Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Related to Complex Orders, 15085-15090 [2017-05852]
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or before April 14, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–05853 Filed 3–23–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
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13:56 Mar 23, 2017
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend its
rules related to complex orders. The text
of the proposed rule change is available
on the Exchange’s Web site (https://
www.cboe.com/AboutCBOE/CBOELegal
RegulatoryHome.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
[FR Doc. 2017–05880 Filed 3–23–17; 8:45 am]
1. Purpose
BILLING CODE 8011–01–P
The Exchange proposes to amend its
rules related to complex orders to: (i)
Simplify the definitions of the complex
order types that may be made available
on a class-by-class basis and remove
references to certain specific complex
order types that will no longer be
defined; (ii) with respect to complex
orders in open outcry, set forth
applicable ratios for an order to be
eligible for complex order priority
within applicable priority rules; (iii)
with respect to complex orders in open
outcry, make explicit the priority
applicable when there are other
complex orders or quotes represented at
the same net price, whether such other
orders or quotes are in the complex
order book (‘‘COB’’) or being
represented in open outcry; and (iv)
with respect to complex orders in open
outcry, clarify the applicable minimum
increment.
First, with respect to definitions, the
Exchange proposes to amend Rule 6.53
to remove the definitions of spread
order, combination order, straddle order
and ratio order and replace them with
a more general definition of a complex
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80279; File No. SR–CBOE–
2017–019]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of a
Proposed Rule Change Related to
Complex Orders
March 20, 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 7,
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, II, and
III below, which Items have been
prepared by the Exchange. The
2 17
Jkt 241001
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
Dated: March 21, 2017.
Eduardo A. Aleman,
Assistant Secretary.
1 15
23 17
15085
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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order (which includes a stock-option
order and a security future-option order)
to simplify the descriptions of the
complex order types that may be made
available on a class-by-class basis. The
proposed definition of a ‘‘complex
order’’ is any order for the same account
as defined below:
• A ‘‘complex order’’ is any order
involving the execution of two or more
different options series in the same
underlying security occurring at or near
the same time for the purpose of
executing a particular investment
strategy.
• A ‘‘stock-option order’’ is an order
to buy or sell a stated number of units
of an underlying stock or a security
convertible into the underlying stock
(‘‘convertible security’’) coupled with
either (i) the purchase or sale of options
contract(s) on the opposite side of the
market representing either (A) the same
number of units of the underlying stock
or convertible security, or (B) the
number of units of the underlying stock
or convertible security necessary to
create a delta neutral position, or (ii) the
purchase or sale of an equal number of
put and call option contracts, each
having the same exercise price,
expiration date and each representing
the same number of units of stock as,
and on the opposite side of the market
from, the underlying stock or
convertible security portion of the
order.3
• A ‘‘security future-option order’’ is
an order to buy or sell a stated number
of units of a security future or a related
security convertible into a security
future (‘‘convertible security future’’)
coupled with either (i) the purchase or
sale of option contract(s) on the
opposite side of the market representing
either the same number of the
underlying for the security future or
convertible security future or the
number of units of the underlying for
the security future or convertible
security future necessary to create a
delta neutral position or (ii) the
purchase or sale of an equal number of
put and call option contracts, each
having the same exercise price,
expiration date and each representing
3 Rule 1.1(ii) currently defines a ‘‘stock-option
order’’ as an order to buy or sell a stated number
of units of an underlying or a related security
coupled with either (i) the purchase or sale of
option contract(s) on the opposite side of the market
representing either the same number of units of the
underlying or related security or the number of
units of the underlying security necessary to create
a delta neutral position or (ii) the purchase or sale
of an equal number of put and call option contracts,
each having the same exercise price, expiration date
and each representing the same number of units of
stock as, and on the opposite side of the market
from, the underlying or related security portion of
the order.
