Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Related to Complex Orders, 12764-12769 [2016-05326]
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Federal Register / Vol. 81, No. 47 / Thursday, March 10, 2016 / Notices
Electronic Comments
• Use the Commission’s Internet
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• Send an email to rule-comments@
sec.gov. Please include File No. SR–
NYSEMKT–2016–34 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
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All submissions should refer to File No.
SR–NYSEMKT–2016–34. 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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printing in the Commission’s Public
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10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
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received will be posted without change;
the Commission does not edit personal
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submissions. You should submit only
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should refer to File No. SR–NYSEMKT–
2016–34, and should be submitted on or
before March 31, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Brent J. Fields,
Secretary.
[FR Doc. 2016–05323 Filed 3–9–16; 8:45 am]
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Dated: March 7, 2016.
Brent J. Fields,
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[FR Doc. 2016–05481 Filed 3–8–16; 11:15 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
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[Release No. 34–77297; File No. SR–CBOE–
2016–014]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Related to Complex
Orders
March 4, 2016.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on February
25, 2016, Chicago Board Options
Exchange, Incorporated (‘‘CBOE’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
1 15
11 17
CFR 200.30–3(a)(12).
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange seeks to amend its rules
related to complex orders. The text of
the proposed rule change is provided
below.
(additions are italicized; deletions are
[bracketed])
*
*
*
*
*
Chicago Board Options Exchange,
Incorporated Rules
*
*
*
*
*
Rule 6.53C. Complex Orders on the
Hybrid System
(a) Definition: No change.
(b) Types of Complex Orders: No
change.
(c) Complex Order Book
No change.
(d) Process for Complex Order RFR
Auction: Prior to routing to the COB or
once on PAR, eligible complex orders
may be subject to an automated request
for responses (‘‘RFR’’) auction process.
(i) For purposes of paragraph (d):
(1) ‘‘COA’’ is the automated complex
order RFR auction process.
(2) A ‘‘COA-eligible order’’ means a
complex order that, as determined by
the Exchange on a class-by-class basis,
is eligible for a COA considering the
order’s [marketability (defined as a
number of ticks away from the current
market),] size, complex order type (as
defined in paragraphs (a) and (b) above)
and complex order origin types (as
defined in subparagraph (c)(i) above).
Complex orders processed through a
COA may be executed without
consideration to prices of the same
complex orders that might be available
on other exchanges.
(ii) Initiation of a COA:
(A) The System will send an RFR
message to all Trading Permit Holders
who have elected to receive RFR
messages on receipt of (1) a COAeligible order with two legs (including
orders submitted for electronic
processing from PAR) that is better than
the same side of the derived net market
or (2) a complex order with three or
more legs that (A) meets the class[,
marketability], size, and complex order
type parameters of subparagraph
(d)(i)(2) and is better than the same side
of the derived net market or (B) is
marketable against the derived net
market, designated as immediate or
cancel, and meets the class [,
marketability,] and size parameters of
subparagraph (d)(i)(2).[, in both cases]
Complex orders as described in
subparagraph (ii)(A)(2) will initiate a
COA regardless of the order’s routing
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parameters or handling instructions
(except for orders routed for manual
handling). Immediate or cancel orders
that are not marketable against the
derived net market in accordance with
subparagraph (ii)(A)(2)(B) will be
cancelled. The RFR message will
identify the component series, the size
and side of the market of the COAeligible order and any contingencies, if
applicable.
(B) No change.
(iii)–(ix) No change.
*
*
*
*
*
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 the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
On October 2, 2015, the Exchange
submitted immediately effective filing
SR–CBOE–2015–081, which amended
Exchange rules related to the initiation
of a complex order auction (‘‘COA’’).3
The purpose of SR–CBOE–2015–081 (as
well as predecessor filing SR–CBOE–
2014–017) 4 was to limit a potential
source of unintended Market-Maker risk
(fully described below) related to how
the Exchange’s Hybrid Trading System
(the ‘‘System’’) 5 calculates risk
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3 See
Securities Exchange Act Release No. 76106
(October 8, 2015), 80 FR 62125 (October 15, 2015)
(SR–CBOE–2015–081) (‘‘Notice’’).
4 See Securities Exchange Act Release No. 72986
(September 4, 2014), 79 FR 53798 (September 10,
2014) (SR–CBOE–2014–017) (‘‘Approval Order’’).
5 The System is a trading platform that allows
automatic executions to occur electronically and
open outcry trades to occur on the floor of the
Exchange. To operate in this ‘‘hybrid’’ environment,
the Exchange has a dynamic order handling system
that has the capability to route orders to the trade
engine for automatic execution and book entry, to
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parameters under Rule 8.18 when
complex orders leg into the market.
Under Rule 8.18, CBOE offers MarketMakers that are obligated to provide and
maintain continuous electronic quotes
in an option class the Quote Risk
Monitor Mechanism (‘‘QRM’’), which is
functionality to help Market-Makers
manage their quotes and related risk.
Market-Makers with appointments in
classes that trade on the System must,
among other things, provide and
maintain continuous electronic quotes
in a specified percentage of series in
each class for a specified percentage of
time.6 To comply with this requirement,
each Market-Maker may use its own
proprietary quotation and risk
management system to determine the
prices and sizes at which it quotes. In
addition, each Market-Maker may use
QRM.
A Market-Maker’s risk in a class is not
limited to the risk in a single series of
that class. Rather, a Market-Maker is
generally actively quoting in multiple
classes, and each class may comprise
hundreds or thousands of individual
series. The System automatically
executes orders against a MarketMaker’s quotes in accordance with the
Exchange’s priority and allocation
rules.7 As a result, a Market-Maker has
exposure and risk in all series in which
it is quoting in each of its appointed
classes. QRM is an optional
functionality that helps Market-Makers,
and TPH organizations with which a
Market-Maker is associated, limit this
overall exposure and risk.
Specifically, if a Market-Maker elects
to use QRM, the System will cancel a
Market-Maker’s quotes in all series in an
appointed class if certain parameters the
Market-Maker establishes are triggered.
Market-Makers may set the following
QRM parameters (Market-Makers may
set none, some or all of these
parameters):
• A maximum number of contracts
for that class (the ‘‘contract limit’’) and
a specified rolling time period in
seconds within which such contract
limit is to be measured (the
‘‘measurement interval’’);
Trading Permit Holder and PAR Official
workstations located in the trading crowds for
manual handling, and/or to other order
management terminals generally located in booths
on the trading floor for manual handling. Where an
order is routed for processing by the Exchange order
handling system depends on various parameters
configured by the Exchange and the order entry
firm itself.
6 See Rules 8.7(d)(ii)(iv) (Market-Makers), 8.13(d)
(Preferred Market-Makers), 8.15A(b)(i) (Lead
Market-Makers) and 8.85(a)(i) (Designated Primary
Market-Makers).
