 The Exchange notes that this provision will
allow CBOE to surveil for potential abuses related
to floor brokers liquidating positions, especially
when a liquidating floor broker trades with a client
order.
12 CBOE Rule 6.19 currently provides that ‘‘[a]
trade on the Exchange may be nullified or adjusted
if the parties to the trade agree to the nullification
or adjustment.’’ However, as part of an industrywide initiative to harmonize exchange rules
regarding obvious errors, Rule 6.19 will be replaced
by revised Rule 6.25. With regards to mutually
agreed nullifications and adjustments, revised Rule
6.25 is proposed to state that ‘‘[a] trade may be
nullified or adjusted on the terms that all parties to
a particular transaction agree, provided, however,
that such agreement to nullify or adjust must be
conveyed to the Exchange in a manner prescribed
by the Exchange prior to 7:30 a.m. Central Time on
the first trading day following the execution. It is
considered conduct inconsistent with just and
equitable principles of trade for any TPH to use the
mutual adjustment process to circumvent any
applicable Exchange rule, the Act or any of the
rules and regulations thereunder.’’ See Securities
Exchange Act Release No. 34–73884 (December 18,
2014), 79 FR 77557 (June 2, 2009 [sic]) (SR–BATS–
2014–067).
13 RG95–49 referred to Trading Permit Holders as
‘‘members’’, and the proposed rule seeks to update
the terminology in this respect.
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perceived conflicts of interest that may
result from error account position
transfers between TPHs.
In addition to the above restriction,
proposed Rule 6.79(b)(i) provides that if
a floor broker discovers an order was
erroneously executed on the Exchange,
the floor broker shall generally proceed
as follows: If a better price is available
at the time the error was discovered, the
client’s order is entitled to be executed
at the better price. If a better price is not
available, then the floor broker is
responsible at the price at which the
client’s order should have been
executed, and the floor broker shall
either: (1) Execute the order at the
available market and give the client a
‘‘difference check’’ or (2) execute the
order out of the floor broker’s error
account 14 and notify a CBOE Official, in
a form and manner prescribed by the
Exchange and announced via Regulatory
Circular, for potential reporting of the
error account transaction as late or out
of sequence as necessary. Additionally,
if executing an order out of the floor
broker’s error account will reduce or
liquidate a position in the floor broker’s
error account, the floor broker must
follow the procedures in paragraph (a).
The Exchange believes giving floor
brokers the option to execute the client’s
order out of the floor broker’s error
account is non-controversial because
RG95–49 generally provides the same
relief for print-throughs, lost or
misplaced market orders, and
erroneously executed orders. Although
under RG95–49 when a print-through,
lost or misplaced market order, or
erroneously executed order is
discovered during trading hours floor
brokers are prohibited from correcting
the error by filling the client out of an
error account if doing so would reduce
or liquidate a position in the floor
broker’s error account, the proposed
rule is non-controversial because the
floor broker must follow the procedures
outlined in paragraph (a) of Rule 6.79
whenever reducing or liquidating a
position in the floor broker’s error
account. As noted above the procedural
requirements of Rule 6.79(a), especially
requiring the client’s order to either be
displayed in the relevant order book or
announced in open outcry in
accordance with Rule 6.74, help to
ensure the client’s order receives the
best possible execution price.15
14 The Exchange notes that the Continuous Trade
Match System (‘‘CTM’’) is the mechanism by which
a floor broker would execute a client’s order out of
the floor broker’s error account.
15 The Exchange believes that all similar
provisions in this proposed rule that allow a floor
broker to provide a fill out of the broker’s error
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Next, proposed Rule 6.79(c) seeks to
codify policies related to lost or
misplaced market orders.16 The
Exchange believes it’s beneficial to
codify the lost or misplaced market
orders policy because doing so more
adequately notifies floor brokers of their
obligations and clients of their rights
regarding lost or misplaced market
orders. The proposed rule mandates that
if a floor broker fails to execute a market
order that has been lost or misplaced,
the client’s order is entitled to an
execution on up to the size of the
disseminated bid or offer at the time the
order was received or at a better price
if it is available at the time the error is
discovered. If a better price or the price
the client’s order is entitled to is not
available at the time the error is
discovered, the floor broker shall
provide an execution in the manner
described in (b)(i). If the unexecuted
market order is in excess of the
disseminated bid or offer at the time the
order was received, the execution price
on the additional contracts shall be
negotiated between the floor broker and
client.
Next, proposed Rule 6.79(d) sets forth
specific policies related to legging
multi-part orders.17 The Exchange
believes it’s beneficial to describe the
procedures a floor broker must follow
when the broker is unable to complete
an order the floor broker has legged. If
a floor broker executes a leg of a
complex option order, for example, the
price of the remaining leg of the order
must be within the current disseminated
market (e.g., when a broker executes the
buy side, the price of the sell side of the
order must be at the disseminated offer
price or lower). If a floor broker is
unable to complete the execution of an
order that the floor broker has legged,
the floor broker must either: (1) Offer
the executed leg to the client; (2)
liquidate the leg and then offer the
trade, regardless of whether it’s a profit
or loss, to the client; (3) execute the
remaining leg(s) of the order at the
available market and give the client a
difference check; or (4) execute the
order out of the floor broker’s error
account 18 and notify a CBOE Official, in
account are non-controversial for the same reasons
outlined above.
16 The Exchange notes, however, that this
provision does not mandate that off floor brokers
follow the procedures in 6.79(c); however, to the
extent that a transaction is executed on the
Exchange to fix an error due to a lost or misplaced
market order, the broker will be held to the
standard set forth in Rule 6.79(c).
17 Multi-part orders include complex orders,
stock-option orders, and futures and option orders
where one of the legs is executed on the Exchange.
18 The Exchange recognizes that RG95–49 stated
that if a floor broker was unable to complete an
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a form and manner prescribed by the
Exchange and announced via Regulatory
Circular, for potential reporting of the
error account transaction as late or out
of sequence as necessary. The floor
broker must document the time and to
whom the offer noted in (1) and (2)
above was made and retain this record.
Additionally, if executing an order out
of the floor broker’s error account will
reduce or liquidate a position in the
floor broker’s error account, the floor
broker must follow the procedures in
paragraph (a).
Next proposed Rule 6.79(e) seeks to
codify policies related to printthroughs.19 The rule mandates that if a
print-through is discovered the order
that is ‘printed-through’ should be
executed at the available market at the
time the print-through is discovered. If
the available market is at a better price,
the order that is ‘printed-through’ is
entitled to the better price. If the
available market is at a worse price, the
floor broker becomes responsible at the
original limit price 20 and must either:
(1) Execute the order at the available
market while providing the client a
‘‘difference check’’ or (2) execute the
order out of the floor broker’s error
account and notify a CBOE Official, in
a form and manner prescribed by the
Exchange and announced via Regulatory
Circular, for potential reporting of the
error account transaction as late or out
of sequence as necessary.21
order the broker legged, the broker could not
provide an execution on the unexecuted portion of
the order from the broker’s error account because
doing so would be acting as a market-maker in
violation of Rule 8.8. The Exchange now believes
that failing to complete an order that the broker has
legged is as much an error as a print-through and
providing an execution with an error account
would not implicate Rule 8.8 in most situations.