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the same number of the underlying for
the security future or convertible
security future, as and on the opposite
side of the market from, the underlying
for the security future or convertible
security future portion of the order. 4
The proposed rule change moves the
definitions of a ‘‘stock-option order’’
from Rule 1.1(ii) and ‘‘security futureoption order’’ from Rule 1.1(zz) to Rule
6.53 (and replaces them in Rule 1.1 with
cross-references to the new location of
the definitions) so that all definitions of
the various types of complex orders are
located in the same place within the
rules. The current and proposed
definitions of stock-option order are
substantially similar. However, the
Exchange believes the language in the
proposed definition of stock-option
order is more consistent with the
language in other rules, including Rules
6.53C (related to electronic handling of
complex orders) and 6.80 (related to
order protection, which relates to the
Options Order Protection and Locked/
Crossed Markets Plan, also commonly
referred to as the Options Distributive
Linkage Plan). The current and
proposed definitions of security futureoption order have no substantive
differences. The proposed complex
order definition is in part modeled after
the definition of a complex order
(including a stock-option order) already
contained in Rule 6.53C(a).
The Exchange proposes conforming
changes to Rules 6.9 (including
Interpretation and Policy .03), 6.42(4)
(including Interpretation and Policy
.01), 6.45(b)(ii), 6.48(b), 6.73(c),
6.74(d)(iii) and 8.51 to harmonize these
rules with the proposed changes in Rule
6.53 to consistently reference the
proposed new definition of a complex
4 Rule 1.1(zz) defines a ‘‘security future-option
order,’’ which is deemed a type of Inter-regulatory
Spread Order as that term is defined in Rule 1.1(ll),
as an order to buy or sell a stated number of units
of a security future or a related security convertible
into a security future (‘‘convertible security future’’)
coupled with either (i) the purchase or sale of
option contract(s) on the opposite side of the market
representing either the same number of the
underlying for the security future or convertible
security future or the number of units of the
underlying for the security future or convertible
security future necessary to create a delta neutral
position or (ii) the purchase or sale of an equal
number of put and call option contracts, each
having the same exercise price, expiration date and
each representing the same number of the
underlying for the security future or convertible
security future, as and on the opposite side of the
market from, the underlying for the security future
or convertible security future portion of the order.
Rule 1.1(ll) defines an ‘‘Inter-regulatory Spread
Order’’ as an order involving the simultaneous
purchase and/or sale of at least one unit in contracts
each of which is subject to different regulatory
jurisdictions at stated limits, or at a stated
differential, or at market prices on the floor of the
Exchange.
PO 00000
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order.5 As a result of the proposed
changes to Rule 6.53, the Exchange
proposes to update related crossreferences in Rules 6.53C.08,
6.74(d)(iii), 7.12(b)(i)(E), 24A.5 and
24B.5. The Exchange notes that, while
Trading Permit Holders (‘‘TPHs’’) may
represent in open outcry a complex
order with any number of legs, and in
any ratio, only complex orders in the
proposed applicable ratios are eligible
for complex order priority (subject to
certain exceptions, including multiclass spreads and SPX Combo Orders
(see Rules 24.19 and 24.20, respectively)
set forth in Rule 6.45 and minimum
increment relief set forth in Rule
6.42(4).
Second, with respect to complex
orders represented and executed in
open outcry, the Exchange is proposing
to amend Rule 6.45 (pertaining to order
and quote priority and allocation).
Specifically, the proposed changes
amend Rule 6.45(b)(ii) to set forth the
following applicable ratio requirements
for complex orders to be eligible for
complex order priority and minimum
increment relief when represented and
executed in open outcry: 6
• For a complex order, the order is in
a ratio that is less than or equal to three5 The proposed rule change also deletes the
paragraph lettering from the order type definitions
and puts the order types in alphabetical order,
which the Exchange believes will allow investors to
more easily locate the order type definitions within
the rules. Other than proposed changes to the
definition of complex orders as described above, the
proposed rule change makes no substantive changes
to the order type definitions.
