Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Relating to Professionals, 7173-7179 [2016-02602]
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Federal Register / Vol. 81, No. 27 / Wednesday, February 10, 2016 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77049; File No. SR–CBOE–
2016–005]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of a
Proposed Rule Change Relating to
Professionals
February 4, 2016.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’), and Rule 19b-4 thereunder,
notice is hereby given that on January
27, 2016, Chicago Board Options
Exchange, Incorporated (the ‘‘Exchange’’
or ‘‘CBOE’’) filed with the Securities
and Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Interpretation and Policy .01 to Rule
1.1(ggg) relating to Professionals. 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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CHAPTER I Definitions
Rule 1.1. Definitions
When used in these Rules, unless the
context otherwise requires:
(a) Any term defined in the Bylaws
and not otherwise defined in this
Chapter shall have the meaning
assigned to such term in the Bylaws.
(b)—(fff) No change.
Professional
(ggg) The term ‘‘Professional’’ means
any person or entity that (i) is not a
broker or dealer in securities, and (ii)
places more than 390 orders in listed
options per day on average during a
calendar month for its own beneficial
account(s). A Professional will be
treated in the same manner as a broker
or dealer in securities for purposes of
Rules 6.2A, 6.2B, 6.8C, 6.9, 6.13A,
6.13B, 6.25, 6.45, 6.45A (except for
Interpretation and Policy .02), 6.45B
(except for Interpretation and Policy
.02), 6.53C(c)(ii), 6.53C(d)(v),
subparagraphs (b) and (c) under
Interpretation and Policy .06 to Rule
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6.53C, 6.74 (except Professional orders
may be considered public customer
orders subject to facilitation under
paragraphs (b) and (d)), 6.74A, 6.74B,
8.13, 8.15B, 8.87, 24.19, 43.1, 44.4,
44.14. The Professional designation is
not available in Hybrid 3.0 classes. All
Professional orders shall be marked
with the appropriate origin code as
determined by the Exchange.
. . . Interpretations and Policies:
.01 [For purposes of this Rule 1.1(ggg),
an order which is placed for the
beneficial account(s) of a person or
entity that is not a broker or dealer in
securities that is broken into multiple
parts by a broker or dealer or by an
algorithm housed at a broker or dealer
or by an algorithm licensed from a
broker or dealer, but which is housed
with the customer in order to achieve a
specific execution strategy including,
for example, a basket trade, program
trade, portfolio trade, basis trade, or
benchmark hedge, constitutes a single
order and shall be counted as one
order.] Except as noted below, each
order of any order type counts as one
order for Professional order counting
purposes.
(a) Complex Orders:
(1) A complex order comprised of four
(4) legs or fewer counts as a single order;
(2) A complex order comprised of five
(5) legs or more counts as multiple
orders with each option leg counting as
its own separate order;
(b) ‘‘Parent’’/‘‘Child’’ Orders:
(1) Same Side and Same Series: A
‘‘parent’’ order that is placed for the
beneficial account(s) of a person or
entity that is not a broker or dealer in
securities that is broken into multiple
‘‘child’’ orders on the same side (buy/
sell) and series as the ‘‘parent’’ order by
a broker or dealer, or by an algorithm
housed at a broker or dealer or by an
algorithm licensed from a broker or
dealer, but which is housed with the
customer, counts as one order even if
the ‘‘child’’ orders are routed across
multiple exchanges.
(2) Both Sides and/or Multiple Series:
A ‘‘parent’’ order (including a strategy
order) that is broken into multiple
‘‘child’’ orders on both sides (buy/sell)
of a series and/or multiple series counts
as multiple orders, with each ‘‘child’’
order counting as a new and separate
order.
(c) Cancel/Replace:
(1) Except as provided in paragraph
(c)(2) below, any order that cancels and
replaces an existing order counts as a
separate order (or multiple new orders
in the case of a complex order
comprised of five (5) legs or more).
(2) Same Side and Same Series: An
order that cancels and replaces any
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‘‘child’’ order resulting from a ‘‘parent’’
order that is placed for the beneficial
account(s) of a person or entity that is
not a broker, or dealer in securities that
is broken into multiple ‘‘child’’ orders
on the same side (buy/sell) and series as
the ‘‘parent’’ order by a broker or dealer,
by an algorithm housed at a broker or
dealer, or by an algorithm licensed from
a broker or dealer, but which is housed
with the customer, does not count as a
new order.
(3) Both Sides and/or Multiple Series:
An order that cancels and replaces any
‘‘child’’ order resulting from a ‘‘parent’’
order (including a strategy order) that
generates ‘‘child’’ orders on both sides
(buy/sell) of a series and/or in multiple
series counts as a new order.
(4) Pegged Orders: Notwithstanding
the provisions of paragraph (c)(2) above,
an order that cancels and replaces any
‘‘child’’ order resulting from a ‘‘parent’’
order being ‘‘pegged’’ to the BBO or
NBBO or that cancels and replaces any
‘‘child’’ order pursuant to an algorithm
that uses BBO or NBBO in the
calculation of ‘‘child’’ orders and
attempts to move with or follow the BBO
or NBBO of a series counts as a new
order each time the order cancels and
replaces in order to attempt to move
with or follow the BBO or NBBO.
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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.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
Interpretation and Policy .01 to Rule
1.1(ggg) (Professional) relating to
Professionals. Specifically, the
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Exchange proposes to delete current
Interpretation and Policy .01 to Rule
1.1(ggg) and adopt new Interpretation
and Policy .01 to Rule 1.1(ggg), setting
forth amended standards for calculating
average daily order submissions for
Professional order counting purposes.
The Exchange believes that the
proposed rule change would provide
additional clarity in the Rules and serve
to promote the purposes for which the
Exchange originally adopted Rule
1.1(ggg) relating to Professionals.
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Background
In general, ‘‘public customers’’ are
granted certain marketplace advantages
over other market participants,
including Market-Makers, brokers and
dealers of securities, and industry
‘‘Professionals’’ on most U.S. options
exchanges. The U.S. options exchanges,
including CBOE, have adopted
materially similar definitions of the
term ‘‘Professional,’’ 1 which commonly
refers to persons or entities that are not
a brokers or dealers in securities and
who or which place more than 390
orders in listed options per day on
average during a calendar month for
their own beneficial account(s).2
Various exchanges adopted similar
Professional rules for many of the same
reasons, including, but not limited to
the desire to create more competitive
marketplaces and attract retail order
flow.3 In addition, as several of the
1 Some U.S. options exchanges refer to
‘‘Professionals’’ as ‘‘Professional Customers’’ or
non-‘‘Priority Customers.’’ Compare BATS
Exchange, Inc. (‘‘BZX’’) Rule 16.1(a)(45)
(Professional); BOX Options Exchange LLC (‘‘BOX’’)
Rule 100(a)(50) (Professional); CBOE Rule 1.1(ggg)
(Professional); C2 Rule 1.1; BX Chapter I, Sec. 1(49)
(Professional); NASDAQ OMX PHLX LLC (‘‘PHLX’’)
Rule 1000(b)(14) (Professional); Nasdaq Options
Market (‘‘NOM’’) Chapter I, Sec. 1(a)(48)
(Professional); with ISE Rule 100(a)(37A) (Priority
Customer); Gemini Rule 100(a)(37A) (Priority
Customer); Miami International Securities Exchange
LLC (‘‘MIAX’’) Rule 100 (Priority Customer); NYSE
MKT LLC (‘‘NYSE MKT’’) Rule 900.2NY(18A)
(Professional Customer); NYSE Arca, Inc. (‘‘Arca’’)
Rule 6.1A(4A) (Professional Customer).
2 See, e.g., BZX Rule 16.1(a)(45); BOX Rule
100(a)(50); CBOE Rule 1.1(ggg); C2 Rule 1.1; BX
Chapter I, Sec. 1(49); PHLX Rule 1000(b)(14); NOM
Chapter I, Sec. 1(a)(48); see also ISE Rule
100(a)(37A) (Priority Customer); Gemini Rule
100(a)(37A) (Priority Customer); MIAX Rule 100
(Priority Customer); NYSE MKT Rule 900.2NY(18A)
(Professional Customer); Arca Rule 6.1A(4A)
(Professional Customer).
3 See, e.g., Securities Exchange Act Release No.
60931 (November 4, 2009), 74 FR 58355, 58356
(November 12, 2009) (Notice of Filing of Proposed
Rule Change, as Modified by Amendment No. 1,
Related to Professional Orders) (SR–CBOE 2009–
078); Securities Exchange Act Release No. 59287
(January 23, 2009), 74 FR 5694, 5694 (January 30,
2009) (Notice of Filing of Amendment No. 2 and
Order Granting Accelerated Approval of the
Proposed Rule Change, as Modified by Amendment
Nos. 1 and 2 Thereto, Relating to Professional
Account Holders) (SR–ISE–2006–026); Securities
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exchanges noted in their original
Professional rule filings, their beliefs
that disparate Professional rules and a
lack of uniformity in the application of
such rules across the options markets
would not promote the best regulation
and may, in fact, encourage regulatory
arbitrage.4
Similar to other U.S. options
exchanges, the Exchange grants ‘‘public
customers’’ certain marketplace
advantages over other market
participants pursuant to the Exchange’s
Fees Schedule 5 and the Rules.6 In
general, public customers receive
allocation and execution priority above
equally priced competing interests of
Market-Makers, broker-dealers, and
other market participants. In addition,
customer orders are generally exempt
from transaction fees and certain
Exchange surcharges. Similar to other
U.S. options exchanges, the Exchange
affords these marketplace advantages to
public customers based on various
business- and regulatory-related
objectives, including, for example, to
Exchange Act Release No. 61802 (March 30, 2010),
75 FR 17193, 17194 (April 5, 2010) (Notice of Filing
of Amendment No. 2 and Order Granting
Accelerated Approval of the Proposed Rule Change,
as Modified by Amendment No. 2 Thereto, Relating
to Professional Orders) (SR–PHLX–2010–005);
Securities Exchange Act Release No. 61629 (March
2, 2010), 75 FR 10851, 10851 (March 9, 2010)
(Notice of Filing of Proposed Rule Change Relating
to the Designation of a ‘‘Professional Customer’’)
(SR–NYSEMKT–2010–018).
4 See, e.g., Securities and Exchange Act Release
No. 62724 (August 16, 2010), 75 FR 51509 (August
20, 2010) (Notice of Filing of a Proposed Rule
Change by the NASDAQ Stock Market LLC To
Adopt a Definition of Professional and Require That
All Professional Orders Be Appropriately Marked)
(SR–NASDAQ–2010–099); Securities and Exchange
Act Release No. 65500 (October 6, 2011), 76 FR
63686 (October 13, 2011) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change
To Adopt a Definition of Professional and Require
That All Professional Orders Be Appropriately
Marked) (SR–BATS–2011–041); Securities
Exchange Act Release No. 65036 (August 4, 2011),
76 FR 49517, 49518 (August 10, 2011) (Notice of
Filing and Immediate Effectiveness of Proposed
Rule Change To Adopt a Definition of
‘‘Professional’’ and Require That Professional
Orders Be Appropriately Marked by BOX Options
Participants) (SR–BX–2011–049); Securities
Exchange Act Release No. 60931 (November 4,
2009), 74 FR 58355, 58357 (November 12, 2009)
(Notice of Filing of Proposed Rule Change, as
Modified by Amendment No. 1, Related to
Professional Orders) (SR–CBOE 2009–078); see also
Securities Exchange Act Release 73628 (November
18, 2014), 79 FR 69958, 69960 (November 24, 2014)
(Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change Relating to Professional
Orders) (SR–CBOE–2014–085).
