Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Related to Complex Orders, 14768-14774 [2017-05608]
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Federal Register / Vol. 82, No. 54 / Wednesday, March 22, 2017 / Notices
II. Docketed Proceeding(s)
1. Docket No(s).: CP2017–141; Filing
Title: Notice of United States Postal
Service of Filing a Functionally
Equivalent Global Expedited Package
Services 7 Negotiated Service
Agreement and Application for NonPublic Treatment of Materials Filed
Under Seal; Filing Acceptance Date:
March 16, 2017; Filing Authority: 39
CFR 3015.5; Public Representative:
Christopher C. Mohr; Comments Due:
March 24, 2017.
2. Docket No(s).: CP2017–142; Filing
Title: Notice of United States Postal
Service of Filing a Functionally
Equivalent Global Expedited Package
Services 3 Negotiated Service
Agreement and Application for NonPublic Treatment of Materials Filed
Under Seal; Filing Acceptance Date:
March 16, 2017; Filing Authority: 39
CFR 3015.5; Public Representative:
Gregory Stanton; Comments Due: March
24, 2017.
3. Docket No(s).: CP2017–143; Filing
Title: Notice of United States Postal
Service of Filing a Functionally
Equivalent Global Expedited Package
Services 7 Negotiated Service
Agreement and Application for NonPublic Treatment of Materials Filed
Under Seal; Filing Acceptance Date:
March 16, 2017; Filing Authority: 39
CFR 3015.5; Public Representative:
Gregory Stanton; Comments Due: March
24, 2017.
This notice will be published in the
Federal Register.
Ruth Ann Abrams,
Acting Secretary.
[FR Doc. 2017–05695 Filed 3–21–17; 8:45 am]
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[FR Doc. 2017–05582 Filed 3–21–17; 8:45 am]
POSTAL SERVICE
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SECURITIES AND EXCHANGE
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FOR FURTHER INFORMATION CONTACT:
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SUPPLEMENTARY INFORMATION: The
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it filed with the Postal Regulatory
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CP2017–135.
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POSTAL SERVICE
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[FR Doc. 2017–05590 Filed 3–21–17; 8:45 am]
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AGENCY:
18:14 Mar 21, 2017
Stanley F. Mires,
Attorney, Federal Compliance.
Stanley F. Mires,
Attorney, Federal Compliance.
Product Change—Priority Mail
Express, Priority Mail, & First-Class
Package Service Negotiated Service
Agreement
VerDate Sep<11>2014
gives notice that, pursuant to 39 U.S.C.
3642 and 3632(b)(3), on March 15, 2017,
it filed with the Postal Regulatory
Commission a Request of the United
States Postal Service to Add Priority
Mail Express, Priority Mail, & First-Class
Package Service Contract 15 to
Competitive Product List. Documents
are available at www.prc.gov, Docket
Nos. MC2017–97, CP2017–137.
Product Change—First-Class Package
Service Negotiated Service Agreement
Postal
Notice.
AGENCY:
ACTION:
ServiceTM.
The Postal Service gives
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SUMMARY:
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[Release No. 34–80264; File No. SR–CBOE–
2017–021]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change Related to Complex
Orders
March 16, 2017.
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 March 6,
2017, 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 and II
below, which Items have been prepared
by the Exchange. The Exchange filed the
proposal pursuant to Section
19(b)(3)(A)(iii) of the Act3 and Rule
19b–4(f)(6) thereunder.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange seeks to amend its rules
related to complex orders. The text of
the proposed rule change is provided
below.
(additions are italicized; deletions are
[bracketed])
*
*
*
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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Chicago Board Options Exchange,
Incorporated Rules
*
*
*
*
*
Rule 6.53C. Complex Orders on the Hybrid
System
(a)–(c) No change.
(d) Process for Complex Order RFR
Auction: Prior to routing to the COB or once
on PAR, eligible complex orders may be
subject to an automated request for responses
(‘‘RFR’’) auction process.
(i) For purposes of paragraph (d):
(1) ‘‘COA’’ is the automated complex order
RFR auction process.
(2) A ‘‘COA-eligible order’’ means a
complex order that, as determined by the
Exchange on a class-by-class basis, is eligible
for a COA considering the order’s size,
complex order type (as defined in paragraphs
(a) and (b) above) and complex order origin
types (as defined in subparagraph (c)(i)
above). Complex orders processed through a
COA may be executed without consideration
to prices of the same complex orders that
might be available on other exchanges.
(ii) Initiation of a COA:
(A) The System will send an RFR message
to all Trading Permit Holders who have
elected to receive RFR messages on receipt of
(1) a COA-eligible order with two or more
legs (including orders submitted for
electronic processing from PAR) that is better
than the same side of the derived net market
or (2) a complex order with three or more
legs that [(A)] meets the class, size, and
complex order type parameters of
subparagraph (d)(i)(2) and [is better than the
same side of the derived net market or (B)]
is marketable against the derived net market[,
designated as immediate or cancel and meets
the class and size parameters of subparagraph
(d)(i)(2)]. Complex orders as described in
subparagraph (ii)(A)(2) will initiate a COA
regardless of the order’s routing parameters
or handling instructions (except for orders
routed for manual handling). Immediate or
cancel orders that are not marketable against
the derived net market in accordance with
subparagraph (ii)(A)(2)[(B)] will be cancelled.
The RFR message will identify the
component series, the size and side of the
market of the COA-eligible order and any
contingencies, if applicable.
(B) No change.
(iii)–(ix) No change.
*
*
*
*
The text of the proposed rule change
is also available on the Exchange’s Web
site (https://www.cboe.com/AboutCBOE/
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
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*
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
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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
On February 25, 2016, the Exchange
submitted immediately effective filing
SR–CBOE–2016–014, which amended
Exchange rules related to the initiation
of a complex order auction (‘‘COA’’).5
The purpose of SR–CBOE–2016–014 (as
well as predecessor filings SR–CBOE–
2015–081 6 and SR–CBOE–2014–017) 7
was to limit a potential source of
unintended Market-Maker risk related to
how the Exchange’s Hybrid Trading
System (the ‘‘System’’) 8 calculates risk
parameters under Rule 8.18 when
complex orders leg into the market.9
Quote Risk Monitor
Under Rule 8.18, CBOE offers MarketMakers that are obligated to provide and
maintain continuous electronic quotes
in an option class the Quote Risk
Monitor Mechanism (‘‘QRM’’), which is
functionality to help Market-Makers
manage their quotes and related risk.
Market-Makers with appointments in
classes that trade on the System must,
among other things, provide and
maintain continuous electronic quotes
in a specified percentage of series in
each class for a specified percentage of
time.10 To comply with this
5 See Securities Exchange Act Release No. 77297
(March 4, 2016), 81 FR 12764 (March 10, 2016) (SR–
CBOE–2016–014) (‘‘2016 Notice).
6 See Securities Exchange Act Release No. 76106
(October 8, 2015), 80 FR 62125 (October 15, 2015)
(SR–CBOE–2015–081) (‘‘2015 Notice).
7 See Securities Exchange Act Release No. 72986
(September 4, 2014), 79 FR 53798 (September 10,
2014) (SR–CBOE–2014–017) (‘‘Approval Order’’).
8 The System is a trading platform that allows
automatic executions to occur electronically and
open outcry trades to occur on the floor of the
Exchange. To operate in this ‘‘hybrid’’ environment,
the Exchange has a dynamic order handling system
that has the capability to route orders to the trade
engine for automatic execution and book entry, to
Trading Permit Holder and PAR Official
workstations located in the trading crowds for
manual handling, and/or to other order
management terminals generally located in booths
on the trading floor for manual handling. Where an
order is routed for processing by the Exchange order
handling system depends on various parameters
configured by the Exchange and the order entry
firm itself.
9 See the Approval Order, the 2015 Notice, and
the 2016 Notice.
10 See Rules 8.7(d)(ii)(iv) (Market-Makers), 8.13(d)
(Preferred Market-Makers), 8.15A(b)(i) (Lead
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14769
requirement, each Market-Maker may
use its own proprietary quotation and
risk management system to determine
the prices and sizes at which it quotes.
In addition, each Market-Maker may use
QRM.
A Market-Maker’s risk in a class is not
limited to the risk in a single series of
that class. Rather, a Market-Maker is
generally actively quoting in multiple
classes, and each class may comprise
hundreds or thousands of individual
series. The System automatically
executes orders against a MarketMaker’s quotes in accordance with the
Exchange’s priority and allocation
rules.11 As a result, a Market-Maker has
exposure and risk in all series in which
it is quoting in each of its appointed
classes. QRM is an optional
functionality that helps Market-Makers,
and TPH organizations with which a
Market-Maker is associated, limit this
overall exposure and risk.
Specifically, if a Market-Maker elects
to use QRM, the System will cancel a
Market-Maker’s quotes in all series in an
appointed class if certain parameters the
Market-Maker establishes are triggered.
Market-Makers may set the following
QRM parameters (Market-Makers may
set none, some or all of these
parameters):
• A maximum number of contracts
for that class (the ‘‘contract limit’’) and
a specified rolling time period in
seconds within which such contract
limit is to be measured (the
‘‘measurement interval’’);
• a maximum cumulative percentage
(which is the sum of the percentages of
the original quoted size of each side of
each series that trade) (the ‘‘cumulative
percentage limit’’) that the MarketMaker is willing to trade within a
specified measurement interval; or
• a maximum number of series for
which either side of the quote is fully
traded (the ‘‘number of series fully
traded’’) within a specified
measurement interval.
