Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Relating to SPX Combo Orders, 66105-66109 [2016-23044]
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Federal Register / Vol. 81, No. 186 / Monday, September 26, 2016 / Notices
Commission may designate if it finds
such longer period to be appropriate
and publishes its reasons for so finding
or (ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning Amendment No.
1, including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
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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–
NYSE–2016–45 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File No.
SR–NYSE–2016–45. 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
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available publicly. All submissions
should refer to File No. SR–NYSE–
2016–45, and should be submitted on or
before October 17, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.48
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–23046 Filed 9–23–16; 8:45 am]
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
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78885; File No. SR–CBOE–
2016–064]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of a
Proposed Rule Change Relating to
SPX Combo Orders
September 20, 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
September 8, 2016, Chicago Board
Options Exchange, Incorporated (the
‘‘Exchange’’ or ‘‘CBOE’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange seeks to amend its rules
related to SPX Combo Orders. The text
of the proposed rule change is available
on the Exchange’s Web site (https://
www.cboe.com/AboutCBOE/
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
The Exchange proposes to amend
Rules 24.20, SPX Combo Orders, and
6.42, Minimum Increment for Bids and
Offers, to specify the manner in which
the minimum increment provision of
Rule 6.42 applies to SPX Combo Orders.
Background
An SPX Combo Order consists of an
order to purchase or sell one or more
SPX option series (hereinafter the ‘‘nonSPX combination’’) and the offsetting
number of ‘‘SPX combinations’’ defined
by the delta.3 For purposes of an SPX
Combo Order, an SPX combination is a
purchase (sale) of an SPX call and sale
(purchase) of an SPX put having the
same expiration date and strike price.
Additionally, the delta is the positive
(negative) number of SPX combinations
that must be sold (bought) to establish
a market neutral hedge with one or more
SPX option series (i.e., the non-SPX
combination).4
SPX traders commonly hedge their
options positions with SPX
combinations, also called ‘‘synthetic
futures,’’ which, as the above definition
provides, are created by combining
long(short) SPX calls with short(long)
SPX puts of the same series, in lieu of
hedging with the actual S&P 500 futures
contract trading at CME. The individual
legs of the SPX combination are priced
such that a value for the SPX
combination is established which is
equivalent to the value of a future at a
level at which the trader wishes to make
the underlying futures market ‘‘static.’’
Then, based on the static value
established by the SPX combination that
has been quoted, the trader will request
a market for the non-SPX combination
that he wishes to trade, and will
indicate the delta of the non-SPX
combination. An SPX trader will
execute the SPX combination in
conjunction with the non-SPX
combination, taking into account the
delta of the particular options making
up the non-SPX combination, such that
the combined positions will create a
48 17
1 15
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3 See
4 See
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Rule 24.20(a)(3).
Rule 24.20(a)(1) and (2).
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‘‘delta neutral’’ hedge.5 For example, a
customer that wants to purchase 100
SPX calls that have a delta of ‘‘30’’ (30%
or .30) may hedge against a downward
movement in the S&P 500 Index by
selling 30 SPX combinations (.30 × 100).
In other words, the SPX combination in
this example will be to sell 30 SPX calls
and buy 30 SPX puts with the same
strike price and expiration date.
When the non-SPX combination is
paired with an SPX combination the
non-SPX combination can be described
as being ‘‘tied’’ to the value of a future
because the non-SPX combination is
tied to an SPX combination that is
equivalent to the value of a future. The
concept of an option being ‘‘tied’’ to an
underlying value extends to stockoption orders.6 For example, floor
brokers may represent an order to buy
an AAPL call tied to the sale of AAPL
stock at a specified price. The price at
which the crowd is willing to sell the
call is dependent on the specified price
of the AAPL stock. For purposes of this
example, assume the specified price is
$99. The crowd may be willing to sell
the call for $5.00 tied to AAPL stock at
$99. If the specified price of AAPL stock
was instead $100, the crowd’s market
for the call would change. If the broker
is unable to execute the stock portion of
the order at the specified price of $99,
the option portion of the order also
cannot be executed. Similarly, a broker
representing an SPX Combo Order may
be unable to execute the SPX
combination portion of the order at the
desired futures level because the
individual leg prices of the SPX
combination that would create the
equivalent futures value are outside the
market for the leg prices.
Minimum Increment Applicable to SPX
Combo Orders
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Currently, SPX Combo Orders are
treated as complex orders for the
purposes of the minimum increment
provision of Rule 6.42(4).7 Although
5 The entire SPX Combo Order consisting of the
SPX combination portion and the non-SPX
combination portion must be executed as a package.
6 A stock-option order is an order to buy or sell
a stated number of units of an underlying or a
related security coupled with either (a) the
purchase or sale of option contract(s) on the
opposite side of the market representing either the
same number of units of the underlying or related
security or the number of units of the underlying
security necessary to create a delta neutral position
or (b) the purchase or sale of an equal number of
put and call option contracts, each having the same
exercise price, expiration date and each
representing the same number of units of stock as,
and on the opposite side of the market from, the
underlying or related security portion of the order.
Rule 1.1(ii).
7 Rule 6.42(4) states that except as provided in
Rule 6.53C, bids and offers on complex orders, as
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Rule 24.20 does not explicitly specify
the minimum increment applicable to
SPX Combo Orders,8 or reference how
the minimum increment provision of
Rule 6.42(4) applies to SPX Combo
Orders, the Exchange believes the
original intent was for SPX Combo
Orders to be considered ‘‘complex
orders’’ for the purposes of the
minimum increment. In support of this
conclusion the Exchange notes that Rule
6.42(4)(b) states that ‘‘complex orders
are subject to special priority
requirements as described in Rules 6.45,
6.45A, 6.45B, 6.53C, 24.19 and 24.20.’’ 9
The Exchange believes referencing Rule
24.20 in this manner demonstrates the
intent to include SPX Combo Orders as
complex orders for purposes of the
minimum increment provision.