5 See, e.g., Fees Schedule (Options Transaction
Fees).
6 See, e.g., Rules 6.45A (Priority and Allocation of
Equity Option Trades on the CBOE Hybrid System),
6.45B (Priority and Allocation of Trades in Index
Options and Options on ETFs on the CBOE Hybrid
System).
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attract retail order flow to the Exchange
and to provide competitive pricing.
Prior to 2009, the Exchange
designated all orders as either customer
orders or non-customer orders based
solely on whether or not the order was
placed for the account of a registered
securities broker or dealer. As nonbroker-dealer investors gained more
access to electronic trading platforms,
analytics technology, and market data
services previously available only to
securities brokers and dealers, the
distinction between public customers
and non-customers became less effective
in promoting the intended purposes of
the Exchange’s customer priority rules
because certain customers were more
similarly situated to broker-dealers. As
the Exchange noted at the time, the
Exchange no longer believed that the
definitions of customer and noncustomer properly distinguished
between the kind of nonprofessional
retail investors that the order priority
rules and fee exemptions were intended
to benefit and non-broker-dealer
professional traders with access to
advanced market data information and
sophisticated trading platforms that
were not intended to benefit from those
rules and exemptions.7 Furthermore, the
Exchange believed that distinguishing
solely between registered broker-dealers
and non-broker-dealers with respect to
order priority and fee exemptions was
inconsistent with principles of fair
competition and inappropriate in the
marketplace given professional traders’
access to the same trading tools and
market data services as broker-dealers
while taking advantage of the same
order priority and fee exemptions as
retail investors. Accordingly, in 2009,
the Exchange adopted a definition of
‘‘Professional’’ under Rule 1.1(ggg) to
further distinguish different types of
orders placed on the Exchange.8
Under Rule 1.1(ggg), a Professional is
defined as a person or entity that is not
a securities broker or dealer that places
more than 390 listed options orders per
day on average during a calendar month
for its own beneficial account(s). As
discussed above, in large part, the
Exchange’s Professional order rules
were adopted to distinguish non-broker
dealer individuals and entities that have
access to information and technology
7 See Securities Exchange Act Release No. 60931
(November 4, 2009), 74 FR 58355, 58356 (November
12, 2009) (Notice of Filing of Proposed Rule
Change, as Modified by Amendment No. 1, Related
to Professional Orders) (SR–CBOE 2009–078).
8 Notably, the Exchange’s Professional order rule
was materially based upon a similar proposal by the
International Securities Exchange, LLC (‘‘ISE’’) as
set forth in SR–ISE–2006–026. See id. at 58356, note
6.
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that enable them to professionally trade
listed options in a manner similar to
brokers or dealers in securities from
retail investors for order priority and/or
transaction fees purposes. In general,
Professionals are treated as brokers or
dealers in securities under the
Exchange’s rules, including, but not
limited to with respect to order priority
and fees.9 Rule 1.1(ggg) is substantially
similar to the Professional order rules of
other exchanges and was materially
based upon the preexistent Professional
order rules of other exchanges.10
After adopting Rule 1.1(ggg), the
Exchange issued a Regulatory Circular,
interpreting Rule 1.1(ggg).11 In
particular, with respect to the counting
of single original orders that are then
broken up into multiple orders to
achieve a specific execution strategy,
the Exchange interpreted Rule 1.1(ggg)
to allow such orders to be counted as
one single order for Professional order
counting purposes.12 Over time,
however, the Exchange began to receive
more and more questions as to what
constitutes an ‘‘order’’ for Professional
order counting purposes, including, but
not limited to questions about how to
count certain types of strategy orders
and how to count ‘‘child’’ orders
generated as part of specific ‘‘parent’’
execution strategies.
In November 2014, in response to
these questions, the Exchange clarified
its Professional order rule by adopting
Interpretation and Policy .01 to Rule
1.1(ggg). Specifically, the Exchange
codified its interpretation that, for
Professional order counting purposes,
‘‘parent’’ orders that are placed on a
single ticket and entered for the
beneficial account(s) of a person or
entity that is not a broker or dealer in
securities and that are broken into
multiple parts by a broker or dealer, or
by an algorithm housed at a broker or
dealer, or by an algorithm licensed from
a broker or dealer that is housed with
the customer in order to achieve a
specific execution strategy, including,
but not limited to basket trades, program
trades, portfolio trades, basis trades, and
benchmark hedges, should count as one
single order for Professional order
9 See Rule 1.1(ggg). Notably, however,
Professional orders are treated as public customer
orders pursuant to certain rules, such as if the order
is held by a broker and the broker crosses it with
a facilitation order on the floor.
10 See Securities Exchange Act Release No. 60931
(November 4, 2009), 74 FR 58355, 58356 (November
12, 2009) (Notice of Filing of Proposed Rule
Change, as Modified by Amendment No. 1, Related
to Professional Orders) (SR–CBOE 2009–078); see,
e.g., ISE Rule 100(a)(31A).
11 See Regulatory Circular RG09–148
(Professional Orders).
12 See id. at Question 14.
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counting purposes. This interpretation
was a clarification in the Rules based on
the Exchange’s past interpretations of
Rule 1.1(ggg) and similar interpretations
set forth in a previously issued ISE/ISE
Gemini, LLC (‘‘Gemini’’) Joint
Regulatory Information Circular.13
The Exchange’s adoption of
Interpretation and Policy .01 to Rule
1.1(ggg), however, has not clarified the
Exchange’s Professional rule
completely. The advent of new multi-leg
spread products and the proliferation of
the use of complex orders and
algorithmic execution strategies by both
institutional and retail market
participants continue to raise questions
as to what constitutes an ‘‘order’’ for
Professional order counting purposes.
For example, do multi-leg spread orders
(which on the Exchange may be up to
12 legs) or strategy orders such as
volatility orders constitute a single order
or multiple orders for Professional order
counting purposes? The Exchange’s
Professional rule does not fully address
these issues and there is no common
interpretation across the U.S. options
markets. In fact, CBOE is the only U.S.
options exchange to have adopted any
interpretation of how certain types of
orders should be counted under its
Professional rule. The Exchange
believes that additional clarity is needed
regarding the application of Rule
1.1(ggg). Accordingly, the Exchange is
proposing to amend Interpretation and
Policy .01 to Rule 1.1(ggg) to address
how various new execution and order
strategies should be treated under the
Exchange’s Professional rule.
Moreover, the Exchange believes that
a new Interpretation and Policy would
better serve to accomplish the
Exchange’s stated goals for its
Professional rule. Under current
Interpretation and Policy .01 to Rule
1.1(ggg) many market participants using
sophisticated execution strategies and
trading algorithms who would typically
be considered professional traders are
not identified under the Exchange’s
Professional rule. The Exchange
believes that these types of market
participants have access to technology
and market information akin to brokerdealers. The Exchange also believes that
a new Interpretation and Policy to Rule
1.1(ggg) is warranted to ensure that
public customers are afforded the
marketplace advantages that they are
intended to be afforded over other types
of market participants on the Exchange.
13 See ISE Regulatory Information Circular 2014–
007/Gemini Regulatory Information Circular 2014–
011 (Priority Customer Orders and Professional
Orders (FAQ)).
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The Exchange notes that despite the
adoption of materially similar
Professional rules across the markets,
exchanges’ interpretations of their
respective Professional rules vary.
Although Professionals are similarly
defined by exchanges as non-brokerdealer persons or entities that place
more than 390 orders in listed options
for their own beneficial account(s) per
day on average during a calendar
month, there is no consistent definition
across the markets as to what constitutes
an ‘‘order’’ for Professional order
counting purposes. While several
options exchanges, including CBOE,
have attempted to clarify their
interpretations of their Professional
rules through regulatory and
information notices and circulars,14
many of the options exchanges have not
issued any guidance regarding the
application of their Professional rules.
Furthermore, where exchanges have
issued such interpretive guidance, those
interpretations have not necessarily
been consistent.15 As a result, the
Exchange believes that the rather than
helping to promote the best regulation
and discourage regulatory arbitrage, the
Professional rules have become a basis
of intermarket competition. As noted
above, CBOE is the only U.S. options
exchange that has adopted interpretive
guidance regarding its Professional rule
in its rules.
The Exchange believes that a new set
of standards and a more detailed
counting regime than the Exchange’s
current Professional order rules provide
would allow the Exchange to better
compete for order flow and help ensure
deeper levels of liquidity on the
Exchange. The Exchange also believes
that the proposed rule change would
help to remove impediments to and
help perfect the mechanism of a free
and open market and a national market
system by increasing competition in the
marketplace. Accordingly, the Exchange
proposes to amend the Rules by deleting
14 See Regulatory Circular RG09–148
(Professional Orders); ISE Regulatory Information
Circular 2014–007/Gemini Regulatory Information
Circular 2014–011 (Priority Customer Orders and
Professional Orders (FAQ)); MIAX Regulatory
Circular 2014–69 (Priority Customer and
Professional Interest Order Summary); NYSE Joint
Regulatory Bulletin, NYSE Acra RBO–15–03, NYSE
Amex RBO–15–06) (Professional Customer Orders);
BOX Regulatory Circular RC–2015–21 (Professional
Orders).
15 Compare NYSE Joint Regulatory Bulletin,
NYSE Acra RBO–15–03, NYSE Amex RBO–15–06)
(Professional Customer Orders) with Interpretation
and Policy .01 to Rule 1.1(ggg); Regulatory Circular
RG09–148 (Professional Orders); ISE Regulatory
Information Circular 2014–007/Gemini Regulatory
Information Circular 2014–011 (Priority Customer
Orders and Professional Orders (FAQ)); and ISE
Regulatory Information Circular 2009–179 (Priority
Customer Orders and Professional Orders (FAQ)).
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current Interpretation and Policy .01 to
Rule 1.1(ggg) and, in its place, adopt a
new Interpretation and Policy with
respect to Professional order counting.
Proposal
The Exchange proposes to delete
current Interpretation and Policy .01 to
Rule 1.1(ggg) and replace it with a new
Interpretation and Policy setting forth a
more detailed counting regime for
calculating average daily orders for
Professional order counting purposes.
Specifically, the Exchange’s proposed
Interpretation and Policy would make
clear how to count complex orders,
‘‘parent/child’’ orders that are broken
into multiple orders, and ‘‘cancel/
replace’’ orders for Professional order
counting purposes.