If the Exchange determines the
Market-Maker has traded more than the
contract limit or cumulative percentage
limit, or has traded at least the number
of series fully traded, of a class during
the specified measurement interval, the
System will cancel all of the MarketMaker’s electronic quotes in that class
(and any other cases with the same
underlying security) until the MarketMaker refreshes those quotes (a ‘‘QRM
Incident’’). A Market-Maker, or TPH
organization with which the MarketMaker is associated, may also specify a
Market-Makers) and 8.85(a)(i) (Designated Primary
Market-Makers).
11 See Rules 6.45 and 6.53C.
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maximum number of QRM Incidents
that may occur on an Exchange-wide
basis during a specified measurement
interval. If the Exchange determines that
a Market-Maker or TPH Organization, as
applicable, has reached its QRM
Incident limit during the specified
measurement interval, the System will
cancel all of the Market-Maker’s or TPH
Organization’s quotes, as applicable,
and the Market-Maker’s orders resting in
the book in all classes and prevent the
Market-Maker and TPH organization
from sending additional quotes or
orders to the Exchange until the earlier
to occur of (1) the Market-Maker or TPH
organization reactivates this ability or
(2) the next trading day.
The purpose of the QRM functionality
is to allow Market-Makers to provide
liquidity across most series in their
appointed classes without being at risk
of executing the full cumulative size of
all their quotes before being given
adequate opportunity to adjust their
quotes. For example, if a Market-Maker
can enter quotes with a size of 25
contracts in 100 series of class ABC, its
potential exposure is 2,500 contracts in
ABC. To mitigate the risk of having all
2,500 contracts in ABC execute without
the opportunity to evaluate its positions,
the Market-Maker may elect to use
QRM. If the Market-Maker elects to use
the contract limit functionality and sets
the contract limit at 100 and the
measurement interval at five seconds for
ABC, the System will automatically
cancel the Market-Maker’s quotes in all
series of ABC if 100 or more contracts
in series of ABC execute during any
five-second period.
To assure that all quotations are firm
for their full size, the System performs
the parameter calculations after an
execution against a Market-Maker’s
quote occurs. For example, using the
same parameters in class ABC as above,
if a Market-Maker has executed a total
of 95 contracts in ABC within the
previous three seconds, a quote in a
series of ABC with a size of 25 contracts
continues to be firm for all 25 contracts.
An incoming order in that series could
execute all 25 contracts of that quote,
and, following the execution, the total
size parameter would add 25 contracts
to the previous total of 95 for a total of
120 contracts executed in ABC. Because
the total size executed within the
previous five seconds now exceeds the
100 contract limit for ABC, the System
would, following the execution,
immediately cancel all of the MarketMaker’s quotes in series of ABC. The
Market-Maker would then enter new
quotes for series in ABC. Thus, QRM
limits the amount by which a MarketMaker’s executions in a class may
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exceed its contract limit to the largest
size of its quote in a single series of the
class (or 25 in this example).
Proposal
SR–CBOE–2016–014 indicated that
the Exchange would announce the
implementation date of that rule change
in a Regulatory Circular to be published
no later than 90 days following the
effective date of that filing and that the
implementation date would be no later
than 180 days following the effective
date of that filing. The Exchange was
unable to make the necessary system
changes in time to meet the deadlines
set forth in SR–CBOE–2016–014. Thus,
the Exchange proposes to revise the
implementation date of SR–CBOE–
2016–014. In conjunction with revising
the implementation date of SR–CBOE–
2016–014, the Exchange is proposing to
revise the relevant rule text of Rule
6.53C to modify the manner in which
the rule text describes complex orders
that will initiate a COA.
The purpose of the rule filings in this
series (SR–CBOE–2014–017, SR–CBOE–
2015–081, and SR–CBOE–2016–014),
including the instant filing, is to limit a
potential source of unintended MarketMaker risk related to how the System
calculates risk parameters under Rule
8.18 when complex orders leg into the
market.12 As discussed above, and
described in the previous filings, by
checking the risk parameters following
each execution in a series, the risk
parameters allow a Market-Maker to
provide liquidity across multiple series
of a class without being at risk of
executing the full cumulative size of all
its quotes. This is not the case, however,
when a complex order legs into the
regular market (i.e. the market for
individual, or simple, orders). Because
the execution of each leg of a complex
order is contingent on the execution of
the other legs, the execution of all the
12 Rule 6.53C(c)(ii)(1) provides that complex
orders in the complex order book (‘‘COB’’) may
execute against individual orders or quotes in the
book provided the complex order can be executed
in full (or a permissible ratio) by the orders and
quotes in the book. Rule 6.53C(d)(v)(1) provides
that orders that are eligible for the complex order
auction (‘‘COA’’) may trade with individual orders
and quotes in the book provided the COA-eligible
order can be executed in full (or a permissible ratio)
by the orders and quotes in the book. COA is an
automated request for responses (‘‘RFR’’) auction
process. Upon initiation of a COA, the Exchange
sends an RFR message to all Trading Permit Holders
who have elected to receive RFR messages, which
RFR message identifies the series, size and side of
the market of the COA-eligible order and any
contingencies. Eligible market participants may
submit responses during a response time interval.
At the conclusion of the response time interval,
COA-eligible orders are allocated in accordance
with Rule 6.53C(d)(v), including against individual
orders and quotes in the book.
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legs in the regular market is processed
as a single transaction, not as a series of
individual transactions.
For example, if market participants
enter into the System individual orders
to buy 25 contracts for the Jan 30 call,
Jan 35 call, Jan 40 call and Jan 45 call
in class ABC, the System processes each
order as it is received and calculates the
Market-Makers parameters in class ABC
following the execution of each 25contract call. However, if a market
participant enters into the System a
complex order to buy all four of these
strikes in class ABC 25 times, which
complex order executes against bids and
offers for the individual series (i.e. legs
into the market), the System will
calculate the Market-Maker’s parameters
in class ABC following the execution of
all 100 contracts. If the Market-Maker
had set the same parameters in class
ABC as discussed above (100-contract
limit with five-second measurement
interval) and had executed 95 contracts
in class ABC within the previous three
seconds, the amount by which the next
transaction might exceed 100 is limited
to the largest size of its quote in a single
series of the class. In that example, since
the largest size of the Market-Maker’s
quotes in any series was 25 contracts,
the Market-Maker could not have
exceeded the 100-contract limit by more
than 20 contracts (95 + 25 = 120).
However, with respect to the complex
order with four legs 25 times, the next
transaction against the Market-Maker’s
quotes potentially could be as large as
100 contracts (depending upon whether
there are other market participants at
the same price), creating the potential in
this example for the Market-Maker to
exceed the 100-contract limit by 95
contracts (95 + 100 = 195) instead of 20
contracts.
As this example demonstrates, legging
of complex orders into the regular
market presents higher risk to MarketMakers than executing their quotes
against individual orders entered in
multiple series of a class in the regular
market, because it may result in MarketMakers exceeding their risk parameters
by a greater number of contracts. This
risk is directly proportional to the
number of legs associated with a
complex order. Market-Makers have
expressed concerns to the Exchange
regarding this risk.
In order to alleviate this potential risk
to Market-Makers, the Exchange, in SR–
CBOE–2015–081, amended Rule
6.53C(d) to, among other things, provide
that a COA will be initiated when a
complex order with three or more legs
is designated as immediate or cancel
(‘‘IOC’’) and meets the class,
marketability, and size parameters of
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subparagraph (d)(i)(2).13 The Exchange
observed IOC orders causing the risk to
Market-Makers described above and
believed the previous amendment
proposed in SR–CBOE–2015–081 would
reduce that risk by initiating a COA in
those circumstances. SR–CBOE–2016–
014 attempted to fine tune this
requirement by amending Rule
6.53C(d)(ii)(A)(2)(B) to provide that a
COA will be initiated when a complex
order with three or more legs that is
marketable against the derived net
market is designated as immediate or
cancel and the order meets the class and
size parameters of subparagraph
(d)(i)(2). SR–CBOE–2016–014 also
hardcoded the price at which an order
could initiate a COA.
The Exchange is proposing to further
fine tune the rule text by amending Rule
6.53C(d)(ii)(A)(1) and (2).14 Currently
the term COA-eligible order in Rule
6.53C(d)(ii)(A)(1) is used in relation to
orders with two legs. The Exchange is
proposing to keep the term COA-eligible
as the starting point for orders with
three or more legs as well,15 because all
orders with two or more legs that are
COA-eligible (i.e., meets the class, size,
order type, and origin code parameters
of Rule 6.53C(d)(i)(2)) will be treated the
same by the Exchange—meaning the
number of legs of an order under Rule
6.53C(d)(ii)(A)(1) will not be a factor in
determining whether a complex order
will or will not COA. In order to
effectuate this change the Exchange is
also modifying subparagraph
(ii)(A)(2)(A) because all orders with
three legs or more that are priced better
than the same side of the derived net
market will only COA if they are COAeligible under subparagraph (ii)(A)(1),
which means the current rule text of
(ii)(A)(2)(A) is unnecessary. The
Exchange notes that the difference
between the current rule text with
regards to orders with three legs that are
priced better than the same side of the
derived net market is that current
subparagraph (ii)(A)(2)(A) requires a
complex order with three or more legs
that meets the class, size, and order type
parameter to COA, regardless of the
13 See Rule 6.53C(d)(ii)(A)(2)(B). The Exchange
has not yet implemented the changes described in
SR–CBOE–2015–081 in anticipation of this
proposal.
14 As with SR–CBOE–2015–081 and SR–CBOE–
2016–014, this proposed change applies to Hybrid
classes only, and not Hybrid 3.0 classes. The
Exchange does not believe the risk discussed in this
rule filing is present in Hybrid 3.0 classes because
in Hybrid 3.0 classes complex orders are not legged
into the regular market. See Rule 6.53C.10
(providing flexibility for the Exchange to determine
to not allow marketable complex orders entered
into COB and/or COA to automatically execute
against individual quotes residing in the EBook).