7 See Rules 6.45A, 6.45B and 6.53C.
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• a maximum cumulative percentage
(which is the sum of the percentages of
the original quoted size of each side of
each series that trade) (the ‘‘cumulative
percentage limit’’) that the MarketMaker is willing to trade within a
specified measurement interval; or
• a maximum number of series for
which either side of the quote is fully
traded (the ‘‘number of series fully
traded’’) within a specified
measurement interval.
If the Exchange determines the
Market-Maker has traded more than the
contract limit or cumulative percentage
limit, or has traded at least the number
of series fully traded, of a class during
the specified measurement interval, the
System will cancel all of the MarketMaker’s electronic quotes in that class
(and any other cases with the same
underlying security) until the MarketMaker refreshes those quotes (a ‘‘QRM
Incident’’). A Market-Maker, or TPH
organization with which the MarketMaker is associated, may also specify a
maximum number of QRM Incidents
that may occur on an Exchange-wide
basis during a specified measurement
interval. If the Exchange determines that
a Market-Maker or TPH Organization, as
applicable, has reached its QRM
Incident limit during the specified
measurement interval, the System will
cancel all of the Market-Maker’s or TPH
Organization’s quotes, as applicable,
and the Market-Maker’s orders resting in
the book in all classes and prevent the
Market-Maker and TPH organization
from sending additional quotes or
orders to the Exchange until the earlier
to occur of (1) the Market-Maker or TPH
organization reactivates this ability or
(2) the next trading day.
The purpose of the QRM functionality
is to allow Market-Makers to provide
liquidity across most series in their
appointed classes without being at risk
of executing the full cumulative size of
all their quotes before being given
adequate opportunity to adjust their
quotes. For example, if a Market-Maker
can enter quotes with a size of 25
contracts in 100 series of class ABC, its
potential exposure is 2,500 contracts in
ABC. To mitigate the risk of having all
2,500 contracts in ABC execute without
the opportunity to evaluate its positions,
the Market-Maker may elect to use
QRM. If the Market-Maker elects to use
the contract limit functionality and sets
the contract limit at 100 and the
measurement interval at five seconds for
ABC, the System will automatically
cancel the Market-Maker’s quotes in all
series of ABC if 100 or more contracts
in series of ABC execute during any
five-second period.
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To assure that all quotations are firm
for their full size, the System performs
the parameter calculations after an
execution against a Market-Maker’s
quote occurs. For example, using the
same parameters in class ABC as above,
if a Market-Maker has executed a total
of 95 contracts in ABC within the
previous three seconds, a quote in a
series of ABC with a size of 25 contracts
continues to be firm for all 25 contracts.
An incoming order in that series could
execute all 25 contracts of that quote,
and, following the execution, the total
size parameter would add 25 contracts
to the previous total of 95 for a total of
120 contracts executed in ABC. Because
the total size executed within the
previous five seconds now exceeds the
100 contract limit for ABC, the System
would, following the execution,
immediately cancel all of the MarketMaker’s quotes in series of ABC. The
Market-Maker would then enter new
quotes for series in ABC. Thus, QRM
limits the amount by which a MarketMaker’s executions in a class may
exceed its contract limit to the largest
size of its quote in a single series of the
class (or 25 in this example).
The Exchange proposes to amend
Rule 6.53C regarding complex orders to
limit a potential source of unintended
Market-Maker risk related to how the
System calculates risk parameters under
Rule 8.18 when complex orders leg into
the market.8 As discussed above, by
checking the risk parameters following
each execution in a series, the risk
parameters allow a Market-Maker to
provide liquidity across multiple series
of a class without being at risk of
executing the full cumulative size of all
its quotes. This is not the case, however,
when a complex order legs into the
regular market (i.e. the market for
individual, or simple, orders). Because
the execution of each leg of a complex
order is contingent on the execution of
8 Rule 6.53C(c)(ii)(1) provides that complex
orders in the complex order book (‘‘COB’’) may
execute against individual orders or quotes in the
book provided the complex order can be executed
in full (or a permissible ratio) by the orders and
quotes in the book. Rule 6.53C(d)(v)(1) provides
that orders that are eligible for the complex order
auction (‘‘COA’’) may trade with individual orders
and quotes in the book provided the COA-eligible
order can be executed in full (or a permissible ratio)
by the orders and quotes in the book. COA is an
automated request for responses (‘‘RFR’’) auction
process. Upon initiation of a COA, the Exchange
sends an RFR message to all Trading Permit Holders
who have elected to receive RFR messages, which
RFR message identifies the series, size and side of
the market of the COA-eligible order and any
contingencies. Eligible market participants may
submit responses during a response time interval.
At the conclusion of the response time interval,
COA-eligible orders are allocated in accordance
with Rule 6.53C(d)(v), including against individual
orders and quotes in the book.
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the other legs, the execution of all the
legs in the regular market is processed
as a single transaction, not as a series of
individual transactions.
For example, if market participants
enter into the System individual orders
to buy 25 contracts for the Jan 30 call,
Jan 35 call, Jan 40 call and Jan 45 call
in class ABC, the System processes each
order as it is received and calculates the
Market-Makers parameters in class ABC
following the execution of each 25contract call. However, if a market
participant enters into the System a
complex order to buy all four of these
strikes in class ABC 25 times, which
complex order executes against bids and
offers for the individual series (i.e. legs
into the market), the System will
calculate the Market-Maker’s parameters
in class ABC following the execution of
all 100 contracts. If the Market-Maker
had set the same parameters in class
ABC as discussed above (100-contract
limit with five-second measurement
interval) and had executed 95 contracts
in class ABC within the previous three
seconds, the amount by which the next
transaction might exceed 100 is limited
to the largest size of its quote in a single
series of the class. In that example, since
the largest size of the Market-Maker’s
quotes in any series was 25 contracts,
the Market-Maker could not have
exceeded the 100-contract limit by more
than 20 contracts (95 + 25 = 120).
However, with respect to the complex
order with four legs 25 times, the next
transaction against the Market-Maker’s
quotes potentially could be as large as
100 contracts (depending upon whether
there are other market participants at
the same price), creating the potential in
this example for the Market-Maker to
exceed the 100-contract limit by 95
contracts (95 + 100 = 195) instead of 20
contracts.
As this example demonstrates, legging
of complex orders into the regular
market presents higher risk to MarketMakers than executing their quotes
against individual orders entered in
multiple series of a class in the regular
market, because it may result in MarketMakers exceeding their risk parameters
by a greater number of contracts. This
risk is directly proportional to the
number of legs associated with a
complex order. Market-Makers have
expressed concerns to the Exchange
regarding this risk.