Under the Exchange’s proposed
Interpretation and Policy .01 to Rule
1.1(ggg), all orders would count as one
single order for Professional counting
purposes, unless otherwise specified
under the Rules. Proposed
Interpretation and Policy .01 to Rule
1.1(ggg) would provide that except as
noted below, each order of any order
type counts as one order for Professional
order counting purposes. Paragraph (a)
of proposed Interpretation and Policy
.01 to Rule 1.1(ggg) would discuss
complex orders. Under paragraph (a)(1)
of proposed Interpretation and Policy
.01 to Rule 1.1(ggg), a complex order
comprised of four (4) legs or fewer
would count as a single order.
Conversely, paragraph (a)(2) of proposed
Interpretation and Policy .01 to Rule
1.1(ggg) would provide that a complex
order comprised of five (5) legs or more
counts as multiple orders with each
option leg counting as its own separate
order. The Exchange believes the
distinction between complex orders
with up to four legs from those with five
or more legs is appropriate in light of
the purposes for which Rule 1.1(ggg)
was adopted. In particular, the
Exchange notes that multi-leg complex
order strategies with five or more legs
are more complex in nature and thus,
more likely to be used by professional
traders than traditional two, three, and
four leg complex order strategies such as
the strangle, straddle, butterfly, collar,
and condor strategies, which are
oftentimes used by retail investors.
Thus, the types of complex orders
traditionally placed by retail investors
would continue to count as only one
order while the more complex strategy
orders that are typically used by
professional traders would count as
multiple orders for Professional order
counting purposes.
Paragraph (b) of proposed
Interpretation and Policy .01 to Rule
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1.1(ggg) would provide details relating
to the counting of ‘‘parent/child’’ orders.
Under paragraph (b)(1) of proposed
Interpretation and Policy .01 to Rule
1.1(ggg), a ‘‘parent’’ order that is placed
for the beneficial account(s) of a person
or entity that is not a broker or dealer
in securities that is broken into multiple
‘‘child’’ orders on the same side (buy/
sell) and series as the ‘‘parent’’ order by
a broker or dealer, or by an algorithm
housed at a broker or dealer or by an
algorithm licensed from a broker or
dealer, but which is housed with the
customer, counts as one order even if
the ‘‘child’’ orders are routed across
multiple exchanges. Essentially, this
paragraph would describe how orders
placed for public customers, which are
‘‘worked’’ by a broker in order to receive
best execution should be counted for
Professional order counting purposes.
Paragraph (b)(1) of proposed
Interpretation and Policy .01 to Rule
1.1(ggg) would permit larger ‘‘parent’’
orders (which may be simple orders or
complex orders consisting of up to four
legs), to be broken into multiple smaller
orders on the same side (buy/sell) and
in the same series (or complex orders
consisting of up to four legs) in order to
attempt to achieve best execution for the
overall order.
For example, if a customer were to
enter an order to buy 1,000 XYZ $5
January calls at a limit price of $1,
which the customer’s broker then broke
into four separate orders to buy 250
XYZ $5 January calls at a limit price of
$1 in order to achieve a better
execution, the four ‘‘child’’ orders
would still only count as one order for
Professional order counting purposes
(whether or not the four separate orders
were sent to the same or different
exchanges for execution).16 Similarly, in
the case of a complex order, if a
customer were to enter an order to buy
1,000 XYZ $5 January(sell)/March(buy)
calendar spreads (with a 1:1 ratio on the
legs), at a net debit limit price of $0.20,
which the customer’s broker then broke
into four separate orders to buy 250
XYZ $5 January/March calendar spreads
(each with a 1:1 ratio on the legs), each
at a net debit limit price of $0.20, the
four ‘‘child’’ orders would still only
count as one order for Professional order
16 Notably, however, if the customer herself were
to enter the same four identical orders to buy 250
XYZ $5 January calls at a limit price of $1 prior to
sending the orders, those orders would count as
four separate orders for Professional order counting
purposes because the orders would not have been
broken into multiple ‘‘child’’ orders on the same
side (buy/sell) and series as the ‘‘parent’’ order by
a broker or dealer, or by an algorithm housed at a
broker or dealer or by an algorithm licensed from
a broker or dealer, but which is housed with the
customer.
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counting purposes (whether or not the
four separate orders were sent to the
same or different exchanges for
execution).
Conversely, under paragraph (b)(2) of
proposed Interpretation and Policy .01
to Rule 1.1(ggg), a ‘‘parent’’ order
(including a strategy order) 17 that is
broken into multiple ‘‘child’’ orders on
both sides (buy/sell) of a series 18 and/
or multiple series counts as multiple
orders, with each ‘‘child’’ order
counting as a new and separate order.
Accordingly, under this provision,
strategy orders, which are most often
used by sophisticated traders best
characterized as ‘‘Professionals,’’ would
count as multiple orders for each child
order entered as part of the overall
strategy. For example, if a customer
were to enter a volatility order 19 or
‘‘vega’’ order 20 with her broker by
17 For purposes of this proposed Interpretation
and Policy, the term ‘‘strategy order’’ is intended to
mean an execution strategy, trading instruction, or
algorithm whereby multiple ‘‘child’’ orders on both
sides of a series and/or multiple series are generated
prior to being sent to any or multiple U.S. options
exchange(s).
18 The Exchange recognizes that with respect to
customers and, in particular, the counting of
customer orders for Professional purposes,
paragraphs (b)(2) and (c)(3) of proposed
Interpretation and Policy .01 to Rule 1.1(ggg)
contain language that is somewhat redundant and
superfluous. Because non-professional customers
may not simultaneously or nearly simultaneously
enter multiple limit orders to buy and sell the same
security (i.e. act as Market-Makers) (see Rule 6.8C),
a ‘‘parent’’ customer order that is broken into
multiple ‘‘child’’ orders on both sides (buy/sell)
must necessarily be placed across multiple series.
Accordingly, when considered in conjunction with
the prohibitions in Rule 6.8C, the operation of
paragraphs (b)(2) and (c)(3) of proposed
Interpretation and Policy .01 to Rule 1.1(ggg) would
be the same even if the proposed rule were only
applied to ‘‘child’’ orders placed in multiple series.
The Exchange, however, has determined to include
references to ‘‘both sides (buy/sell) of a series’’ in
the text of proposed Interpretation and Policy .01
to Rule 1.1(ggg) to reinforce the concepts
underlying the Exchange’s proposed Professional
order counting structure.
19 A ‘‘volatility’’ or ‘‘volatility-type’’ order may be
characterized as an order instruction or
combination to buy/sell contracts at a specific
implied volatility rather than at a specific price or
premium. Because implied volatility is a key
determinant of the premium on an option, some
traders may wish to take positions in specific
contract months in an effort to take advantage of
perceived changes in implied volatility arising
before, during, or after earnings or in a certain
company when specific or broad market volatility
is predicted to change. In certain cases, depending
on where a customer’s account is housed or the
trading capabilities of the participant involved, an
options trader may trade and position for
movements in the price of the option based on
implied volatility using a ‘‘volatility’’ or ‘‘volatilitytype’’ order or trading instruction by setting a limit
for the volatility level they are willing to pay or
receive. In such cases, premiums may be calculated
in percentage terms rather than premiums.
20 An option’s vega is a measure of the impact of
changes in the underlying volatility on the option
price. Specifically, the vega of an option expresses
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which multiple ‘‘child’’ orders were
then sent to the Exchange across
multiple series in a particular option
class, each order entered would count as
a separate order for Professional order
counting purposes. Likewise, if the
customer instructed her broker to buy a
variety of calls across various option
classes as part of a basket trade, each
order entered by the broker in order to
obtain the positions making up the
basket would count as a separate order
for Professional counting purposes.21
The Exchange believes that the
distinctions between ‘‘parent’’ and
‘‘child’’ orders in paragraph (b) to
proposed Rule 1.1(ggg) are appropriate.
The Exchange notes that paragraph (b)
to proposed Interpretation and Policy
.01 to Rule 1.1(ggg) is not aimed at
capturing orders that are being
‘‘worked’’ or broken into multiple
orders to avoid showing large orders to
the market in an effort to elude frontrunning and to achieve best execution
as is typically done by brokers on behalf
of retail clients. Rather, paragraph (b) to
proposed Interpretation and Policy .01
to Rule 1.1(ggg) is aimed at identifying
‘‘child’’ orders of ‘‘parent’’ orders
generated by algorithms that are
typically used by sophisticated traders
to continuously update their orders in
concert with market updates in order to
keep their overall trading strategies in
balance. The Exchange believes that
these types of ‘‘parent/child’’ orders
typically used by sophisticated traders
should count as multiple orders.
Paragraph (c) of proposed
Interpretation and Policy .01 to Rule
1.1(ggg), would discuss the counting of
orders that are cancelled and replaced.
Similar to the distinctions drawn in
paragraph (b) of proposed Interpretation
and Policy .01 to Rule 1.1(ggg),
paragraph (c) of proposed Interpretation
and Policy .01 to Rule 1.1(ggg) would
essentially separate orders that are
cancelled and replaced as part of an
overall strategy from those that are
cancelled and replaced by a broker that
is ‘‘working’’ the order to achieve best
execution or attempting to time the
market. Specifically, paragraph (c)(1) of
proposed Interpretation and Policy .01
to Rule 1.1(ggg) would provide that
except as otherwise provided in the rule
(and specifically as provided under
the change in the price of the option for every 1%
change in underlying volatility.
21 Notably, with respect to the types of ‘‘parent’’
orders (including strategy orders) described in
paragraph (b)(2) to proposed Interpretation and
Policy .01 to Rule 1.1(ggg), such orders would be
received only as multiple ‘‘child’’ orders the U.S.
options exchange receiving such orders. The
‘‘parent’’ order would be broken apart before being
sent by the participant to the exchange(s) as
multiple ‘‘child’’ orders. See supra at note 19.
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paragraph (c)(2) to proposed
Interpretation and Policy .01 to Rule
1.1(ggg)), any order that cancels and
replaces an existing order counts as a
separate order (or multiple new orders
in the case of a complex order
comprised of five (5) legs or more). For
example, if a trader were to enter a nonmarketable limit order to buy an option
contract at a certain net debit price,
cancel the order in response to market
movements, and then reenter the same
order once it became marketable, those
orders would count as two separate
orders for Professional order counting
purposes even though the terms of both
orders were the same.
