Self-Regulatory Organizations; C2 Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to Professionals Order Counting, 43681-43687 [2016-15760]
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Federal Register / Vol. 81, No. 128 / Tuesday, July 5, 2016 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78187; File No. SR–C2–
2016–009]
Self-Regulatory Organizations; C2
Options Exchange, Incorporated;
Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change Relating to Professionals
Order Counting
June 28, 2016.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 23,
2016, C2 Options Exchange,
Incorporated (the ‘‘Exchange’’ or ‘‘C2’’)
filed with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange. The
Exchange filed the proposal as a ‘‘noncontroversial’’ proposed rule change
pursuant to Section 19(b)(3)(A)(iii) of
the Act 3 and Rule 19b–4(f)(6)
thereunder.4 The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to amend its
definition of ‘‘Professional’’ in Rule 1.1
to include guidance on how orders
should be counted for Professional order
counting purposes. The text of the
proposed rule change is provided below
(additions are italicized; deletions are
[bracketed]).
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C2 Options Exchange, Incorporated
Rules
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CHAPTER 1
Definitions
Rule 1.1. Definitions
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Professional
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
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(6).
2 17
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same manner as a broker or dealer in
securities for purposes of Rules 6.11,
6.12, 6.13(b)(1), 6.13(c)(5), 6.14, 6.15,
6.51, 6.52 and 8.13. All Professional
orders shall be marked with the
appropriate origin code as determined
by the Exchange.
. . . Interpretations and Policies:
.01 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
eight (8) legs or fewer counts as a single
order.
(2) A complex order comprised of
nine (9) 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 nine (9) 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
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(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 its
definition of ‘‘Professional’’ in Rule 1.1
to include guidance on how orders
should be counted for Professional order
counting purposes. Specifically, the
Exchange proposes to adopt
Interpretation and Policy .01 to the
definition of ‘‘Professional’’ within Rule
1.1 (Definitions), setting forth standards
for calculating average daily order
submissions for Professional order
counting purposes. The Exchange also
proposes to add a provision to Rule 1.1’s
definition of Professional, which would
provide that all Professional orders shall
be marked with the appropriate origin
code as determined by the Exchange.
The Exchange believes that the
proposed rule change would provide
additional clarity in the Rules and serve
to promote the purposes for which the
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Exchange’s Professional rule was
originally adopted. The Exchange notes
that this filing is materially based upon
and substantially similar to rule changes
recently adopted by several of the U.S.
options exchanges, including, but not
limited to Chicago Board Options
Exchange, Incorporated (‘‘CBOE’’) filing
SR–CBOE–2016–005.5
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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 C2, have adopted materially
similar definitions of the term
‘‘Professional,’’ 6 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).7
Various exchanges adopted similar
5 See Securities Exchange Act Release No. 77450
(March 25, 2016), 81 FR 18668 (March 31, 2016)
(Notice of Filing of Amendment No. 1 and Order
Granting Accelerated Approval of a Proposed Rule
Change, as Modified by Amendment No. 1, To
Amend Interpretation and Policy .01 to Rule
1.1(ggg) Relating to the Professional Customer
Definition) (SR–CBOE–2016–005); Securities
Exchange Act Release No. 77449 (March 25, 2016),
81 FR 18665 (March 31, 2016) (Notice of Filing of
Amendment No. 1 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified
by Amendment No. 1, Relating to the Professional
Customer Definition) (SR–Phlx–2016–10);
Securities Exchange Act Release No. 77580 (April
11, 2016), 81 FR 22328 (April 15, 2016) (Notice of
Filing of Proposal to Amend Rule 100 (Definitions)
Relating to Professionals) (SR–BOX–2016–13); see
also Securities Exchange Act Release No. 73628
(November 18, 2014), 79 FR 69958 (November 24,
2014) (Notice of Filing and Immediate Effectiveness
of a Proposed Rule Change Relating to Professional
Orders) (SR–CBOE–2014–085).
6 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).
7 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).
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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.8 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.9
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 10 and the Rules.11 In
8 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).
9 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).