The Exchange recognizes, however, that a pattern
and practice of consistently using the error account
in this manner may lead the Exchange to the
conclusion that a broker is acting like a marketmaker in violation of Rule 8.8. The same is true for
the other provisions of the proposed rule that allow
a broker to provide a client a fill via the broker’s
error account.
19 A print-through on a limit order occurs when
a trade is effected at a better price than the order’s
limit during the time that the order should have
been represented in the crowd. For example, a floor
broker holds a client’s limit order to sell at $1.00.
If a trade occurs at $1.05 during the time in which
the order should have been represented in the
trading crowd, a print-through has occurred.
20 The rule contemplates situations in which the
client would not be entitled to the better price. For
example, a systems failure that causes a large
number of orders to not be received or if receipt was
delayed.
21 RG95–49 provided for three separate
procedures for print-throughs (print throughs
during trading hours; print-throughs outside trading
hours; and print-throughs on the opening).
Although the proposed rule includes a separate
procedure for print-throughs occurring on the
opening, the Exchange believes the proposed rule
protects investors and avoids potential confusion
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Additionally, if executing an order out
of the floor broker’s error account will
reduce or liquidate a position in the
floor broker’s error account, the floor
broker must follow the procedures in
paragraph (a).
Next, proposed Rule 6.79(f) seeks to
codify its policy related to stopping
orders. Again, pursuant to Rule 8.8, the
Exchange believes it is a violation of
Rule 8.8 for a broker to ‘‘Stop’’ or
guarantee an execution on a client’s
order he is holding from the floor
broker’s error account. The Exchange
believes that prohibiting floor brokers
from stopping orders or guaranteeing an
execution on a client’s order from the
floor broker’s error account ensures that
the floor broker is acting in the best
interest of the floor broker’s client;
rather than the interest of the broker’s
proprietary position.
Next, proposed Rule 6.79(g) seeks to
codify its policy related to the
documentation of errors and record
keeping requirements. The proposed
rule mandates that ‘‘[a]ll transactions
executed for a floor broker’s error
account must be documented.’’ In
addition, the ‘‘records must be retained
for a minimum of three years, the first
two years in an easily accessible place.’’
In addition, in order to further stress the
importance of maintaining adequate and
complete records, the Exchange
specifies some of the records that must
be maintained in accordance with the
Securities Exchange Act of 1934, SEC
Rules 17a–3 and 17a–4, and CBOE Rules
4.2 (‘‘Adherence to Law’’) and 15.1
(‘‘Maintenance, Retention and
Furnishing of Books, Records and Other
Information), including all cancelled
orders and unexecuted orders.
Next, the Exchange proposes to adopt
Interpretation and Policy .01 to provide
clarity regarding its policy prohibiting
floor brokers from acting as marketmakers. According to CBOE rules 22
floor brokers are generally prohibited
from acting as a market-maker on the
same business day in which they act as
a floor broker. However, Rule 8.8 is not
clear on whether a floor broker
representing the broker’s error account
is acting as a market-maker. The
Exchange does not believe in the
ordinary course of business that a floor
related to separate procedures by consolidating
procedures related to print-throughs during trading
hours and print-throughs outside trading hours. In
addition, the Exchange notes that the proposed rule
provides that for a print-through that occurs on the
opening, the order that is ‘printed-through’ is
entitled to the number of contracts which print
through at the opening price. For print-throughs not
occurring on the opening, the proposed rule does
not limit the number of contracts to which the order
is entitled.
22 CBOE Rule 8.8.
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broker is acting as a market-maker when
providing fills via an error account in
accordance with this proposed rule or
executing liquidating orders in
accordance with this proposed rule.
However, as noted previously, the
Exchange recognizes that a pattern of
consistently using an error account to
provide fills to customers may lead the
Exchange to the conclusion that a floor
broker is acting as a market-maker in
violation of Rule 8.8. In addition,
although the proposed rule clearly states
that a broker may execute liquidation
orders, Interpretation and Policy .01
makes it abundantly clear that the
prohibition against a broker acting as a
market-maker does not apply to a
liquidation order being executed by a
liquidating floor broker in the trading
crowd in which the floor broker is
active. In addition, CBOE Rules
generally do not prohibit a floor broker
‘‘from entering into transactions on
other exchanges for the floor broker’s
personal account in financial
instruments underling or related 23 to
the classes in the trading crowd where
the floor broker acts as a floor broker.’’
The Exchange notes, however, that it
would be a violation of CBOE Rules 4.1
(‘‘Just and Equitable Principles of
Trade’’) and 6.73 (‘‘Responsibilities of
Floor Brokers’’) and Regulatory Circular
RG94–76 (‘‘Front-running of Blocks’’)
for a floor broker to enter into
transactions in an underlying or related
financial instrument based on
information concerning a client’s option
order the floor broker holds, and
regulatory staff monitors for such
activity in the same manner it monitors
for front-running generally. In addition,
floor broker transactions in underlying
or related financial instruments are not
entitled to good faith credit under
Regulation T and must be margined as
customer transactions.
Finally, the Exchange proposes to
adopt Interpretation and Policy .02 to
make it clear that a broker’s agency
business takes priority over a floor
broker’s liquidation orders. For
example, marketable agency orders
should be executed prior to a broker
attempting to liquidate or reduce the
broker’s error account position.
To conclude, the Exchange believes
that the proposed rule is in furtherance
of the Act because it will allow floor
broker’s a straight-forward mechanism
for liquidating error account positions
while protecting investors. As stated
above, the Exchange intends to release
23 A related financial instrument would include
index futures if you are an OEX or SPX floor broker,
OEX options if you are an SPX floor broker, and
SPX options if you are an OEX floor broker.
PO 00000
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28025
a Regulatory Circular to announce the
implementation of the Rule and other
specifics surrounding the procedures of
the implementation. In addition, prior
to implementation, the Exchange will
ensure it has proper policies and
procedures in place to correctly
administer the Rule.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (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 facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 26 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, in addition to codifying
relevant portions of RG95–49, the
Exchange believes that the proposed
rule change enhances several aspects of
RG95–49, which helps perfect the
mechanism of a free and open market
and protect investors and the public
interest. Where RG95–49 disallows a
floor broker from crossing a client order
with an order for the broker’s error
account (i.e., a client order reducing an
error account position), the proposed
rule allows the activity if certain
procedures are followed (e.g., notifying
a client that the broker intends to
execute the client’s order against an
order for the broker’s error account in
order to allow the client to consent to
trade with the floor broker’s error
account), which promotes a free and
open market by allowing brokers to
source liquidity.
In addition, where RG95–49 ensured
that a customer is entitled to only ten
contracts at the disseminated bid or
offer when a broker loses or misplaces
24 15
25 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
26 Id.
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a market order, the proposed rule
provides that the customer is entitled to
the price and size of the disseminated
bid or offer, which the Exchange
believes promotes just and equitable
principles of trade because it more
adequately reflects the size and price
that a customer would have been
entitled to if no mistake was made.