6 To be eligible for electronic processing via the
CBOE Hybrid System’s COB and complex order
RFR auction (‘‘COA’’), the system requires that a
complex order be entered on a single order ticket
to be electronically processed. Under existing Rule
6.53C(a)(1) and (2), the Exchange may determine on
a class-by-class basis the applicable number of legs
of a complex order or stock-option order that is
eligible for processing via COB and COA. Under the
same provisions, the Exchange may determine on
a class-by-class basis within certain parameters the
applicable ratio of a complex order or stock-option
order that is eligible for processing via COB and
COA. Currently, the Exchange has limited COB and
COA to orders of no more than four (4) legs and
ratios equal to or greater than one-to-three (.333)
and less than or equal to three-to-one (3.00) (and,
for stock-option orders, ratios no greater than eightto-one (8.00)). Under this current structure, orders
with more than four (4) legs or that do not satisfy
the ratio requirements are not eligible for electronic
processing via COB or COA, but would instead be
routed for handling in open outcry. The proposed
rule change adds language to the introductory
paragraph of Rule 6.53C(a) to explicitly state that
the definitions of complex orders contained in that
rule apply only for purposes of the electronic
handling of complex orders pursuant to that rule,
notwithstanding the proposed broader definition of
complex order contained in Rule 6.53. Because
there are two separate definitions of complex
orders, the Exchange believes this additional
language will bring clarity to the rules about when
the definition of complex orders in Rule 6.53C(a)
applies, which is in the context of electronic
trading.
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to-one (3.00) or the order is in a ratio
that is larger than three-to-one (3.00) but
the order is fully hedged (without regard
to any prior existing position). An order
will be considered fully hedged if the
order is delta neutral +/¥10% or if the
party representing the order can
demonstrate that the complex order is
fully hedged using reasonable riskvaluation methodologies;
• for a stock-option order, the options
leg(s) must (A) represent the same
number of units of the underlying stock
or convertible security in the stock leg
or (B) represent the number of units of
the underlying stock or convertible
security necessary to create a delta
neutral position, but in no case in a ratio
greater than eight-to-one (8.00), where
the ratio represents the total number of
units of the underlying stock or
convertible security in the options leg to
the total number of units of stock or
convertible security in the stock leg; and
• for a security futures-option order,
the options leg(s) must (A) represent the
same number of units of the underlying
stock in the security future leg or (B)
represent the number of units of the
underlying stock necessary to create a
delta neutral position, but in no case in
a ratio greater than eight-to-one (8.00),
where the ratio represents the total
number of units of the underlying stock
in the options leg to the total number of
units of stock or convertible security in
the security-futures leg.
The proposed rule change also adds to
the respective rules that, for the purpose
of applying the aforementioned ratios to
complex orders comprised of both minioption contracts and standard option
contracts, ten (10) mini-option contracts
will represent one (1) standard option
contract.
As discussed above, proposed Rule
6.45(b)(ii)(A) sets forth the ratio that
determines whether a complex order
executed in open outcry is eligible for
priority; however, proposed Rule
6.45(b)(ii)(B) sets forth the terms of the
priority for complex orders. The
Exchange proposes to add the following
language to Rule 6.45(b)(ii)(B):
• A complex order may be executed
without consideration to prices of the
same complex order that might be
available on other exchanges. A
complex order with a ratio greater than
three-to-one (3.00) may not trade
through prices in the individual option
series that are available on other
exchanges.7
7 This is consistent with Rule 6.53C(c)(ii), which
states that ‘‘[c]omplex orders that are submitted to
the COB may be executed without consideration to
prices of the same complex orders that might be
available on other exchanges[.]’’
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The above language is consistent with
the order protection rules implemented
by all options exchanges.8 The
Exchange is simply proposing to add the
language to proposed Rule 6.45(b)(ii)(B)
in order to avoid confusion with regards
to the ability of a complex order to
trade-through away markets.
Third, with respect to complex orders
in classes where the COB is available,
the Exchange also proposes to make
explicit the open outcry priority
applicable when there are other
complex orders or quotes represented at
the same net price, whether such other
orders or quotes are in the COB or being
represented in open outcry. Specifically,
the Exchange proposes to amend Rule
6.45(b)(ii) to provide that if a complex
order would trade in open outcry at the
same net debit or credit price as another
complex order, priority would go first to
public customer orders in COB (with
multiple public customer orders ranked
based on time), then to complex order
bids and offers represented in the
trading crowd (with multiple bids and
offers ranked in accordance with the
allocation principles applicable to incrowd market participants contained in
Rule 6.45(b)(i)(B) and (D), respectively),
and then to all other orders and quotes
in the COB (with multiple bids and
offers ranked in accordance with the
allocation algorithm in effect pursuant
to Rule 6.53C).9 This methodology for
8 Rule 6.81(b)(7) indicates that Trading Permit
Holders need not prevent Trade-Throughs where
the ‘‘transaction that constituted the Trade-Through
was effected as a portion of a Complex Trade[.]’’