10 See, e.g., Fees Schedule (Transaction Fees).
11 See, e.g., Rules 6.12(c) (Order Execution and
Priority—Contingency Orders); 6.13(c)(5)(B)
(Complex Order Execution—Execution of COAEligible Orders); 6.51(b)(3) (Automated
Improvement Mechanism (‘‘AIM’’)—Order
Allocation).
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general, public customers may receive
allocation and execution priority above
equally priced competing interests of
Market-Makers, broker-dealers, and
other market participants. In addition,
customer orders may be exempt or pay
lower transaction fees and/or be exempt
from certain Exchange surcharges.
Similar to other U.S. options exchanges,
the Exchange affords these marketplace
advantages to public customers based
on various business- and regulatoryrelated objectives, including, for
example, to attract retail order flow to
the Exchange and to provide
competitive pricing.
Currently, Rule 1.1 defines a
Professional 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). 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 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.12 Rule 1.1 is substantially
similar to the Professional order rules of
other exchanges and was materially
based upon the preexistent Professional
order rules of other exchanges.13
Over time, the Exchange has received
various 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. 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 have continued to spur
questions as to what constitutes an
‘‘order’’ for Professional order counting
purposes. For example, do multi-leg
spread orders or strategy orders such as
volatility orders constitute a single order
or multiple orders for Professional order
counting purposes? The Exchange’s
12 See
Rule 1.1; Fees Schedule (Transaction Fees).
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).
13 See
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Professional rule does not fully address
these issues and, to date, there has not
been a common interpretation across the
U.S. options markets. The Exchange
believes that additional clarity is needed
regarding the application of Rule 1.1
with respect to Professionals.
Accordingly, the Exchange is proposing
to amend Rule 1.1 to add Interpretation
and Policy .01 to the definition of
Professional to address how various
new execution and order strategies
should be treated under the Exchange’s
Professional rule. The Exchange
believes that the adoption of proposed
Interpretation and Policy .01 to Rule
1.1’s definition of Professional 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-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 have attempted to
clarify their interpretations of their
Professional rules through regulatory
and information notices and circulars,14
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. The Exchange believes that
the proposed set of standards would
allow the Exchange to better compete
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); Interpretation and
Policy .01 to Rule 1.1(ggg) with 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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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
adopting Interpretation and Policy .01 to
Rule 1.1’s definition of Professional.
Proposal
The Exchange proposes to adopt
Interpretation and Policy to Rule 1.1’s
definition of Professional setting forth a
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’s definition of Professional, 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’s definition of
Professional 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’s definition of
Professional would discuss complex
orders. Under paragraph (a)(1) of
proposed Interpretation and Policy .01
to Rule 1.1’s definition of Professional,
a complex order comprised of eight (8)
legs or fewer would count as a single
order. Conversely, paragraph (a)(2) of
proposed Interpretation and Policy .01
to Rule 1.1’s definition of Professional
would provide that a complex order
comprised of nine (9) 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 eight legs from those with
nine or more legs is appropriate in light
of the purposes for which the
Exchange’s Professional rule was
adopted. In particular, the Exchange
notes that multi-leg complex order
strategies with nine 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,
condor strategies, and combinations
thereof with eight legs or fewer, which
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are generally not algorithmically
generated and are frequently 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’s definition of Professional 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’s definition of Professional, 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’s definition of Professional would
permit larger ‘‘parent’’ orders (which
may be simple orders or complex orders
consisting of up to eight 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 eight 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
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
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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).
Conversely, under paragraph (b)(2) of
proposed Interpretation and Policy .01
to Rule 1.1’s definition of Professional,
a ‘‘parent’’ order (including a strategy
order) 17 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. 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 18 or
‘‘vega’’ order 19 with her broker by
which multiple ‘‘child’’ orders were
then sent to the Exchange across
multiple series in a particular option
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.
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 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.
19 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.
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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.20
The Exchange believes that the
distinctions between ‘‘parent’’ and
‘‘child’’ orders in paragraph (b) to
proposed Interpretation and Policy .01
to Rule 1.1’s definition of Professional
are appropriate. The Exchange notes
that paragraph (b) to proposed
Interpretation and Policy .01 to Rule
1.1’s definition of Professional 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’s definition of Professional 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’s definition of Professional, 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’s definition of Professional,
paragraph (c) of proposed Interpretation
and Policy .01 to Rule 1.1’s definition of
Professional 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’s definition of
Professional would provide that except
as otherwise provided in the rule (and
20 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’s definition of Professional,
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 17.