Although the Exchange believes the
intent was to include SPX Combo
Orders as complex orders for purposes
of the minimum increment, the
Exchange also believes there is
confusion amongst members of the
trading crowd regarding the applicable
minimum increment. The Exchange
believes the confusion has arisen
because Interpretation and Policy .01 to
Rule 6.42 does not specifically identify
SPX Combo Orders as complex orders;
rather, Rule 6.42.01 states:
For purposes of this rule [6.42], ‘‘complex
order’’ means a spread, straddle, combination
defined in Interpretation and Policy .01 [to Rule
6.42], may be expressed in any net price increment
(that may not be less than $0.01) that may be
determined by the Exchange on a class-by-class
basis and announced to the Trading Permit Holders
via Regulatory Circular, regardless of the minimum
increments otherwise appropriate to the individual
legs of the order. Notwithstanding the foregoing
sentence, bids and offers on complex orders in
options on the S&P 500 Index (SPX), p.m.-settled
S&P 500 Index (SPXPM) or on the S&P 100 Index
(OEX and XEO), except for box/roll spreads, shall
be expressed in decimal increments no smaller than
$0.05 or in any increment, as determined by the
Exchange on a class-by-class basis and announced
to the Trading Permit Holders via Regulatory
Circular. In addition: (a) The legs of a complex
order may be executed in $0.01 increments; and (b)
complex orders are subject to special priority
requirements as described in Rules 6.45, 6.45A,
6.45B, 6.53C, 24.19 and 24.20.
8 Rule 24.20(b)(2) uses the term ‘‘minimum
increment’’ but only in reference to the priority
requirements for SPX Combo Orders, stating that:
‘‘[w]hen a Trading Permit Holder holding an SPX
Combo Order with the required combo indicator
and bidding or offering in a multiple of the
minimum increment on the basis of a total debit or
credit for the order has determined that the order
may not be executed by a combination of
transaction with the bids and offers displayed in the
SPX limit order book or by the displayed quotes of
the crowd, then the order may be executed at the
best net debit or credit so long as (A) no leg of the
order would trade at a price outside the currently
displayed bids or offers in the trading crowd or bids
or offers in the SPX limit order book and (B) at least
on leg of the order would trade at a price that is
better than the corresponding bid or offer in the
SPX limit order book.’’
9 See Rule 6.42(4)(b).
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or ratio order as defined in Rule 6.53,10 a
stock-option order as defined in Rule 1.1(ii),
a security future-option order as defined in
Rule 1.1(zz), or any other complex order as
defined in Rule 6.53C.11
As the definitions of spread, straddle,
combination and ratio order do not
specifically identify SPX Combo Orders,
the Exchange believes confusion has
arisen with respect to whether an SPX
Combo Order is a complex order for
purposes of the minimum increment.
In addition, the current interpretation
that an SPX Combo Order is technically
a complex order for purposes of the
minimum increment (meaning all legs
can be executed in $0.01 increments)
does not fit how SPX Combo Orders are
generally executed. In general, the only
time legs of an SPX Combo Order are
executed in $0.01 increments is in
relation to a non-SPX combination with
multiple legs. When the non-SPX
combination is a single leg, the trading
crowd generally executes the non-SPX
combination in $0.05 or $0.10
increments, even though the current
interpretation allows the legs to be
executed in $0.01 increments. The
Exchange notes that it is not a violation
to execute a single leg non-SPX
combination in $0.01, $0.05 or $.10
10 A spread order is defined as ‘‘an order to buy
a stated number of option contracts and to sell the
same number of option contracts, or contracts
representing the same number of shares at option,
of the same class of options.’’ See Rule 6.53(d). A
combination order is defined as ‘‘an order involving
a number of call option contracts and the same
number of put option contracts in the same
underlying security. In the case of adjusted option
contracts, a combination order need not consist of
the same number of put and call contracts if such
contracts both represent the same number of shares
at option.’’ See Rule 6.53(e). A straddle order is
defined as ‘‘an order to buy a number of call option
contracts and the same number of put option
contracts on the same underlying security which
contracts have the same exercise price and
expiration date; or an order to sell a number of call
option contracts and the same number of put option
contracts on the same underlying security which
contracts have the same exercise price and
expiration date. (E.g., an order to buy two XYZ July
50 calls and to buy two July 50 XYZ puts is a
straddle order.) In the case of adjusted option
contracts, a straddle order need not consist of the
same number of put and call contracts if such
contracts both represent the same number of shares
at option.’’ See Rule 6.53(f). A ratio order is defined
as ‘‘a spread, straddle, or combination order in
which the stated number of option contracts to buy
(sell) is not equal to the stated number of option
contracts to sell (buy), provided that the number of
contracts differ by a permissible ratio. For purposes
of this section, a permissible ratio is any ratio that
is equal to or greater than one-to-three (.333) and
less than or equal to three-to-one (3.00). For
example, a one-to-two (.5) ratio, a two-to-three
(.667) ratio, or a two-to-one (2.00) ratio is
permissible, whereas a one-to-four (.25) ratio or a
four-to-one (4.0) ratio is not.’’ See Rule 6.53(n).
11 Rule 6.53C is inapplicable to SPX Combo
Orders because SPX Combo Orders may be
executed in open outcry only whereas Rule 6.53C
governs complex orders submitted to the Hybrid
System for electronic handling.
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increments. To illustrate, if the legs
were required to be executed in $0.05
increments, for example, and the legs
were instead executed in $0.01
increments, it would be a violation.
Here, however, the situation is
reversed—$0.01 increments are allowed,
which automatically allows larger
increment executions. Furthermore, the
Exchange believes the reason single
legged non-SPX combinations are
generally executed in $0.05 or $0.10
increments is because executing a single
leg non-SPX combination portion in
$0.01 increments makes it difficult to
attain a net execution price in $0.05
increments for the entire package.12 For
example, if the net execution price of
the SPX combination is $5.00, the
execution price of a single leg non-SPX
combination portion cannot be $1.01,
$1.02, $1.03, or $1.04 for example,
because the net execution price for the
entire package would be in a net price
increment less than $0.05. Additionally,
a single legged non-SPX combination
that is tied to an SPX combination is
thought of in the same way as any single
leg SPX option that is tied to an S&P 500
futures position. That is—an SPX option
that is tied to an actual S&P 500 futures
position would have to execute in $0.05
or $0.10 increments. Similarly, a single
legged non-SPX combination is tied to
an SPX combination that is equivalent
to the futures; thus, it follows that the
single legged non-SPX combination
should be executed in the same
increment that would be applicable if a
customer was using the actual S&P 500
futures instead of the SPX combination.