Also, where RG95–49 prohibits the use
of a floor broker error account to
provide an execution to a client in
certain circumstances (e.g., when
providing a fill from an error account to
correct a print-through, lost or
misplaced market order, or erroneously
executed order would reduce or
liquidate a position in the floor broker’s
error account or when providing a fill
from an error account to provide an
execution on an unexecuted portion of
a multi-leg order,), the proposed rule
gives the broker the flexibility to
execute the order out of the broker’s
error account, which protects investors
and the public interest by ensuring that
customer orders are executed. As noted
above, the Exchange believes giving
floor brokers the option to correct an
error by executing the client’s order out
of the floor broker’s error account is
non-controversial because RG95–49
generally provides the same relief for
print-throughs, lost or misplaced market
orders, and erroneously executed
orders. Although under RG95–49 when
a print-through, lost or misplaced
market order, or erroneously executed
order is discovered during trading hours
floor brokers are prohibited from
correcting the error by filling the client
out of an error account if doing so
would reduce or liquidate a position in
the floor broker’s error account, the
proposed rule is non-controversial
because the floor broker must follow the
procedures outlined in paragraph (a) of
Rule 6.79 whenever reducing or
liquidating a position in the floor
broker’s error account. As noted above
the procedural requirements of Rule
6.79(a), especially requiring the client’s
order to either be displayed in the
relevant order book or announced in
open outcry in accordance with Rule
6.74, help to ensure the client’s order
receives the best possible execution
price. Finally, where RG95–49 provided
for three separate procedures for printthroughs (print throughs during trading
hours; print-throughs outside trading
hours; and print-throughs on the
opening), the proposed rule protects
investors and avoids potential confusion
related to separate procedures (even
though the proposed rule maintains a
separate procedure for print-throughs
that occur on the opening) by
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consolidating procedures related to
print-throughs during trading hours and
print-throughs outside trading hours.
Additionally, the proposed rule
prevents fraudulent and manipulative
acts and practices by requiring brokers
to clear errors in their own accounts
unless nullified pursuant to a mutually
agreement under Exchange rules.
Furthermore, requiring floor brokers to
notify the Exchange after executing an
order for the floor broker’s error account
or providing a fill to a client via the
floor broker’s error account will aid the
Exchange in the surveillance of error
account activity, which helps prevent
fraudulent and manipulative acts and
practices and promotes just and
equitable principles of trade. Finally,
the Exchange believes the proposed rule
promotes just and equitable principles
of trade by ensuring client orders are not
harmed for mistakes that are the fault of
brokers. The Exchange does not believe
the proposed rule is unfairly
discriminatory toward customers,
issuers, or brokers because the proposed
rule simply sets forth the process for
floor brokers to correct certain mistakes.
Finally, the proposed rule change is
also consistent with Section 11(a)(1) of
the Act and the rules promulgated
thereunder. Generally, Section 11(a)(1)
of the Act restricts any member of a
national securities exchange from
effecting any transaction on such
exchange for (i) the member’s own
account, (ii) the account of a person
associated with the member, or (iii) an
account over which the member or a
person associated with the member
exercises discretion, unless a specific
exemption is available. Examples of
common exemptions include the
exemption for transactions by broker
dealers acting in the capacity of a
market maker under Section 11(a)(1)(A),
the ‘‘G’’ exemption for yielding priority
to non-members under Section
11(a)(1)(G) of the Act and Rule 11a1–
1(T) thereunder, and ‘‘Effect vs.
Execute’’ exemption under Rule 11a2–
2(T) under the Act. In this regard, we
note that, consistent with existing
Exchange Rules for effecting proprietary
orders from on the floor of the
Exchange, Floor Broker TPHs effecting
orders for their error accounts and
relying on the G exemption would be
required to yield priority to any interest
in the electronic book at the same price
(not just public customer orders) to
ensure that non-member interest is
protected.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
CBOE does not believe that the
proposed rule change will impose any
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burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. More
specifically, the Exchange does not
believe the proposed rule changes will
impose any burden on intramarket
competition because it will be
applicable to all floor brokers. In
addition, the Exchange does not believe
the proposed changes will impose any
burden on intermarket competition
because proposed Rule 6.79 simply
provides a clearer mechanism for
correcting errors.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not:
A. Significantly affect the protection
of investors or the public interest;
B. impose any significant burden on
competition; and
C. become operative for 30 days from
the date on which it was filed, or such
shorter time as the Commission may
designate, it has become effective
pursuant to Section 19(b)(3)(A) of the
Act 27 and Rule 19b-4(f)(6) 28
thereunder.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.29
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
27 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6).
29 In addition, Rule 19b–4(f)(6)(iii) requires the
Exchange to give the Commission written notice of
the Exchange’s intent to file the proposed rule
change, along with a brief description and text of
the proposed rule change, at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
28 17
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Federal Register / Vol. 80, No. 94 / Friday, May 15, 2015 / Notices
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–2015–030 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.
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All submissions should refer to File
Number SR–CBOE–2015–030. 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–
2015–030, and should be submitted on
or before June 5, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.30
Robert W. Errett,
Deputy Secretary.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. IC–31598; File No. 812–14368]
Business Development Corporation of
America, et al.; Notice of Application
May 11, 2015.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice of application for an
order under sections 17(d) and 57(i) of
the Investment Company Act of 1940
(the ‘‘Act’’) and rule 17d–1 under the
Act to permit certain joint transactions
otherwise prohibited by sections 17(d)
and 57(a)(4) of the Act and rule 17d–1
under the Act.
AGENCY:
Applicants
request an order to permit business
development companies (‘‘BDCs’’) to coinvest in portfolio companies with each
other and with affiliated investment
funds.
APPLICANTS: Business Development
Corporation of America (‘‘BDCA’’);
Business Development Corporation of
America II (‘‘BDCA II’’); BDCA Venture,
Inc. (‘‘BDCA Venture,’’ and BDCA
Venture together with BDCA and BDCA
II, the ‘‘BDCA Funds’’), BDCA Adviser,
LLC (‘‘BDCA Adviser’’), on behalf of
itself and its successors; 1 BDCA Adviser
II, LLC (‘‘BDCA Adviser II’’), on behalf
of itself and its successors; BDCA
Venture Adviser, LLC, on behalf of itself
and its successors (‘‘BDCA Venture
Adviser’’); and BDCA Funding I, LLC;
BDCA 2L Funding I, LLC; BDCA–CB
Funding, LLC; and 54th Street Equity
Holdings, Inc. (collectively, the
‘‘Existing BDCA Subs’’).
DATES: Filing Dates: The application was
filed on October 2, 2014 and amended
on March 13, 2015.
HEARING OR NOTIFICATION OF HEARING: An
order granting the requested relief will
be issued unless the Commission orders
a hearing. Interested persons may
request a hearing by writing to the
Commission’s Secretary and serving
applicants with a copy of the request,
personally or by mail. Hearing requests
should be received by the Commission
by 5:30 p.m. on June 8, 2015, and
should be accompanied by proof of
service on applicants, in the form of an
affidavit or, for lawyers, a certificate of
service. Hearing requests should state
the nature of the writer’s interest, the
reason for the request, and the issues
contested. Persons who wish to be
SUMMARY OF APPLICATION:
[FR Doc. 2015–11716 Filed 5–14–15; 8:45 am]
1 The term ‘‘successor,’’ as applied to each
Adviser, means an entity that results from a
reorganization into another jurisdiction or change
in the type of business organization.