Paragraph (c)(2) of proposed
Interpretation and Policy .01 to Rule
1.1(ggg) would specify the exception to
paragraph (c)(1) of proposed
Interpretation and Policy .01 to Rule
1.1(ggg) and would provide that an
order that cancels and replaces any
‘‘child’’ order resulting from a ‘‘parent’’
order that is placed for the beneficial
account(s) of a person or entity that is
not a broker, or dealer in securities that
is broken into multiple ‘‘child’’ orders
on the same side (buy/sell) and series as
the ‘‘parent’’ order by a broker or dealer,
by an algorithm housed at a broker or
dealer, or by an algorithm licensed from
a broker or dealer, but which is housed
with the customer, would not count as
a new order. For example, if a customer
were to enter an order with her broker
to buy 10,000 XYZ $5 January calls at
a limit price of $1, which the customer’s
broker then entered, but could not fill
and then cancelled to avoid having to
rest the order in the book as part of a
strategy to obtain a better execution for
the customer and then resubmitted the
remainder of the order, which would be
considered a ‘‘child’’ of the ‘‘parent’’
order, once it became marketable, such
orders would only count as one order
for Professional order counting
purposes. Again, similar to paragraph
(b) of proposed Interpretation and
Policy .01 to Rule 1.1(ggg), the Exchange
notes that paragraph (c) to proposed
Interpretation and Policy .01 to Rule
1.1(ggg) is not aimed at capturing orders
that are being ‘‘worked’’ or being
cancelled and replaced to avoid
showing large orders to the market in an
effort to elude front-running and to
achieve best execution as is typically
done by brokers on behalf of retail
clients. Rather, paragraph (c) to
proposed Interpretation and Policy .01
to Rule 1.1(ggg) is aimed at identifying
‘‘child’’ orders of ‘‘parent’’ orders
generated by algorithms that are
typically used by sophisticated traders
to continuously update their orders in
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7177
concert with market updates in order to
keep their overall trading strategies in
balance. The Exchange believes that
paragraph (c)(2) to proposed
Interpretation and Policy .01 to Rule
1.1(ggg) is consistent with these goals.
Accordingly, consistent with
paragraph (c)(1) of proposed
Interpretation and Policy .01 to Rule
1.1(ggg), under paragraph (c)(3) of
proposed Interpretation and Policy .01
to Rule 1.1(ggg), an order that cancels
and replaces any ‘‘child’’ order resulting
from a ‘‘parent’’ order (including a
strategy order) that generates ‘‘child’’
orders on both sides (buy/sell) of a
series and/or in multiple series would
count as a new order. For example, if an
investor were to seek to make a trade (or
series of trades) to take a long vega
position at a certain percentage limit on
a basket of options, the investor may
need to cancel and replace several of the
‘‘child’’ orders entered to achieve the
overall execution strategy several times
to account for updates in the prices of
the underlyings. In such a case, each
‘‘child’’ order placed to keep the overall
execution strategy in place would count
as a new and separate order even if the
particular ‘‘child’’ order were being
used to replace a slightly different
‘‘child’’ order that was previously being
used to keep the same overall execution
strategy in place. The Exchange believes
that the distinctions between cancel/
replace orders in paragraph (c) to
proposed Rule 1.1(ggg) are appropriate
as such orders are typically generated by
algorithms used by sophisticated traders
to keep strategy orders continuously in
line with updates in the markets. As
such, the Exchange believes that in most
cases, cancel/replace orders should
count as multiple orders.
Finally, paragraph (c)(4) of proposed
Interpretation and Policy .01 to Rule
1.1(ggg) would codify the Exchange’s
‘‘pegged’’ order interpretation in the text
of the Rules. Paragraph (c)(4) of
proposed Interpretation and Policy .01
to Rule 1.1(ggg) would provide that
notwithstanding the provisions of
paragraph (c)(2) above, an order that
cancels and replaces any ‘‘child’’ order
resulting from a ‘‘parent’’ order being
‘‘pegged’’ to the Exchange’s best bid or
offer (‘‘BBO’’) or national best bid or
offer (‘‘NBBO’’) or that cancels and
replaces any ‘‘child’’ order pursuant to
an algorithm that uses BBO or NBBO in
the calculation of ‘‘child’’ orders and
attempts to move with or follow the
BBO or NBBO of a series would count
as a new order each time the order
cancels and replaces in order to attempt
to move with or follow the BBO or
NBBO. This interpretation is similar to
the Exchange’s current interpretation of
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its Professional order rules, but adds
clarifying language to the Exchange’s
current interpretation and the Rules.22
The Exchange believes that paragraph
(c)(4) is appropriate to make clear that
‘‘pegged’’ strategy orders that are
typically used by sophisticated traders
should be counted as multiple orders
even though such orders may cancel/
replace orders in on the same side (buy/
sell) of the market in a single series in
order to achieve an overall order
strategy.
Under current Rule 1.1(ggg), in order
to properly represent orders entered on
the Exchange according to the
Professional order rules, Trading Permit
Holders (‘‘TPHs’’) are required to
indicate whether public customer orders
are ‘‘Professional’’ orders.23 This
requirement will remain the same. To
comply with this requirement, TPHs are
required to review their customers’
activity on at least a quarterly basis to
determine whether orders that are not
for the account of a broker or dealer
should be represented as customer
orders or Professional orders.24 Orders
for any customer that had an average of
more than 390 orders per day during
any month of a calendar quarter must be
represented as Professional orders for
the next calendar quarter. TPHs are
required to conduct a quarterly review
and make any appropriate changes to
the way in which they are representing
orders within five days after the end of
each calendar quarter. While TPHs only
will be required to review their accounts
on a quarterly basis, if during a quarter
the Exchange identifies a customer for
which orders are being represented as
public customer orders but that has
averaged more than 390 orders per day
during a month, the Exchange will
notify the TPH and the TPH will be
required to change the manner in which
it is representing the customer’s orders
within five days. Because Rule 1.1(ggg)
only requires that TPHs conduct a lookback to determine whether their
customers are averaging more than 390
orders per day at the end of each
calendar quarter, the Exchange proposes
an effective date of April 1, 2016 for
proposed Interpretation and Policy .01
to Rule 1.1(ggg) to ensure that all orders
during the next quarterly review will be
counted in the same manner and that
proposed Interpretation and Policy .01
22 See CBOE Regulatory Circular RG09–148
(Professional Orders) at Question 12.
23 See Securities Exchange Act Release No. 60931
(November 4, 2009), 74 FR 58355 (November 12,
2009) (Notice of Filing of Proposed Rule Change, as
Modified by Amendment No. 1, Related to
Professional Orders) (SR–CBOE 2009–078).
24 See id.
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to Rule 1.1(ggg) will not be applied
retroactively.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the Act
and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.25 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 26 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) 27 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the Exchange believes
that proposed Interpretation and Policy
.01 to Rule 1.1(ggg) provides a more
conservative order counting regime for
Professional order counting purposes
that would identify more traders as
Professionals to which the Exchange’s
definition of Professional was designed
to apply and create a better competitive
balance for all participants on the
Exchange, consistent with the Act. As
the options markets have evolved to
become more electronic and more
competitive, the Exchange believes that
the distinction between registered
broker-dealers and professional traders
who are currently treated as public
customers has become increasingly
blurred. More and more, the category of
public customer today includes
sophisticated algorithmic traders
including former market makers and
hedge funds that trade with a frequency
resembling that of broker-dealers. The
Exchange believes that it is reasonable
under the Act to treat those customers
who meet the high level of trading
activity established in the proposal
differently than customers who do not
meet that threshold and are more typical
retail investors to ensure that
professional traders do not take
25 15
26 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
27 Id.
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advantage of priority and fee benefits
intended for public customers.
The Exchange notes that it is not
unfair to differentiate between different
types of investors in order to achieve
certain marketplace balances. The Rules
currently differentiate between public
customers, broker-dealers, MarketMakers, Designated Primary MarketMakers (‘‘DPMs’’) and the like. These
differentiations have been recognized to
be consistent with the Act. The
Exchange does not believe that the
current rules of CBOE and other
exchanges that accord priority to all
public customers over broker-dealers are
unfairly discriminatory. Nor does the
Exchange believe that it is unfairly
discriminatory to accord priority to only
those customers who on average do not
place more than one order per minute
(390 per day) under the counting regime
that the Exchange proposes. The
Exchange believes that such
differentiations drive competition in the
marketplace and are within the business
judgment of the Exchange. Accordingly,
the Exchange also believes that its
proposal is consistent with the
requirement of Section 6(b)(8) of the Act
that the rules of an exchange not impose
an unnecessary or inappropriate burden
upon competition in that it treats
persons who should be deemed
Professionals, but who may not be
under current Interpretation and Policy
.01 to Rule 1.1(ggg) in a manner so that
they do not receive special priority
benefits.
Furthermore, the Exchange believes
that the proposed rule change will
protect investors and the public interest
by helping to assure that retail
customers continue to receive the
appropriate marketplace advantages in
the CBOE marketplace as intended,
while furthering competition among
marketplace professionals by treating
them in the same manner as other
similarly situated market participants.
The Exchange believes that it is
consistent with Section 6(b)(5) of the
Act not to afford market participants
with similar access to information and
technology as that of brokers and
dealers of securities with marketplace
advantages over such marketplace
competitors. The Exchange also believes
that the proposed Interpretation and
Policy would help to remove burdens
on competition and promote a more
competitive marketplace by affording
certain marketplace advantages only to
those for whom they are intended.
Finally, the Exchange believes that the
proposed rule change sets forth a more
detailed and clear regulatory regime
with respect to calculating average daily
order entry for Professional order
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counting purposes. The Exchange
believes that this additional clarity and
detail will eliminate confusion among
market participants, which is in the
interests of all investors and the general
public.
asabaliauskas on DSK9F6TC42PROD with NOTICES2
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. As discussed
above, the Exchange does not believe
that the current rules of CBOE and other
exchanges that accord priority to all
public customers over broker-dealers are
unfairly discriminatory. Nor does the
Exchange believe that it is unfairly
discriminatory to accord priority to only
those customers who on average do not
place more than one order per minute
(390 per day) under the counting regime
that the Exchange proposes. The
Exchange believes that its proposal does
not impose an undue burden on
competition. The Exchange notes that
one of the purposes of the Professional
rules is to help ensure fairness in the
marketplace and promote competition
among all market participants. The
Exchange believes that proposed
Interpretation and Policy .01 to Rule
1.1(ggg) would help establish more
competition among market participants
and promote the purposes for which the
Exchange’s Professional rule was
originally adopted. The Exchange does
not believe that the Act requires it to
provide the same incentives and
discounts to all market participants
equally, so as long as the exchange does
not unfairly discriminate among
participants with regard to access to
exchange systems. The Exchange
believes that here, that is clearly the
case.
Rather than burden competition, the
Exchange believes that the proposed
rule change promotes competition by
ensuring that retail investors continue to
receive the appropriate marketplace
advantages in the CBOE marketplace as
intended, while furthering competition
among marketplace professionals by
treating them in the same manner under
the Rules as other similarly situated
market participants by ensuring that
market participants with similar access
to information and technology (i.e.
Professionals and broker-dealers),
receive similar treatment under the
Rules while retail investors receive the
benefits of order priority and fee
waivers that are intended to apply to
public customers.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
The Exchange neither solicited nor
received written comments on the
proposed rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will:
A. by order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File No. SR–
CBOE–2016–005 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
No. SR–CBOE–2016–005. 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
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7179
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing will also be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File No. SR–CBOE–
2016–005 and should be submitted on
or before March 2,2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.28
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–02602 Filed 2–9–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release Nos. 33–10034; 34–77064; File No.