Customers reasonably should expect to
receive an execution price on an
individual leg that is in $0.05 or $0.10
increments.
Thus, in order to provide clarity
regarding the minimum increment
applicable to SPX Combo Orders, as
well as to modify the Exchange’s above
interpretation in order to match the
general practice of executing SPX
Combo Orders, the Exchange proposes
to add Rule 24.20.02 to provide as
follows:
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The minimum increment applicable to SPX
Combo Orders under Rule 6.42 is as follows:
(a) The legs of the SPX combination
portion of an SPX Combo Order may be
executed in $0.01 increments and the entire
SPX combination must be executed in net
price increments no smaller than $0.05.13
12 Because the current interpretation is an SPX
Combo Order is a complex order for purposes of the
minimum increment, the entire SPX Combo Order
package must be executed in net price increments
no smaller than $0.05 in accordance with Rule
6.42(4).
13 Paragraph (a) will have no effect on customers
as the current practice is in accordance with
paragraph (a).
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(b) If the non-SPX combination portion of
an SPX Combo Order consists of one leg, the
leg must be executed in increments no
smaller than $0.05 if the execution price is
below $3.00 and increments no smaller than
$0.10 if the execution price is at or above
$3.00.14
(c) If the non-SPX combination portion of
an SPX Combo Order consists of multiple
legs, the individual legs may be executed in
$0.01 increments and the entire non-SPX
combination portion of the SPX Combo Order
must be executed in net price increments no
smaller than $0.05.15
When an SPX Combo Order is treated
as a complex order for purposes of the
minimum increment, as is currently the
case, then the entire package may be
executed at $0.05 increments and each
individual leg may be executed at $0.01
increments.16 For example, an SPX
Combo Order consisting of the purchase
of one SPX 2000 call for $41.35 and the
offsetting SPX combination consisting of
a sale of one SPX 2065 call for $23.02
and the purchase of one SPX 2065 put
for $21.02 would have a net debit price
of $39.35.
Applying the proposed rule to the
above example provides that the nonSPX combination (the SPX 2000 call) is
one leg that executes above $3.00; thus,
it must be executed in $0.10 increments,
which means it would have to execute
at $41.30 or $41.40, instead of $41.35.
The Exchange notes that the customer
may in fact receive a better execution
price because of this rule change
because, in the above example, market
participants may be willing to sell to a
customer at $41.30 instead of $41.35. If
instead the SPX Combo Order contained
a non-SPX combination with two legs—
one leg to buy an SPX 2000 call and one
leg to buy an SPX 2010 call—tied to an
SPX combination, each leg of the nonSPX combination could be executed in
$0.01 increments, and the net execution
price of the non-SPX combination
package could be in net price
increments of $0.05.17
14 Paragraph (b) is unlikely to have any effect on
customers as the current practice is generally in
accordance with paragraph (b); however, on very
rare occasions members of the trading crowd
currently execute a single legged non-SPX
combination portion of an SPX Combo Order in
$0.01 increments.
15 Paragraph (c) will have no effect on customers
as the current practice is in accordance with
paragraph (c).
16 See Rule 6.42(4) (stating that bids and offers on
complex orders in options on the S&P 500 Index
(SPX), p.m.-settled S&P 500 Index (SPXPM) or on
the S&P 100 Index (OEX and XEO), except for box/
roll spreads, shall be expressed in decimal
increments no smaller than $0.05 and that the legs
of a complex order may be executed in $0.01
increments).
17 This is similar to how complex orders must be
executed in net price increments no smaller than
$0.05. See Rule 6.42(4).
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The Exchange notes that the priority
requirements of Rule 24.20(b)(2) will
still apply to the entire SPX Combo
Order. Thus, an SPX Combo Order will
still be able to execute at the best net
debit or credit so long as (A) no leg of
the order would trade at a price outside
the currently displayed bids or offers in
the trading crowd or bids or offers in the
SPX limit order book and (B) at least
one leg of the order would trade at a
price that is better than the
corresponding bid or offer in the SPX
limit order book.
Furthermore, as noted above, for an
SPX Combo Order comprised of a nonSPX combination portion with one leg,
the trading crowd’s practice is generally
to execute the non-SPX combination
portion of an SPX Combo Order in $0.05
or $0.10 increments, because executing
a single leg non-SPX combination
portion in $0.01 increments makes it
difficult to attain a net execution price
in $0.05 increments for the entire
package. As noted above, if the net
execution price of the SPX combination
is $5.00, the execution price of a single
leg non-SPX combination portion
cannot be $1.01, $1.02, $1.03, or $1.04
for example, because the net execution
price for the entire package would be in
a net price increment less than $0.05.
Thus, the practice for the non-SPX
combination portion, which is
completely reasonable, is to provide
markets in increments of $0.05 and
$0.10 to ensure that the entire package
is executed in a net execution price of
$0.05 increments. Thus, the Exchange
believes customers will not be adversely
impacted by this rule change. The rules
are simply being modified to meet the
existing, general practice of the trading
crowd. The Exchange notes that it is the
trading crowd and their practices that
have created a vibrant ecosystem for
customers to execute SPX Combo
Orders and modifying the rules to match
the practice that has helped to create
this ecosystem is logical and desirable.
Conclusion
The Exchange believes this proposal
will provide clarity with regards to the
minimum increment applicable to SPX
Combo Orders and will prevent the
inconsistent application of the
minimum increment. Also, customers
that want to hedge a single leg SPX
option order with S&P 500 futures
would be required to execute the SPX
option in either $0.05 or $0.10
increments; therefore, customers
reasonably should expect to be required
to execute a single leg SPX option in
either $0.05 or $0.10 increments when
the single leg SPX option is tied to an
SPX combination because the SPX
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combination is equivalent to an
underlying futures level.
Upon approval of this rule change, the
Exchange will announce the
implementation date of the proposed
rule change in a Regulatory Circular to
be published no later than 90 days
following the approval date. The
implementation date will be no later
than 180 days following the approval
date.