In order to alleviate this potential risk
to Market-Makers, the Exchange, in SR–
CBOE–2015–081, amended Rule
6.53C(d) to, among other things, provide
that a COA will be initiated when a
complex order with three or more legs
is designated as IOC and meets the
class, marketability, and size parameters
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of subparagraph (d)(i)(2).9 The Exchange
observed IOC orders causing the risk to
Market-Makers described above and
believed the previous amendment
proposed in SR–CBOE–2015–081 would
reduce that risk by initiating a COA in
those circumstances. The Exchange is
now proposing to fine tune this
requirement by amending Rule
6.53C(d)(ii)(A)(2)(B) to provide that a
COA will be initiated when a complex
order with three or more legs that is
marketable against the derived net
market is designated as immediate or
cancel and the order meets the class and
size parameters of subparagraph
(d)(i)(2).10
As noted above, it is the legging of
complex orders into the regular market
that presents the potential risk to
Market-Makers. Generally, a complex
order has the potential to leg into the
market when the complex order is
marketable against leg quotes. For
example, if the derived net market of a
complex order strategy is 1.00–1.20 and
a complex order to buy or sell at $1.10
is entered, the complex order would not
execute against the legs of the regular
market because the leg markets (which
make-up the derived net market) cannot
satisfy the order. A complex order to
buy at $1.20 or higher or to sell at $1.00
or lower (i.e., an order that is marketable
against the derived net market) would
potentially be executable against the leg
quotes. However, the current rule
requires the Exchange to initiate a COA
for a complex order with three or more
legs that is designated IOC and meets
the class, marketability, and size
parameters of subparagraph (d)(i)(2),
even if the complex order is not
marketable against the derived net
market. Complex orders that are not
marketable against the derived net
market do not pose the same risk to
Market-Makers as complex orders that
are marketable against the derived net
market because, as noted above, it is
marketable complex orders that can leg
into the market and execute against
individual quotes causing the risk to
Market-Makers. Thus, the Exchange is
proposing to amend Rule
6.53C(d)(ii)(A)(2)(B) as described above.
Additionally, IOC orders that are not
9 See Rule 6.53C(d)(ii)(A)(2)(B). The Exchange has
not yet implemented the changes described in SR–
CBOE–2015–081 in anticipation of this proposal.
10 This proposed change applies to Hybrid classes
only, and not Hybrid 3.0 classes. The Exchange
does not believe the risk discussed in this rule filing
is present in Hybrid 3.0 classes because in Hybrid
3.0 classes complex orders are not legged into the
regular market. See Rule 6.53C.10 (providing
flexibility for the Exchange to determine to not
allow marketable complex orders entered into COB
and/or COA to automatically execute against
individual quotes residing in the EBook).
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marketable against the derived net
market in accordance with
subparagraph (ii)(A)(2)(B) will be
cancelled, which allows order entry
firms to use their own sophisticated
technology to manage their orders
helping to remove impediments to and
perfect the mechanism of a free and
open market.
Currently, the marketability parameter
in Rule 6.53C(d)(i)(2), defined as a
number of ticks away from the current
market, sets the price at which a
complex order will initiate a COA. To
avoid confusion, the Exchange proposes
to remove the marketability parameter
from the definition of ‘‘COA-eligible
order,’’ which will remove the
Exchange’s flexibility to set the price at
which a complex order will initiate a
COA. The Exchange does not foresee
any issues with removing the flexibility
to determine the price at which a COA
will be initiated because the Exchange
does not foresee a future need to modify
the price at which auctions are initiated.
If unforeseen circumstances arise where
the Exchange believes it is necessary to
modify the price at which auctions are
initiated then the Exchange will submit
a subsequent rule filing. Additionally,
removing such flexibility may provide
increased certainty to market
participants about the price at which a
complex order will initiate a COA,
helping to remove impediments to and
perfect the mechanism of a free and
open market.
The Exchange proposes to hardcode
the price at which a complex order may
initiate a COA in Rule 6.53C(d)(ii)(A).
For example, assuming all of the nonprice specific requirements are met, a
complex order with two legs under
subparagraph (d)(ii)(A)(1) and a
complex order with three legs under
subparagraph (d)(ii)(A)(2)(A) will
initiate a COA if the derived net market
is 1–1.20 and the complex order is to
buy at $1.01 or higher or to sell at 1.19
or lower.11 As described above,
assuming the non-price specific
requirements are met, a complex order
with three legs under subparagraph
(d)(ii)(A)(2)(B) will initiate a COA if the
derived net market is 1–1.20 and the
complex order is to buy at $1.20 or
higher or to sell at $1.00 or lower.
Initiating a COA in these situations will
relieve the risk to Market-Makers noted
above, which helps promote just and
equitable principles of trade by relieving
risk to Market-Makers allowing them to
11 The Exchange notes that the prices at which a
complex order will initiate a COA under
subparagraphs (d)(ii)(A)(1) or (d)(ii)(A)(2)(A) are
consistent with the current settings for the
marketability parameter. This portion of the
proposal simply hardcodes existing settings.
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more efficiently and effectively provide
important liquidity.
In short, SR–CBOE–2015–081, among
other things, identified certain orders
that potentially cause the risk to MarketMakers described above (i.e., complex
orders with three or more legs that are
designated as IOC and meet the class,
marketability, and size parameters of
subparagraph (d)(i)(2)). This proposal
goes a step further and focuses on the
above orders that are marketable against
the derived net market. This is
consistent with the purpose of SR–
CBOE–2015–081, which was to alleviate
the potential risk to Market-Makers.
Additionally, this proposal helps to
further balance the protection of MarketMakers with the desire of market
participants entering IOC orders to have
those orders cancel if not immediately
executed. The Exchange also notes that
the Exchange is removing its flexibility
with regards to the marketability
parameter.
The Exchange will announce the
implementation date of the proposed
rule change in a Regulatory Circular to
be published no later than 90 days
following the effective date of this filing.
The implementation date will be no
later than 180 days following the
effective date of this filing.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.12 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 13 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) 14 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
12 15
13 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
In particular, the Exchange believes
the proposed rule change is consistent
with the purpose of SR–CBOE–2015–
081, which was to alleviate a potential
risk to Market-Makers that arises
through the use of QRM. Complex
orders with three or more legs that are
designated as IOC and meet the class
and size parameters of subparagraph
(d)(i)(2) and that are marketable against
the derived net market (which the
Exchange has identified as potentially
causing risk to Market-Makers) will
COA, which helps promote just and
equitable principles of trade by relieving
risk to Market-Makers allowing them to
more efficiently and effectively provide
important liquidity. Orders that are
designated as IOC and meet the class
and size parameters of subparagraph
(d)(i)(2), but that are not marketable
against the derived net market, will be
cancelled, which allows order entry
firms to use their own sophisticated
technology to manage their orders
helping to remove impediments to and
perfect the mechanism of a free and
open market. The Exchange is also
removing flexibility with regards to the
marketability parameter. Although the
Exchange prefers flexibility, the
Exchange does not foresee the need to
retain flexibility with regards to the
marketability parameter and hardcoding
the parameter may help avoid confusion
with regards to the price at which a
complex order will initiate a COA,
which also helps to remove
impediments to and perfect the
mechanism of a free and open market.