265–27]
SEC Advisory Committee on Small and
Emerging Companies; Meeting
Securities and Exchange
Commission.
ACTION: Notice of meeting.
AGENCY:
The Securities and Exchange
Commission Advisory Committee on
Small and Emerging Companies is
providing notice that it will hold a
public meeting on Thursday, February
25, 2016, in Multi-Purpose Room LL–
006 at the Commission’s headquarters,
100 F Street NE., Washington, DC. The
meeting will begin at 9:30 a.m. (EST)
and will be open to the public. The
meeting will be webcast on the
Commission’s Web site at www.sec.gov.
Persons needing special
accommodations to take part because of
a disability should notify the contact
person listed below. The public is
invited to submit written statements to
the Committee. The agenda for the
meeting includes matters relating to
rules and regulations affecting small and
emerging companies under the federal
securities laws.
DATES: The public meeting will be held
on Thursday, February 25, 2016.
Written statements should be received
on or before February 23, 2016.
ADDRESSES: The meeting will be held at
the Commission’s headquarters, 100 F
SUMMARY:
28 17
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CFR 200.30–3(a)(12).
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]]>Agencies
[Federal Register Volume 81, Number 27 (Wednesday, February 10, 2016)]
[Notices]
[Pages 7173-7179]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-02602]
[[Page 7173]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77049; File No. SR-CBOE-2016-005]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change Relating to
Professionals
February 4, 2016.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''), and Rule 19b-4 thereunder, notice is hereby given that
on January 27, 2016, Chicago Board Options Exchange, Incorporated (the
``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Interpretation and Policy .01 to
Rule 1.1(ggg) relating to Professionals. The text of the proposed rule
change is provided below.
(Additions are italicized; deletions are [bracketed])
* * * * *
Chicago Board Options Exchange, Incorporated Rules
* * * * *
CHAPTER I Definitions
Rule 1.1. Definitions
When used in these Rules, unless the context otherwise requires:
(a) Any term defined in the Bylaws and not otherwise defined in
this Chapter shall have the meaning assigned to such term in the
Bylaws.
(b)--(fff) No change.
Professional
(ggg) The term ``Professional'' means any person or entity that (i)
is not a broker or dealer in securities, and (ii) places more than 390
orders in listed options per day on average during a calendar month for
its own beneficial account(s). A Professional will be treated in the
same manner as a broker or dealer in securities for purposes of Rules
6.2A, 6.2B, 6.8C, 6.9, 6.13A, 6.13B, 6.25, 6.45, 6.45A (except for
Interpretation and Policy .02), 6.45B (except for Interpretation and
Policy .02), 6.53C(c)(ii), 6.53C(d)(v), subparagraphs (b) and (c) under
Interpretation and Policy .06 to Rule 6.53C, 6.74 (except Professional
orders may be considered public customer orders subject to facilitation
under paragraphs (b) and (d)), 6.74A, 6.74B, 8.13, 8.15B, 8.87, 24.19,
43.1, 44.4, 44.14. The Professional designation is not available in
Hybrid 3.0 classes. All Professional orders shall be marked with the
appropriate origin code as determined by the Exchange.
. . . Interpretations and Policies:
.01 [For purposes of this Rule 1.1(ggg), an order which is placed
for the beneficial account(s) of a person or entity that is not a
broker or dealer in securities that is broken into multiple parts by a
broker or dealer or by an algorithm housed at a broker or dealer or by
an algorithm licensed from a broker or dealer, but which is housed with
the customer in order to achieve a specific execution strategy
including, for example, a basket trade, program trade, portfolio trade,
basis trade, or benchmark hedge, constitutes a single order and shall
be counted as one order.] Except as noted below, each order of any
order type counts as one order for Professional order counting
purposes.
(a) Complex Orders:
(1) A complex order comprised of four (4) legs or fewer counts as a
single order;
(2) A complex order comprised of five (5) legs or more counts as
multiple orders with each option leg counting as its own separate
order;
(b) ``Parent''/``Child'' Orders:
(1) Same Side and Same Series: A ``parent'' order that is placed
for the beneficial account(s) of a person or entity that is not a
broker or dealer in securities that is broken into multiple ``child''
orders on the same side (buy/sell) and series as the ``parent'' order
by a broker or dealer, or by an algorithm housed at a broker or dealer
or by an algorithm licensed from a broker or dealer, but which is
housed with the customer, counts as one order even if the ``child''
orders are routed across multiple exchanges.
(2) Both Sides and/or Multiple Series: A ``parent'' order
(including a strategy order) that is broken into multiple ``child''
orders on both sides (buy/sell) of a series and/or multiple series
counts as multiple orders, with each ``child'' order counting as a new
and separate order.
(c) Cancel/Replace:
(1) Except as provided in paragraph (c)(2) below, any order that
cancels and replaces an existing order counts as a separate order (or
multiple new orders in the case of a complex order comprised of five
(5) legs or more).
(2) Same Side and Same Series: An order that cancels and replaces
any ``child'' order resulting from a ``parent'' order that is placed
for the beneficial account(s) of a person or entity that is not a
broker, or dealer in securities that is broken into multiple ``child''
orders on the same side (buy/sell) and series as the ``parent'' order
by a broker or dealer, by an algorithm housed at a broker or dealer, or
by an algorithm licensed from a broker or dealer, but which is housed
with the customer, does not count as a new order.
(3) Both Sides and/or Multiple Series: An order that cancels and
replaces any ``child'' order resulting from a ``parent'' order
(including a strategy order) that generates ``child'' orders on both
sides (buy/sell) of a series and/or in multiple series counts as a new
order.
(4) Pegged Orders: Notwithstanding the provisions of paragraph
(c)(2) above, an order that cancels and replaces any ``child'' order
resulting from a ``parent'' order being ``pegged'' to the BBO or NBBO
or that cancels and replaces any ``child'' order pursuant to an
algorithm that uses BBO or NBBO in the calculation of ``child'' orders
and attempts to move with or follow the BBO or NBBO of a series counts
as a new order each time the order cancels and replaces in order to
attempt to move with or follow the BBO or NBBO.
* * * * *
The text of the proposed rule change is also available on the
Exchange's Web site (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Interpretation and Policy .01 to
Rule 1.1(ggg) (Professional) relating to Professionals. Specifically,
the
[[Page 7174]]
Exchange proposes to delete current Interpretation and Policy .01 to
Rule 1.1(ggg) and adopt new Interpretation and Policy .01 to Rule
1.1(ggg), setting forth amended standards for calculating average daily
order submissions for Professional order counting purposes. The
Exchange believes that the proposed rule change would provide
additional clarity in the Rules and serve to promote the purposes for
which the Exchange originally adopted Rule 1.1(ggg) relating to
Professionals.
Background
In general, ``public customers'' are granted certain marketplace
advantages over other market participants, including Market-Makers,
brokers and dealers of securities, and industry ``Professionals'' on
most U.S. options exchanges. The U.S. options exchanges, including
CBOE, have adopted materially similar definitions of the term
``Professional,'' \1\ which commonly refers to persons or entities that
are not a brokers or dealers in securities and who or which place more
than 390 orders in listed options per day on average during a calendar
month for their own beneficial account(s).\2\ Various exchanges adopted
similar Professional rules for many of the same reasons, including, but
not limited to the desire to create more competitive marketplaces and
attract retail order flow.\3\ In addition, as several of the exchanges
noted in their original Professional rule filings, their beliefs that
disparate Professional rules and a lack of uniformity in the
application of such rules across the options markets would not promote
the best regulation and may, in fact, encourage regulatory
arbitrage.\4\
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\1\ Some U.S. options exchanges refer to ``Professionals'' as
``Professional Customers'' or non-``Priority Customers.'' Compare
BATS Exchange, Inc. (``BZX'') Rule 16.1(a)(45) (Professional); BOX
Options Exchange LLC (``BOX'') Rule 100(a)(50) (Professional); CBOE
Rule 1.1(ggg) (Professional); C2 Rule 1.1; BX Chapter I, Sec. 1(49)
(Professional); NASDAQ OMX PHLX LLC (``PHLX'') Rule 1000(b)(14)
(Professional); Nasdaq Options Market (``NOM'') Chapter I, Sec.
1(a)(48) (Professional); with ISE Rule 100(a)(37A) (Priority
Customer); Gemini Rule 100(a)(37A) (Priority Customer); Miami
International Securities Exchange LLC (``MIAX'') Rule 100 (Priority
Customer); NYSE MKT LLC (``NYSE MKT'') Rule 900.2NY(18A)
(Professional Customer); NYSE Arca, Inc. (``Arca'') Rule 6.1A(4A)
(Professional Customer).
\2\ See, e.g., BZX Rule 16.1(a)(45); BOX Rule 100(a)(50); CBOE
Rule 1.1(ggg); C2 Rule 1.1; BX Chapter I, Sec. 1(49); PHLX Rule
1000(b)(14); NOM Chapter I, Sec. 1(a)(48); see also ISE Rule
100(a)(37A) (Priority Customer); Gemini Rule 100(a)(37A) (Priority
Customer); MIAX Rule 100 (Priority Customer); NYSE MKT Rule
900.2NY(18A) (Professional Customer); Arca Rule 6.1A(4A)
(Professional Customer).
\3\ See, e.g., Securities Exchange Act Release No. 60931
(November 4, 2009), 74 FR 58355, 58356 (November 12, 2009) (Notice
of Filing of Proposed Rule Change, as Modified by Amendment No. 1,
Related to Professional Orders) (SR-CBOE 2009-078); Securities
Exchange Act Release No. 59287 (January 23, 2009), 74 FR 5694, 5694
(January 30, 2009) (Notice of Filing of Amendment No. 2 and Order
Granting Accelerated Approval of the Proposed Rule Change, as
Modified by Amendment Nos. 1 and 2 Thereto, Relating to Professional
Account Holders) (SR-ISE-2006-026); Securities Exchange Act Release
No. 61802 (March 30, 2010), 75 FR 17193, 17194 (April 5, 2010)
(Notice of Filing of Amendment No. 2 and Order Granting Accelerated
Approval of the Proposed Rule Change, as Modified by Amendment No. 2
Thereto, Relating to Professional Orders) (SR-PHLX-2010-005);
Securities Exchange Act Release No. 61629 (March 2, 2010), 75 FR
10851, 10851 (March 9, 2010) (Notice of Filing of Proposed Rule
Change Relating to the Designation of a ``Professional Customer'')
(SR-NYSEMKT-2010-018).