BILLING CODE 8011–01–P
30 17
CFR 200.30–3(a)(12).
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28027
notified of a hearing may request
notification by writing to the
Commission’s Secretary.
ADDRESSES: Secretary, U.S. Securities
and Exchange Commission, 100 F St.
NE., Washington, DC 20549–1090.
Applicants: James A. Tanaka, General
Counsel, RCS Capital, 405 Park Avenue,
14th Floor, New York, NY, 10022.
FOR FURTHER INFORMATION CONTACT:
Michael S. Didiuk, Senior Counsel, at
(202) 551–6839 or Holly Hunter-Ceci,
Branch Chief, at (202) 551–6869 (Chief
Counsel’s Office, Division of Investment
Management).
SUPPLEMENTARY INFORMATION: The
following is a summary of the
application. The complete application
may be obtained via the Commission’s
Web site by searching for the file
number, or for an applicant using the
Company name box, at https://
www.sec.gov/search/search.htm or by
calling (202) 551–8090.
Applicants’ Representations
1. BDCA, BDCA II and BDCA Venture
are Maryland corporations organized as
closed-end management investment
companies that have elected to be
regulated as BDCs under Section 54(a)
of the Act.2 BDCA’s Objectives and
Strategies 3 are to generate both current
income and to a lesser extent long-term
capital appreciation through debt and
equity investments. BDCA invests
primarily in first and second lien senior
loans and mezzanine debt issued by
middle market companies. BDCA II’s
Objectives and Strategies are to generate
both current income and, to a lesser
extent, capital appreciation through its
investments. BDCA II intends to achieve
this objective by investing in a portfolio
composed primarily of leveraged loans.
BDCA Venture’s Objectives and
Strategies are to maximize total return
by generating current income from debt
investments and, to a lesser extent,
capital appreciation from equity and
equity-related investments. BDCA
Venture seeks to accomplish its total
return objective by primarily lending
with warrants to emerging growth
2 Section 2(a)(48) defines a BDC to be any closedend investment company that operates for the
purpose of making investments in securities
described in sections 55(a)(1) through 55(a)(3) of the
Act and makes available significant managerial
assistance with respect to the issuers of such
securities.
3 ‘‘Objectives and Strategies’’ means a Regulated
Fund’s investment objectives and strategies, as
described in the Regulated Fund’s registration
statement on Form N–2, other filings the Regulated
Fund has made with the Commission under the
Securities Act of 1933 (the ‘‘Securities Act’’), or
under the Securities Exchange Act of 1934 and the
Regulated Fund’s reports to shareholders.
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]]>Agencies
[Federal Register Volume 80, Number 94 (Friday, May 15, 2015)]
[Notices]
[Pages 28021-28027]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-11716]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74923; File No. SR-CBOE-2015-030]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change Related to Floor Broker Errors and the Use of
Floor Broker Error Accounts
May 11, 2015.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 30, 2015, Chicago Board Options Exchange, Incorporated (the
``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in Items I and II below, which Items have been prepared by
the Exchange. The Exchange filed the proposal as a ``non-
controversial'' proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange seeks to update its rules related to floor broker
errors and the use of floor broker error accounts. The text of the
proposed rule change is provided below.
(additions are italicized; deletions are [bracketed])
* * * * *
Chicago Board Options Exchange, Incorporated Rules
* * * * *
Rule 6.79. Floor Broker Practices
(a) Liquidation or Reduction of Error Account Positions. For a
position obtained as a result of a bona fide error, a floor broker may
reduce or liquidate a position in the floor broker's error account
(``error account position'') in accordance with this Rule, but any
profit/loss from the liquidation or reduction belongs to the floor
broker (``liquidating floor broker'').
A liquidating floor broker may personally represent an order that
will liquidate or reduce the broker's error account position
(``liquidation order''); however, a liquidating floor broker may not
cross a liquidation order with a client's order also represented by the
liquidating floor broker, unless the liquidating floor broker either:
(1) Prior to executing the orders, the liquidating floor broker informs
the client of the broker's intention to execute the client's order
against an order for the floor broker's error account and the client
does not object; (2) the liquidating floor broker sends the liquidation
order to an unassociated broker; or (3) the liquidating floor broker
sends the client's order to a PAR Official. For 1 through 3 above, the
client's order must either be displayed in the relevant order book or
announced in open outcry in accordance with Rule 6.74. An unassociated
broker for purposes of this rule is any broker who is not directly or
indirectly controlling, controlled by, or under common control with the
liquidating floor broker. After a floor broker executes a liquidation
order, the floor brokers must notify the Exchange in a form and manner
prescribed by the Exchange via Regulatory Circular.
(b) Erroneously Executed Orders. Orders erroneously executed (e.g.,
executing a call order as a put or a buy order as a sell) on the
Exchange must clear in the error account of the floor broker that
executed the erroneous order, unless the erroneously executed orders
are nullified pursuant to a mutual agreement under Exchange Rules. It
shall be considered conduct inconsistent with just and equitable
principals of trade and a violation of Rule 4.1 for a floor broker to
give a trade acquired through an error to another Trading Permit Holder
or for a Trading
[[Page 28022]]
Permit Holder to accept a transaction that another Trading Permit
Holder acquired through an error. If a floor broker discovers an order
was erroneously executed on the Exchange, the floor broker shall
proceed as follows:
(i) If a better price is available at the time the error was
discovered, the client's order is entitled to be executed at the better
price. If a better price is not available, then the floor broker is
responsible at the price at which the client's order should have been
executed, and the floor broker shall either: (1) Execute the order at
the available market and give the client a ``difference check'' or (2)
execute the order out of the floor broker's error account and notify a
CBOE Official, in a form and manner prescribed by the Exchange and
announced via Regulatory Circular, for potential reporting of the error
account transaction as late or out of sequence as necessary. If
executing an order out of the floor broker's error account will reduce
or liquidate a position in the floor broker's error account, the floor
broker must follow the procedures in paragraph (a).
(c) Lost or Misplaced Market Orders. If a floor broker fails to
execute a market order, the client's order is entitled to an execution
on up to the size of the disseminated bid or offer at the time the
order was received or at a better price if it is available at the time
the error is discovered. If a better price or the price the client's
order is entitled to is not available at the time the error is
discovered, the floor broker shall provide an execution in the manner
described in (b)(i) above. If the unexecuted market order is in excess
of the disseminated bid or offer at the time the order was received,
the execution price on the additional contracts shall be negotiated
between the floor broker and client.