15 See Proposed Rule 6.53C(d)(ii)(A)(1).
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origin code, and proposed subparagraph
(ii)(A)(1) provides that the origin code is
an additional parameter the Exchange
may set with regards to complex orders
with three legs that are priced better
than the same side of the derived net
market. The Exchange believes it’s
appropriate to apply the origin code
parameter to such orders because the
flexibility allows the Exchange to use its
considerable expertise in an effort to
ensure COAs are beneficial to the
marketplace, which is why the
Exchange is proposing this particular
rule change and why the Exchange
developed the COA origin code
parameter in 2008.16 Applying the
origin code parameter to complex orders
with three legs that are priced better
than the same side of the derived net
market is consistent with the manner in
which the rule text was written prior to
SR–CBOE–2014–017. To illustrate, SR–
CBOE–2008–082 added the origin type
parameter to the definition of a COAeligible order, such that a COA-eligible
order was defined as:
A complex order that, as determined by the
Exchange on a class-by-class basis, is eligible
for a COA considering the order’s
marketability (defined as a number of ticks
away from the current market), size, complex
order type (as defined in paragraphs (a) and
(b) above) and complex order origin types (as
defined in subparagraph (c)(i) above).17
Making current subparagraph
(ii)(A)(2)(A) inapplicable to complex
orders that are priced better than the
derived net market and making
subparagraph (ii)(A)(1) applicable to all
such orders (i.e., allowing the origin
code parameter to apply to complex
orders that are priced better than the
same side of the derived net market) is
consistent with the Act because it
essentially reverts rule text regarding
COA-eligible orders back to how the
rule text read prior to SR–CBOE–2014–
017.
Additionally, prior to SR–CBOE–
2014–017, the rule text essentially
provided that any COA-eligible order
will COA (as long as a member
requested that a particular order COA),
and as previously noted, what
determines COA-eligibility has included
the origin code parameter since 2008.18
To illustrate, SR–CBOE–2005–65, which
created COA, provided that a COA
would be initiated ‘‘[o]n receipt of a
COA-eligible order and request from the
member representing the order that it be
16 See Securities Exchange Act Release No. 58326
(August 7, 2008), 73 FR 47986 (August 15, 2008)
(SR–CBOE–2008–82).
17 Id.
18 Id.
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COA’d[.]’’ 19 SR–CBOE–2015–089
removed the requirement that an order
include a request to initiate a COA, and
instead implemented the opposite—a
‘‘do-not-COA’’ request that is only
allowed for certain orders.20 This
particular proposed rule change
essentially provides that all COAeligible orders will COA (unless the
‘‘do-not-COA provision of Rule
6.53C(d)(ii)(B) applies) provided that
the complex order is priced better than
the same side of the derived net market,
except the proposal goes further by
allowing certain orders that are not
COA-eligible to still COA according to
proposed subparagraph (ii)(A)(2). In
short, it was consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) to: Initiate a COA for COAeligible order when COA was
established in 2005; include the origin
type parameter in the COA-eligibility
definition when the origin type
parameter was applied to the COAeligibility definition in 2008; and allow
COA-eligible orders to COA unless a
‘‘do-not-COA’’ accompanies certain
orders when the ‘‘do-not-COA’’ request
was established in 2015. Thus, it
remains consistent with the Act to
initiate a COA for a COA-eligible order
today, which is essentially all proposed
subparagraph (ii)(A)(1) states. It
similarly remains consistent with the
Act to allow COA-eligibility to include
the origin type parameter and to COA
all COA-eligible orders unless particular
orders defined in Rule 6.53C(d)(ii)(B)
include a ‘‘do-not-COA’’ request.
The Exchange also notes that adding
the words ‘‘or more’’ to current
subparagraph (ii)(A)(1) to provide that a
COA-eligible order ‘‘with two legs or
more’’ will COA is consistent with the
Exchange Act because it is no different
than not identifying the number of legs
at all, which is how the rule text read
from COA’s inception in 2005 until the
19 See Securities Exchange Act Release No. 54135
(July 12, 2006), 71 FR 41287 (July 20, 2006) (SR–
CBOE–2005–65).
20 See current Rule 6.53C(d)(ii)(B), which
provides: Notwithstanding subparagraph (ii)(A)(1),
Trading Permit Holders may request on an orderby-order basis that an incoming COA-eligible order
with two legs not COA (a ‘‘do-not-COA’’ request).
Notwithstanding subparagraph (ii)(A)(2), the
System will reject back to a Trading Permit Holder
any complex order described in that subparagraph
that includes a do-not-COA request. Any complex
order in subparagraph (ii)(A)(2) on PAR will COA
even if the PAR operator includes a do-not-COA
request. If a two-legged order with a do-not-COA
request rests on PAR, then the PAR operator may
not request that the order COA. An order initially
submitted to the Exchange with a do-not-COA
request may still COA after it has rested on the COB
pursuant to Interpretation and Policy .04. Securities
Exchange Act Release No. 76622 (December 11,
2015), 80 FR 78803 (December 17, 2015) (SR–
CBOE–2015–089).
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Exchange submitted SR–CBOE–2014–
017. As previously noted, SR–CBOE–
2005–65, provided that a COA would be
initiated ‘‘[o]n receipt of a COA-eligible
order and request from the member
representing the order that it be
COA’d[.]’’ 21 In both cases—a ‘‘COAeligible order with two or more legs’’ as
proposed or ‘‘a COA-eligible order’’ as
provided in SR–CBOE–2005–65— the
phrase means a complex order with two
or more legs. In fact, there really is no
purpose to identifying the number of
legs of a COA-eligible order in
subparagraph (d)(ii)(A)(1), but it might
provide some kind of clarity to market
participants, considering that proposed
subparagraph (d)(ii)(A)(2) will indicate
that that particular provision applies to
complex orders with three or more legs.
Thus, it was consistent with the Act to
initiate a COA upon receipt of COAeligible order when COA was
established in 2005, and it remains
consistent with the Act to initiate a COA
for a COA-eligible order, even if the rule
text indicates that a COA will be
initiated upon receipt of a COA-eligible
order with two or more legs.
The purpose of proposed
subparagraph (2) of Rule 6.53C(d)(ii)(A)
is simply to allow certain orders with
three legs that will not COA under
subparagraph (1) to COA pursuant to
subparagraph (2). Proposed Rule
6.53C(d)(ii)(A)(2) provides that a COA
will be initiated upon receipt of a
complex order with three or more legs
that meets the class, size, and complex
order type parameters of subparagraph
(d)(i)(2) and is marketable against the
derived net market. In short, if an order
with three or more legs does not COA
pursuant to Rule 6.53C(d)(ii)(A)(1)—
because it is not COA-eligible—it may
still COA pursuant to Rule
6.53C(d)(ii)(A)(2), as long as the order
meets the class, size, complex order
type parameters of subparagraph
(d)(i)(2) and is marketable against the
derived net market.
The Exchange notes that the flaw with
SR–CBOE–2016–014 lies in current rule
6.53C(d)(ii)(A)(2)(B), which provides
that a COA will be initiated when a
complex order with three or more legs:
asabaliauskas on DSK3SPTVN1PROD with NOTICES
is marketable against the derived net market,
designated as immediate or cancel and meets
the class and size parameters of subparagraph
(d)(i)(2).
This provision would prevent the
Exchange from initiating a COA for an
order that does not have the IOC
contingency—even though the order has
three or more legs, the order is
21 See Securities Exchange Act Release No. 54135
(July 12, 2006), 71 FR 41287 (July 20, 2006) (SR–
CBOE–2005–65).
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marketable against the derived net
market, and the order meets the class
the class and size parameters of
subparagraph (d)(i)(2). As previously
noted, the purpose of the rule filings in
this series (SR–CBOE–2014–017, SR–
CBOE–2015–081, and SR–CBOE–2016–
014), including the instant filing, is to
limit a potential source of unintended
Market-Maker risk related to how the
System calculates risk parameters under
Rule 8.18 when complex orders leg into
the market. Complex orders with three
or more legs that are not designated as
IOC may still cause the risk to MarketMakers; thus, it is prudent for the
Exchange to include the order type
parameter in proposed Rule
6.53C(d)(ii)(A)(2) instead of singling out
IOCs. The Exchange believes the reason
SR–CBOE–2016–014 specifically
identified IOCs in Rule
6.53C(d)(ii)(A)(2)(B) is because IOC’s are
not currently COA-eligible so all IOC
orders with two or more legs do not
currently initiate a COA and identifying
IOCs in the rule text provided further
notice to market participants that orders
designated as IOC may COA. However,
the Exchange believes it’s unnecessary
to identify IOCs in the rule text in this
manner—although the Exchange notes
that the rule text will continue to state
that IOCs that are not marketable against
the derived net market in accordance
with subparagraph (ii)(A)(2) will be
cancelled, which serves as notice to
market participants that IOCs will
initiate a COA in certain circumstances,
especially considering that upon filing
this proposal the Exchange will also be
publishing a circular that identifies
IOCs as a contingency that may initiate
a COA in certain circumstances.