PO 00000
Frm 00115
Fmt 4703
Sfmt 4703
specifically as provided under
paragraph (c)(2) to proposed
Interpretation and Policy .01 to Rule
1.1’s definition of Professional), 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 nine (9)
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’s definition of Professional would
specify the exception to paragraph (c)(1)
of proposed Interpretation and Policy
.01 to Rule 1.1’s definition of
Professional 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’s definition of
Professional, the Exchange notes that
paragraph (c) to proposed Interpretation
and Policy .01 to Rule 1.1’s definition of
Professional 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’s definition of Professional is
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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’s definition of Professional is
consistent with these goals.
Accordingly, consistent with
paragraph (c)(1) of proposed
Interpretation and Policy .01 to Rule
1.1’s definition of Professional, under
paragraph (c)(3) of proposed
Interpretation and Policy .01 to Rule
1.1’s definition of Professional, 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’s definition of Professional 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.
Paragraph (c)(4) of proposed
Interpretation and Policy .01 to Rule
1.1’s definition of Professional 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
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the order cancels and replaces in order
to attempt to move with or follow the
BBO or NBBO. 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.
Finally, the Exchange also proposes to
amend Rule 1.1 to provide that all
Professional orders shall be marked
with the appropriate origin code as
determined by the Exchange in order to
bring the Exchange’s rules in-line with
the Professional order rules of other
exchanges.21 The Exchange notes that
Permit Holders are already required to
mark orders with appropriate origin
codes.22 The Exchange is simply
proposing to codify this requirement in
the Rules under the definition of
Professional in current Rule 1.1; Permit
Holders would continue to be required
to indicate whether public customer
orders are ‘‘Professional’’ orders as they
are currently. To comply with this
requirement, Permit Holders would be
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 and make
any appropriate changes to the way in
which they are representing orders
within five days after the end of each
calendar quarter. 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. If, however,
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 Permit Holder
and the Permit Holder will be required
to change the manner in which it is
representing the customer’s orders
within five days.
Because the rule only requires that
Permit Holders conduct a look-back to
determine whether their customers are
21 See see [sic] also Securities Exchange Act
Release No. 73628 (November 18, 2014), 79 FR
69958 (November 24, 2014) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
Relating to Professional Orders) (SR–CBOE–2014–
085); see also ISE Regulatory Information Circular
2014–007 (Priority Customer Orders and
Professional Orders (FAQ)).
22 See Regulator Circular C2 RG13–015 (Order
Origin Requirement).
PO 00000
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Fmt 4703
Sfmt 4703
43685
averaging more than 390 orders per day
at the end of each calendar quarter, the
Exchange proposes an effective date of
July 1, 2016 for proposed Interpretation
and Policy .01 to the definition of
Professional in Rule 1.1 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) [sic] 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.23 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 24 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)25 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’s definition of
Professional 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
23 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
24 15
25 Id.
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Federal Register / Vol. 81, No. 128 / Tuesday, July 5, 2016 / Notices
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, MarketMakers, and the like. These
differentiations have been recognized to
be consistent with the Act. The
Exchange does not believe that the
current rules of C2 or 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 the current Rules), 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 C2 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
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competitive marketplace by affording
certain marketplace advantages only to
those for whom they are intended. 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 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. The
Exchange also believes that codifying
the requirement that all Professional
orders shall be marked with the
appropriate origin code as determined
by the Exchange will add additional
transparency and clarity to the Rules,
which is also in the interests of all
investors and the general public.
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.
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 C2 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’s definition of Professional 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 C2 marketplace as
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 26 and
subparagraph (f)(6) of Rule 19b–4
thereunder.27 A proposed rule change
filed under Rule 19b–4(f)(6) normally
does not become operative prior to 30
days after the date of filing.28 Rule 19b–
4(f)(6)(iii), however, permits the
Commission to designate a shorter time
if such action is consistent with the
protection of investors and the public
interest.29
The Exchange has requested that the
Commission waive the 30-day operative
delay. The Commission notes that it has
considered substantially similar
proposed rule changes filed by CBOE
and PHLX which it approved after a
notice and comment period.30 This
proposed rule change does not raise any
new or novel issues from those
considered in the CBOE or PHLX
PO 00000
Frm 00117
Fmt 4703
Sfmt 4703
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.