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 Securities Exchange
Act of 1934 (the ‘‘Act’’).18 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 19 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) 20 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 it
is not clear from the rules what
minimum increment applies to SPX
Combo Orders and that specifying the
minimum increment applicable to SPX
Combo Orders will help to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system.
Furthermore, the Exchange believes that
essentially treating the non-SPX
combination portion and the SPX
combination as separate orders for
purposes of the applicable minimum
increment is consistent with the nature
of SPX Combo Orders, which consist of
a non-SPX combination tied to an
underlying S&P Index value via the SPX
combination. The Exchange believes
maintaining consistency throughout its
rules in this manner helps eliminate
confusion in the marketplace, which
helps to protect investors and the public
18 15
19 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
20 Id.
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interest generally. The consistency and
clarity provided by this amendment will
help to protect investors and the public
interest generally. Finally, the
Commission has already determined
that it’s consistent with the Act to
require orders in SPX with only one leg
(i.e., orders that are not complex orders
or SPX Combo Orders) to be executed in
increments no smaller than $0.05 for
option series below $3.00 and $.10 for
all options series at or above $3.00.21
Thus, it follows that requiring a one
legged non-SPX combination portion of
an SPX Combo Order to be executed in
$0.05 and $0.10 in the same manner is
consistent with the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed rule change will apply to all
SPX Combo Orders, and all TPHs that
represent and compete for those orders,
in the same manner. The Exchange
believes that specifying the minimum
increment applicable to SPX Combo
Orders, and clarifying the manner in
which these orders execute on the
Exchange, promotes fair and orderly
markets, as well as assists the Exchange
in its ability to effectively attract order
flow and liquidity to its market, and
ultimately benefits all TPHs and all
investors. Furthermore, any perceived
burden on customers due to the fact that
the single legged non-SPX combination
portion of an SPX Combo Order must be
executed in $0.05 or $0.10 increments
pursuant to this rule (instead of $0.01
increments as is currently the
Exchange’s interpretation) is
outweighed by the fact that the current
practice of the trading crowd is to
execute the single legged non-SPX
combination in $0.05 or $0.10
increments and that the current practice
enables the trading crowd to more
quickly provide bids and offers that
meet the minimum increment
requirements. Furthermore, customers
may in fact receive a better execution
price on their SPX Combo Orders
because TPHs competing for the order
may improve their market by $0.05 or
$0.10 instead of just $0.01. This rule
change will only prevent the rare
situation where a member is determined
to execute a single legged non-SPX
combination portion of an SPX Combo
Order in $0.01 increments, which,
again, is not a frequent occurrence.
Furthermore, customers that want to
21 See
19:40 Sep 23, 2016
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hedge a single leg SPX option order
with S&P 500 futures would be required
to execute the SPX option in either
$0.05 or $0.10 increments; therefore,
customers reasonably should expect to
be required to execute a single leg SPX
option in either $0.05 or $0.10
increments when the single leg SPX
option is tied to an SPX combination
because the SPX combination is
equivalent to an underlying futures
level. Finally, the Commission has
already determined that it’s not unduly
burdensome to competition to require
orders in SPX with only one leg (i.e.,
orders that are not complex orders or
SPX Combo Orders) to be executed in
increments no smaller than $0.05 for
option series below $3.00 and $.10 for
all options series at or above $3.00.22
Thus, it follows that requiring a one
legged non-SPX combination portion of
an SPX Combo Order to be executed in
$0.05 and $0.10 in the same manner is
also not unduly burdensome on
competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will:
A. By order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
22 See
Sfmt 4703
E:\FR\FM\26SEN1.SGM
Rule 6.42(1)–(3).
26SEN1
Federal Register / Vol. 81, No. 186 / Monday, September 26, 2016 / Notices
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CBOE–2016–064 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CBOE–2016–064. 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 the
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 Number SR–CBOE–
2016–064 and should be submitted on
or before October 17, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–23044 Filed 9–23–16; 8:45 am]
mstockstill on DSK3G9T082PROD with NOTICES
BILLING CODE 8011–01–P
23 17
19:40 Sep 23, 2016
[Release No. 34–78882; File No. TP 16–13]
Order Granting Limited Exemptions
From Exchange Act Rule 10b–17 and
Rules 101 and 102 of Regulation M to
Amplify YieldShares Prime 5 Dividend
ETF Pursuant to Exchange Act Rule
10b–17(b)(2) and Rules 101(d) and
102(e) of Regulation M
September 20, 2016.
By letter dated September 20, 2016
(the ‘‘Letter’’), as supplemented by
conversations with the staff of the
Division of Trading and Markets,
counsel for Amplify ETF Trust (the
‘‘Trust’’) on behalf of the Trust, Amplify
YieldShares Prime 5 Dividend ETF (the
‘‘Fund’’), any national securities
exchange on or through which shares of
the Fund (‘‘Shares’’) are listed and may
subsequently trade, and persons or
entities engaging in transactions in
Shares (collectively, the ‘‘Requestors’’),
requested exemptions, or interpretive or
no-action relief, from Rule 10b–17 of the
Securities Exchange Act of 1934, as
amended (‘‘Exchange Act’’), and Rules
101 and 102 of Regulation M, in
connection with secondary market
transactions in Shares and the creation
or redemption of aggregations of Shares
of 50,000 shares (‘‘Creation Units’’).
The Trust is registered with the
Securities and Exchange Commission
(‘‘Commission’’) under the Investment
Company Act of 1940, as amended
(‘‘1940 Act’’), as an open-end
management investment company. The
Fund seeks to track the performance of
an underlying index, the Prime 5 US
Dividend ETF Index (‘‘Underlying
Index’’). The Underlying Index seeks to
provide exposure to the five highestranked dividend ETFs based on the
index provider’s scoring and selection
criteria.
The Fund will seek to track the
performance of its Underlying Index by
normally investing at least 80% of its
total assets in the underlying exchangetraded funds that comprise the
Underlying Index.1 In light of the
composition of the Underlying Index,
the Fund intends to operate as an ‘‘ETF
of ETFs.’’ Except for the fact that the
Fund will operate as an ETF of ETFs,
the Fund will operate in a manner
identical to the underlying ETFs.