The Exchange also notes that SR–
CBOE–2016–014 proposed to treat all
market participants the same when the
Exchange received an order with three
or more legs that met the class, size,
complex order type parameters of
subparagraph (d)(i)(2) and was better
than the same side of the derived net
market. Proposed subparagraph (2) of
Rule 6.53C(d)(ii)(A) will continue to
treat all market participants the same
when the Exchange receives an order
with three or more legs that meets the
class, size, and complex order type
parameters of subparagraph (d)(i)(2)—
except the Exchange will only utilize
subparagraph (2) when the incoming
order is marketable against the derived
net market—instead of when the orders
is priced better than the same side of the
derived net market as SR–CBOE–2016–
014 proposed. Ultimately, the Exchange
believes this proposal represents much
PO 00000
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simpler rule text than what was
proposed in SR–CBOE–2016–014.
In sum, if a complex order with two
or more legs is COA-eligible and priced
better than the same side of the derived
net market, the order will initiate a
COA. If a complex order with three
more legs is not otherwise COA-eligible
it will still initiate a COA if it is
marketable against the derived net
market and it meets the class, size, and
order type parameters. To illustrate,
assuming all of the non-price specific
requirements are met, a complex order
with two or more legs under
subparagraph (d)(ii)(A)(1) will initiate a
COA if the derived net market is 1–1.20
and the complex order is to buy at $1.01
or higher or to sell at 1.19 or lower.22
As described above, assuming the nonprice specific requirements are met, a
complex order with three legs under
subparagraph (d)(ii)(A)(2) will initiate a
COA if the derived net market is 1—1.20
and the complex order is to buy at $1.20
or higher or to sell at $1.00 or lower.
Initiating a COA in these situations will
relieve the risk to Market-Makers noted
above and throughout this series of rule
filings, which helps promote just and
equitable principles of trade by relieving
risk to Market-Makers allowing them to
more efficiently and effectively provide
important liquidity.
As previously noted, the Exchange
was unable to implement the
amendments made by SR–CBOE–2016–
014 in the timeframe set forth in SR–
CBOE–2016–014. Thus, the Exchange
will announce the implementation date
of amendments made in SR–CBOE–
2016–014, as modified by this proposed
rule change, in a Regulatory Circular to
be published no later than 90 days
following the effective date of this filing.
The implementation date will be no
later than 180 days following the
effective date of this filing.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.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
22 As previously noted, the price at which an
order may initiate a COA was hardcoded by SR–
CBOE–2016–014. This proposal makes no changes
to the price at which an order may initiate a COA.
23 15 U.S.C. 78f(b).
24 15 U.S.C. 78f(b)(5).
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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
the proposed rule change is consistent
with the purpose of SR–CBOE–2014–
017, SR–CBOE–2015–081, and SR–
CBOE–2016–14, which was to alleviate
a potential risk to Market-Makers that
arises through the use of QRM. Complex
orders with three or more legs that are
designated that meet the class, size, and
order type (including IOCs) parameters
of subparagraph (d)(i)(2) and that are
marketable against the derived net
market (which the Exchange has
identified as potentially causing risk to
Market-Makers) will initiate a COA,
which helps promote just and equitable
principles of trade by relieving risk to
Market-Makers allowing them to more
efficiently and effectively provide
important liquidity. Orders that are
designated as IOC and meet the class
and size parameters of subparagraph
(d)(i)(2), but that are not marketable
against the derived net market, will be
cancelled, which allows order entry
firms to use their own sophisticated
technology to manage their orders
helping to remove impediments to and
perfect the mechanism of a free and
open market. SR–CBOE–2016–014
removed the Exchange’s flexibility to
determine that price at which an order
may initiate a COA, and this proposal
makes no changes in that regard.
Although the Exchange prefers
flexibility, the Exchange does not
foresee the need to retain flexibility in
this regard and hardcoding the
parameter may help avoid confusion
with regards to the price at which a
complex order may initiate a COA,
which also helps to remove
impediments to and perfect the
mechanism of a free and open market.
The Exchange also believes the
proposed rule change to initiate a COA
upon receipt of complex orders with
three or more legs that meet the class,
size, and order type (including IOCs)
parameters of subparagraph (d)(i)(2) and
that are marketable against the derived
25 Id.
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net market is consistent with the
requirement that Market-Makers’ quotes
be firm under Rule 602 of Regulation
NMS.26 The proposed rule change does
not relieve Market-Makers of their
obligation to provide ‘‘firm’’ quotes. If a
complex order in a Hybrid class with
three or more legs goes through COA
and then legs into the market for
execution upon completion of the COA,
at which point the complex order would
execute against a Market-Maker’s quotes
based on priority rules, the MarketMaker must execute its quotes against
the order at its then-published bid or
offer up to its published quote size, even
if such execution would cause the
Market-Maker to significantly exceed its
risk parameters. However, prior to the
end of COA (and thus prior to a
complex order legging into the market),
a Market-Maker may adjust its
published quotes to manage its risk in
a class as it deems necessary, including
to prevent executions that would exceed
its risk parameters. In this case, the firm
quote rule does not obligate the MarketMaker to execute its quotes against the
complex order at the quote price and
size that was published when the order
entered the System and initiated the
COA. Rather, the Market-Maker’s firm
quote obligation applies only to its
disseminated quote at the time an order
is presented to the Market-Maker for
execution, which presentation does not
occur until the System processes the
order against the leg markets after
completion of the COA.27 Thus, the
26 Rule 602(b)(2) obligates a Market-Maker to
execute any order to buy or sell a subject security
presented to it by another broker or dealer or any
other person belonging to a category of persons with
whom the Market-Maker customarily deals, at a
price at least as favorable to the buyer or sell as the
Market-Maker’s published bid or offer in any
amount up to its published quotation size. Rule
602(b)(3) provides that no Market-Maker is
obligated to execute a transaction for any subject
security to purchase or sell that subject security in
an amount greater than its revised quotation size if,
prior to the presentation of an order for the
purchase or sale of a subject security, the MarketMaker communicated to the Exchange a revised
quotation size. Similarly, no Market-Maker is
obligated to execute a transaction for any subject
security if, before the order sought to be executed
is presented, the Market-Maker has communicated
to the Exchange a revised bid or offer. CBOE Rule
8.51 imposes a similar obligation (Market-Maker
must sell (buy) at least the established number of
contracts at the offer (bid) which is displayed when
the Market-Maker receives a buy (sell) order at the
trading station where the reported security is
located for trading; however, no Market-Maker is
obligated to execute a transaction for a listed option
when, prior to the presentation of an order to sell
(buy) to the Market-Maker, the Market-Maker has
communicated to the Exchange a revised quote).
27 See Staff Legal Bulletin No. 16, Transaction in
Listed Options Under Exchange Act Rule 11Ac1–1,
U.S. Securities and Exchange Commission, Division
of Market Regulation, January 20, 2004 (‘‘Scenario
3: When an Order is ‘‘Presented’’ . . . If an
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14773
proposed rule change is consistent with
the firm quote rule.
The Exchange also notes making
subparagraph (ii)(A)(2)(A) inapplicable
to complex orders that are priced better
than the derived net market and making
subparagraph (ii)(A)(1) applicable to all
such orders is consistent with the Act
because it essentially reverts rule text
regarding COA-eligible orders back to
how the rule text read prior to SR–
CBOE–2014–017. Prior to SR–CBOE–
2014–017, the rule text essentially
provided that any COA-eligible order
will COA.28 This proposed rule change
essentially provides the same, except
certain orders that are not COA-eligible
may still COA according to proposed
subparagraph (ii)(A)(2). Thus, it was
consistent with the Securities Exchange
Act of 1934 (the ‘‘Act’’) to initiate a
COA-eligible order when COA was
established in 2005, and it remains
consistent with the Act to initiate a
COA-eligible order.
The Exchange also notes that adding
the words ‘‘or more’’ to current
subparagraph (ii)(A)(1) to provide that a
COA-eligible order ‘‘with two legs or
more’’ will COA is consistent with the
Exchange Act because it is no different
than not identifying the number of legs
at all, which is how the rule text read
from COA’s inception in 2005 29 until
the Exchange submitted SR–CBOE–
2014–017. In both cases—a ‘‘COAeligible order with two or more legs’’ or
‘‘a COA-eligible order’’—the phrase
means a complex order with two or
more legs. In fact, there really is no
purpose to identifying the number of
legs of a COA-eligible order in
subparagraph (d)(ii)(A)(1), but it might
provide some kind of clarity to market
participants, considering that proposed
subparagraph (d)(ii)(A)(2) will indicate
that that particular provision applies to
complex orders with three or more legs.
Thus, it was consistent with the Act to
initiate a COA-eligible order when COA
was established in 2005, and it remains
individual market maker generates its own
quotations . . . and exchange systems route
incoming orders to the responsible broker-dealer
with priority, when is an order presented to a
responsible broker-dealer? Response:. . . . When
each market maker is the responsible broker-dealer
with respect to its own quote, an order is presented
to it when received by the market maker from the
exchange system.’’). When a complex order is
processing through COA, the order is still in the
System and has not yet been presented to a broker
or dealer (including a Market-Maker) for execution.
Only after completion of the COA, when the System
allocates the complex order for execution in
accordance with priority rules, will that order be
‘‘presented’’ to the Market-Maker for firm quote
purposes.
28 See Securities Exchange Act Release No. 54135
(July 12, 2006), 71 FR 41287 (July 20, 2006) (SR–
CBOE–2005–65).