\4\ See, e.g., Securities and Exchange Act Release No. 62724
(August 16, 2010), 75 FR 51509 (August 20, 2010) (Notice of Filing
of a Proposed Rule Change by the NASDAQ Stock Market LLC To Adopt a
Definition of Professional and Require That All Professional Orders
Be Appropriately Marked) (SR-NASDAQ-2010-099); Securities and
Exchange Act Release No. 65500 (October 6, 2011), 76 FR 63686
(October 13, 2011) (Notice of Filing and Immediate Effectiveness of
Proposed Rule Change To Adopt a Definition of Professional and
Require That All Professional Orders Be Appropriately Marked) (SR-
BATS-2011-041); Securities Exchange Act Release No. 65036 (August 4,
2011), 76 FR 49517, 49518 (August 10, 2011) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change To Adopt a
Definition of ``Professional'' and Require That Professional Orders
Be Appropriately Marked by BOX Options Participants) (SR-BX-2011-
049); Securities Exchange Act Release No. 60931 (November 4, 2009),
74 FR 58355, 58357 (November 12, 2009) (Notice of Filing of Proposed
Rule Change, as Modified by Amendment No. 1, Related to Professional
Orders) (SR-CBOE 2009-078); see also Securities Exchange Act Release
73628 (November 18, 2014), 79 FR 69958, 69960 (November 24, 2014)
(Notice of Filing and Immediate Effectiveness of a Proposed Rule
Change Relating to Professional Orders) (SR-CBOE-2014-085).
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Similar to other U.S. options exchanges, the Exchange grants
``public customers'' certain marketplace advantages over other market
participants pursuant to the Exchange's Fees Schedule \5\ and the
Rules.\6\ In general, public customers receive allocation and execution
priority above equally priced competing interests of Market-Makers,
broker-dealers, and other market participants. In addition, customer
orders are generally exempt from transaction fees and certain Exchange
surcharges. Similar to other U.S. options exchanges, the Exchange
affords these marketplace advantages to public customers based on
various business- and regulatory-related objectives, including, for
example, to attract retail order flow to the Exchange and to provide
competitive pricing.
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\5\ See, e.g., Fees Schedule (Options Transaction Fees).
\6\ See, e.g., Rules 6.45A (Priority and Allocation of Equity
Option Trades on the CBOE Hybrid System), 6.45B (Priority and
Allocation of Trades in Index Options and Options on ETFs on the
CBOE Hybrid System).
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Prior to 2009, the Exchange designated all orders as either
customer orders or non-customer orders based solely on whether or not
the order was placed for the account of a registered securities broker
or dealer. As non-broker-dealer investors gained more access to
electronic trading platforms, analytics technology, and market data
services previously available only to securities brokers and dealers,
the distinction between public customers and non-customers became less
effective in promoting the intended purposes of the Exchange's customer
priority rules because certain customers were more similarly situated
to broker-dealers. As the Exchange noted at the time, the Exchange no
longer believed that the definitions of customer and non-customer
properly distinguished between the kind of nonprofessional retail
investors that the order priority rules and fee exemptions were
intended to benefit and non-broker-dealer professional traders with
access to advanced market data information and sophisticated trading
platforms that were not intended to benefit from those rules and
exemptions.\7\ Furthermore, the Exchange believed that distinguishing
solely between registered broker-dealers and non-broker-dealers with
respect to order priority and fee exemptions was inconsistent with
principles of fair competition and inappropriate in the marketplace
given professional traders' access to the same trading tools and market
data services as broker-dealers while taking advantage of the same
order priority and fee exemptions as retail investors. Accordingly, in
2009, the Exchange adopted a definition of ``Professional'' under Rule
1.1(ggg) to further distinguish different types of orders placed on the
Exchange.\8\
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\7\ See Securities Exchange Act Release No. 60931 (November 4,
2009), 74 FR 58355, 58356 (November 12, 2009) (Notice of Filing of
Proposed Rule Change, as Modified by Amendment No. 1, Related to
Professional Orders) (SR-CBOE 2009-078).
\8\ Notably, the Exchange's Professional order rule was
materially based upon a similar proposal by the International
Securities Exchange, LLC (``ISE'') as set forth in SR-ISE-2006-026.
See id. at 58356, note 6.
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Under Rule 1.1(ggg), a Professional is defined as a person or
entity that is not a securities broker or dealer that places more than
390 listed options orders per day on average during a calendar month
for its own beneficial account(s). As discussed above, in large part,
the Exchange's Professional order rules were adopted to distinguish
non-broker dealer individuals and entities that have access to
information and technology
[[Page 7175]]
that enable them to professionally trade listed options in a manner
similar to brokers or dealers in securities from retail investors for
order priority and/or transaction fees purposes. In general,
Professionals are treated as brokers or dealers in securities under the
Exchange's rules, including, but not limited to with respect to order
priority and fees.\9\ Rule 1.1(ggg) is substantially similar to the
Professional order rules of other exchanges and was materially based
upon the preexistent Professional order rules of other exchanges.\10\
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\9\ See Rule 1.1(ggg). Notably, however, Professional orders are
treated as public customer orders pursuant to certain rules, such as
if the order is held by a broker and the broker crosses it with a
facilitation order on the floor.
\10\ See Securities Exchange Act Release No. 60931 (November 4,
2009), 74 FR 58355, 58356 (November 12, 2009) (Notice of Filing of
Proposed Rule Change, as Modified by Amendment No. 1, Related to
Professional Orders) (SR-CBOE 2009-078); see, e.g., ISE Rule
100(a)(31A).
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After adopting Rule 1.1(ggg), the Exchange issued a Regulatory
Circular, interpreting Rule 1.1(ggg).\11\ In particular, with respect
to the counting of single original orders that are then broken up into
multiple orders to achieve a specific execution strategy, the Exchange
interpreted Rule 1.1(ggg) to allow such orders to be counted as one
single order for Professional order counting purposes.\12\ Over time,
however, the Exchange began to receive more and more questions as to
what constitutes an ``order'' for Professional order counting purposes,
including, but not limited to questions about how to count certain
types of strategy orders and how to count ``child'' orders generated as
part of specific ``parent'' execution strategies.
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\11\ See Regulatory Circular RG09-148 (Professional Orders).
\12\ See id. at Question 14.
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In November 2014, in response to these questions, the Exchange
clarified its Professional order rule by adopting Interpretation and
Policy .01 to Rule 1.1(ggg). Specifically, the Exchange codified its
interpretation that, for Professional order counting purposes,
``parent'' orders that are placed on a single ticket and entered for
the beneficial account(s) of a person or entity that is not a broker or
dealer in securities and that are broken into multiple parts by a
broker or dealer, or by an algorithm housed at a broker or dealer, or
by an algorithm licensed from a broker or dealer that is housed with
the customer in order to achieve a specific execution strategy,
including, but not limited to basket trades, program trades, portfolio
trades, basis trades, and benchmark hedges, should count as one single
order for Professional order counting purposes. This interpretation was
a clarification in the Rules based on the Exchange's past
interpretations of Rule 1.1(ggg) and similar interpretations set forth
in a previously issued ISE/ISE Gemini, LLC (``Gemini'') Joint
Regulatory Information Circular.\13\
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\13\ See ISE Regulatory Information Circular 2014-007/Gemini
Regulatory Information Circular 2014-011 (Priority Customer Orders
and Professional Orders (FAQ)).
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The Exchange's adoption of Interpretation and Policy .01 to Rule
1.1(ggg), however, has not clarified the Exchange's Professional rule
completely. The advent of new multi-leg spread products and the
proliferation of the use of complex orders and algorithmic execution
strategies by both institutional and retail market participants
continue to raise questions as to what constitutes an ``order'' for
Professional order counting purposes. For example, do multi-leg spread
orders (which on the Exchange may be up to 12 legs) or strategy orders
such as volatility orders constitute a single order or multiple orders
for Professional order counting purposes? The Exchange's Professional
rule does not fully address these issues and there is no common
interpretation across the U.S. options markets. In fact, CBOE is the
only U.S. options exchange to have adopted any interpretation of how
certain types of orders should be counted under its Professional rule.
The Exchange believes that additional clarity is needed regarding the
application of Rule 1.1(ggg). Accordingly, the Exchange is proposing to
amend Interpretation and Policy .01 to Rule 1.1(ggg) to address how
various new execution and order strategies should be treated under the
Exchange's Professional rule.
Moreover, the Exchange believes that a new Interpretation and
Policy would better serve to accomplish the Exchange's stated goals for
its Professional rule. Under current Interpretation and Policy .01 to
Rule 1.1(ggg) many market participants using sophisticated execution
strategies and trading algorithms who would typically be considered
professional traders are not identified under the Exchange's
Professional rule. The Exchange believes that these types of market
participants have access to technology and market information akin to
broker-dealers. The Exchange also believes that a new Interpretation
and Policy to Rule 1.1(ggg) is warranted to ensure that public
customers are afforded the marketplace advantages that they are
intended to be afforded over other types of market participants on the
Exchange.
The Exchange notes that despite the adoption of materially similar
Professional rules across the markets, exchanges' interpretations of
their respective Professional rules vary. Although Professionals are
similarly defined by exchanges as non-broker-dealer persons or entities
that place more than 390 orders in listed options for their own
beneficial account(s) per day on average during a calendar month, there
is no consistent definition across the markets as to what constitutes
an ``order'' for Professional order counting purposes. While several
options exchanges, including CBOE, have attempted to clarify their
interpretations of their Professional rules through regulatory and
information notices and circulars,\14\ many of the options exchanges
have not issued any guidance regarding the application of their
Professional rules. Furthermore, where exchanges have issued such
interpretive guidance, those interpretations have not necessarily been
consistent.\15\ As a result, the Exchange believes that the rather than
helping to promote the best regulation and discourage regulatory
arbitrage, the Professional rules have become a basis of intermarket
competition. As noted above, CBOE is the only U.S. options exchange
that has adopted interpretive guidance regarding its Professional rule
in its rules.
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\14\ See Regulatory Circular RG09-148 (Professional Orders); ISE
Regulatory Information Circular 2014-007/Gemini Regulatory
Information Circular 2014-011 (Priority Customer Orders and
Professional Orders (FAQ)); MIAX Regulatory Circular 2014-69
(Priority Customer and Professional Interest Order Summary); NYSE
Joint Regulatory Bulletin, NYSE Acra RBO-15-03, NYSE Amex RBO-15-06)
(Professional Customer Orders); BOX Regulatory Circular RC-2015-21
(Professional Orders).
\15\ Compare NYSE Joint Regulatory Bulletin, NYSE Acra RBO-15-
03, NYSE Amex RBO-15-06) (Professional Customer Orders) with
Interpretation and Policy .01 to Rule 1.1(ggg); Regulatory Circular
RG09-148 (Professional Orders); ISE Regulatory Information Circular
2014-007/Gemini Regulatory Information Circular 2014-011 (Priority
Customer Orders and Professional Orders (FAQ)); and ISE Regulatory
Information Circular 2009-179 (Priority Customer Orders and
Professional Orders (FAQ)).