The Requestors represent, among
other things, the following:
• Shares of the Fund will be issued
by the Trust, an open-end management
1 The remaining 20% may be invested in
securities with maturities of less than one year or
cash equivalents, or the Fund may hold cash.
CFR 200.30–3(a)(12).
VerDate Sep<11>2014
SECURITIES AND EXCHANGE
COMMISSION
Jkt 238001
PO 00000
Frm 00115
Fmt 4703
Sfmt 4703
66109
investment company that is registered
with the Commission;
• Creation Units will be continuously
redeemable at the net asset value
(‘‘NAV’’) next determined after receipt
of a request for redemption by the Fund,
and the secondary market price of the
Shares should not vary substantially
from the NAV of such Shares;
• Shares of the Fund will be listed
and traded on BATS Exchange Inc. or
another exchange in accordance with
exchange listing standards that are, or
will become, effective pursuant to
Section 19(b) of the Exchange Act (the
‘‘Listing Exchange’’); 2
• The Fund seeks to track the
performance of the Underlying Index,
all the components of which have
publicly available last sale trade
information;
• The Listing Exchange will
disseminate continuously every 15
seconds throughout the trading day,
through the facilities of the
Consolidated Tape Association, the
market value of a Share;
• The Listing Exchange, market data
vendors or other information providers
will disseminate, every 15 seconds
throughout the trading day, a
calculation of the intraday indicative
value of a Share;
• On each business day before the
opening of business on the Listing
Exchange, the Fund will cause to be
published through the National
Securities Clearing Corporation the list
of the names and the quantities of
securities of the Fund’s portfolio that
will be applicable that day to creation
and redemption requests;
• The arbitrage mechanism will be
facilitated by the transparency of the
Fund’s portfolio and the availability of
the intraday indicative value, the
liquidity of securities held by the Fund,
the ability to acquire such securities, as
well as arbitrageurs’ ability to create
workable hedges;
• The Fund will invest solely in
liquid securities;
• The Fund will invest in securities
that will facilitate an effective and
efficient arbitrage mechanism and the
ability to create workable hedges;
• All ETFs in which the Fund invests
will either meet all conditions set forth
in one or more class relief letters, will
have received individual relief from the
Commission, will be able to rely on
individual relief even though they are
not named parties, or will be able to rely
2 Further, the Letter states that should the Shares
also trade on a market pursuant to unlisted trading
privileges, such trading will be conducted pursuant
to self-regulatory organization rules that are or will
become effective pursuant to Section 19(b) of the
Exchange Act.
E:\FR\FM\26SEN1.SGM
26SEN1
]]>Agencies
[Federal Register Volume 81, Number 186 (Monday, September 26, 2016)]
[Notices]
[Pages 66105-66109]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-23044]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78885; File No. SR-CBOE-2016-064]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change Relating to
SPX Combo Orders
September 20, 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 September 8, 2016, Chicago Board Options Exchange, Incorporated
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange seeks to amend its rules related to SPX Combo Orders.
The text of the proposed rule change is available on the Exchange's Web
site (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at
the Exchange's Office of the Secretary, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
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 Rules 24.20, SPX Combo Orders, and
6.42, Minimum Increment for Bids and Offers, to specify the manner in
which the minimum increment provision of Rule 6.42 applies to SPX Combo
Orders.
Background
An SPX Combo Order consists of an order to purchase or sell one or
more SPX option series (hereinafter the ``non-SPX combination'') and
the offsetting number of ``SPX combinations'' defined by the delta.\3\
For purposes of an SPX Combo Order, an SPX combination is a purchase
(sale) of an SPX call and sale (purchase) of an SPX put having the same
expiration date and strike price. Additionally, the delta is the
positive (negative) number of SPX combinations that must be sold
(bought) to establish a market neutral hedge with one or more SPX
option series (i.e., the non-SPX combination).\4\
---------------------------------------------------------------------------
\3\ See Rule 24.20(a)(3).
\4\ See Rule 24.20(a)(1) and (2).
---------------------------------------------------------------------------
SPX traders commonly hedge their options positions with SPX
combinations, also called ``synthetic futures,'' which, as the above
definition provides, are created by combining long(short) SPX calls
with short(long) SPX puts of the same series, in lieu of hedging with
the actual S&P 500 futures contract trading at CME. The individual legs
of the SPX combination are priced such that a value for the SPX
combination is established which is equivalent to the value of a future
at a level at which the trader wishes to make the underlying futures
market ``static.'' Then, based on the static value established by the
SPX combination that has been quoted, the trader will request a market
for the non-SPX combination that he wishes to trade, and will indicate
the delta of the non-SPX combination. An SPX trader will execute the
SPX combination in conjunction with the non-SPX combination, taking
into account the delta of the particular options making up the non-SPX
combination, such that the combined positions will create a
[[Page 66106]]
``delta neutral'' hedge.\5\ For example, a customer that wants to
purchase 100 SPX calls that have a delta of ``30'' (30% or .30) may
hedge against a downward movement in the S&P 500 Index by selling 30
SPX combinations (.30 x 100). In other words, the SPX combination in
this example will be to sell 30 SPX calls and buy 30 SPX puts with the
same strike price and expiration date.
---------------------------------------------------------------------------
\5\ The entire SPX Combo Order consisting of the SPX combination
portion and the non-SPX combination portion must be executed as a
package.
---------------------------------------------------------------------------
When the non-SPX combination is paired with an SPX combination the
non-SPX combination can be described as being ``tied'' to the value of
a future because the non-SPX combination is tied to an SPX combination
that is equivalent to the value of a future. The concept of an option
being ``tied'' to an underlying value extends to stock-option
orders.\6\ For example, floor brokers may represent an order to buy an
AAPL call tied to the sale of AAPL stock at a specified price. The
price at which the crowd is willing to sell the call is dependent on
the specified price of the AAPL stock. For purposes of this example,
assume the specified price is $99. The crowd may be willing to sell the
call for $5.00 tied to AAPL stock at $99. If the specified price of
AAPL stock was instead $100, the crowd's market for the call would
change. If the broker is unable to execute the stock portion of the
order at the specified price of $99, the option portion of the order
also cannot be executed. Similarly, a broker representing an SPX Combo
Order may be unable to execute the SPX combination portion of the order
at the desired futures level because the individual leg prices of the
SPX combination that would create the equivalent futures value are
outside the market for the leg prices.