Additionally, a ‘‘Complex Trade’’ is defined as ‘‘(i)
the execution of an order in an option series in
conjunction with the execution of one or more
related order(s) in different option series in the
same underlying security occurring at or near the
same time in a ratio that is equal to or greater than
one-to-three (.333) and less than or equal to threeto-one (3.0) and for the purpose of executing a
particular investment strategy (for the purpose of
applying the aforementioned ratios to complex
trades comprised of both mini-option contracts and
standard option contracts, ten (10) mini-option
contracts will represent one (1) standard option
contract); or (ii) the execution of a stock-option
order to buy or sell a stated number of units of an
underlying stock or a security convertible into the
underlying stock (‘‘convertible security’’) coupled
with the purchase or sale of option contract(s) on
the opposite side of the market representing either
(A) the same number of units of the underlying
stock or convertible security, or (B) the number of
units of the underlying stock or convertible security
necessary to create a delta neutral position, but in
no case in a ratio greater than eight-to-one (8.00),
where the ratio represents the total number of units
of the underlying stock or convertible security in
the option leg to the total number of units of the
underlying stock or convertible security in the stock
leg.’’ See Rule 6.80.
9 The Exchange notes that, for purposes of this
provision, Voluntary Professionals and
Professionals, as defined in Rules 1.1(fff) and (ggg),
respectively, are treated in the same manner as
broker-dealers in classes where the Voluntary
Professional and Professional designations are
available.
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15087
prioritizing multiple complex orders for
open outcry trading is consistent with
the methodology applicable for
prioritizing multiple simple orders for
open outcry trading and how the
Exchange has interpreted and applied
complex order priority.10 The Exchange
is merely proposing to reflect this
existing interpretation within its rule
text for added clarity. The Exchange is
proposing no changes to the existing
prioritization methodology.
Fourth, with respect to minimum
increments for bids and offers on
complex orders, the Exchange proposes
to clarify in Rule 6.42(4) which complex
orders are eligible for the relief in Rule
6.42(4). Specifically, as discussed above,
the Exchange proposes to add the below
language to Rule 6.42(4):
• Complex orders that do not meet
the requirements of Rule 6.45(b)(ii)(A)
are not eligible for the minimum
increment relief in this paragraph (4)
(including the penny increment relief of
subparagraph (a) below).
In short, if a complex order is in a
ratio that is larger than the 3 to 1 and
the order is not fully hedged, the order
would not be eligible for the minimum
increment relief.11 Instead, each leg
would have to satisfy the minimum
increment applicable to simple orders
generally.12
Finally, the proposed rule change
makes other non-substantive, technical
changes to Rules 6.45, 6.53C(a), 6.73,
24A.5 and 24B.5, including deleting
extra spaces, adding spaces where
necessary, correction of typos and
revising rule headings to be consistent
with other headings.
Discussion
Table 1 below summarizes this
proposal as it relates to complex orders
executed in open outcry and whether
10 The Exchange notes that the provision of Rule
6.45(b)(i)(D), applicable to TPHs relying on Section
11(a)(1)(D) of the Securities Exchange Act of 1934
(the ‘‘Act’’) and Rule 11a1–1(T) thereunder
(commonly known as the ‘‘G’’ exemption rule’’)
would apply to complex orders in the same manner
as it applies to simple orders. Those rule provisions
provide that in open outcry, any TPH relying on the
G exemption rule as an exemption must yield
priority to any bid (offer) at the same price of public
customer orders and broker-dealer orders resting in
the electronic book, as well as any other bids and
offers that have priority over such broker-dealer
orders under those rules. Under these provisions, a
TPH relying on the G exemption rule would yield
priority to simple public customer orders and
broker-dealer orders resting in the book and
complex public customer orders and broker-dealer
orders resting in the COB, as well as any other
simple and complex bids and offers that have
priority over such broker-dealer orders under those
rules.
11 As previously noted, the order would also not
be eligible for complex order priority set forth in
Rule 6.45(b)(ii)(B).
12 See Rules 6.42(1)–(3).
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those orders (based on their ratio)
qualify for complex order minimum
increment relief, complex order priority,
and trade-through relief.