(d) Legging Multi-Part Orders. A floor broker is not restricted
from legging multi-part orders. For the purposes of this Rule, multi-
part orders include complex orders, stock-option orders, and futures
and option orders where one of the legs is executed on the Exchange. If
a broker executes a leg of a complex option order, for example, the
price of the remaining leg of the order must be within the current
disseminated market (e.g., when a broker executes the buy side, the
price of the sell side of the order must be at the disseminated offer
price or lower). If a floor broker is unable to complete the execution
of an order that the floor broker has legged, the floor broker must
either: (1) Offer the executed leg to the client; (2) liquidate the leg
and then offer the trade, regardless of whether it's a profit or loss,
to the client; (3) execute the remaining leg(s) of the order at the
available market and give the client a ``difference check''; or (4)
execute the order out of the floor broker's error account and notify a
CBOE Official, in a form and manner prescribed by the Exchange and
announced via Regulatory Circular, for potential reporting of the error
account transaction as late or out of sequence as necessary. The floor
broker must document the time and to whom the offer noted in (1) and
(2) above was made and retain this record. If executing an order out of
the floor broker's error account will reduce or liquidate a position in
the floor broker's error account, the floor broker must follow the
procedures in paragraph (a).
(e) Print-Throughs. A print-through on a limit order occurs when a
trade is effected at a better price than the order's limit during the
time that the order should have been represented in the crowd. The
order that is `printed-through' is entitled to the number of contracts
which trade through the order's limit up to the number of contracts
specified in the order. Generally, the order that is `printed-through'
should be given a better price if it is available at the time the error
is discovered. However, under certain circumstances, such as a systems
failure, where a large number of orders were not received or receipt
was delayed, it would not be improper for a floor broker to execute the
client's order at the original limit price rather than the better
price. A floor broker shall generally proceed as follows when a print-
through has occurred:
(i) If a floor broker discovers a print-through and a better price
is available at that time, the client's order is entitled to be
executed at the better price. If a better price is no longer available,
then the floor broker is responsible at the original limit price and
the floor broker shall either: (1) Execute the order at the available
market and give the client a ``difference check'' or (2) execute the
order out of the floor broker's error account and notify a CBOE
Official, in a form and manner prescribed by the Exchange and announced
via Regulatory Circular, for potential reporting of the error account
transaction as late or out of sequence as necessary. If executing an
order out of the floor broker's error account will reduce or liquidate
a position in the floor broker's error account, the floor broker must
follow the procedures in paragraph (a).
(ii) If a print-through occurs on the opening, the order that is
`printed-through' is entitled to the number of contracts which print
through at the opening price. If a better price than the opening price
is available at the time the error is discovered, the client's order
shall be filled at the better price; if a better price is not
available, the floor broker shall either: (1) Execute the order at the
available market and give the client a ``difference check'' or (2)
execute the order out of the floor broker's error account and notify a
CBOE Official, in a form and manner prescribed by the Exchange and
announced via Regulatory Circular, for potential reporting of the error
account transaction as late or out of sequence as necessary. If
executing an order out of the floor broker's error account will reduce
or liquidate a position in the floor broker's error account, the floor
broker must follow the procedures in paragraph (a).
(f) Stopping Orders. A floor broker may not ``Stop'' or guarantee
an execution on a client's order the floor broker is holding from the
floor broker's error account because doing so would be acting as a
market-maker in violation of Rule 8.8.
(g) Documentation of Errors and Record Keeping Requirements. All
transactions executed for a floor broker's error account must be
documented. These records must be retained for a minimum of three
years, the first two years in an easily accessible place.
Rules adopted by the SEC under the Securities Exchange Act of 1934
(the ``Act'') require that a floor broker keep a copy of every order
the floor broker receives, including orders received via hand signals
or phone, and all cancelled orders and unexecuted orders. A floor
broker may arrange to have these records kept on the floor broker's
behalf; however, it is still the responsibility of the floor broker to
produce such documents upon request. These records must be retained for
a minimum of three years, the first two years in an easily accessible
place. Failure to do so is a violation of the Act, SEC Rules 17a-3 and
17a-4, and CBOE Rules 4.2 (``Adherence to Law'') and 15.1
(``Maintenance, Retention and Furnishing of Books, Records and Other
Information'').
. . .Interpretations and Policies:
.01 A liquidating floor broker executing a liquidation order in
accordance with this rule in the trading crowd where the broker is
active as a floor broker is not a violation of Rule 8.8. Additionally,
CBOE Rules generally do not prohibit a floor broker from entering into
transactions on other exchanges for the floor broker's personal
[[Page 28023]]
account in financial instruments underlying or related to the classes
in the trading crowd where the floor broker acts as a floor broker.
.02 Pursuant to the due diligence provisions of Rule 6.73, a floor
broker's agency business has priority over the broker's liquidation
orders.
* * * * *
The text of the proposed rule change is also available on the
Exchange's Web site (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is proposing to adopt new Rule 6.79 to codify policies
related to floor broker errors and the use of floor broker error
accounts. The proposed rule incorporates several aspects of CBOE
Regulatory Circular RG95-49.\5\ In addition, the proposed rule will
supersede RG95-49. The Exchange believes it would be beneficial to
codify policies related to floor broker errors and the use of floor
broker error accounts in Exchange rules in order to provide further
detail regarding errors and the use of error accounts.
---------------------------------------------------------------------------
\5\ RG95-49 reissued Regulatory Circular RG94-44. RG94-44 was
filed with the SEC and approved on June 1, 2014 [sic]. See SR-CBOE-
93-44; Securities Exchange Act Release No. 34-34138 (June 7, 1994),
59 FR 108. The proposed rule will supersede RG95-49 and RG94-44.
---------------------------------------------------------------------------
First, with proposed Rule 6.79(a), the Exchange proposes to clarify
and amend its policy related to a floor broker representing orders for
the floor broker's own error account. The general principle is that for
a position obtained as a result of a bona fide error, a broker may
reduce or liquidate a position in the floor broker's error account
(``error account position'') in accordance with proposed Rule 6.79, but
any profit/loss from the liquidation or reduction belongs to the floor
broker (``liquidating floor broker''). Furthermore, a liquidating floor
broker may personally represent an order that will liquidate or reduce
the floor broker's error account position (``liquidation order''). As
stated, the proposed rule does not prohibit floor brokers from
personally representing a liquidation order, except in limited
circumstances. For example, a liquidating floor broker may not cross a
liquidation order with a client's order \6\ also represented by the
floor broker, unless either: (1) Prior to executing the orders, the
liquidating floor broker informs the client of the floor broker's
intention to execute the client's order against an order for the floor
broker's error account and the client does not object \7\; (2) the
liquidating floor broker sends the liquidation order to an unassociated
broker; \8\ or (3) the liquidating floor broker sends the client's
order to a PAR Official.\9\ For 1 through 3 above, the client's order
must either be displayed in the relevant order book or announced in
open outcry in accordance with Rule 6.74.\10\ An unassociated broker
for purposes of this rule is any broker who is not directly or
indirectly controlling, controlled by, or under common control with the
liquidating broker. In addition, after a floor broker executes a
liquidation order, the floor brokers must notify the Exchange in a form
and manner prescribed by the Exchange via regulatory circular.\11\ The
Exchange believes the proposed method for liquidating an error account
position is non-controversial because the procedural requirements,
especially requiring the client's order to either be displayed in the
relevant order book or announced in open outcry in accordance with Rule
6.74, help to ensure the client's order receives the best possible
execution price.