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The Exchange believes that a new set of standards and a more
detailed counting regime than the Exchange's current Professional order
rules provide would allow the Exchange to better compete for order flow
and help ensure deeper levels of liquidity on the Exchange. The
Exchange also believes that the proposed rule change would help to
remove impediments to and help perfect the mechanism of a free and open
market and a national market system by increasing competition in the
marketplace. Accordingly, the Exchange proposes to amend the Rules by
deleting
[[Page 7176]]
current Interpretation and Policy .01 to Rule 1.1(ggg) and, in its
place, adopt a new Interpretation and Policy with respect to
Professional order counting.
Proposal
The Exchange proposes to delete current Interpretation and Policy
.01 to Rule 1.1(ggg) and replace it with a new Interpretation and
Policy setting forth a more detailed counting regime for calculating
average daily orders for Professional order counting purposes.
Specifically, the Exchange's proposed Interpretation and Policy would
make clear how to count complex orders, ``parent/child'' orders that
are broken into multiple orders, and ``cancel/replace'' orders for
Professional order counting purposes.
Under the Exchange's proposed Interpretation and Policy .01 to Rule
1.1(ggg), all orders would count as one single order for Professional
counting purposes, unless otherwise specified under the Rules. Proposed
Interpretation and Policy .01 to Rule 1.1(ggg) would provide that
except as noted below, each order of any order type counts as one order
for Professional order counting purposes. Paragraph (a) of proposed
Interpretation and Policy .01 to Rule 1.1(ggg) would discuss complex
orders. Under paragraph (a)(1) of proposed Interpretation and Policy
.01 to Rule 1.1(ggg), a complex order comprised of four (4) legs or
fewer would count as a single order. Conversely, paragraph (a)(2) of
proposed Interpretation and Policy .01 to Rule 1.1(ggg) would provide
that a complex order comprised of five (5) legs or more counts as
multiple orders with each option leg counting as its own separate
order. The Exchange believes the distinction between complex orders
with up to four legs from those with five or more legs is appropriate
in light of the purposes for which Rule 1.1(ggg) was adopted. In
particular, the Exchange notes that multi-leg complex order strategies
with five or more legs are more complex in nature and thus, more likely
to be used by professional traders than traditional two, three, and
four leg complex order strategies such as the strangle, straddle,
butterfly, collar, and condor strategies, which are oftentimes used by
retail investors. Thus, the types of complex orders traditionally
placed by retail investors would continue to count as only one order
while the more complex strategy orders that are typically used by
professional traders would count as multiple orders for Professional
order counting purposes.
Paragraph (b) of proposed Interpretation and Policy .01 to Rule
1.1(ggg) would provide details relating to the counting of ``parent/
child'' orders. Under paragraph (b)(1) of proposed Interpretation and
Policy .01 to Rule 1.1(ggg), a ``parent'' order that is placed for the
beneficial account(s) of a person or entity that is not a broker or
dealer in securities that is broken into multiple ``child'' orders on
the same side (buy/sell) and series as the ``parent'' order by a broker
or dealer, or by an algorithm housed at a broker or dealer or by an
algorithm licensed from a broker or dealer, but which is housed with
the customer, counts as one order even if the ``child'' orders are
routed across multiple exchanges. Essentially, this paragraph would
describe how orders placed for public customers, which are ``worked''
by a broker in order to receive best execution should be counted for
Professional order counting purposes. Paragraph (b)(1) of proposed
Interpretation and Policy .01 to Rule 1.1(ggg) would permit larger
``parent'' orders (which may be simple orders or complex orders
consisting of up to four legs), to be broken into multiple smaller
orders on the same side (buy/sell) and in the same series (or complex
orders consisting of up to four legs) in order to attempt to achieve
best execution for the overall order.
For example, if a customer were to enter an order to buy 1,000 XYZ
$5 January calls at a limit price of $1, which the customer's broker
then broke into four separate orders to buy 250 XYZ $5 January calls at
a limit price of $1 in order to achieve a better execution, the four
``child'' orders would still only count as one order for Professional
order counting purposes (whether or not the four separate orders were
sent to the same or different exchanges for execution).\16\ Similarly,
in the case of a complex order, if a customer were to enter an order to
buy 1,000 XYZ $5 January(sell)/March(buy) calendar spreads (with a 1:1
ratio on the legs), at a net debit limit price of $0.20, which the
customer's broker then broke into four separate orders to buy 250 XYZ
$5 January/March calendar spreads (each with a 1:1 ratio on the legs),
each at a net debit limit price of $0.20, the four ``child'' orders
would still only count as one order for Professional order counting
purposes (whether or not the four separate orders were sent to the same
or different exchanges for execution).
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\16\ Notably, however, if the customer herself were to enter the
same four identical orders to buy 250 XYZ $5 January calls at a
limit price of $1 prior to sending the orders, those orders would
count as four separate orders for Professional order counting
purposes because the orders would not have been broken into multiple
``child'' orders on the same side (buy/sell) and series as the
``parent'' order by a broker or dealer, or by an algorithm housed at
a broker or dealer or by an algorithm licensed from a broker or
dealer, but which is housed with the customer.
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Conversely, under paragraph (b)(2) of proposed Interpretation and
Policy .01 to Rule 1.1(ggg), a ``parent'' order (including a strategy
order) \17\ that is broken into multiple ``child'' orders on both sides
(buy/sell) of a series \18\ and/or multiple series counts as multiple
orders, with each ``child'' order counting as a new and separate order.
Accordingly, under this provision, strategy orders, which are most
often used by sophisticated traders best characterized as
``Professionals,'' would count as multiple orders for each child order
entered as part of the overall strategy. For example, if a customer
were to enter a volatility order \19\ or ``vega'' order \20\ with her
broker by
[[Page 7177]]
which multiple ``child'' orders were then sent to the Exchange across
multiple series in a particular option class, each order entered would
count as a separate order for Professional order counting purposes.
Likewise, if the customer instructed her broker to buy a variety of
calls across various option classes as part of a basket trade, each
order entered by the broker in order to obtain the positions making up
the basket would count as a separate order for Professional counting
purposes.\21\
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\17\ For purposes of this proposed Interpretation and Policy,
the term ``strategy order'' is intended to mean an execution
strategy, trading instruction, or algorithm whereby multiple
``child'' orders on both sides of a series and/or multiple series
are generated prior to being sent to any or multiple U.S. options
exchange(s).
\18\ The Exchange recognizes that with respect to customers and,
in particular, the counting of customer orders for Professional
purposes, paragraphs (b)(2) and (c)(3) of proposed Interpretation
and Policy .01 to Rule 1.1(ggg) contain language that is somewhat
redundant and superfluous. Because non-professional customers may
not simultaneously or nearly simultaneously enter multiple limit
orders to buy and sell the same security (i.e. act as Market-Makers)
(see Rule 6.8C), a ``parent'' customer order that is broken into
multiple ``child'' orders on both sides (buy/sell) must necessarily
be placed across multiple series. Accordingly, when considered in
conjunction with the prohibitions in Rule 6.8C, the operation of
paragraphs (b)(2) and (c)(3) of proposed Interpretation and Policy
.01 to Rule 1.1(ggg) would be the same even if the proposed rule
were only applied to ``child'' orders placed in multiple series. The
Exchange, however, has determined to include references to ``both
sides (buy/sell) of a series'' in the text of proposed
Interpretation and Policy .01 to Rule 1.1(ggg) to reinforce the
concepts underlying the Exchange's proposed Professional order
counting structure.
\19\ A ``volatility'' or ``volatility-type'' order may be
characterized as an order instruction or combination to buy/sell
contracts at a specific implied volatility rather than at a specific
price or premium. Because implied volatility is a key determinant of
the premium on an option, some traders may wish to take positions in
specific contract months in an effort to take advantage of perceived
changes in implied volatility arising before, during, or after
earnings or in a certain company when specific or broad market
volatility is predicted to change. In certain cases, depending on
where a customer's account is housed or the trading capabilities of
the participant involved, an options trader may trade and position
for movements in the price of the option based on implied volatility
using a ``volatility'' or ``volatility-type'' order or trading
instruction by setting a limit for the volatility level they are
willing to pay or receive. In such cases, premiums may be calculated
in percentage terms rather than premiums.
\20\ An option's vega is a measure of the impact of changes in
the underlying volatility on the option price. Specifically, the
vega of an option expresses the change in the price of the option
for every 1% change in underlying volatility.
\21\ Notably, with respect to the types of ``parent'' orders
(including strategy orders) described in paragraph (b)(2) to
proposed Interpretation and Policy .01 to Rule 1.1(ggg), such orders
would be received only as multiple ``child'' orders the U.S. options
exchange receiving such orders. The ``parent'' order would be broken
apart before being sent by the participant to the exchange(s) as
multiple ``child'' orders. See supra at note 19.
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The Exchange believes that the distinctions between ``parent'' and
``child'' orders in paragraph (b) to proposed Rule 1.1(ggg) are
appropriate. The Exchange notes that paragraph (b) to proposed
Interpretation and Policy .01 to Rule 1.1(ggg) is not aimed at
capturing orders that are being ``worked'' or broken into multiple
orders to avoid showing large orders to the market in an effort to
elude front-running and to achieve best execution as is typically done
by brokers on behalf of retail clients. Rather, paragraph (b) to
proposed Interpretation and Policy .01 to Rule 1.1(ggg) is aimed at
identifying ``child'' orders of ``parent'' orders generated by
algorithms that are typically used by sophisticated traders to
continuously update their orders in concert with market updates in
order to keep their overall trading strategies in balance. The Exchange
believes that these types of ``parent/child'' orders typically used by
sophisticated traders should count as multiple orders.
Paragraph (c) of proposed Interpretation and Policy .01 to Rule
1.1(ggg), would discuss the counting of orders that are cancelled and
replaced. Similar to the distinctions drawn in paragraph (b) of
proposed Interpretation and Policy .01 to Rule 1.1(ggg), paragraph (c)
of proposed Interpretation and Policy .01 to Rule 1.1(ggg) would
essentially separate orders that are cancelled and replaced as part of
an overall strategy from those that are cancelled and replaced by a
broker that is ``working'' the order to achieve best execution or
attempting to time the market. Specifically, paragraph (c)(1) of
proposed Interpretation and Policy .01 to Rule 1.1(ggg) would provide
that except as otherwise provided in the rule (and specifically as
provided under paragraph (c)(2) to proposed Interpretation and Policy
.01 to Rule 1.1(ggg)), any order that cancels and replaces an existing
order counts as a separate order (or multiple new orders in the case of
a complex order comprised of five (5) legs or more). For example, if a
trader were to enter a non-marketable limit order to buy an option
contract at a certain net debit price, cancel the order in response to
market movements, and then reenter the same order once it became
marketable, those orders would count as two separate orders for
Professional order counting purposes even though the terms of both
orders were the same.