29 [sic]
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consistent with the Act to initiate a
COA-eligible order, even if the rule text
indicates that a COA will be initiated
upon receipt of a COA-eligible order
with two or more legs.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
B. Self-Regulatory Organization’s
Statement on Burden on Competition
CBOE does not believe that the
proposed rule change will impose any
burden on intramarket or intermarket
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act. The Exchange does
not believe the proposed rule change
will impose any burden on intramarket
competition because all IOC orders will
be treated equally by the Exchange. The
proposed rule change is intended to
reduce risk to Market-Makers that are
quoting in the regular market. CBOE
believes that the proposed rule change
will promote competition by
encouraging Market-Makers to increase
the size of and to more aggressively
price their quotes, which will increase
liquidity on the Exchange. To the extent
that the rule change makes CBOE a more
attractive marketplace, market
participants are free to become Trading
Permit Holders on CBOE and other
exchanges are free to amend their rules
in a similar manner. Furthermore, the
Exchange does not believe the proposed
rule change will impose any burden on
intermarket competition because the
rule change does not materially affect
the outcome or purpose of SR–CBOE–
2014–017, SR–CBOE–2015–081, or SR–
CBOE–2016–014, which was to alleviate
potential risk to Market-Makers using
QRM. The Exchange also does not
believe that the hardcoding of the price
at which a complex order may initiate
a COA, as described in SR–CBOE–2016–
014, will impose a burden on
competition. Finally, the Exchange does
not believe initiating a COA for a COAeligible order pursuant to Rule
6.53C(d)(ii)(A)(1) will impose any
burden on competition as the Exchange
has initiated a COA for such orders
since the inception of COA in 2005.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
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18:14 Mar 21, 2017
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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) of the Act 30 and Rule 19b–
4(f)(6) thereunder.31
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
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–
2017–021 and should be submitted on
or before April 12, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.32
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–05608 Filed 3–21–17; 8:45 am]
BILLING CODE 8011–01–P
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CBOE–2017–021 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–2017–021. 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
30 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). As required under Rule
19b–4(f)(6)(iii), the Exchange provided the
Commission with written notice of its intent to file
the proposed rule change, along with a brief
description and the text of the proposed rule
change, at least five business days prior to the date
of filing of the proposed rule change, or such
shorter time as designated by the Commission.
31 17
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SECURITIES AND EXCHANGE
COMMISSION
Proposed Collection; Comment
Request
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of Investor
Education and Advocacy,
Washington, DC 20549–0213
Extension:
Rule 482; SEC File No. 270–508, OMB
Control No. 3235–0565
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.) (‘‘Paperwork
Reduction Act’’), the Securities and
Exchange Commission (the
‘‘Commission’’) is soliciting comments
on the collection of information
summarized below. The Commission
plans to submit this existing collection
of information to the Office of
Management and Budget (‘‘OMB’’) for
extension and approval.
Like most issuers of securities, when
an investment company (‘‘fund’’) 1 offers
its shares to the public, its promotional
efforts become subject to the advertising
32 17
CFR 200.30–3(a)(12).
company’’ refers to both
investment companies registered under the
Investment Company Act of 1940 (‘‘Investment
Company Act’’) (15 U.S.C. 80a–1 et seq.) and
business development companies.
1 ‘‘Investment
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[Federal Register Volume 82, Number 54 (Wednesday, March 22, 2017)]
[Notices]
[Pages 14768-14774]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05608]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80264; File No. SR-CBOE-2017-021]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change Related to Complex Orders
March 16, 2017.
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 March 6, 2017, 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 and II below, which Items have been prepared by the
Exchange. The Exchange filed the proposal 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.
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\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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange seeks to amend its rules related to complex orders.
The text of the proposed rule change is provided below.
(additions are italicized; deletions are [bracketed])
* * * * *
[[Page 14769]]
Chicago Board Options Exchange, Incorporated Rules
* * * * *
Rule 6.53C. Complex Orders on the Hybrid System
(a)-(c) No change.
(d) Process for Complex Order RFR Auction: Prior to routing to
the COB or once on PAR, eligible complex orders may be subject to an
automated request for responses (``RFR'') auction process.
(i) For purposes of paragraph (d):
(1) ``COA'' is the automated complex order RFR auction process.
(2) A ``COA-eligible order'' means a complex order that, as
determined by the Exchange on a class-by-class basis, is eligible
for a COA considering the order's size, complex order type (as
defined in paragraphs (a) and (b) above) and complex order origin
types (as defined in subparagraph (c)(i) above). Complex orders
processed through a COA may be executed without consideration to
prices of the same complex orders that might be available on other
exchanges.
(ii) Initiation of a COA:
(A) The System will send an RFR message to all Trading Permit
Holders who have elected to receive RFR messages on receipt of (1) a
COA-eligible order with two or more legs (including orders submitted
for electronic processing from PAR) that is better than the same
side of the derived net market or (2) a complex order with three or
more legs that [(A)] meets the class, size, and complex order type
parameters of subparagraph (d)(i)(2) and [is better than the same
side of the derived net market or (B)] is marketable against the
derived net market[, designated as immediate or cancel and meets the
class and size parameters of subparagraph (d)(i)(2)]. Complex orders
as described in subparagraph (ii)(A)(2) will initiate a COA
regardless of the order's routing parameters or handling
instructions (except for orders routed for manual handling).
Immediate or cancel orders that are not marketable against the
derived net market in accordance with subparagraph (ii)(A)(2)[(B)]
will be cancelled. The RFR message will identify the component
series, the size and side of the market of the COA-eligible order
and any contingencies, if applicable.
(B) No change.
(iii)-(ix) No change.
* * * * *
The text of the proposed rule change is also available on the
Exchange's Web site (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
On February 25, 2016, the Exchange submitted immediately effective
filing SR-CBOE-2016-014, which amended Exchange rules related to the
initiation of a complex order auction (``COA'').\5\ The purpose of SR-
CBOE-2016-014 (as well as predecessor filings SR-CBOE-2015-081 \6\ and
SR-CBOE-2014-017) \7\ was to limit a potential source of unintended
Market-Maker risk related to how the Exchange's Hybrid Trading System
(the ``System'') \8\ calculates risk parameters under Rule 8.18 when
complex orders leg into the market.\9\
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\5\ See Securities Exchange Act Release No. 77297 (March 4,
2016), 81 FR 12764 (March 10, 2016) (SR-CBOE-2016-014) (``2016
Notice).
\6\ See Securities Exchange Act Release No. 76106 (October 8,
2015), 80 FR 62125 (October 15, 2015) (SR-CBOE-2015-081) (``2015
Notice).
\7\ See Securities Exchange Act Release No. 72986 (September 4,
2014), 79 FR 53798 (September 10, 2014) (SR-CBOE-2014-017)
(``Approval Order'').
\8\ The System is a trading platform that allows automatic
executions to occur electronically and open outcry trades to occur
on the floor of the Exchange. To operate in this ``hybrid''
environment, the Exchange has a dynamic order handling system that
has the capability to route orders to the trade engine for automatic
execution and book entry, to Trading Permit Holder and PAR Official
workstations located in the trading crowds for manual handling, and/
or to other order management terminals generally located in booths
on the trading floor for manual handling. Where an order is routed
for processing by the Exchange order handling system depends on
various parameters configured by the Exchange and the order entry
firm itself.
\9\ See the Approval Order, the 2015 Notice, and the 2016
Notice.
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Quote Risk Monitor
Under Rule 8.18, CBOE offers Market-Makers that are obligated to
provide and maintain continuous electronic quotes in an option class
the Quote Risk Monitor Mechanism (``QRM''), which is functionality to
help Market-Makers manage their quotes and related risk. Market-Makers
with appointments in classes that trade on the System must, among other
things, provide and maintain continuous electronic quotes in a
specified percentage of series in each class for a specified percentage
of time.\10\ To comply with this requirement, each Market-Maker may use
its own proprietary quotation and risk management system to determine
the prices and sizes at which it quotes. In addition, each Market-Maker
may use QRM.
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\10\ See Rules 8.7(d)(ii)(iv) (Market-Makers), 8.13(d)
(Preferred Market-Makers), 8.15A(b)(i) (Lead Market-Makers) and
8.85(a)(i) (Designated Primary Market-Makers).
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A Market-Maker's risk in a class is not limited to the risk in a
single series of that class. Rather, a Market-Maker is generally
actively quoting in multiple classes, and each class may comprise
hundreds or thousands of individual series. The System automatically
executes orders against a Market-Maker's quotes in accordance with the
Exchange's priority and allocation rules.\11\ As a result, a Market-
Maker has exposure and risk in all series in which it is quoting in
each of its appointed classes. QRM is an optional functionality that
helps Market-Makers, and TPH organizations with which a Market-Maker is
associated, limit this overall exposure and risk.
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\11\ See Rules 6.45 and 6.53C.
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Specifically, if a Market-Maker elects to use QRM, the System will
cancel a Market-Maker's quotes in all series in an appointed class if
certain parameters the Market-Maker establishes are triggered. Market-
Makers may set the following QRM parameters (Market-Makers may set
none, some or all of these parameters):
A maximum number of contracts for that class (the
``contract limit'') and a specified rolling time period in seconds
within which such contract limit is to be measured (the ``measurement
interval'');
a maximum cumulative percentage (which is the sum of the
percentages of the original quoted size of each side of each series
that trade) (the ``cumulative percentage limit'') that the Market-Maker
is willing to trade within a specified measurement interval; or
a maximum number of series for which either side of the
quote is fully traded (the ``number of series fully traded'') within a
specified measurement interval.
If the Exchange determines the Market-Maker has traded more than
the contract limit or cumulative percentage limit, or has traded at
least the number of series fully traded, of a class during the
specified measurement interval, the System will cancel all of the
Market-Maker's electronic quotes in that class (and any other cases
with the same underlying security) until the Market-Maker refreshes
those quotes (a ``QRM Incident''). A Market-Maker, or TPH organization
with which the Market-Maker is associated, may also specify a
[[Page 14770]]
maximum number of QRM Incidents that may occur on an Exchange-wide
basis during a specified measurement interval. If the Exchange
determines that a Market-Maker or TPH Organization, as applicable, has
reached its QRM Incident limit during the specified measurement
interval, the System will cancel all of the Market-Maker's or TPH
Organization's quotes, as applicable, and the Market-Maker's orders
resting in the book in all classes and prevent the Market-Maker and TPH
organization from sending additional quotes or orders to the Exchange
until the earlier to occur of (1) the Market-Maker or TPH organization
reactivates this ability or (2) the next trading day.