---------------------------------------------------------------------------
\6\ RG95-49 utilized the term customer. The proposed rule
replaces `customer' with `client' in order to avoid confusion as to
the type of `customer' (i.e., retail customer, client customer,
etc.) referred to in RG95-49.
\7\ In order to exit an error account position, floor brokers
often solicit contra side orders. The Exchange believes floor
brokers should be able to cross liquidating orders with those
solicited orders. In addition, the Exchange notes that client
consent is presumed only after the client has been properly
notified. The Exchange also notes that the client may always object
to the transaction, which will prohibit the floor broker from
crossing the liquidation order with the objecting client's order.
Additionally, notification will be made on a per order basis.
\8\ The Exchange notes that sending the liquidation order to an
unassociated broker removes the potential conflict of interest
between a floor broker's due diligence requirements and the floor
broker's personal interest in executing a trade for himself. In
addition, as noted below, the client's order is further protected by
requiring the order to either be displayed in the order book or
announced via open outcry.
\9\ RG95-49 utilized the term OBO's and DPM. The Exchange
proposes to remove the reference to OBOs, as the Exchange no longer
has OBOs. The Exchange also proposes to replace DPM with PAR
Official.
\10\ The Exchange believes client consent protects clients by
allowing them to determine on a per order basis whether their
interests are being served by trading with a liquidating floor
broker. The Exchange also notes that the requirement to either
display the client's order in the relevant order book or announce
the crossing transaction in open outcry also serves to protect the
client by ensuring the client's order has access to greater
liquidity and potentially better prices.
\11\ The Exchange notes that this provision will allow CBOE to
surveil for potential abuses related to floor brokers liquidating
positions, especially when a liquidating floor broker trades with a
client order.
---------------------------------------------------------------------------
Next, proposed Rule 6.79(b) requires erroneously executed orders
(e.g., executing a call order as a put or a buy order as a sell) to be
cleared in the error account of the floor broker that executed the
erroneous order (creating an ``error account position'') unless the
erroneously executed orders are nullified pursuant to a mutual
agreement under Exchange rules.\12\ Furthermore, it will be considered
a violation of just and equitable principles of trade and a violation
of CBOE Rule 4.1 for a floor broker to give a trade acquired through
error to another Trading Permit Holder (``TPHs'').\13\ The proposed
rule also makes it a violation of Rule 4.1 for a TPH to accept a trade
that another TPH has acquired through an error. The Exchange believes
that maintaining a uniform process for the handling of errors by floor
brokers is appropriate. More specifically, by not allowing the transfer
of error positions between floor brokers and market-makers, the
Exchange is eliminating
[[Page 28024]]
perceived conflicts of interest that may result from error account
position transfers between TPHs.
---------------------------------------------------------------------------
\12\ CBOE Rule 6.19 currently provides that ``[a] trade on the
Exchange may be nullified or adjusted if the parties to the trade
agree to the nullification or adjustment.'' However, as part of an
industry-wide initiative to harmonize exchange rules regarding
obvious errors, Rule 6.19 will be replaced by revised Rule 6.25.
With regards to mutually agreed nullifications and adjustments,
revised Rule 6.25 is proposed to state that ``[a] trade may be
nullified or adjusted on the terms that all parties to a particular
transaction agree, provided, however, that such agreement to nullify
or adjust must be conveyed to the Exchange in a manner prescribed by
the Exchange prior to 7:30 a.m. Central Time on the first trading
day following the execution. It is considered conduct inconsistent
with just and equitable principles of trade for any TPH to use the
mutual adjustment process to circumvent any applicable Exchange
rule, the Act or any of the rules and regulations thereunder.'' See
Securities Exchange Act Release No. 34-73884 (December 18, 2014), 79
FR 77557 (June 2, 2009 [sic]) (SR-BATS-2014-067).
\13\ RG95-49 referred to Trading Permit Holders as ``members'',
and the proposed rule seeks to update the terminology in this
respect.
---------------------------------------------------------------------------
In addition to the above restriction, proposed Rule 6.79(b)(i)
provides that if a floor broker discovers an order was erroneously
executed on the Exchange, the floor broker shall generally proceed as
follows: If a better price is available at the time the error was
discovered, the client's order is entitled to be executed at the better
price. If a better price is not available, then the floor broker is
responsible at the price at which the client's order should have been
executed, and the floor broker shall either: (1) Execute the order at
the available market and give the client a ``difference check'' or (2)
execute the order out of the floor broker's error account \14\ and
notify a CBOE Official, in a form and manner prescribed by the Exchange
and announced via Regulatory Circular, for potential reporting of the
error account transaction as late or out of sequence as necessary.
Additionally, if executing an order out of the floor broker's error
account will reduce or liquidate a position in the floor broker's error
account, the floor broker must follow the procedures in paragraph (a).
The Exchange believes giving floor brokers the option to execute the
client's order out of the floor broker's error account is non-
controversial because RG95-49 generally provides the same relief for
print-throughs, lost or misplaced market orders, and erroneously
executed orders. Although under RG95-49 when a print-through, lost or
misplaced market order, or erroneously executed order is discovered
during trading hours floor brokers are prohibited from correcting the
error by filling the client out of an error account if doing so would
reduce or liquidate a position in the floor broker's error account, the
proposed rule is non-controversial because the floor broker must follow
the procedures outlined in paragraph (a) of Rule 6.79 whenever reducing
or liquidating a position in the floor broker's error account. As noted
above the procedural requirements of Rule 6.79(a), especially requiring
the client's order to either be displayed in the relevant order book or
announced in open outcry in accordance with Rule 6.74, help to ensure
the client's order receives the best possible execution price.\15\
---------------------------------------------------------------------------
\14\ The Exchange notes that the Continuous Trade Match System
(``CTM'') is the mechanism by which a floor broker would execute a
client's order out of the floor broker's error account.
\15\ The Exchange believes that all similar provisions in this
proposed rule that allow a floor broker to provide a fill out of the
broker's error account are non-controversial for the same reasons
outlined above.
---------------------------------------------------------------------------
Next, proposed Rule 6.79(c) seeks to codify policies related to
lost or misplaced market orders.\16\ The Exchange believes it's
beneficial to codify the lost or misplaced market orders policy because
doing so more adequately notifies floor brokers of their obligations
and clients of their rights regarding lost or misplaced market orders.
The proposed rule mandates that if a floor broker fails to execute a
market order that has been lost or misplaced, the client's order is
entitled to an execution on up to the size of the disseminated bid or
offer at the time the order was received or at a better price if it is
available at the time the error is discovered. If a better price or the
price the client's order is entitled to is not available at the time
the error is discovered, the floor broker shall provide an execution in
the manner described in (b)(i). If the unexecuted market order is in
excess of the disseminated bid or offer at the time the order was
received, the execution price on the additional contracts shall be
negotiated between the floor broker and client.
---------------------------------------------------------------------------
\16\ The Exchange notes, however, that this provision does not
mandate that off floor brokers follow the procedures in 6.79(c);
however, to the extent that a transaction is executed on the
Exchange to fix an error due to a lost or misplaced market order,
the broker will be held to the standard set forth in Rule 6.79(c).