The Exchange also believes the
proposed rule change to initiate a COA
upon receipt of complex orders with
three or more legs that are designated as
IOC and meet the class and size
parameters of subparagraph (d)(i)(2) and
that are marketable against the derived
net market is consistent with the
requirement that Market-Makers’ quotes
be firm under Rule 602 of Regulation
NMS.15 The proposed rule change does
15 Rule 602(b)(2) obligates a Market-Maker to
execute any order to buy or sell a subject security
presented to it by another broker or dealer or any
other person belonging to a category of persons with
whom the Market-Maker customarily deals, at a
price at least as favorable to the buyer or sell as the
Market-Maker’s published bid or offer in any
amount up to its published quotation size. Rule
602(b)(3) provides that no Market-Maker is
obligated to execute a transaction for any subject
security to purchase or sell that subject security in
an amount greater than its revised quotation size if,
prior to the presentation of an order for the
purchase or sale of a subject security, the MarketMaker communicated to the Exchange a revised
quotation size. Similarly, no Market-Maker is
obligated to execute a transaction for any subject
security if, before the order sought to be executed
is presented, the Market-Maker has communicated
to the Exchange a revised bid or offer. CBOE Rule
14 Id.
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Federal Register / Vol. 81, No. 47 / Thursday, March 10, 2016 / Notices
not relieve Market-Makers of their
obligation to provide ‘‘firm’’ quotes. If a
complex order in a Hybrid class with
three or more legs goes through COA
and then legs into the market for
execution upon completion of the COA,
at which point the complex order would
execute against a Market-Maker’s quotes
based on priority rules, the MarketMaker must execute its quotes against
the order at its then-published bid or
offer up to its published quote size, even
if such execution would cause the
Market-Maker to significantly exceed its
risk parameters. However, prior to the
end of COA (and thus prior to a
complex order legging into the market),
a Market-Maker may adjust its
published quotes to manage its risk in
a class as it deems necessary, including
to prevent executions that would exceed
its risk parameters. In this case, the firm
quote rule does not obligate the MarketMaker to execute its quotes against the
complex order at the quote price and
size that was published when the order
entered the System and initiated the
COA. Rather, the Market-Maker’s firm
quote obligation applies only to its
disseminated quote at the time an order
is presented to the Market-Maker for
execution, which presentation does not
occur until the System processes the
order against the leg markets after
completion of the COA.16 Thus, the
proposed rule change is consistent with
the firm quote rule.
mstockstill on DSK4VPTVN1PROD with NOTICES
B. Self-Regulatory Organization’s
Statement on Burden on Competition
CBOE does not believe that the
proposed rule change will impose any
8.51 imposes a similar obligation (Market-Maker
must sell (buy) at least the established number of
contracts at the offer (bid) which is displayed when
the Market-Maker receives a buy (sell) order at the
trading station where the reported security is
located for trading; however, no Market-Maker is
obligated to execute a transaction for a listed option
when, prior to the presentation of an order to sell
(buy) to the Market-Maker, the Market-Maker has
communicated to the Exchange a revised quote).
16 See Staff Legal Bulletin No. 16, Transaction in
Listed Options Under Exchange Act Rule 11Ac1–1,
U.S. Securities and Exchange Commission, Division
of Market Regulation, January 20, 2004 (‘‘Scenario
3: When an Order is ‘‘Presented’’ . . . If an
individual market maker generates its own
quotations . . . and exchange systems route
incoming orders to the responsible broker-dealer
with priority, when is an order presented to a
responsible broker-dealer? Response: . . . . When
each market maker is the responsible broker-dealer
with respect to its own quote, an order is presented
to it when received by the market maker from the
exchange system.’’). When a complex order is
processing through COA, the order is still in the
System and has not yet been presented to a broker
or dealer (including a Market-Maker) for execution.
Only after completion of the COA, when the System
allocates the complex order for execution in
accordance with priority rules, will that order be
‘‘presented’’ to the Market-Maker for firm quote
purposes.
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burden on intramarket or intermarket
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act. The Exchange does
not believe the proposed rule change
will impose any burden on intramarket
competition because all IOC orders will
be treated equally by the Exchange. The
proposed rule change is intended to
reduce risk to Market-Makers that are
quoting in the regular market. CBOE
believes that the proposed rule change
will promote competition by
encouraging Market-Makers to increase
the size of and to more aggressively
price their quotes, which will increase
liquidity on the Exchange. To the extent
that the rule change makes CBOE a more
attractive marketplace, market
participants are free to become Trading
Permit Holders on CBOE and other
exchanges are free to amend their rules
in a similar manner. Furthermore, the
Exchange does not believe the proposed
rule change will impose any burden on
intermarket competition because the
rule change does not materially affect
the outcome or purpose of SR–CBOE–
2015–081, which was to alleviate
potential risk to Market-Makers using
QRM. The Exchange also does not
believe hardcoding the price at which a
complex order may initiate a COA will
impose a burden on competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not:
A. significantly affect the protection
of investors or the public interest;
B. impose any significant burden on
competition; and
C. become operative for 30 days from
the date on which it was filed, or such
shorter time as the Commission may
designate, it has become effective
pursuant to Section 19(b)(3)(A) of the
Act 17 and Rule 19b–4(f)(6) 18
thereunder. At any time within 60 days
of the filing of the proposed rule change,
17 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
18 17
PO 00000
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Fmt 4703
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the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CBOE–2016–014 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CBOE–2016–014. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
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
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Federal Register / Vol. 81, No. 47 / Thursday, March 10, 2016 / Notices
information that you wish to make
available publicly. All submissions
should refer to File Number SR–CBOE–
2016–014, and should be submitted on
or before March 31, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.19
Brent J. Fields,
Secretary.
[FR Doc. 2016–05326 Filed 3–9–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77295; File No. SR–Phlx–
2016–32]
Self-Regulatory Organizations;
NASDAQ PHLX LLC; Notice of Filing
and Immediate Effectiveness of
Proposed Rule Change To Amend
Provisions Related to Options
Disputes
Pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on February
25, 2016, NASDAQ PHLX LLC
(‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘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 the Substance
of the Proposed Rule Change
mstockstill on DSK4VPTVN1PROD with NOTICES
The Exchange proposes to amend
Rule 124, Disputes-Options and the
corollary Options Floor Procedure
Advice F–27, Options Exchange Official
Rulings,3 in a number of ways described
below.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://
nasdaqomxphlx.cchwallstreet.com/, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Options floor procedures advices generally
correspond to Exchange rules and comprise the
Exchange’s minor rule violation plan establishing
preset fines for certain violations pursuant to Rule
19d–1(c) under the Act. 17 CFR 240.19d–1(c).