TABLE 1
Ratio
Eligible for complex
order
minimum increment
relief—
Rule 6.42(4)
Eligible for complex order
priority—
Rule 6.45(b)(ii)(B)
Eligible to trade-through
complex order book
prices
on other exchanges—
Rules 6.45(b)(ii)(B)
≤3 to 1 ......................................................
>3 to 1 But Fully Hedged .........................
>3 to 1 But Not Fully Hedged ..................
Yes .........................
Yes .........................
No ...........................
Yes ..................................
Yes ..................................
No ....................................
Yes ..................................
Yes ..................................
Yes 13 ..............................
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When the definition of ‘‘ratio order’’
was first instituted in 2003 (which
generally defined a permissible ratio as
one that is less than or equal to 3 to 1),
multi-leg strategies were in their
infancy. Regardless, the Commission
held that ‘‘ratio orders within certain
permissible ratios may provide market
participants with greater flexibility and
precision in effectuating trading and
hedging strategies.’’ 14 Today, multi-leg
strategies are crucial pieces of market
participants’ overall trading strategies,
and the permissible ratio has not been
updated to reflect the reality of today’s
marketplace, which is valid, riskreducing multi-leg orders may have
ratios larger than 3 to 1. The Exchange
believes having a mechanism by which
a complex order in a ratio larger than 3
to 1 may receive the complex order
benefits listed in Table 1 will allow
market participants to execute more
sophisticated multi-leg strategies, which
will also allow market participants to
more efficiently and effectively craft
finely tuned risk profiles.
The Exchange understands that the
Commission is concerned that the
simple order market may be somehow
disadvantaged by allowing certain
multi-legged orders that have ratios
larger than 3 to 1 to receive the complex
order benefits listed in Table 1. The
chief concern appears to be that if the
ratios are too greatly expanded market
participants will, for example, enter
multi-legged strategies designed
primarily to gain priority over orders on
the limit order book or in the trading
crowd, rather than to effectuate a bona
fide trading or hedging strategy.
Although the marketplace may in fact be
better served by a structure that does not
require multi-legged orders to, among
other things, yield priority to a simple
order (which cannot on its own satisfy
the terms of a multi-leg order), this
proposal does not require the
Commission to pass judgment on the
issue. Instead, this proposal strikes a
balance between the Commission’s
concerns and the overall benefit of
giving market participants the ability to
efficiently execute bona-fide, multi-leg
trading or hedging strategies. To ensure
complex orders in ratios larger than 3 to
1 are receiving the complex order
benefits listed in Table 1 only when the
complex orders represent bona-fide
multi-legged trading or hedging
strategies, the Exchange is proposing
that any complex order in a ratio larger
than 3 to 1 must be fully hedged in
order to receive the complex order
benefits listed in Table 1.15
The ‘‘fully hedged’’ concept of this
proposal is based, in part, on SEC Rules
related to qualified contingent trades
(‘‘QCTs’’).16 Specifically, the
13 Exchanges are not required to honor the prices
of a complex order on other exchanges.
14 See Securities Exchange Act Release 48858
(December 1, 2003), 68 FR 68128 (December 5,
2003) (SR–CBOE–2003–007) (‘‘Approval Order’’). In
approving ratio orders, the Commission stated that
‘‘[t]he Commission believes that ratio orders within
certain permissible ratios may provide market
participants with greater flexibility and precision in
effectuating trading and hedging strategies. In
addition, the Commission believes that including
such ratio orders in the exception to the priority
rules provided in CBOE Rule 6.45(e) will facilitate
the execution of ratio orders. In this regard, the
Commission believes that the procedures governing
the execution of complex orders, such as ratio
orders, serve to reduce the risk of incomplete or
inadequate executions while increasing efficiency
and competitive pricing by requiring price
improvement before the order can receive priority
over other orders.’’ Id. Pursuant to SR–CBOE–2017–
009, Rule 6.45(e) was replaced with Rule 6.45(b)(ii).
15 A Complex order in a ratio of 3 to 1 or less
already receive the benefits listed in Table 1. The
Exchange is not proposing to change the benefits as
they relate to a complex order in a ratio of 3 to 1
or less.