26 15
U.S.C. 78s(b)(3)(a)(iii).
CFR 240.19b–4(f)(6). In addition, Rule 19b4(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
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
28 17 CFR 240.19b–4(f)(6)(iii).
29 Id.
30 See Securities Exchange Act Release Nos.
77450 (March 25, 2016) (Order Approving SR–
CBOE–2016–005); 77449 (March 25, 2016), 81 FR
18665, (March 31, 2016) (Order Approving SR–
Phlx–2016–10).
27 17
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Federal Register / Vol. 81, No. 128 / Tuesday, July 5, 2016 / Notices
proposals. Based on the foregoing, the
Commission believes that it is
consistent with the protection of
investors and the public interest to
waive the 30-day operative date so that
the proposal may take effect upon
filing.31
At any time within 60 days of the
filing of such 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 shall institute proceedings
under Section 19(b)(2)(B) of the Act 32 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:
sradovich on DSK3GDR082PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File No. SR–C2–
2016–009 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–C2–2016–009. 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
information that you wish to make
available publicly. All submissions
should refer to File No. SR–C2–2016–
009, and should be submitted on or
before July 26, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.33
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–15760 Filed 7–1–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78186; File No. SR–MSRB–
2016–08]
Self-Regulatory Organizations;
Municipal Securities Rulemaking
Board; Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change Relating to the Content Outline
for the Municipal Advisor
Representative Qualification
Examination (Series 50)
June 28, 2016.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’ or ‘‘Exchange Act’’) 1 and Rule
19b–4 thereunder,2 notice is hereby
given that on June 15, 2016 the
Municipal Securities Rulemaking Board
(the ‘‘MSRB’’ or ‘‘Board’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the MSRB. The MSRB has
designated the proposed rule change as
‘‘constituting a stated policy, practice,
or interpretation with respect to the
meaning, administration, or
enforcement of an existing rule’’ under
Section 19(b)(3)(A)(i) of the Act 3 and
Rule 19b–4(f)(1) thereunder,4 which
31 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
32 15 U.S.C. 78s(b)(2)(B).
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17:27 Jul 01, 2016
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PO 00000
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(i).
4 17 CFR 240.19b–4(f)(1).
43687
renders the proposal effective upon
receipt of this filing by the
Commission.5 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 MSRB filed with the Commission
proposed revisions to the content
outline for the Municipal Advisor
Representative Qualification
Examination (Series 50) (the ‘‘proposed
rule change’’). The MSRB proposes to
implement the revised Series 50
examination program on September 12,
2016. The proposed revisions to the
content outline update the material to
reflect changes to the laws, rules and
regulations covered by the examination
and to incorporate the functions and
associated tasks currently performed by
a Municipal Advisor Representative. As
a result of recent changes to MSRB
rules, revisions to the Series 50 content
outline are necessary to indicate the
current rule requirements and rule
citations. In addition, the Board is
proposing to make changes to the format
of the content outline. The MSRB is not
proposing in this filing any textual
changes to its rules.
The text of the proposed rule change
is available on the MSRB’s Web site at
www.msrb.org/Rules-andInterpretations/SEC-Filings/2016Filings.aspx, at the MSRB’s principal
office, 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
MSRB 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 MSRB has
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
33 17
1 15
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5 See also letter to Diane G. Klinke, General
Counsel, MSRB, from Belinda Blaine, Associate
Director, Division of Market Regulation, SEC, dated
July 24, 2000, attached as Exhibit 3b.