VerDate Sep<11>2014
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Jkt 238001
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
March 4, 2016.
19 17
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
The purpose of the proposal is to
update the rules under which disputes
can be addressed, as described below.
Rule 124 pertains to disputes on the
options trading floor. Disputes occurring
on and relating to the trading floor, if
not settled by agreement between the
members interested, shall be settled, if
practicable, by vote of the members
knowing of the transaction in question;
if not so settled, they shall be settled by
an Options Exchange Official.
In issuing decisions for the resolution
of trading disputes, an Options
Exchange Official shall institute the
course of action deemed to be most fair
to all parties under the circumstances at
the time. An Options Exchange Official
may direct the execution of an order on
the floor, or adjust the transaction terms
or participants to an executed order on
the floor. An Options Exchange Official
may nullify a transaction if the Options
Exchange Official determines the
transaction to have been in violation of
certain rules that are listed in Rule 124.
The Exchange proposes to delete from
this list the rules that are now entirely
automated such that they do not operate
on the trading floor and would not be
subject to the provisions of Rule 124.
Specifically, Rule 1017, Openings in
Options, and Rule 1080, Phlx XL and
Phlx XL II,4 are proposed to be deleted
from Rule 124. Both of these rules
pertain only to automated activity.
Because errors resulting from automated
order handling and execution are
handled pursuant to Rule 1092, there is
no need for the Rule 124 process to
apply.
4 The Exchange intends to separately update Rule
1080 in a variety of ways to make clear that it only
applies to automated trading system activity.
PO 00000
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12769
2. Statutory Basis
The Exchange believes that its
proposal is consistent with section 6(b)
of the Act 5 in general, and furthers the
objectives of section 6(b)(5) of the Act 6
in particular, in that it is designed to
promote just and equitable principles of
trade and to protect investors and the
public interest, by maintaining a
framework to handle disputes on the
trading floor, consistent with the current
market structure for trading options on
the Exchange. The proposed change to
delete two rules from the list of rules
that, if violated, could result in a trade
nullification should promote just and
equitable principles of trade by
recognizing that due to increased
automation those disputes are handled
by a different rule, Rule 1092.
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 not
necessary or appropriate in furtherance
of the purposes of the Act. In terms of
intra-market competition, the proposal
applies to all trading floor participants
and does not affect competition among
such participants. The proposal does
not burden competition among options
markets, which is fierce, because it
merely updates an internal dispute
process on the Phlx options trading
floor.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to section
19(b)(3)(A)(iii) of the Act 7 and
subparagraph (f)(6) of Rule 19b–4
thereunder.8
5 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
7 15 U.S.C. 78s(b)(3)(a)(iii).
8 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
6 15
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]]>Agencies
[Federal Register Volume 81, Number 47 (Thursday, March 10, 2016)]
[Notices]
[Pages 12764-12769]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-05326]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77297; File No. SR-CBOE-2016-014]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change Related to Complex Orders
March 4, 2016.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 25, 2016, Chicago Board Options Exchange, Incorporated
(``CBOE'' or the ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange seeks to amend its rules related to complex orders.
The text of the proposed rule change is provided below.
(additions are italicized; deletions are [bracketed])
* * * * *
Chicago Board Options Exchange, Incorporated Rules
* * * * *
Rule 6.53C. Complex Orders on the Hybrid System
(a) Definition: No change.
(b) Types of Complex Orders: No change.
(c) Complex Order Book
No change.
(d) Process for Complex Order RFR Auction: Prior to routing to the
COB or once on PAR, eligible complex orders may be subject to an
automated request for responses (``RFR'') auction process.
(i) For purposes of paragraph (d):
(1) ``COA'' is the automated complex order RFR auction process.
(2) A ``COA-eligible order'' means a complex order that, as
determined by the Exchange on a class-by-class basis, is eligible for a
COA considering the order's [marketability (defined as a number of
ticks away from the current market),] size, complex order type (as
defined in paragraphs (a) and (b) above) and complex order origin types
(as defined in subparagraph (c)(i) above). Complex orders processed
through a COA may be executed without consideration to prices of the
same complex orders that might be available on other exchanges.
(ii) Initiation of a COA:
(A) The System will send an RFR message to all Trading Permit
Holders who have elected to receive RFR messages on receipt of (1) a
COA-eligible order with two legs (including orders submitted for
electronic processing from PAR) that is better than the same side of
the derived net market or (2) a complex order with three or more legs
that (A) meets the class[, marketability], size, and complex order type
parameters of subparagraph (d)(i)(2) and is better than the same side
of the derived net market or (B) is marketable against the derived net
market, designated as immediate or cancel, and meets the class [,
marketability,] and size parameters of subparagraph (d)(i)(2).[, in
both cases] Complex orders as described in subparagraph (ii)(A)(2) will
initiate a COA regardless of the order's routing
[[Page 12765]]
parameters or handling instructions (except for orders routed for
manual handling). Immediate or cancel orders that are not marketable
against the derived net market in accordance with subparagraph
(ii)(A)(2)(B) will be cancelled. The RFR message will identify the
component series, the size and side of the market of the COA-eligible
order and any contingencies, if applicable.
(B) No change.
(iii)-(ix) No change.
* * * * *
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
On October 2, 2015, the Exchange submitted immediately effective
filing SR-CBOE-2015-081, which amended Exchange rules related to the
initiation of a complex order auction (``COA'').\3\ The purpose of SR-
CBOE-2015-081 (as well as predecessor filing SR-CBOE-2014-017) \4\ was
to limit a potential source of unintended Market-Maker risk (fully
described below) related to how the Exchange's Hybrid Trading System
(the ``System'') \5\ calculates risk parameters under Rule 8.18 when
complex orders leg into the market.
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 76106 (October 8,
2015), 80 FR 62125 (October 15, 2015) (SR-CBOE-2015-081)
(``Notice'').
\4\ See Securities Exchange Act Release No. 72986 (September 4,
2014), 79 FR 53798 (September 10, 2014) (SR-CBOE-2014-017)
(``Approval Order'').
\5\ The System is a trading platform that allows automatic
executions to occur electronically and open outcry trades to occur
on the floor of the Exchange. To operate in this ``hybrid''
environment, the Exchange has a dynamic order handling system that
has the capability to route orders to the trade engine for automatic
execution and book entry, to Trading Permit Holder and PAR Official
workstations located in the trading crowds for manual handling, and/
or to other order management terminals generally located in booths
on the trading floor for manual handling. Where an order is routed
for processing by the Exchange order handling system depends on
various parameters configured by the Exchange and the order entry
firm itself.
---------------------------------------------------------------------------
Under Rule 8.18, CBOE offers Market-Makers that are obligated to
provide and maintain continuous electronic quotes in an option class
the Quote Risk Monitor Mechanism (``QRM''), which is functionality to
help Market-Makers manage their quotes and related risk. Market-Makers
with appointments in classes that trade on the System must, among other
things, provide and maintain continuous electronic quotes in a
specified percentage of series in each class for a specified percentage
of time.\6\ To comply with this requirement, each Market-Maker may use
its own proprietary quotation and risk management system to determine
the prices and sizes at which it quotes. In addition, each Market-Maker
may use QRM.