---------------------------------------------------------------------------
\6\ A stock-option order is an order to buy or sell a stated
number of units of an underlying or a related security coupled with
either (a) the purchase or sale of option contract(s) on the
opposite side of the market representing either the same number of
units of the underlying or related security or the number of units
of the underlying security necessary to create a delta neutral
position or (b) the purchase or sale of an equal number of put and
call option contracts, each having the same exercise price,
expiration date and each representing the same number of units of
stock as, and on the opposite side of the market from, the
underlying or related security portion of the order. Rule 1.1(ii).
---------------------------------------------------------------------------
Minimum Increment Applicable to SPX Combo Orders
Currently, SPX Combo Orders are treated as complex orders for the
purposes of the minimum increment provision of Rule 6.42(4).\7\
Although Rule 24.20 does not explicitly specify the minimum increment
applicable to SPX Combo Orders,\8\ or reference how the minimum
increment provision of Rule 6.42(4) applies to SPX Combo Orders, the
Exchange believes the original intent was for SPX Combo Orders to be
considered ``complex orders'' for the purposes of the minimum
increment. In support of this conclusion the Exchange notes that Rule
6.42(4)(b) states that ``complex orders are subject to special priority
requirements as described in Rules 6.45, 6.45A, 6.45B, 6.53C, 24.19 and
24.20.'' \9\ The Exchange believes referencing Rule 24.20 in this
manner demonstrates the intent to include SPX Combo Orders as complex
orders for purposes of the minimum increment provision.
---------------------------------------------------------------------------
\7\ Rule 6.42(4) states that except as provided in Rule 6.53C,
bids and offers on complex orders, as defined in Interpretation and
Policy .01 [to Rule 6.42], may be expressed in any net price
increment (that may not be less than $0.01) that may be determined
by the Exchange on a class-by-class basis and announced to the
Trading Permit Holders via Regulatory Circular, regardless of the
minimum increments otherwise appropriate to the individual legs of
the order. Notwithstanding the foregoing sentence, bids and offers
on complex orders in options on the S&P 500 Index (SPX), p.m.-
settled S&P 500 Index (SPXPM) or on the S&P 100 Index (OEX and XEO),
except for box/roll spreads, shall be expressed in decimal
increments no smaller than $0.05 or in any increment, as determined
by the Exchange on a class-by-class basis and announced to the
Trading Permit Holders via Regulatory Circular. In addition: (a) The
legs of a complex order may be executed in $0.01 increments; and (b)
complex orders are subject to special priority requirements as
described in Rules 6.45, 6.45A, 6.45B, 6.53C, 24.19 and 24.20.
\8\ Rule 24.20(b)(2) uses the term ``minimum increment'' but
only in reference to the priority requirements for SPX Combo Orders,
stating that: ``[w]hen a Trading Permit Holder holding an SPX Combo
Order with the required combo indicator and bidding or offering in a
multiple of the minimum increment on the basis of a total debit or
credit for the order has determined that the order may not be
executed by a combination of transaction with the bids and offers
displayed in the SPX limit order book or by the displayed quotes of
the crowd, then the order may be executed at the best net debit or
credit so long as (A) no leg of the order would trade at a price
outside the currently displayed bids or offers in the trading crowd
or bids or offers in the SPX limit order book and (B) at least on
leg of the order would trade at a price that is better than the
corresponding bid or offer in the SPX limit order book.''
\9\ See Rule 6.42(4)(b).
---------------------------------------------------------------------------
Although the Exchange believes the intent was to include SPX Combo
Orders as complex orders for purposes of the minimum increment, the
Exchange also believes there is confusion amongst members of the
trading crowd regarding the applicable minimum increment. The Exchange
believes the confusion has arisen because Interpretation and Policy .01
to Rule 6.42 does not specifically identify SPX Combo Orders as complex
orders; rather, Rule 6.42.01 states:
For purposes of this rule [6.42], ``complex order'' means a
spread, straddle, combination or ratio order as defined in Rule
6.53,\10\ a stock-option order as defined in Rule 1.1(ii), a
security future-option order as defined in Rule 1.1(zz), or any
other complex order as defined in Rule 6.53C.\11\
---------------------------------------------------------------------------
\10\ A spread order is defined as ``an order to buy a stated
number of option contracts and to sell the same number of option
contracts, or contracts representing the same number of shares at
option, of the same class of options.'' See Rule 6.53(d). A
combination order is defined as ``an order involving a number of
call option contracts and the same number of put option contracts in
the same underlying security. In the case of adjusted option
contracts, a combination order need not consist of the same number
of put and call contracts if such contracts both represent the same
number of shares at option.'' See Rule 6.53(e). A straddle order is
defined as ``an order to buy a number of call option contracts and
the same number of put option contracts on the same underlying
security which contracts have the same exercise price and expiration
date; or an order to sell a number of call option contracts and the
same number of put option contracts on the same underlying security
which contracts have the same exercise price and expiration date.
(E.g., an order to buy two XYZ July 50 calls and to buy two July 50
XYZ puts is a straddle order.) In the case of adjusted option
contracts, a straddle order need not consist of the same number of
put and call contracts if such contracts both represent the same
number of shares at option.'' See Rule 6.53(f). A ratio order is
defined as ``a spread, straddle, or combination order in which the
stated number of option contracts to buy (sell) is not equal to the
stated number of option contracts to sell (buy), provided that the
number of contracts differ by a permissible ratio. For purposes of
this section, a permissible ratio is any ratio that is equal to or
greater than one-to-three (.333) and less than or equal to three-to-
one (3.00). For example, a one-to-two (.5) ratio, a two-to-three
(.667) ratio, or a two-to-one (2.00) ratio is permissible, whereas a
one-to-four (.25) ratio or a four-to-one (4.0) ratio is not.'' See
Rule 6.53(n).