The purpose of the QRM functionality is to allow Market-Makers to
provide liquidity across most series in their appointed classes without
being at risk of executing the full cumulative size of all their quotes
before being given adequate opportunity to adjust their quotes. For
example, if a Market-Maker can enter quotes with a size of 25 contracts
in 100 series of class ABC, its potential exposure is 2,500 contracts
in ABC. To mitigate the risk of having all 2,500 contracts in ABC
execute without the opportunity to evaluate its positions, the Market-
Maker may elect to use QRM. If the Market-Maker elects to use the
contract limit functionality and sets the contract limit at 100 and the
measurement interval at five seconds for ABC, the System will
automatically cancel the Market-Maker's quotes in all series of ABC if
100 or more contracts in series of ABC execute during any five-second
period.
To assure that all quotations are firm for their full size, the
System performs the parameter calculations after an execution against a
Market-Maker's quote occurs. For example, using the same parameters in
class ABC as above, if a Market-Maker has executed a total of 95
contracts in ABC within the previous three seconds, a quote in a series
of ABC with a size of 25 contracts continues to be firm for all 25
contracts. An incoming order in that series could execute all 25
contracts of that quote, and, following the execution, the total size
parameter would add 25 contracts to the previous total of 95 for a
total of 120 contracts executed in ABC. Because the total size executed
within the previous five seconds now exceeds the 100 contract limit for
ABC, the System would, following the execution, immediately cancel all
of the Market-Maker's quotes in series of ABC. The Market-Maker would
then enter new quotes for series in ABC. Thus, QRM limits the amount by
which a Market-Maker's executions in a class may exceed its contract
limit to the largest size of its quote in a single series of the class
(or 25 in this example).
Proposal
SR-CBOE-2016-014 indicated that the Exchange would announce the
implementation date of that rule change in a Regulatory Circular to be
published no later than 90 days following the effective date of that
filing and that the implementation date would be no later than 180 days
following the effective date of that filing. The Exchange was unable to
make the necessary system changes in time to meet the deadlines set
forth in SR-CBOE-2016-014. Thus, the Exchange proposes to revise the
implementation date of SR-CBOE-2016-014. In conjunction with revising
the implementation date of SR-CBOE-2016-014, the Exchange is proposing
to revise the relevant rule text of Rule 6.53C to modify the manner in
which the rule text describes complex orders that will initiate a COA.
The purpose of the rule filings in this series (SR-CBOE-2014-017,
SR-CBOE-2015-081, and SR-CBOE-2016-014), including the instant filing,
is to limit a potential source of unintended Market-Maker risk related
to how the System calculates risk parameters under Rule 8.18 when
complex orders leg into the market.\12\ As discussed above, and
described in the previous filings, by checking the risk parameters
following each execution in a series, the risk parameters allow a
Market-Maker to provide liquidity across multiple series of a class
without being at risk of executing the full cumulative size of all its
quotes. This is not the case, however, when a complex order legs into
the regular market (i.e. the market for individual, or simple, orders).
Because the execution of each leg of a complex order is contingent on
the execution of the other legs, the execution of all the legs in the
regular market is processed as a single transaction, not as a series of
individual transactions.
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\12\ Rule 6.53C(c)(ii)(1) provides that complex orders in the
complex order book (``COB'') may execute against individual orders
or quotes in the book provided the complex order can be executed in
full (or a permissible ratio) by the orders and quotes in the book.
Rule 6.53C(d)(v)(1) provides that orders that are eligible for the
complex order auction (``COA'') may trade with individual orders and
quotes in the book provided the COA-eligible order can be executed
in full (or a permissible ratio) by the orders and quotes in the
book. COA is an automated request for responses (``RFR'') auction
process. Upon initiation of a COA, the Exchange sends an RFR message
to all Trading Permit Holders who have elected to receive RFR
messages, which RFR message identifies the series, size and side of
the market of the COA-eligible order and any contingencies. Eligible
market participants may submit responses during a response time
interval. At the conclusion of the response time interval, COA-
eligible orders are allocated in accordance with Rule 6.53C(d)(v),
including against individual orders and quotes in the book.
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For example, if market participants enter into the System
individual orders to buy 25 contracts for the Jan 30 call, Jan 35 call,
Jan 40 call and Jan 45 call in class ABC, the System processes each
order as it is received and calculates the Market-Makers parameters in
class ABC following the execution of each 25-contract call. However, if
a market participant enters into the System a complex order to buy all
four of these strikes in class ABC 25 times, which complex order
executes against bids and offers for the individual series (i.e. legs
into the market), the System will calculate the Market-Maker's
parameters in class ABC following the execution of all 100 contracts.
If the Market-Maker had set the same parameters in class ABC as
discussed above (100-contract limit with five-second measurement
interval) and had executed 95 contracts in class ABC within the
previous three seconds, the amount by which the next transaction might
exceed 100 is limited to the largest size of its quote in a single
series of the class. In that example, since the largest size of the
Market-Maker's quotes in any series was 25 contracts, the Market-Maker
could not have exceeded the 100-contract limit by more than 20
contracts (95 + 25 = 120). However, with respect to the complex order
with four legs 25 times, the next transaction against the Market-
Maker's quotes potentially could be as large as 100 contracts
(depending upon whether there are other market participants at the same
price), creating the potential in this example for the Market-Maker to
exceed the 100-contract limit by 95 contracts (95 + 100 = 195) instead
of 20 contracts.
As this example demonstrates, legging of complex orders into the
regular market presents higher risk to Market-Makers than executing
their quotes against individual orders entered in multiple series of a
class in the regular market, because it may result in Market-Makers
exceeding their risk parameters by a greater number of contracts. This
risk is directly proportional to the number of legs associated with a
complex order. Market-Makers have expressed concerns to the Exchange
regarding this risk.
In order to alleviate this potential risk to Market-Makers, the
Exchange, in SR-CBOE-2015-081, amended Rule 6.53C(d) to, among other
things, provide that a COA will be initiated when a complex order with
three or more legs is designated as immediate or cancel (``IOC'') and
meets the class, marketability, and size parameters of
[[Page 14771]]
subparagraph (d)(i)(2).\13\ The Exchange observed IOC orders causing
the risk to Market-Makers described above and believed the previous
amendment proposed in SR-CBOE-2015-081 would reduce that risk by
initiating a COA in those circumstances. SR-CBOE-2016-014 attempted to
fine tune this requirement by amending Rule 6.53C(d)(ii)(A)(2)(B) to
provide that a COA will be initiated when a complex order with three or
more legs that is marketable against the derived net market is
designated as immediate or cancel and the order meets the class and
size parameters of subparagraph (d)(i)(2). SR-CBOE-2016-014 also
hardcoded the price at which an order could initiate a COA.
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\13\ See Rule 6.53C(d)(ii)(A)(2)(B). The Exchange has not yet
implemented the changes described in SR-CBOE-2015-081 in
anticipation of this proposal.
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The Exchange is proposing to further fine tune the rule text by
amending Rule 6.53C(d)(ii)(A)(1) and (2).\14\ Currently the term COA-
eligible order in Rule 6.53C(d)(ii)(A)(1) is used in relation to orders
with two legs. The Exchange is proposing to keep the term COA-eligible
as the starting point for orders with three or more legs as well,\15\
because all orders with two or more legs that are COA-eligible (i.e.,
meets the class, size, order type, and origin code parameters of Rule
6.53C(d)(i)(2)) will be treated the same by the Exchange--meaning the
number of legs of an order under Rule 6.53C(d)(ii)(A)(1) will not be a
factor in determining whether a complex order will or will not COA. In
order to effectuate this change the Exchange is also modifying
subparagraph (ii)(A)(2)(A) because all orders with three legs or more
that are priced better than the same side of the derived net market
will only COA if they are COA-eligible under subparagraph (ii)(A)(1),
which means the current rule text of (ii)(A)(2)(A) is unnecessary. The
Exchange notes that the difference between the current rule text with
regards to orders with three legs that are priced better than the same
side of the derived net market is that current subparagraph
(ii)(A)(2)(A) requires a complex order with three or more legs that
meets the class, size, and order type parameter to COA, regardless of
the origin code, and proposed subparagraph (ii)(A)(1) provides that the
origin code is an additional parameter the Exchange may set with
regards to complex orders with three legs that are priced better than
the same side of the derived net market. The Exchange believes it's
appropriate to apply the origin code parameter to such orders because
the flexibility allows the Exchange to use its considerable expertise
in an effort to ensure COAs are beneficial to the marketplace, which is
why the Exchange is proposing this particular rule change and why the
Exchange developed the COA origin code parameter in 2008.\16\ Applying
the origin code parameter to complex orders with three legs that are
priced better than the same side of the derived net market is
consistent with the manner in which the rule text was written prior to
SR-CBOE-2014-017. To illustrate, SR-CBOE-2008-082 added the origin type
parameter to the definition of a COA-eligible order, such that a COA-
eligible order was defined as:
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\14\ As with SR-CBOE-2015-081 and SR-CBOE-2016-014, this
proposed change applies to Hybrid classes only, and not Hybrid 3.0
classes. The Exchange does not believe the risk discussed in this
rule filing is present in Hybrid 3.0 classes because in Hybrid 3.0
classes complex orders are not legged into the regular market. See
Rule 6.53C.10 (providing flexibility for the Exchange to determine
to not allow marketable complex orders entered into COB and/or COA
to automatically execute against individual quotes residing in the
EBook).