---------------------------------------------------------------------------
\6\ See Rules 8.7(d)(ii)(iv) (Market-Makers), 8.13(d) (Preferred
Market-Makers), 8.15A(b)(i) (Lead Market-Makers) and 8.85(a)(i)
(Designated Primary Market-Makers).
---------------------------------------------------------------------------
A Market-Maker's risk in a class is not limited to the risk in a
single series of that class. Rather, a Market-Maker is generally
actively quoting in multiple classes, and each class may comprise
hundreds or thousands of individual series. The System automatically
executes orders against a Market-Maker's quotes in accordance with the
Exchange's priority and allocation rules.\7\ As a result, a Market-
Maker has exposure and risk in all series in which it is quoting in
each of its appointed classes. QRM is an optional functionality that
helps Market-Makers, and TPH organizations with which a Market-Maker is
associated, limit this overall exposure and risk.
---------------------------------------------------------------------------
\7\ See Rules 6.45A, 6.45B and 6.53C.
---------------------------------------------------------------------------
Specifically, if a Market-Maker elects to use QRM, the System will
cancel a Market-Maker's quotes in all series in an appointed class if
certain parameters the Market-Maker establishes are triggered. Market-
Makers may set the following QRM parameters (Market-Makers may set
none, some or all of these parameters):
A maximum number of contracts for that class (the
``contract limit'') and a specified rolling time period in seconds
within which such contract limit is to be measured (the ``measurement
interval'');
a maximum cumulative percentage (which is the sum of the
percentages of the original quoted size of each side of each series
that trade) (the ``cumulative percentage limit'') that the Market-Maker
is willing to trade within a specified measurement interval; or
a maximum number of series for which either side of the
quote is fully traded (the ``number of series fully traded'') within a
specified measurement interval.
If the Exchange determines the Market-Maker has traded more than
the contract limit or cumulative percentage limit, or has traded at
least the number of series fully traded, of a class during the
specified measurement interval, the System will cancel all of the
Market-Maker's electronic quotes in that class (and any other cases
with the same underlying security) until the Market-Maker refreshes
those quotes (a ``QRM Incident''). A Market-Maker, or TPH organization
with which the Market-Maker is associated, may also specify a maximum
number of QRM Incidents that may occur on an Exchange-wide basis during
a specified measurement interval. If the Exchange determines that a
Market-Maker or TPH Organization, as applicable, has reached its QRM
Incident limit during the specified measurement interval, the System
will cancel all of the Market-Maker's or TPH Organization's quotes, as
applicable, and the Market-Maker's orders resting in the book in all
classes and prevent the Market-Maker and TPH organization from sending
additional quotes or orders to the Exchange until the earlier to occur
of (1) the Market-Maker or TPH organization reactivates this ability or
(2) the next trading day.
The purpose of the QRM functionality is to allow Market-Makers to
provide liquidity across most series in their appointed classes without
being at risk of executing the full cumulative size of all their quotes
before being given adequate opportunity to adjust their quotes. For
example, if a Market-Maker can enter quotes with a size of 25 contracts
in 100 series of class ABC, its potential exposure is 2,500 contracts
in ABC. To mitigate the risk of having all 2,500 contracts in ABC
execute without the opportunity to evaluate its positions, the Market-
Maker may elect to use QRM. If the Market-Maker elects to use the
contract limit functionality and sets the contract limit at 100 and the
measurement interval at five seconds for ABC, the System will
automatically cancel the Market-Maker's quotes in all series of ABC if
100 or more contracts in series of ABC execute during any five-second
period.
[[Page 12766]]
To assure that all quotations are firm for their full size, the
System performs the parameter calculations after an execution against a
Market-Maker's quote occurs. For example, using the same parameters in
class ABC as above, if a Market-Maker has executed a total of 95
contracts in ABC within the previous three seconds, a quote in a series
of ABC with a size of 25 contracts continues to be firm for all 25
contracts. An incoming order in that series could execute all 25
contracts of that quote, and, following the execution, the total size
parameter would add 25 contracts to the previous total of 95 for a
total of 120 contracts executed in ABC. Because the total size executed
within the previous five seconds now exceeds the 100 contract limit for
ABC, the System would, following the execution, immediately cancel all
of the Market-Maker's quotes in series of ABC. The Market-Maker would
then enter new quotes for series in ABC. Thus, QRM limits the amount by
which a Market-Maker's executions in a class may exceed its contract
limit to the largest size of its quote in a single series of the class
(or 25 in this example).
The Exchange proposes to amend Rule 6.53C regarding complex orders
to limit a potential source of unintended Market-Maker risk related to
how the System calculates risk parameters under Rule 8.18 when complex
orders leg into the market.\8\ As discussed above, by checking the risk
parameters following each execution in a series, the risk parameters
allow a Market-Maker to provide liquidity across multiple series of a
class without being at risk of executing the full cumulative size of
all its quotes. This is not the case, however, when a complex order
legs into the regular market (i.e. the market for individual, or
simple, orders). Because the execution of each leg of a complex order
is contingent on the execution of the other legs, the execution of all
the legs in the regular market is processed as a single transaction,
not as a series of individual transactions.
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\8\ Rule 6.53C(c)(ii)(1) provides that complex orders in the
complex order book (``COB'') may execute against individual orders
or quotes in the book provided the complex order can be executed in
full (or a permissible ratio) by the orders and quotes in the book.
Rule 6.53C(d)(v)(1) provides that orders that are eligible for the
complex order auction (``COA'') may trade with individual orders and
quotes in the book provided the COA-eligible order can be executed
in full (or a permissible ratio) by the orders and quotes in the
book. COA is an automated request for responses (``RFR'') auction
process. Upon initiation of a COA, the Exchange sends an RFR message
to all Trading Permit Holders who have elected to receive RFR
messages, which RFR message identifies the series, size and side of
the market of the COA-eligible order and any contingencies. Eligible
market participants may submit responses during a response time
interval. At the conclusion of the response time interval, COA-
eligible orders are allocated in accordance with Rule 6.53C(d)(v),
including against individual orders and quotes in the book.
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For example, if market participants enter into the System
individual orders to buy 25 contracts for the Jan 30 call, Jan 35 call,
Jan 40 call and Jan 45 call in class ABC, the System processes each
order as it is received and calculates the Market-Makers parameters in
class ABC following the execution of each 25-contract call. However, if
a market participant enters into the System a complex order to buy all
four of these strikes in class ABC 25 times, which complex order
executes against bids and offers for the individual series (i.e. legs
into the market), the System will calculate the Market-Maker's
parameters in class ABC following the execution of all 100 contracts.