\11\ Rule 6.53C is inapplicable to SPX Combo Orders because SPX
Combo Orders may be executed in open outcry only whereas Rule 6.53C
governs complex orders submitted to the Hybrid System for electronic
handling.
As the definitions of spread, straddle, combination and ratio order
do not specifically identify SPX Combo Orders, the Exchange believes
confusion has arisen with respect to whether an SPX Combo Order is a
complex order for purposes of the minimum increment.
In addition, the current interpretation that an SPX Combo Order is
technically a complex order for purposes of the minimum increment
(meaning all legs can be executed in $0.01 increments) does not fit how
SPX Combo Orders are generally executed. In general, the only time legs
of an SPX Combo Order are executed in $0.01 increments is in relation
to a non-SPX combination with multiple legs. When the non-SPX
combination is a single leg, the trading crowd generally executes the
non-SPX combination in $0.05 or $0.10 increments, even though the
current interpretation allows the legs to be executed in $0.01
increments. The Exchange notes that it is not a violation to execute a
single leg non-SPX combination in $0.01, $0.05 or $.10
[[Page 66107]]
increments. To illustrate, if the legs were required to be executed in
$0.05 increments, for example, and the legs were instead executed in
$0.01 increments, it would be a violation. Here, however, the situation
is reversed--$0.01 increments are allowed, which automatically allows
larger increment executions. Furthermore, the Exchange believes the
reason single legged non-SPX combinations are generally executed in
$0.05 or $0.10 increments is because executing a single leg non-SPX
combination portion in $0.01 increments makes it difficult to attain a
net execution price in $0.05 increments for the entire package.\12\ For
example, if the net execution price of the SPX combination is $5.00,
the execution price of a single leg non-SPX combination portion cannot
be $1.01, $1.02, $1.03, or $1.04 for example, because the net execution
price for the entire package would be in a net price increment less
than $0.05. Additionally, a single legged non-SPX combination that is
tied to an SPX combination is thought of in the same way as any single
leg SPX option that is tied to an S&P 500 futures position. That is--an
SPX option that is tied to an actual S&P 500 futures position would
have to execute in $0.05 or $0.10 increments. Similarly, a single
legged non-SPX combination is tied to an SPX combination that is
equivalent to the futures; thus, it follows that the single legged non-
SPX combination should be executed in the same increment that would be
applicable if a customer was using the actual S&P 500 futures instead
of the SPX combination. Customers reasonably should expect to receive
an execution price on an individual leg that is in $0.05 or $0.10
increments.
---------------------------------------------------------------------------
\12\ Because the current interpretation is an SPX Combo Order is
a complex order for purposes of the minimum increment, the entire
SPX Combo Order package must be executed in net price increments no
smaller than $0.05 in accordance with Rule 6.42(4).
---------------------------------------------------------------------------
Thus, in order to provide clarity regarding the minimum increment
applicable to SPX Combo Orders, as well as to modify the Exchange's
above interpretation in order to match the general practice of
executing SPX Combo Orders, the Exchange proposes to add Rule 24.20.02
to provide as follows:
The minimum increment applicable to SPX Combo Orders under Rule
6.42 is as follows:
(a) The legs of the SPX combination portion of an SPX Combo
Order may be executed in $0.01 increments and the entire SPX
combination must be executed in net price increments no smaller than
$0.05.\13\
---------------------------------------------------------------------------
\13\ Paragraph (a) will have no effect on customers as the
current practice is in accordance with paragraph (a).
---------------------------------------------------------------------------
(b) If the non-SPX combination portion of an SPX Combo Order
consists of one leg, the leg must be executed in increments no
smaller than $0.05 if the execution price is below $3.00 and
increments no smaller than $0.10 if the execution price is at or
above $3.00.\14\
---------------------------------------------------------------------------
\14\ Paragraph (b) is unlikely to have any effect on customers
as the current practice is generally in accordance with paragraph
(b); however, on very rare occasions members of the trading crowd
currently execute a single legged non-SPX combination portion of an
SPX Combo Order in $0.01 increments.
---------------------------------------------------------------------------
(c) If the non-SPX combination portion of an SPX Combo Order
consists of multiple legs, the individual legs may be executed in
$0.01 increments and the entire non-SPX combination portion of the
SPX Combo Order must be executed in net price increments no smaller
than $0.05.\15\
---------------------------------------------------------------------------
\15\ Paragraph (c) will have no effect on customers as the
current practice is in accordance with paragraph (c).
When an SPX Combo Order is treated as a complex order for purposes
of the minimum increment, as is currently the case, then the entire
package may be executed at $0.05 increments and each individual leg may
be executed at $0.01 increments.\16\ For example, an SPX Combo Order
consisting of the purchase of one SPX 2000 call for $41.35 and the
offsetting SPX combination consisting of a sale of one SPX 2065 call
for $23.02 and the purchase of one SPX 2065 put for $21.02 would have a
net debit price of $39.35.
---------------------------------------------------------------------------
\16\ See Rule 6.42(4) (stating that bids and offers on complex
orders in options on the S&P 500 Index (SPX), p.m.-settled S&P 500
Index (SPXPM) or on the S&P 100 Index (OEX and XEO), except for box/
roll spreads, shall be expressed in decimal increments no smaller
than $0.05 and that the legs of a complex order may be executed in
$0.01 increments).
---------------------------------------------------------------------------
Applying the proposed rule to the above example provides that the
non-SPX combination (the SPX 2000 call) is one leg that executes above
$3.00; thus, it must be executed in $0.10 increments, which means it
would have to execute at $41.30 or $41.40, instead of $41.35. The
Exchange notes that the customer may in fact receive a better execution
price because of this rule change because, in the above example, market
participants may be willing to sell to a customer at $41.30 instead of
$41.35. If instead the SPX Combo Order contained a non-SPX combination
with two legs--one leg to buy an SPX 2000 call and one leg to buy an
SPX 2010 call--tied to an SPX combination, each leg of the non-SPX
combination could be executed in $0.01 increments, and the net
execution price of the non-SPX combination package could be in net
price increments of $0.05.\17\
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\17\ This is similar to how complex orders must be executed in
net price increments no smaller than $0.05. See Rule 6.42(4).