---------------------------------------------------------------------------
Next, proposed Rule 6.79(d) sets forth specific policies related to
legging multi-part orders.\17\ The Exchange believes it's beneficial to
describe the procedures a floor broker must follow when the broker is
unable to complete an order the floor broker has legged. If a floor
broker executes a leg of a complex option order, for example, the price
of the remaining leg of the order must be within the current
disseminated market (e.g., when a broker executes the buy side, the
price of the sell side of the order must be at the disseminated offer
price or lower). If a floor broker is unable to complete the execution
of an order that the floor broker has legged, the floor broker must
either: (1) Offer the executed leg to the client; (2) liquidate the leg
and then offer the trade, regardless of whether it's a profit or loss,
to the client; (3) execute the remaining leg(s) of the order at the
available market and give the client a difference check; or (4) execute
the order out of the floor broker's error account \18\ and notify a
CBOE Official, in a form and manner prescribed by the Exchange and
announced via Regulatory Circular, for potential reporting of the error
account transaction as late or out of sequence as necessary. The floor
broker must document the time and to whom the offer noted in (1) and
(2) above was made and retain this record. Additionally, if executing
an order out of the floor broker's error account will reduce or
liquidate a position in the floor broker's error account, the floor
broker must follow the procedures in paragraph (a).
---------------------------------------------------------------------------
\17\ Multi-part orders include complex orders, stock-option
orders, and futures and option orders where one of the legs is
executed on the Exchange.
\18\ The Exchange recognizes that RG95-49 stated that if a floor
broker was unable to complete an order the broker legged, the broker
could not provide an execution on the unexecuted portion of the
order from the broker's error account because doing so would be
acting as a market-maker in violation of Rule 8.8. The Exchange now
believes that failing to complete an order that the broker has
legged is as much an error as a print-through and providing an
execution with an error account would not implicate Rule 8.8 in most
situations. The Exchange recognizes, however, that a pattern and
practice of consistently using the error account in this manner may
lead the Exchange to the conclusion that a broker is acting like a
market-maker in violation of Rule 8.8. The same is true for the
other provisions of the proposed rule that allow a broker to provide
a client a fill via the broker's error account.
---------------------------------------------------------------------------
Next proposed Rule 6.79(e) seeks to codify policies related to
print-throughs.\19\ The rule mandates that if a print-through is
discovered the order that is `printed-through' should be executed at
the available market at the time the print-through is discovered. If
the available market is at a better price, the order that is `printed-
through' is entitled to the better price. If the available market is at
a worse price, the floor broker becomes responsible at the original
limit price \20\ and must either: (1) Execute the order at the
available market while providing the client a ``difference check'' or
(2) execute the order out of the floor broker's error account and
notify a CBOE Official, in a form and manner prescribed by the Exchange
and announced via Regulatory Circular, for potential reporting of the
error account transaction as late or out of sequence as necessary.\21\
[[Page 28025]]
Additionally, if executing an order out of the floor broker's error
account will reduce or liquidate a position in the floor broker's error
account, the floor broker must follow the procedures in paragraph (a).
---------------------------------------------------------------------------
\19\ A print-through on a limit order occurs when a trade is
effected at a better price than the order's limit during the time
that the order should have been represented in the crowd. For
example, a floor broker holds a client's limit order to sell at
$1.00. If a trade occurs at $1.05 during the time in which the order
should have been represented in the trading crowd, a print-through
has occurred.
\20\ The rule contemplates situations in which the client would
not be entitled to the better price. For example, a systems failure
that causes a large number of orders to not be received or if
receipt was delayed.
\21\ RG95-49 provided for three separate procedures for print-
throughs (print throughs during trading hours; print-throughs
outside trading hours; and print-throughs on the opening). Although
the proposed rule includes a separate procedure for print-throughs
occurring on the opening, the Exchange believes the proposed rule
protects investors and avoids potential confusion related to
separate procedures by consolidating procedures related to print-
throughs during trading hours and print-throughs outside trading
hours. In addition, the Exchange notes that the proposed rule
provides that for a print-through that occurs on the opening, the
order that is `printed-through' is entitled to the number of
contracts which print through at the opening price. For print-
throughs not occurring on the opening, the proposed rule does not
limit the number of contracts to which the order is entitled.
---------------------------------------------------------------------------
Next, proposed Rule 6.79(f) seeks to codify its policy related to
stopping orders. Again, pursuant to Rule 8.8, the Exchange believes it
is a violation of Rule 8.8 for a broker to ``Stop'' or guarantee an
execution on a client's order he is holding from the floor broker's
error account. The Exchange believes that prohibiting floor brokers
from stopping orders or guaranteeing an execution on a client's order
from the floor broker's error account ensures that the floor broker is
acting in the best interest of the floor broker's client; rather than
the interest of the broker's proprietary position.
Next, proposed Rule 6.79(g) seeks to codify its policy related to
the documentation of errors and record keeping requirements. The
proposed rule mandates that ``[a]ll transactions executed for a floor
broker's error account must be documented.'' In addition, the ``records
must be retained for a minimum of three years, the first two years in
an easily accessible place.'' In addition, in order to further stress
the importance of maintaining adequate and complete records, the
Exchange specifies some of the records that must be maintained in
accordance with the Securities Exchange Act of 1934, SEC Rules 17a-3
and 17a-4, and CBOE Rules 4.2 (``Adherence to Law'') and 15.1
(``Maintenance, Retention and Furnishing of Books, Records and Other
Information), including all cancelled orders and unexecuted orders.
Next, the Exchange proposes to adopt Interpretation and Policy .01
to provide clarity regarding its policy prohibiting floor brokers from
acting as market-makers. According to CBOE rules \22\ floor brokers are
generally prohibited from acting as a market-maker on the same business
day in which they act as a floor broker. However, Rule 8.8 is not clear
on whether a floor broker representing the broker's error account is
acting as a market-maker. The Exchange does not believe in the ordinary
course of business that a floor broker is acting as a market-maker when
providing fills via an error account in accordance with this proposed
rule or executing liquidating orders in accordance with this proposed
rule. However, as noted previously, the Exchange recognizes that a
pattern of consistently using an error account to provide fills to
customers may lead the Exchange to the conclusion that a floor broker
is acting as a market-maker in violation of Rule 8.8. In addition,
although the proposed rule clearly states that a broker may execute
liquidation orders, Interpretation and Policy .01 makes it abundantly
clear that the prohibition against a broker acting as a market-maker
does not apply to a liquidation order being executed by a liquidating
floor broker in the trading crowd in which the floor broker is active.
In addition, CBOE Rules generally do not prohibit a floor broker ``from
entering into transactions on other exchanges for the floor broker's
personal account in financial instruments underling or related \23\ to
the classes in the trading crowd where the floor broker acts as a floor
broker.'' The Exchange notes, however, that it would be a violation of
CBOE Rules 4.1 (``Just and Equitable Principles of Trade'') and 6.73
(``Responsibilities of Floor Brokers'') and Regulatory Circular RG94-76
(``Front-running of Blocks'') for a floor broker to enter into
transactions in an underlying or related financial instrument based on
information concerning a client's option order the floor broker holds,
and regulatory staff monitors for such activity in the same manner it
monitors for front-running generally. In addition, floor broker
transactions in underlying or related financial instruments are not
entitled to good faith credit under Regulation T and must be margined
as customer transactions.