\15\ See Proposed Rule 6.53C(d)(ii)(A)(1).
\16\ See Securities Exchange Act Release No. 58326 (August 7,
2008), 73 FR 47986 (August 15, 2008) (SR-CBOE-2008-82).
A complex order that, as determined by the Exchange on a class-by-
class basis, is eligible for a COA considering the order's
marketability (defined as a number of ticks away from the current
market), size, complex order type (as defined in paragraphs (a) and
(b) above) and complex order origin types (as defined in
---------------------------------------------------------------------------
subparagraph (c)(i) above).\17\
\17\ Id.
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Making current subparagraph (ii)(A)(2)(A) inapplicable to complex
orders that are priced better than the derived net market and making
subparagraph (ii)(A)(1) applicable to all such orders (i.e., allowing
the origin code parameter to apply to complex orders that are priced
better than the same side of the derived net market) is consistent with
the Act because it essentially reverts rule text regarding COA-eligible
orders back to how the rule text read prior to SR-CBOE-2014-017.
Additionally, prior to SR-CBOE-2014-017, the rule text essentially
provided that any COA-eligible order will COA (as long as a member
requested that a particular order COA), and as previously noted, what
determines COA-eligibility has included the origin code parameter since
2008.\18\ To illustrate, SR-CBOE-2005-65, which created COA, provided
that a COA would be initiated ``[o]n receipt of a COA-eligible order
and request from the member representing the order that it be
COA'd[.]'' \19\ SR-CBOE-2015-089 removed the requirement that an order
include a request to initiate a COA, and instead implemented the
opposite--a ``do-not-COA'' request that is only allowed for certain
orders.\20\ This particular proposed rule change essentially provides
that all COA-eligible orders will COA (unless the ``do-not-COA
provision of Rule 6.53C(d)(ii)(B) applies) provided that the complex
order is priced better than the same side of the derived net market,
except the proposal goes further by allowing certain orders that are
not COA-eligible to still COA according to proposed subparagraph
(ii)(A)(2). In short, it was consistent with the Securities Exchange
Act of 1934 (the ``Act'') to: Initiate a COA for COA-eligible order
when COA was established in 2005; include the origin type parameter in
the COA-eligibility definition when the origin type parameter was
applied to the COA-eligibility definition in 2008; and allow COA-
eligible orders to COA unless a ``do-not-COA'' accompanies certain
orders when the ``do-not-COA'' request was established in 2015. Thus,
it remains consistent with the Act to initiate a COA for a COA-eligible
order today, which is essentially all proposed subparagraph (ii)(A)(1)
states. It similarly remains consistent with the Act to allow COA-
eligibility to include the origin type parameter and to COA all COA-
eligible orders unless particular orders defined in Rule
6.53C(d)(ii)(B) include a ``do-not-COA'' request.
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\18\ Id.
\19\ See Securities Exchange Act Release No. 54135 (July 12,
2006), 71 FR 41287 (July 20, 2006) (SR-CBOE-2005-65).
\20\ See current Rule 6.53C(d)(ii)(B), which provides:
Notwithstanding subparagraph (ii)(A)(1), Trading Permit Holders may
request on an order-by-order basis that an incoming COA-eligible
order with two legs not COA (a ``do-not-COA'' request).
Notwithstanding subparagraph (ii)(A)(2), the System will reject back
to a Trading Permit Holder any complex order described in that
subparagraph that includes a do-not-COA request. Any complex order
in subparagraph (ii)(A)(2) on PAR will COA even if the PAR operator
includes a do-not-COA request. If a two-legged order with a do-not-
COA request rests on PAR, then the PAR operator may not request that
the order COA. An order initially submitted to the Exchange with a
do-not-COA request may still COA after it has rested on the COB
pursuant to Interpretation and Policy .04. Securities Exchange Act
Release No. 76622 (December 11, 2015), 80 FR 78803 (December 17,
2015) (SR-CBOE-2015-089).
---------------------------------------------------------------------------
The Exchange also notes that adding the words ``or more'' to
current subparagraph (ii)(A)(1) to provide that a COA-eligible order
``with two legs or more'' will COA is consistent with the Exchange Act
because it is no different than not identifying the number of legs at
all, which is how the rule text read from COA's inception in 2005 until
the
[[Page 14772]]
Exchange submitted SR-CBOE-2014-017. As previously noted, SR-CBOE-2005-
65, provided that a COA would be initiated ``[o]n receipt of a COA-
eligible order and request from the member representing the order that
it be COA'd[.]'' \21\ In both cases--a ``COA-eligible order with two or
more legs'' as proposed or ``a COA-eligible order'' as provided in SR-
CBOE-2005-65-- the phrase means a complex order with two or more legs.
In fact, there really is no purpose to identifying the number of legs
of a COA-eligible order in subparagraph (d)(ii)(A)(1), but it might
provide some kind of clarity to market participants, considering that
proposed subparagraph (d)(ii)(A)(2) will indicate that that particular
provision applies to complex orders with three or more legs. Thus, it
was consistent with the Act to initiate a COA upon receipt of COA-
eligible order when COA was established in 2005, and it remains
consistent with the Act to initiate a COA for a COA-eligible order,
even if the rule text indicates that a COA will be initiated upon
receipt of a COA-eligible order with two or more legs.
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\21\ See Securities Exchange Act Release No. 54135 (July 12,
2006), 71 FR 41287 (July 20, 2006) (SR-CBOE-2005-65).
---------------------------------------------------------------------------
The purpose of proposed subparagraph (2) of Rule 6.53C(d)(ii)(A) is
simply to allow certain orders with three legs that will not COA under
subparagraph (1) to COA pursuant to subparagraph (2). Proposed Rule
6.53C(d)(ii)(A)(2) provides that a COA will be initiated upon receipt
of a complex order with three or more legs that meets the class, size,
and complex order type parameters of subparagraph (d)(i)(2) and is
marketable against the derived net market. In short, if an order with
three or more legs does not COA pursuant to Rule 6.53C(d)(ii)(A)(1)--
because it is not COA-eligible--it may still COA pursuant to Rule
6.53C(d)(ii)(A)(2), as long as the order meets the class, size, complex
order type parameters of subparagraph (d)(i)(2) and is marketable
against the derived net market.
The Exchange notes that the flaw with SR-CBOE-2016-014 lies in
current rule 6.53C(d)(ii)(A)(2)(B), which provides that a COA will be
initiated when a complex order with three or more legs:
is marketable against the derived net market, designated as
immediate or cancel and meets the class and size parameters of
subparagraph (d)(i)(2).
This provision would prevent the Exchange from initiating a COA for
an order that does not have the IOC contingency--even though the order
has three or more legs, the order is marketable against the derived net
market, and the order meets the class the class and size parameters of
subparagraph (d)(i)(2). As previously noted, the purpose of the rule
filings in this series (SR-CBOE-2014-017, SR-CBOE-2015-081, and SR-
CBOE-2016-014), including the instant filing, is to limit a potential
source of unintended Market-Maker risk related to how the System
calculates risk parameters under Rule 8.18 when complex orders leg into
the market. Complex orders with three or more legs that are not
designated as IOC may still cause the risk to Market-Makers; thus, it
is prudent for the Exchange to include the order type parameter in
proposed Rule 6.53C(d)(ii)(A)(2) instead of singling out IOCs. The
Exchange believes the reason SR-CBOE-2016-014 specifically identified
IOCs in Rule 6.53C(d)(ii)(A)(2)(B) is because IOC's are not currently
COA-eligible so all IOC orders with two or more legs do not currently
initiate a COA and identifying IOCs in the rule text provided further
notice to market participants that orders designated as IOC may COA.
However, the Exchange believes it's unnecessary to identify IOCs in the
rule text in this manner--although the Exchange notes that the rule
text will continue to state that IOCs that are not marketable against
the derived net market in accordance with subparagraph (ii)(A)(2) will
be cancelled, which serves as notice to market participants that IOCs
will initiate a COA in certain circumstances, especially considering
that upon filing this proposal the Exchange will also be publishing a
circular that identifies IOCs as a contingency that may initiate a COA
in certain circumstances.
The Exchange also notes that SR-CBOE-2016-014 proposed to treat all
market participants the same when the Exchange received an order with
three or more legs that met the class, size, complex order type
parameters of subparagraph (d)(i)(2) and was better than the same side
of the derived net market. Proposed subparagraph (2) of Rule
6.53C(d)(ii)(A) will continue to treat all market participants the same
when the Exchange receives an order with three or more legs that meets
the class, size, and complex order type parameters of subparagraph
(d)(i)(2)--except the Exchange will only utilize subparagraph (2) when
the incoming order is marketable against the derived net market--
instead of when the orders is priced better than the same side of the
derived net market as SR-CBOE-2016-014 proposed. Ultimately, the
Exchange believes this proposal represents much simpler rule text than
what was proposed in SR-CBOE-2016-014.
In sum, if a complex order with two or more legs is COA-eligible
and priced better than the same side of the derived net market, the
order will initiate a COA. If a complex order with three more legs is
not otherwise COA-eligible it will still initiate a COA if it is
marketable against the derived net market and it meets the class, size,
and order type parameters. To illustrate, assuming all of the non-price
specific requirements are met, a complex order with two or more legs
under subparagraph (d)(ii)(A)(1) will initiate a COA if the derived net
market is 1-1.20 and the complex order is to buy at $1.01 or higher or
to sell at 1.19 or lower.\22\ As described above, assuming the non-
price specific requirements are met, a complex order with three legs
under subparagraph (d)(ii)(A)(2) will initiate a COA if the derived net
market is 1--1.20 and the complex order is to buy at $1.20 or higher or
to sell at $1.00 or lower. Initiating a COA in these situations will
relieve the risk to Market-Makers noted above and throughout this
series of rule filings, which helps promote just and equitable
principles of trade by relieving risk to Market-Makers allowing them to
more efficiently and effectively provide important liquidity.