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The Exchange notes that the priority requirements of Rule
24.20(b)(2) will still apply to the entire SPX Combo Order. Thus, an
SPX Combo Order will still be able to execute at the best net debit or
credit so long as (A) no leg of the order would trade at a price
outside the currently displayed bids or offers in the trading crowd or
bids or offers in the SPX limit order book and (B) at least one leg of
the order would trade at a price that is better than the corresponding
bid or offer in the SPX limit order book.
Furthermore, as noted above, for an SPX Combo Order comprised of a
non-SPX combination portion with one leg, the trading crowd's practice
is generally to execute the non-SPX combination portion of an SPX Combo
Order in $0.05 or $0.10 increments, because executing a single leg non-
SPX combination portion in $0.01 increments makes it difficult to
attain a net execution price in $0.05 increments for the entire
package. As noted above, if the net execution price of the SPX
combination is $5.00, the execution price of a single leg non-SPX
combination portion cannot be $1.01, $1.02, $1.03, or $1.04 for
example, because the net execution price for the entire package would
be in a net price increment less than $0.05. Thus, the practice for the
non-SPX combination portion, which is completely reasonable, is to
provide markets in increments of $0.05 and $0.10 to ensure that the
entire package is executed in a net execution price of $0.05
increments. Thus, the Exchange believes customers will not be adversely
impacted by this rule change. The rules are simply being modified to
meet the existing, general practice of the trading crowd. The Exchange
notes that it is the trading crowd and their practices that have
created a vibrant ecosystem for customers to execute SPX Combo Orders
and modifying the rules to match the practice that has helped to create
this ecosystem is logical and desirable.
Conclusion
The Exchange believes this proposal will provide clarity with
regards to the minimum increment applicable to SPX Combo Orders and
will prevent the inconsistent application of the minimum increment.
Also, customers that want to hedge a single leg SPX option order with
S&P 500 futures would be required to execute the SPX option in either
$0.05 or $0.10 increments; therefore, customers reasonably should
expect to be required to execute a single leg SPX option in either
$0.05 or $0.10 increments when the single leg SPX option is tied to an
SPX combination because the SPX
[[Page 66108]]
combination is equivalent to an underlying futures level.
Upon approval of this rule change, the Exchange will announce the
implementation date of the proposed rule change in a Regulatory
Circular to be published no later than 90 days following the approval
date. The implementation date will be no later than 180 days following
the approval date.
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
Securities Exchange Act of 1934 (the ``Act'').\18\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \19\ 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) \20\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
\20\ Id.
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In particular, the Exchange believes it is not clear from the rules
what minimum increment applies to SPX Combo Orders and that specifying
the minimum increment applicable to SPX Combo Orders will help to
remove impediments to and perfect the mechanism of a free and open
market and a national market system. Furthermore, the Exchange believes
that essentially treating the non-SPX combination portion and the SPX
combination as separate orders for purposes of the applicable minimum
increment is consistent with the nature of SPX Combo Orders, which
consist of a non-SPX combination tied to an underlying S&P Index value
via the SPX combination. The Exchange believes maintaining consistency
throughout its rules in this manner helps eliminate confusion in the
marketplace, which helps to protect investors and the public interest
generally. The consistency and clarity provided by this amendment will
help to protect investors and the public interest generally. Finally,
the Commission has already determined that it's consistent with the Act
to require orders in SPX with only one leg (i.e., orders that are not
complex orders or SPX Combo Orders) to be executed in increments no
smaller than $0.05 for option series below $3.00 and $.10 for all
options series at or above $3.00.\21\ Thus, it follows that requiring a
one legged non-SPX combination portion of an SPX Combo Order to be
executed in $0.05 and $0.10 in the same manner is consistent with the
Act.
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\21\ See Rule 6.42(1)-(3).
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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. The proposed rule change
will apply to all SPX Combo Orders, and all TPHs that represent and
compete for those orders, in the same manner. The Exchange believes
that specifying the minimum increment applicable to SPX Combo Orders,
and clarifying the manner in which these orders execute on the
Exchange, promotes fair and orderly markets, as well as assists the
Exchange in its ability to effectively attract order flow and liquidity
to its market, and ultimately benefits all TPHs and all investors.
Furthermore, any perceived burden on customers due to the fact that the
single legged non-SPX combination portion of an SPX Combo Order must be
executed in $0.05 or $0.10 increments pursuant to this rule (instead of
$0.01 increments as is currently the Exchange's interpretation) is
outweighed by the fact that the current practice of the trading crowd
is to execute the single legged non-SPX combination in $0.05 or $0.10
increments and that the current practice enables the trading crowd to
more quickly provide bids and offers that meet the minimum increment
requirements. Furthermore, customers may in fact receive a better
execution price on their SPX Combo Orders because TPHs competing for
the order may improve their market by $0.05 or $0.10 instead of just
$0.01. This rule change will only prevent the rare situation where a
member is determined to execute a single legged non-SPX combination
portion of an SPX Combo Order in $0.01 increments, which, again, is not
a frequent occurrence. Furthermore, customers that want to hedge a
single leg SPX option order with S&P 500 futures would be required to
execute the SPX option in either $0.05 or $0.10 increments; therefore,
customers reasonably should expect to be required to execute a single
leg SPX option in either $0.05 or $0.10 increments when the single leg
SPX option is tied to an SPX combination because the SPX combination is
equivalent to an underlying futures level. Finally, the Commission has
already determined that it's not unduly burdensome to competition to
require orders in SPX with only one leg (i.e., orders that are not
complex orders or SPX Combo Orders) to be executed in increments no
smaller than $0.05 for option series below $3.00 and $.10 for all
options series at or above $3.00.\22\ Thus, it follows that requiring a
one legged non-SPX combination portion of an SPX Combo Order to be
executed in $0.05 and $0.10 in the same manner is also not unduly
burdensome on competition.
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\22\ See Rule 6.42(1)-(3).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
[[Page 66109]]
Send an email to rule-comments@sec.gov. Please include
File Number SR-CBOE-2016-064 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2016-064. 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 the 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 Number SR-CBOE-2016-064 and should be
submitted on or before October 17, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-23044 Filed 9-23-16; 8:45 am]
BILLING CODE 8011-01-P