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]]>Agencies
[Federal Register Volume 81, Number 128 (Tuesday, July 5, 2016)]
[Notices]
[Pages 43681-43687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-15760]
[[Page 43681]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78187; File No. SR-C2-2016-009]
Self-Regulatory Organizations; C2 Options Exchange, Incorporated;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
Relating to Professionals Order Counting
June 28, 2016.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on June 23, 2016, C2 Options Exchange, Incorporated (the
``Exchange'' or ``C2'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I and II below, which Items have been prepared by the
Exchange. The Exchange filed the proposal as a ``non-controversial''
proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act
\3\ and Rule 19b-4(f)(6) thereunder.\4\ The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to amend its definition of ``Professional''
in Rule 1.1 to include guidance on how orders should be counted for
Professional order counting purposes. The text of the proposed rule
change is provided below (additions are italicized; deletions are
[bracketed]).
* * * * *
C2 Options Exchange, Incorporated
Rules
* * * * *
CHAPTER 1
Definitions
Rule 1.1. Definitions
* * * * *
Professional
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
6.11, 6.12, 6.13(b)(1), 6.13(c)(5), 6.14, 6.15, 6.51, 6.52 and 8.13.
All Professional orders shall be marked with the appropriate origin
code as determined by the Exchange.
. . . Interpretations and Policies:
.01 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 eight (8) legs or fewer counts as
a single order.
(2) A complex order comprised of nine (9) 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 nine
(9) 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 its definition of ``Professional''
in Rule 1.1 to include guidance on how orders should be counted for
Professional order counting purposes. Specifically, the Exchange
proposes to adopt Interpretation and Policy .01 to the definition of
``Professional'' within Rule 1.1 (Definitions), setting forth standards
for calculating average daily order submissions for Professional order
counting purposes. The Exchange also proposes to add a provision to
Rule 1.1's definition of Professional, which would provide that all
Professional orders shall be marked with the appropriate origin code as
determined by the Exchange. The Exchange believes that the proposed
rule change would provide additional clarity in the Rules and serve to
promote the purposes for which the
[[Page 43682]]
Exchange's Professional rule was originally adopted. The Exchange notes
that this filing is materially based upon and substantially similar to
rule changes recently adopted by several of the U.S. options exchanges,
including, but not limited to Chicago Board Options Exchange,
Incorporated (``CBOE'') filing SR-CBOE-2016-005.\5\
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 77450 (March 25,
2016), 81 FR 18668 (March 31, 2016) (Notice of Filing of Amendment
No. 1 and Order Granting Accelerated Approval of a Proposed Rule
Change, as Modified by Amendment No. 1, To Amend Interpretation and
Policy .01 to Rule 1.1(ggg) Relating to the Professional Customer
Definition) (SR-CBOE-2016-005); Securities Exchange Act Release No.
77449 (March 25, 2016), 81 FR 18665 (March 31, 2016) (Notice of
Filing of Amendment No. 1 and Order Granting Accelerated Approval of
a Proposed Rule Change, as Modified by Amendment No. 1, Relating to
the Professional Customer Definition) (SR-Phlx-2016-10); Securities
Exchange Act Release No. 77580 (April 11, 2016), 81 FR 22328 (April
15, 2016) (Notice of Filing of Proposal to Amend Rule 100
(Definitions) Relating to Professionals) (SR-BOX-2016-13); see also
Securities Exchange Act Release No. 73628 (November 18, 2014), 79 FR
69958 (November 24, 2014) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change Relating to Professional
Orders) (SR-CBOE-2014-085).
---------------------------------------------------------------------------
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 C2,
have adopted materially similar definitions of the term
``Professional,'' \6\ 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).\7\ 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.\8\ 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.\9\
---------------------------------------------------------------------------
\6\ 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).
\7\ 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).
\8\ 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).
\9\ 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).
---------------------------------------------------------------------------
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 \10\ and the
Rules.\11\ In general, public customers may receive allocation and
execution priority above equally priced competing interests of Market-
Makers, broker-dealers, and other market participants. In addition,
customer orders may be exempt or pay lower transaction fees and/or be
exempt from 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.
---------------------------------------------------------------------------
\10\ See, e.g., Fees Schedule (Transaction Fees).
\11\ See, e.g., Rules 6.12(c) (Order Execution and Priority--
Contingency Orders); 6.13(c)(5)(B) (Complex Order Execution--
Execution of COA-Eligible Orders); 6.51(b)(3) (Automated Improvement
Mechanism (``AIM'')--Order Allocation).