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\22\ As previously noted, the price at which an order may
initiate a COA was hardcoded by SR-CBOE-2016-014. This proposal
makes no changes to the price at which an order may initiate a COA.
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As previously noted, the Exchange was unable to implement the
amendments made by SR-CBOE-2016-014 in the timeframe set forth in SR-
CBOE-2016-014. Thus, the Exchange will announce the implementation date
of amendments made in SR-CBOE-2016-014, as modified by this proposed
rule change, in a Regulatory Circular to be published no later than 90
days following the effective date of this filing. The implementation
date will be no later than 180 days following the effective date of
this filing.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\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
[[Page 14773]]
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 the proposed rule change is
consistent with the purpose of SR-CBOE-2014-017, SR-CBOE-2015-081, and
SR-CBOE-2016-14, which was to alleviate a potential risk to Market-
Makers that arises through the use of QRM. Complex orders with three or
more legs that are designated that meet the class, size, and order type
(including IOCs) parameters of subparagraph (d)(i)(2) and that are
marketable against the derived net market (which the Exchange has
identified as potentially causing risk to Market-Makers) will initiate
a COA, which helps promote just and equitable principles of trade by
relieving risk to Market-Makers allowing them to more efficiently and
effectively provide important liquidity. Orders that are designated as
IOC and meet the class and size parameters of subparagraph (d)(i)(2),
but that are not marketable against the derived net market, will be
cancelled, which allows order entry firms to use their own
sophisticated technology to manage their orders helping to remove
impediments to and perfect the mechanism of a free and open market. SR-
CBOE-2016-014 removed the Exchange's flexibility to determine that
price at which an order may initiate a COA, and this proposal makes no
changes in that regard. Although the Exchange prefers flexibility, the
Exchange does not foresee the need to retain flexibility in this regard
and hardcoding the parameter may help avoid confusion with regards to
the price at which a complex order may initiate a COA, which also helps
to remove impediments to and perfect the mechanism of a free and open
market.
The Exchange also believes the proposed rule change to initiate a
COA upon receipt of complex orders with three or more legs that meet
the class, size, and order type (including IOCs) parameters of
subparagraph (d)(i)(2) and that are marketable against the derived net
market is consistent with the requirement that Market-Makers' quotes be
firm under Rule 602 of Regulation NMS.\26\ The proposed rule change
does not relieve Market-Makers of their obligation to provide ``firm''
quotes. If a complex order in a Hybrid class with three or more legs
goes through COA and then legs into the market for execution upon
completion of the COA, at which point the complex order would execute
against a Market-Maker's quotes based on priority rules, the Market-
Maker must execute its quotes against the order at its then-published
bid or offer up to its published quote size, even if such execution
would cause the Market-Maker to significantly exceed its risk
parameters. However, prior to the end of COA (and thus prior to a
complex order legging into the market), a Market-Maker may adjust its
published quotes to manage its risk in a class as it deems necessary,
including to prevent executions that would exceed its risk parameters.
In this case, the firm quote rule does not obligate the Market-Maker to
execute its quotes against the complex order at the quote price and
size that was published when the order entered the System and initiated
the COA. Rather, the Market-Maker's firm quote obligation applies only
to its disseminated quote at the time an order is presented to the
Market-Maker for execution, which presentation does not occur until the
System processes the order against the leg markets after completion of
the COA.\27\ Thus, the proposed rule change is consistent with the firm
quote rule.
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\26\ Rule 602(b)(2) obligates a Market-Maker to execute any
order to buy or sell a subject security presented to it by another
broker or dealer or any other person belonging to a category of
persons with whom the Market-Maker customarily deals, at a price at
least as favorable to the buyer or sell as the Market-Maker's
published bid or offer in any amount up to its published quotation
size. Rule 602(b)(3) provides that no Market-Maker is obligated to
execute a transaction for any subject security to purchase or sell
that subject security in an amount greater than its revised
quotation size if, prior to the presentation of an order for the
purchase or sale of a subject security, the Market-Maker
communicated to the Exchange a revised quotation size. Similarly, no
Market-Maker is obligated to execute a transaction for any subject
security if, before the order sought to be executed is presented,
the Market-Maker has communicated to the Exchange a revised bid or
offer. CBOE Rule 8.51 imposes a similar obligation (Market-Maker
must sell (buy) at least the established number of contracts at the
offer (bid) which is displayed when the Market-Maker receives a buy
(sell) order at the trading station where the reported security is
located for trading; however, no Market-Maker is obligated to
execute a transaction for a listed option when, prior to the
presentation of an order to sell (buy) to the Market-Maker, the
Market-Maker has communicated to the Exchange a revised quote).
\27\ See Staff Legal Bulletin No. 16, Transaction in Listed
Options Under Exchange Act Rule 11Ac1-1, U.S. Securities and
Exchange Commission, Division of Market Regulation, January 20, 2004
(``Scenario 3: When an Order is ``Presented'' . . . If an individual
market maker generates its own quotations . . . and exchange systems
route incoming orders to the responsible broker-dealer with
priority, when is an order presented to a responsible broker-dealer?
Response:. . . . When each market maker is the responsible broker-
dealer with respect to its own quote, an order is presented to it
when received by the market maker from the exchange system.''). When
a complex order is processing through COA, the order is still in the
System and has not yet been presented to a broker or dealer
(including a Market-Maker) for execution. Only after completion of
the COA, when the System allocates the complex order for execution
in accordance with priority rules, will that order be ``presented''
to the Market-Maker for firm quote purposes.
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The Exchange also notes making subparagraph (ii)(A)(2)(A)
inapplicable to complex orders that are priced better than the derived
net market and making subparagraph (ii)(A)(1) applicable to all such
orders is consistent with the Act because it essentially reverts rule
text regarding COA-eligible orders back to how the rule text read prior
to SR-CBOE-2014-017. Prior to SR-CBOE-2014-017, the rule text
essentially provided that any COA-eligible order will COA.\28\ This
proposed rule change essentially provides the same, except certain
orders that are not COA-eligible may still COA according to proposed
subparagraph (ii)(A)(2). Thus, it was consistent with the Securities
Exchange Act of 1934 (the ``Act'') to initiate a COA-eligible order
when COA was established in 2005, and it remains consistent with the
Act to initiate a COA-eligible order.
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\28\ See Securities Exchange Act Release No. 54135 (July 12,
2006), 71 FR 41287 (July 20, 2006) (SR-CBOE-2005-65).
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The Exchange also notes that adding the words ``or more'' to
current subparagraph (ii)(A)(1) to provide that a COA-eligible order
``with two legs or more'' will COA is consistent with the Exchange Act
because it is no different than not identifying the number of legs at
all, which is how the rule text read from COA's inception in 2005 \29\
until the Exchange submitted SR-CBOE-2014-017. In both cases--a ``COA-
eligible order with two or more legs'' or ``a COA-eligible order''--the
phrase means a complex order with two or more legs. In fact, there
really is no purpose to identifying the number of legs of a COA-
eligible order in subparagraph (d)(ii)(A)(1), but it might provide some
kind of clarity to market participants, considering that proposed
subparagraph (d)(ii)(A)(2) will indicate that that particular provision
applies to complex orders with three or more legs. Thus, it was
consistent with the Act to initiate a COA-eligible order when COA was
established in 2005, and it remains
[[Page 14774]]
consistent with the Act to initiate a COA-eligible order, even if the
rule text indicates that a COA will be initiated upon receipt of a COA-
eligible order with two or more legs.
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\29\ [sic]
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B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change will impose any
burden on intramarket or intermarket competition that is not necessary
or appropriate in furtherance of the purposes of the Act. The Exchange
does not believe the proposed rule change will impose any burden on
intramarket competition because all IOC orders will be treated equally
by the Exchange. The proposed rule change is intended to reduce risk to
Market-Makers that are quoting in the regular market. CBOE believes
that the proposed rule change will promote competition by encouraging
Market-Makers to increase the size of and to more aggressively price
their quotes, which will increase liquidity on the Exchange. To the
extent that the rule change makes CBOE a more attractive marketplace,
market participants are free to become Trading Permit Holders on CBOE
and other exchanges are free to amend their rules in a similar manner.
Furthermore, the Exchange does not believe the proposed rule change
will impose any burden on intermarket competition because the rule
change does not materially affect the outcome or purpose of SR-CBOE-
2014-017, SR-CBOE-2015-081, or SR-CBOE-2016-014, which was to alleviate
potential risk to Market-Makers using QRM. The Exchange also does not
believe that the hardcoding of the price at which a complex order may
initiate a COA, as described in SR-CBOE-2016-014, will impose a burden
on competition. Finally, the Exchange does not believe initiating a COA
for a COA-eligible order pursuant to Rule 6.53C(d)(ii)(A)(1) will
impose any burden on competition as the Exchange has initiated a COA
for such orders since the inception of COA in 2005.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (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) of the Act \30\ and Rule 19b-
4(f)(6) thereunder.\31\
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\30\ 15 U.S.C. 78s(b)(3)(A).
\31\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written
notice of its intent to file the proposed rule change, along with a
brief description and the text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule change should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-CBOE-2017-021 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-2017-021. 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-2017-021 and should be
submitted on or before April 12, 2017.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05608 Filed 3-21-17; 8:45 am]
BILLING CODE 8011-01-P