---------------------------------------------------------------------------
\22\ CBOE Rule 8.8.
\23\ A related financial instrument would include index futures
if you are an OEX or SPX floor broker, OEX options if you are an SPX
floor broker, and SPX options if you are an OEX floor broker.
---------------------------------------------------------------------------
Finally, the Exchange proposes to adopt Interpretation and Policy
.02 to make it clear that a broker's agency business takes priority
over a floor broker's liquidation orders. For example, marketable
agency orders should be executed prior to a broker attempting to
liquidate or reduce the broker's error account position.
To conclude, the Exchange believes that the proposed rule is in
furtherance of the Act because it will allow floor broker's a straight-
forward mechanism for liquidating error account positions while
protecting investors. As stated above, the Exchange intends to release
a Regulatory Circular to announce the implementation of the Rule and
other specifics surrounding the procedures of the implementation. In
addition, prior to implementation, the Exchange will ensure it has
proper policies and procedures in place to correctly administer the
Rule.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (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 facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \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, in addition to codifying relevant portions of RG95-
49, the Exchange believes that the proposed rule change enhances
several aspects of RG95-49, which helps perfect the mechanism of a free
and open market and protect investors and the public interest. Where
RG95-49 disallows a floor broker from crossing a client order with an
order for the broker's error account (i.e., a client order reducing an
error account position), the proposed rule allows the activity if
certain procedures are followed (e.g., notifying a client that the
broker intends to execute the client's order against an order for the
broker's error account in order to allow the client to consent to trade
with the floor broker's error account), which promotes a free and open
market by allowing brokers to source liquidity.
In addition, where RG95-49 ensured that a customer is entitled to
only ten contracts at the disseminated bid or offer when a broker loses
or misplaces
[[Page 28026]]
a market order, the proposed rule provides that the customer is
entitled to the price and size of the disseminated bid or offer, which
the Exchange believes promotes just and equitable principles of trade
because it more adequately reflects the size and price that a customer
would have been entitled to if no mistake was made. Also, where RG95-49
prohibits the use of a floor broker error account to provide an
execution to a client in certain circumstances (e.g., when providing a
fill from an error account to correct a print-through, lost or
misplaced market order, or erroneously executed order would reduce or
liquidate a position in the floor broker's error account or when
providing a fill from an error account to provide an execution on an
unexecuted portion of a multi-leg order,), the proposed rule gives the
broker the flexibility to execute the order out of the broker's error
account, which protects investors and the public interest by ensuring
that customer orders are executed. As noted above, the Exchange
believes giving floor brokers the option to correct an error by
executing the client's order out of the floor broker's error account is
non-controversial because RG95-49 generally provides the same relief
for print-throughs, lost or misplaced market orders, and erroneously
executed orders. Although under RG95-49 when a print-through, lost or
misplaced market order, or erroneously executed order is discovered
during trading hours floor brokers are prohibited from correcting the
error by filling the client out of an error account if doing so would
reduce or liquidate a position in the floor broker's error account, the
proposed rule is non-controversial because the floor broker must follow
the procedures outlined in paragraph (a) of Rule 6.79 whenever reducing
or liquidating a position in the floor broker's error account. As noted
above the procedural requirements of Rule 6.79(a), especially requiring
the client's order to either be displayed in the relevant order book or
announced in open outcry in accordance with Rule 6.74, help to ensure
the client's order receives the best possible execution price. Finally,
where RG95-49 provided for three separate procedures for print-throughs
(print throughs during trading hours; print-throughs outside trading
hours; and print-throughs on the opening), the proposed rule protects
investors and avoids potential confusion related to separate procedures
(even though the proposed rule maintains a separate procedure for
print-throughs that occur on the opening) by consolidating procedures
related to print-throughs during trading hours and print-throughs
outside trading hours.
Additionally, the proposed rule prevents fraudulent and
manipulative acts and practices by requiring brokers to clear errors in
their own accounts unless nullified pursuant to a mutually agreement
under Exchange rules. Furthermore, requiring floor brokers to notify
the Exchange after executing an order for the floor broker's error
account or providing a fill to a client via the floor broker's error
account will aid the Exchange in the surveillance of error account
activity, which helps prevent fraudulent and manipulative acts and
practices and promotes just and equitable principles of trade. Finally,
the Exchange believes the proposed rule promotes just and equitable
principles of trade by ensuring client orders are not harmed for
mistakes that are the fault of brokers. The Exchange does not believe
the proposed rule is unfairly discriminatory toward customers, issuers,
or brokers because the proposed rule simply sets forth the process for
floor brokers to correct certain mistakes.
Finally, the proposed rule change is also consistent with Section
11(a)(1) of the Act and the rules promulgated thereunder. Generally,
Section 11(a)(1) of the Act restricts any member of a national
securities exchange from effecting any transaction on such exchange for
(i) the member's own account, (ii) the account of a person associated
with the member, or (iii) an account over which the member or a person
associated with the member exercises discretion, unless a specific
exemption is available. Examples of common exemptions include the
exemption for transactions by broker dealers acting in the capacity of
a market maker under Section 11(a)(1)(A), the ``G'' exemption for
yielding priority to non-members under Section 11(a)(1)(G) of the Act
and Rule 11a1-1(T) thereunder, and ``Effect vs. Execute'' exemption
under Rule 11a2-2(T) under the Act. In this regard, we note that,
consistent with existing Exchange Rules for effecting proprietary
orders from on the floor of the Exchange, Floor Broker TPHs effecting
orders for their error accounts and relying on the G exemption would be
required to yield priority to any interest in the electronic book at
the same price (not just public customer orders) to ensure that non-
member interest is protected.
B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. More specifically, the Exchange
does not believe the proposed rule changes will impose any burden on
intramarket competition because it will be applicable to all floor
brokers. In addition, the Exchange does not believe the proposed
changes will impose any burden on intermarket competition because
proposed Rule 6.79 simply provides a clearer mechanism for correcting
errors.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not:
A. Significantly affect the protection of investors or the public
interest;
B. impose any significant burden on competition; and
C. become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act \27\ and
Rule 19b-4(f)(6) \28\ thereunder.
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\27\ 15 U.S.C. 78s(b)(3)(A).
\28\ 17 CFR 240.19b-4(f)(6).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission will institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.\29\
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\29\ In addition, Rule 19b-4(f)(6)(iii) requires the Exchange to
give the Commission written notice of the Exchange's intent to file
the proposed rule change, along with a brief description and text of
the proposed rule change, at least five business days prior to the
date of filing of the proposed rule change, or such shorter time as
designated by the Commission. The Exchange has satisfied this
requirement.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
[[Page 28027]]
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-2015-030 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-2015-030. 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-2015-030,
and should be submitted on or before June 5, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-11716 Filed 5-14-15; 8:45 am]
BILLING CODE 8011-01-P