If the Market-Maker had set the same parameters in class ABC as
discussed above (100-contract limit with five-second measurement
interval) and had executed 95 contracts in class ABC within the
previous three seconds, the amount by which the next transaction might
exceed 100 is limited to the largest size of its quote in a single
series of the class. In that example, since the largest size of the
Market-Maker's quotes in any series was 25 contracts, the Market-Maker
could not have exceeded the 100-contract limit by more than 20
contracts (95 + 25 = 120). However, with respect to the complex order
with four legs 25 times, the next transaction against the Market-
Maker's quotes potentially could be as large as 100 contracts
(depending upon whether there are other market participants at the same
price), creating the potential in this example for the Market-Maker to
exceed the 100-contract limit by 95 contracts (95 + 100 = 195) instead
of 20 contracts.
As this example demonstrates, legging of complex orders into the
regular market presents higher risk to Market-Makers than executing
their quotes against individual orders entered in multiple series of a
class in the regular market, because it may result in Market-Makers
exceeding their risk parameters by a greater number of contracts. This
risk is directly proportional to the number of legs associated with a
complex order. Market-Makers have expressed concerns to the Exchange
regarding this risk.
In order to alleviate this potential risk to Market-Makers, the
Exchange, in SR-CBOE-2015-081, amended Rule 6.53C(d) to, among other
things, provide that a COA will be initiated when a complex order with
three or more legs is designated as IOC and meets the class,
marketability, and size parameters of subparagraph (d)(i)(2).\9\ The
Exchange observed IOC orders causing the risk to Market-Makers
described above and believed the previous amendment proposed in SR-
CBOE-2015-081 would reduce that risk by initiating a COA in those
circumstances. The Exchange is now proposing to fine tune this
requirement by amending Rule 6.53C(d)(ii)(A)(2)(B) to provide that a
COA will be initiated when a complex order with three or more legs that
is marketable against the derived net market is designated as immediate
or cancel and the order meets the class and size parameters of
subparagraph (d)(i)(2).\10\
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\9\ See Rule 6.53C(d)(ii)(A)(2)(B). The Exchange has not yet
implemented the changes described in SR-CBOE-2015-081 in
anticipation of this proposal.
\10\ This proposed change applies to Hybrid classes only, and
not Hybrid 3.0 classes. The Exchange does not believe the risk
discussed in this rule filing is present in Hybrid 3.0 classes
because in Hybrid 3.0 classes complex orders are not legged into the
regular market. See Rule 6.53C.10 (providing flexibility for the
Exchange to determine to not allow marketable complex orders entered
into COB and/or COA to automatically execute against individual
quotes residing in the EBook).
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As noted above, it is the legging of complex orders into the
regular market that presents the potential risk to Market-Makers.
Generally, a complex order has the potential to leg into the market
when the complex order is marketable against leg quotes. For example,
if the derived net market of a complex order strategy is 1.00-1.20 and
a complex order to buy or sell at $1.10 is entered, the complex order
would not execute against the legs of the regular market because the
leg markets (which make-up the derived net market) cannot satisfy the
order. A complex order to buy at $1.20 or higher or to sell at $1.00 or
lower (i.e., an order that is marketable against the derived net
market) would potentially be executable against the leg quotes.
However, the current rule requires the Exchange to initiate a COA for a
complex order with three or more legs that is designated IOC and meets
the class, marketability, and size parameters of subparagraph
(d)(i)(2), even if the complex order is not marketable against the
derived net market. Complex orders that are not marketable against the
derived net market do not pose the same risk to Market-Makers as
complex orders that are marketable against the derived net market
because, as noted above, it is marketable complex orders that can leg
into the market and execute against individual quotes causing the risk
to Market-Makers. Thus, the Exchange is proposing to amend Rule
6.53C(d)(ii)(A)(2)(B) as described above. Additionally, IOC orders that
are not
[[Page 12767]]
marketable against the derived net market in accordance with
subparagraph (ii)(A)(2)(B) will be cancelled, which allows order entry
firms to use their own sophisticated technology to manage their orders
helping to remove impediments to and perfect the mechanism of a free
and open market.
Currently, the marketability parameter in Rule 6.53C(d)(i)(2),
defined as a number of ticks away from the current market, sets the
price at which a complex order will initiate a COA. To avoid confusion,
the Exchange proposes to remove the marketability parameter from the
definition of ``COA-eligible order,'' which will remove the Exchange's
flexibility to set the price at which a complex order will initiate a
COA. The Exchange does not foresee any issues with removing the
flexibility to determine the price at which a COA will be initiated
because the Exchange does not foresee a future need to modify the price
at which auctions are initiated. If unforeseen circumstances arise
where the Exchange believes it is necessary to modify the price at
which auctions are initiated then the Exchange will submit a subsequent
rule filing. Additionally, removing such flexibility may provide
increased certainty to market participants about the price at which a
complex order will initiate a COA, helping to remove impediments to and
perfect the mechanism of a free and open market.
The Exchange proposes to hardcode the price at which a complex
order may initiate a COA in Rule 6.53C(d)(ii)(A). For example, assuming
all of the non-price specific requirements are met, a complex order
with two legs under subparagraph (d)(ii)(A)(1) and a complex order with
three legs under subparagraph (d)(ii)(A)(2)(A) will initiate a COA if
the derived net market is 1-1.20 and the complex order is to buy at
$1.01 or higher or to sell at 1.19 or lower.\11\ As described above,
assuming the non-price specific requirements are met, a complex order
with three legs under subparagraph (d)(ii)(A)(2)(B) will initiate a COA
if the derived net market is 1-1.20 and the complex order is to buy at
$1.20 or higher or to sell at $1.00 or lower. Initiating a COA in these
situations will relieve the risk to Market-Makers noted above, which
helps promote just and equitable principles of trade by relieving risk
to Market-Makers allowing them to more efficiently and effectively
provide important liquidity.
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\11\ The Exchange notes that the prices at which a complex order
will initiate a COA under subparagraphs (d)(ii)(A)(1) or
(d)(ii)(A)(2)(A) are consistent with the current settings for the
marketability parameter. This portion of the proposal simply
hardcodes existing settings.
---------------------------------------------------------------------------
In short, SR-CBOE-2015-081, among other things, identified certain
orders that potentially cause the risk to Market-Makers described above
(i.e., complex orders with three or more legs that are designated as
IOC and meet the class, marketability, and size parameters of
subparagraph (d)(i)(2)). This proposal goes a step further and focuses
on the above orders that are marketable against the derived net market.
This is consistent with the purpose of SR-CBOE-2015-081, which was to
alleviate the potential risk to Market-Makers. Additionally, this
proposal helps to further balance the protection of Market-Makers with
the desire of market participants entering IOC orders to have those
orders cancel if not immediately executed. The Exchange also notes that
the Exchange is removing its flexibility with regards to the
marketability parameter.