Paragraph (c)(2) of proposed Interpretation and Policy .01 to Rule
1.1(ggg) would specify the exception to paragraph (c)(1) of proposed
Interpretation and Policy .01 to Rule 1.1(ggg) and would provide that
an order that cancels and replaces any ``child'' order resulting from a
``parent'' order that is placed for the beneficial account(s) of a
person or entity that is not a broker, or dealer in securities that is
broken into multiple ``child'' orders on the same side (buy/sell) and
series as the ``parent'' order by a broker or dealer, by an algorithm
housed at a broker or dealer, or by an algorithm licensed from a broker
or dealer, but which is housed with the customer, would not count as a
new order. For example, if a customer were to enter an order with her
broker to buy 10,000 XYZ $5 January calls at a limit price of $1, which
the customer's broker then entered, but could not fill and then
cancelled to avoid having to rest the order in the book as part of a
strategy to obtain a better execution for the customer and then
resubmitted the remainder of the order, which would be considered a
``child'' of the ``parent'' order, once it became marketable, such
orders would only count as one order for Professional order counting
purposes. Again, similar to paragraph (b) of proposed Interpretation
and Policy .01 to Rule 1.1(ggg), the Exchange notes that paragraph (c)
to proposed Interpretation and Policy .01 to Rule 1.1(ggg) is not aimed
at capturing orders that are being ``worked'' or being cancelled and
replaced to avoid showing large orders to the market in an effort to
elude front-running and to achieve best execution as is typically done
by brokers on behalf of retail clients. Rather, paragraph (c) to
proposed Interpretation and Policy .01 to Rule 1.1(ggg) is aimed at
identifying ``child'' orders of ``parent'' orders generated by
algorithms that are typically used by sophisticated traders to
continuously update their orders in concert with market updates in
order to keep their overall trading strategies in balance. The Exchange
believes that paragraph (c)(2) to proposed Interpretation and Policy
.01 to Rule 1.1(ggg) is consistent with these goals.
Accordingly, consistent with paragraph (c)(1) of proposed
Interpretation and Policy .01 to Rule 1.1(ggg), under paragraph (c)(3)
of proposed Interpretation and Policy .01 to Rule 1.1(ggg), an order
that cancels and replaces any ``child'' order resulting from a
``parent'' order (including a strategy order) that generates ``child''
orders on both sides (buy/sell) of a series and/or in multiple series
would count as a new order. For example, if an investor were to seek to
make a trade (or series of trades) to take a long vega position at a
certain percentage limit on a basket of options, the investor may need
to cancel and replace several of the ``child'' orders entered to
achieve the overall execution strategy several times to account for
updates in the prices of the underlyings. In such a case, each
``child'' order placed to keep the overall execution strategy in place
would count as a new and separate order even if the particular
``child'' order were being used to replace a slightly different
``child'' order that was previously being used to keep the same overall
execution strategy in place. The Exchange believes that the
distinctions between cancel/replace orders in paragraph (c) to proposed
Rule 1.1(ggg) are appropriate as such orders are typically generated by
algorithms used by sophisticated traders to keep strategy orders
continuously in line with updates in the markets. As such, the Exchange
believes that in most cases, cancel/replace orders should count as
multiple orders.
Finally, paragraph (c)(4) of proposed Interpretation and Policy .01
to Rule 1.1(ggg) would codify the Exchange's ``pegged'' order
interpretation in the text of the Rules. Paragraph (c)(4) of proposed
Interpretation and Policy .01 to Rule 1.1(ggg) would provide that
notwithstanding the provisions of paragraph (c)(2) above, an order that
cancels and replaces any ``child'' order resulting from a ``parent''
order being ``pegged'' to the Exchange's best bid or offer (``BBO'') or
national best bid or offer (``NBBO'') or that cancels and replaces any
``child'' order pursuant to an algorithm that uses BBO or NBBO in the
calculation of ``child'' orders and attempts to move with or follow the
BBO or NBBO of a series would count as a new order each time the order
cancels and replaces in order to attempt to move with or follow the BBO
or NBBO. This interpretation is similar to the Exchange's current
interpretation of
[[Page 7178]]
its Professional order rules, but adds clarifying language to the
Exchange's current interpretation and the Rules.\22\ The Exchange
believes that paragraph (c)(4) is appropriate to make clear that
``pegged'' strategy orders that are typically used by sophisticated
traders should be counted as multiple orders even though such orders
may cancel/replace orders in on the same side (buy/sell) of the market
in a single series in order to achieve an overall order strategy.
---------------------------------------------------------------------------
\22\ See CBOE Regulatory Circular RG09-148 (Professional Orders)
at Question 12.
---------------------------------------------------------------------------
Under current Rule 1.1(ggg), in order to properly represent orders
entered on the Exchange according to the Professional order rules,
Trading Permit Holders (``TPHs'') are required to indicate whether
public customer orders are ``Professional'' orders.\23\ This
requirement will remain the same. To comply with this requirement, TPHs
are required to review their customers' activity on at least a
quarterly basis to determine whether orders that are not for the
account of a broker or dealer should be represented as customer orders
or Professional orders.\24\ Orders for any customer that had an average
of more than 390 orders per day during any month of a calendar quarter
must be represented as Professional orders for the next calendar
quarter. TPHs are required to conduct a quarterly review and make any
appropriate changes to the way in which they are representing orders
within five days after the end of each calendar quarter. While TPHs
only will be required to review their accounts on a quarterly basis, if
during a quarter the Exchange identifies a customer for which orders
are being represented as public customer orders but that has averaged
more than 390 orders per day during a month, the Exchange will notify
the TPH and the TPH will be required to change the manner in which it
is representing the customer's orders within five days. Because Rule
1.1(ggg) only requires that TPHs conduct a look-back to determine
whether their customers are averaging more than 390 orders per day at
the end of each calendar quarter, the Exchange proposes an effective
date of April 1, 2016 for proposed Interpretation and Policy .01 to
Rule 1.1(ggg) to ensure that all orders during the next quarterly
review will be counted in the same manner and that proposed
Interpretation and Policy .01 to Rule 1.1(ggg) will not be applied
retroactively.
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\23\ See Securities Exchange Act Release No. 60931 (November 4,
2009), 74 FR 58355 (November 12, 2009) (Notice of Filing of Proposed
Rule Change, as Modified by Amendment No. 1, Related to Professional
Orders) (SR-CBOE 2009-078).
\24\ See id.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\25\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \26\ 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) \27\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\25\ 15 U.S.C. 78f(b).
\26\ 15 U.S.C. 78f(b)(5).
\27\ Id.
---------------------------------------------------------------------------
In particular, the Exchange believes that proposed Interpretation
and Policy .01 to Rule 1.1(ggg) provides a more conservative order
counting regime for Professional order counting purposes that would
identify more traders as Professionals to which the Exchange's
definition of Professional was designed to apply and create a better
competitive balance for all participants on the Exchange, consistent
with the Act. As the options markets have evolved to become more
electronic and more competitive, the Exchange believes that the
distinction between registered broker-dealers and professional traders
who are currently treated as public customers has become increasingly
blurred. More and more, the category of public customer today includes
sophisticated algorithmic traders including former market makers and
hedge funds that trade with a frequency resembling that of broker-
dealers. The Exchange believes that it is reasonable under the Act to
treat those customers who meet the high level of trading activity
established in the proposal differently than customers who do not meet
that threshold and are more typical retail investors to ensure that
professional traders do not take advantage of priority and fee benefits
intended for public customers.
The Exchange notes that it is not unfair to differentiate between
different types of investors in order to achieve certain marketplace
balances. The Rules currently differentiate between public customers,
broker-dealers, Market-Makers, Designated Primary Market-Makers
(``DPMs'') and the like. These differentiations have been recognized to
be consistent with the Act. The Exchange does not believe that the
current rules of CBOE and other exchanges that accord priority to all
public customers over broker-dealers are unfairly discriminatory. Nor
does the Exchange believe that it is unfairly discriminatory to accord
priority to only those customers who on average do not place more than
one order per minute (390 per day) under the counting regime that the
Exchange proposes. The Exchange believes that such differentiations
drive competition in the marketplace and are within the business
judgment of the Exchange. Accordingly, the Exchange also believes that
its proposal is consistent with the requirement of Section 6(b)(8) of
the Act that the rules of an exchange not impose an unnecessary or
inappropriate burden upon competition in that it treats persons who
should be deemed Professionals, but who may not be under current
Interpretation and Policy .01 to Rule 1.1(ggg) in a manner so that they
do not receive special priority benefits.
Furthermore, the Exchange believes that the proposed rule change
will protect investors and the public interest by helping to assure
that retail customers continue to receive the appropriate marketplace
advantages in the CBOE marketplace as intended, while furthering
competition among marketplace professionals by treating them in the
same manner as other similarly situated market participants. The
Exchange believes that it is consistent with Section 6(b)(5) of the Act
not to afford market participants with similar access to information
and technology as that of brokers and dealers of securities with
marketplace advantages over such marketplace competitors. The Exchange
also believes that the proposed Interpretation and Policy would help to
remove burdens on competition and promote a more competitive
marketplace by affording certain marketplace advantages only to those
for whom they are intended. Finally, the Exchange believes that the
proposed rule change sets forth a more detailed and clear regulatory
regime with respect to calculating average daily order entry for
Professional order
[[Page 7179]]
counting purposes. The Exchange believes that this additional clarity
and detail will eliminate confusion among market participants, which is
in the interests of all investors and the general public.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. As discussed above, the
Exchange does not believe that the current rules of CBOE and other
exchanges that accord priority to all public customers over broker-
dealers are unfairly discriminatory. Nor does the Exchange believe that
it is unfairly discriminatory to accord priority to only those
customers who on average do not place more than one order per minute
(390 per day) under the counting regime that the Exchange proposes. The
Exchange believes that its proposal does not impose an undue burden on
competition. The Exchange notes that one of the purposes of the
Professional rules is to help ensure fairness in the marketplace and
promote competition among all market participants. The Exchange
believes that proposed Interpretation and Policy .01 to Rule 1.1(ggg)
would help establish more competition among market participants and
promote the purposes for which the Exchange's Professional rule was
originally adopted. The Exchange does not believe that the Act requires
it to provide the same incentives and discounts to all market
participants equally, so as long as the exchange does not unfairly
discriminate among participants with regard to access to exchange
systems. The Exchange believes that here, that is clearly the case.
Rather than burden competition, the Exchange believes that the
proposed rule change promotes competition by ensuring that retail
investors continue to receive the appropriate marketplace advantages in
the CBOE marketplace as intended, while furthering competition among
marketplace professionals by treating them in the same manner under the
Rules as other similarly situated market participants by ensuring that
market participants with similar access to information and technology
(i.e. Professionals and broker-dealers), receive similar treatment
under the Rules while retail investors receive the benefits of order
priority and fee waivers that are intended to apply to public
customers.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange neither solicited nor received written comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. by order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File No. SR-CBOE-2016-005 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 No. SR-CBOE-2016-005. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing will also be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File No. SR-CBOE-2016-005 and should be
submitted on or before March 2, 2016.
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\28\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-02602 Filed 2-9-16; 8:45 am]
BILLING CODE 8011-01-P