---------------------------------------------------------------------------
Currently, Rule 1.1 defines a Professional 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). 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
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.\12\ Rule 1.1 is substantially similar to the
Professional order rules of other exchanges and was materially based
upon the preexistent Professional order rules of other exchanges.\13\
---------------------------------------------------------------------------
\12\ See Rule 1.1; Fees Schedule (Transaction Fees).
\13\ 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).
---------------------------------------------------------------------------
Over time, the Exchange has received various 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. 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 have continued to spur questions as to what
constitutes an ``order'' for Professional order counting purposes. For
example, do multi-leg spread orders or strategy orders such as
volatility orders constitute a single order or multiple orders for
Professional order counting purposes? The Exchange's
[[Page 43683]]
Professional rule does not fully address these issues and, to date,
there has not been a common interpretation across the U.S. options
markets. The Exchange believes that additional clarity is needed
regarding the application of Rule 1.1 with respect to Professionals.
Accordingly, the Exchange is proposing to amend Rule 1.1 to add
Interpretation and Policy .01 to the definition of Professional to
address how various new execution and order strategies should be
treated under the Exchange's Professional rule. The Exchange believes
that the adoption of proposed Interpretation and Policy .01 to Rule
1.1's definition of Professional 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 have attempted to clarify their interpretations of
their Professional rules through regulatory and information notices and
circulars,\14\ 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. The Exchange believes that the proposed set of standards
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 adopting
Interpretation and Policy .01 to Rule 1.1's definition of Professional.
---------------------------------------------------------------------------
\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);
Interpretation and Policy .01 to Rule 1.1(ggg) with 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)).
---------------------------------------------------------------------------
Proposal
The Exchange proposes to adopt Interpretation and Policy to Rule
1.1's definition of Professional setting forth a 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's definition of Professional, 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's
definition of Professional 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's definition of Professional would discuss complex
orders. Under paragraph (a)(1) of proposed Interpretation and Policy
.01 to Rule 1.1's definition of Professional, a complex order comprised
of eight (8) legs or fewer would count as a single order. Conversely,
paragraph (a)(2) of proposed Interpretation and Policy .01 to Rule
1.1's definition of Professional would provide that a complex order
comprised of nine (9) 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 eight legs from those
with nine or more legs is appropriate in light of the purposes for
which the Exchange's Professional rule was adopted. In particular, the
Exchange notes that multi-leg complex order strategies with nine 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, condor strategies, and combinations thereof with eight legs or
fewer, which are generally not algorithmically generated and are
frequently 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's definition of Professional 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's definition of Professional,
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's definition of Professional would permit larger
``parent'' orders (which may be simple orders or complex orders
consisting of up to eight 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 eight 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
[[Page 43684]]
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).
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
Conversely, under paragraph (b)(2) of proposed Interpretation and
Policy .01 to Rule 1.1's definition of Professional, a ``parent'' order
(including a strategy order) \17\ 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. 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 \18\ or ``vega'' order
\19\ with her broker by 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.\20\
---------------------------------------------------------------------------
\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\ 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.
\19\ 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.
\20\ 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's definition of
Professional, 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 17.
---------------------------------------------------------------------------
The Exchange believes that the distinctions between ``parent'' and
``child'' orders in paragraph (b) to proposed Interpretation and Policy
.01 to Rule 1.1's definition of Professional are appropriate. The
Exchange notes that paragraph (b) to proposed Interpretation and Policy
.01 to Rule 1.1's definition of Professional 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's definition of Professional
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's definition of Professional, 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's
definition of Professional, paragraph (c) of proposed Interpretation
and Policy .01 to Rule 1.1's definition of Professional 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's definition of
Professional 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's definition of
Professional), 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 nine (9) 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's definition of Professional would specify the exception to
paragraph (c)(1) of proposed Interpretation and Policy .01 to Rule
1.1's definition of Professional 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's definition of Professional, the Exchange
notes that paragraph (c) to proposed Interpretation and Policy .01 to
Rule 1.1's definition of Professional 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's definition of Professional is
[[Page 43685]]
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's definition of Professional is consistent with these
goals.
Accordingly, consistent with paragraph (c)(1) of proposed
Interpretation and Policy .01 to Rule 1.1's definition of Professional,
under paragraph (c)(3) of proposed Interpretation and Policy .01 to
Rule 1.1's definition of Professional, 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's definition of Professional 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.