The Exchange will announce the implementation date of the proposed
rule change in a Regulatory Circular to be published no later than 90
days following the effective date of this filing. The implementation
date will be no later than 180 days following the effective date of
this filing.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\12\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \13\ 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) \14\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
\14\ Id.
---------------------------------------------------------------------------
In particular, the Exchange believes the proposed rule change is
consistent with the purpose of SR-CBOE-2015-081, which was to alleviate
a potential risk to Market-Makers that arises through the use of QRM.
Complex orders with three or more legs that are designated as IOC and
meet the class and size parameters of subparagraph (d)(i)(2) and that
are marketable against the derived net market (which the Exchange has
identified as potentially causing risk to Market-Makers) will COA,
which helps promote just and equitable principles of trade by relieving
risk to Market-Makers allowing them to more efficiently and effectively
provide important liquidity. Orders that are designated as IOC and meet
the class and size parameters of subparagraph (d)(i)(2), but that are
not marketable against the derived net market, will be cancelled, which
allows order entry firms to use their own sophisticated technology to
manage their orders helping to remove impediments to and perfect the
mechanism of a free and open market. The Exchange is also removing
flexibility with regards to the marketability parameter. Although the
Exchange prefers flexibility, the Exchange does not foresee the need to
retain flexibility with regards to the marketability parameter and
hardcoding the parameter may help avoid confusion with regards to the
price at which a complex order will initiate a COA, which also helps to
remove impediments to and perfect the mechanism of a free and open
market.
The Exchange also believes the proposed rule change to initiate a
COA upon receipt of complex orders with three or more legs that are
designated as IOC and meet the class and size parameters of
subparagraph (d)(i)(2) and that are marketable against the derived net
market is consistent with the requirement that Market-Makers' quotes be
firm under Rule 602 of Regulation NMS.\15\ The proposed rule change
does
[[Page 12768]]
not relieve Market-Makers of their obligation to provide ``firm''
quotes. If a complex order in a Hybrid class with three or more legs
goes through COA and then legs into the market for execution upon
completion of the COA, at which point the complex order would execute
against a Market-Maker's quotes based on priority rules, the Market-
Maker must execute its quotes against the order at its then-published
bid or offer up to its published quote size, even if such execution
would cause the Market-Maker to significantly exceed its risk
parameters. However, prior to the end of COA (and thus prior to a
complex order legging into the market), a Market-Maker may adjust its
published quotes to manage its risk in a class as it deems necessary,
including to prevent executions that would exceed its risk parameters.
In this case, the firm quote rule does not obligate the Market-Maker to
execute its quotes against the complex order at the quote price and
size that was published when the order entered the System and initiated
the COA. Rather, the Market-Maker's firm quote obligation applies only
to its disseminated quote at the time an order is presented to the
Market-Maker for execution, which presentation does not occur until the
System processes the order against the leg markets after completion of
the COA.\16\ Thus, the proposed rule change is consistent with the firm
quote rule.
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\15\ Rule 602(b)(2) obligates a Market-Maker to execute any
order to buy or sell a subject security presented to it by another
broker or dealer or any other person belonging to a category of
persons with whom the Market-Maker customarily deals, at a price at
least as favorable to the buyer or sell as the Market-Maker's
published bid or offer in any amount up to its published quotation
size. Rule 602(b)(3) provides that no Market-Maker is obligated to
execute a transaction for any subject security to purchase or sell
that subject security in an amount greater than its revised
quotation size if, prior to the presentation of an order for the
purchase or sale of a subject security, the Market-Maker
communicated to the Exchange a revised quotation size. Similarly, no
Market-Maker is obligated to execute a transaction for any subject
security if, before the order sought to be executed is presented,
the Market-Maker has communicated to the Exchange a revised bid or
offer. CBOE Rule 8.51 imposes a similar obligation (Market-Maker
must sell (buy) at least the established number of contracts at the
offer (bid) which is displayed when the Market-Maker receives a buy
(sell) order at the trading station where the reported security is
located for trading; however, no Market-Maker is obligated to
execute a transaction for a listed option when, prior to the
presentation of an order to sell (buy) to the Market-Maker, the
Market-Maker has communicated to the Exchange a revised quote).
\16\ See Staff Legal Bulletin No. 16, Transaction in Listed
Options Under Exchange Act Rule 11Ac1-1, U.S. Securities and
Exchange Commission, Division of Market Regulation, January 20, 2004
(``Scenario 3: When an Order is ``Presented'' . . . If an individual
market maker generates its own quotations . . . and exchange systems
route incoming orders to the responsible broker-dealer with
priority, when is an order presented to a responsible broker-dealer?
Response: . . . . When each market maker is the responsible broker-
dealer with respect to its own quote, an order is presented to it
when received by the market maker from the exchange system.''). When
a complex order is processing through COA, the order is still in the
System and has not yet been presented to a broker or dealer
(including a Market-Maker) for execution. Only after completion of
the COA, when the System allocates the complex order for execution
in accordance with priority rules, will that order be ``presented''
to the Market-Maker for firm quote purposes.
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B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change will impose any
burden on intramarket or intermarket competition that is not necessary
or appropriate in furtherance of the purposes of the Act. The Exchange
does not believe the proposed rule change will impose any burden on
intramarket competition because all IOC orders will be treated equally
by the Exchange. The proposed rule change is intended to reduce risk to
Market-Makers that are quoting in the regular market. CBOE believes
that the proposed rule change will promote competition by encouraging
Market-Makers to increase the size of and to more aggressively price
their quotes, which will increase liquidity on the Exchange. To the
extent that the rule change makes CBOE a more attractive marketplace,
market participants are free to become Trading Permit Holders on CBOE
and other exchanges are free to amend their rules in a similar manner.
Furthermore, the Exchange does not believe the proposed rule change
will impose any burden on intermarket competition because the rule
change does not materially affect the outcome or purpose of SR-CBOE-
2015-081, which was to alleviate potential risk to Market-Makers using
QRM. The Exchange also does not believe hardcoding the price at which a
complex order may initiate a COA will impose a burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not:
A. significantly affect the protection of investors or the public
interest;
B. impose any significant burden on competition; and
C. become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act \17\ and
Rule 19b-4(f)(6) \18\ thereunder. At any time within 60 days of the
filing of the proposed rule change, the Commission summarily may
temporarily suspend such rule change if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission will institute proceedings to determine whether the proposed
rule change should be approved or disapproved.
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-CBOE-2016-014 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2016-014. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal 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
[[Page 12769]]
information that you wish to make available publicly. All submissions
should refer to File Number SR-CBOE-2016-014, and should be submitted
on or before March 31, 2016.
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\19\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
Brent J. Fields,
Secretary.
[FR Doc. 2016-05326 Filed 3-9-16; 8:45 am]
BILLING CODE 8011-01-P