Paragraph (c)(4) of proposed Interpretation and Policy .01 to Rule
1.1's definition of Professional 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.
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.
Finally, the Exchange also proposes to amend Rule 1.1 to provide
that all Professional orders shall be marked with the appropriate
origin code as determined by the Exchange in order to bring the
Exchange's rules in-line with the Professional order rules of other
exchanges.\21\ The Exchange notes that Permit Holders are already
required to mark orders with appropriate origin codes.\22\ The Exchange
is simply proposing to codify this requirement in the Rules under the
definition of Professional in current Rule 1.1; Permit Holders would
continue to be required to indicate whether public customer orders are
``Professional'' orders as they are currently. To comply with this
requirement, Permit Holders would be 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 and make any
appropriate changes to the way in which they are representing orders
within five days after the end of each calendar quarter. 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. If, however, 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 Permit Holder and
the Permit Holder will be required to change the manner in which it is
representing the customer's orders within five days.
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\21\ See see [sic] also Securities Exchange Act Release No.
73628 (November 18, 2014), 79 FR 69958 (November 24, 2014) (Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change
Relating to Professional Orders) (SR-CBOE-2014-085); see also ISE
Regulatory Information Circular 2014-007 (Priority Customer Orders
and Professional Orders (FAQ)).
\22\ See Regulator Circular C2 RG13-015 (Order Origin
Requirement).
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Because the rule only requires that Permit Holders 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 July 1, 2016 for proposed Interpretation
and Policy .01 to the definition of Professional in Rule 1.1 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) [sic] 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.\23\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \24\ 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)\25\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\23\ 15 U.S.C. 78f(b).
\24\ 15 U.S.C. 78f(b)(5).
\25\ Id.
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In particular, the Exchange believes that proposed Interpretation
and Policy .01 to Rule 1.1's definition of Professional 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
[[Page 43686]]
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, and the like. These differentiations
have been recognized to be consistent with the Act. The Exchange does
not believe that the current rules of C2 or 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
the current Rules), 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 C2 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. 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
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. The Exchange
also believes that codifying the requirement that all Professional
orders shall be marked with the appropriate origin code as determined
by the Exchange will add additional transparency and clarity to the
Rules, which is also 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 C2 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's
definition of Professional 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 C2 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
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 \26\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\27\ A proposed rule
change filed under Rule 19b-4(f)(6) normally does not become operative
prior to 30 days after the date of filing.\28\ Rule 19b-4(f)(6)(iii),
however, permits the Commission to designate a shorter time if such
action is consistent with the protection of investors and the public
interest.\29\
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\26\ 15 U.S.C. 78s(b)(3)(a)(iii).
\27\ 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 change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
\28\ 17 CFR 240.19b-4(f)(6)(iii).
\29\ Id.
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The Exchange has requested that the Commission waive the 30-day
operative delay. The Commission notes that it has considered
substantially similar proposed rule changes filed by CBOE and PHLX
which it approved after a notice and comment period.\30\ This proposed
rule change does not raise any new or novel issues from those
considered in the CBOE or PHLX
[[Page 43687]]
proposals. Based on the foregoing, the Commission believes that it is
consistent with the protection of investors and the public interest to
waive the 30-day operative date so that the proposal may take effect
upon filing.\31\
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\30\ See Securities Exchange Act Release Nos. 77450 (March 25,
2016) (Order Approving SR-CBOE-2016-005); 77449 (March 25, 2016), 81
FR 18665, (March 31, 2016) (Order Approving SR-Phlx-2016-10).
\31\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of such 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 shall institute proceedings under
Section 19(b)(2)(B) of the Act \32\ to determine whether the proposed
rule change should be approved or disapproved.
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\32\ 15 U.S.C. 78s(b)(2)(B).
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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 No. SR-C2-2016-009 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-C2-2016-009. 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 information that you wish to make available publicly. All
submissions should refer to File No. SR-C2-2016-009, and should be
submitted on or before July 26, 2016.
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\33\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-15760 Filed 7-1-16; 8:45 am]
BILLING CODE 8011-01-P