16 The Commission granted an exemption from
Rule 611(a) for any trade-throughs of quotations in
NMS stocks caused by the execution of an order
involving one or more NMS stocks that are
components of a QCT. See Securities Exchange Act
Release 54389 (August 31, 2006), 71 FR 52829
(September 7, 2006) and Securities Exchange Act
Release 57620 (April 4, 2008), 73 FR 19271 (April
9, 2008). The Commission defines a QCT as a
transaction consisting of two or more component
orders, executed as agent or principal, where: (1) At
least one component order is in an NMS stock; (2)
all components are effected with a product or price
contingency that either has been agreed to by the
respective counterparties or arranged for by a
broker-dealer as principal or agent; (3) the
execution of one component is contingent upon the
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Sfmt 4703
Eligible to tradethrough
leg prices on other
exchanges (Rule
6.81)
Yes.
No.
No.
Commission granted an exemption from
Rule 611(a) for any trade-throughs of
quotations in NMS stocks caused by the
execution of an order involving one or
more NMS stocks that are components
of a QCT. More specifically, in order for
a transaction to qualify as a QCT, the
Commission requires, among other
things, that the exempted NMS Stock
Transaction be ‘‘fully hedged (without
regard to any prior existing position) as
a result of the other components of the
contingent trade.’’ 17 The Exchange is
simply proposing that the fully hedged
concept be used to determine whether a
multi-legged order in a ratio larger than
3 to 1 qualifies to receive the complex
order benefits described in Table 1.
Consistent with the QCT exemption, for
the purposes of the complex order
benefits a multi-legged order must be
evaluated without regard to any prior
existing position. In addition, in order
to have a reasonable basis to conclude
that an order is fully hedged market
participants must use reasonable riskvaluation methodologies.18
In addition to allowing market
participants to devise their own
reasonable risk-valuation methodologies
to determine if an order is fully hedged,
the Exchange believes it’s important to
specify in the Rules a method for market
participants to determine whether a
complex order in a ratio larger than 3 to
1 is fully hedged. Thus, the Exchange is
also proposing that a multi-legged order
execution of all other components at or near the
same time; (4) the specific relationship between the
component orders (e.g., the spread between the
prices of the component orders) is determined at
the time the contingent order is placed; (5) the
component orders bear a derivative relationship to
one another, represent different classes of shares of
the same issuer, or involve the securities of
participants in mergers or with intentions to merge
that have been announced or since cancelled; and
(6) the Exempted NMS Stock Transaction is fully
hedged (without regard to any prior existing
position) as a result of the other components of the
contingent trade. Id.
17 Id.
18 See QCT Exemptive Order, FN 16 (providing
that a trading center may demonstrate that an
Exempted NMS Stock Transaction is fully hedged
based on the use of reasonable risk-valuation
methodologies).
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in a ratio larger than 3 to 1 that is delta
neutral plus or minus 10% will be
considered fully hedged for the
purposes of the complex order benefits
listed in Table 1. The Exchange believes
delta hedging is one example of a
proven, longstanding risk-valuation
methodology, and a transaction that is
nearly 100% delta neutral represents a
bona-fide multi-legged strategy that
deserves the complex order benefits
listed in Table 1. For example, a
complex order consisting of one leg to
buy 30 VIX calls and another leg to sell
30 VIX puts—both in the same series—
combined with a third leg to purchase
100 VIX calls in a separate series that
have a delta of ‘‘30’’ (30% or .30) creates
a delta neutral position, and there is no
reason such a transaction should not
receive the complex order benefits listed
in Table 1. Additionally, because
reasonable minds may disagree as to a
particular options delta, the plus or
minus 10% standard gives market
participants a reasonable margin for
error when determining whether the
order should receive the complex order
benefits listed in Table 1. For example,
in the above transaction, the Exchange
may determine that the delta for the 100
VIX calls is 29, which would mean the
transaction is not 100% delta neutral
because the transaction represents a
position that is long 29 deltas and short
30 deltas. The difference in delta
calculations should not affect the ability
of the order to qualify for the complex
order benefits listed in Table 1 because
whether the transaction is 100% delta
neutral, or nearly 100% delta neutral,
such orders represent bona-fide multilegged strategies that do not
disadvantage the simple order market
because the simple order market cannot
satisfy the terms of the complex order.
In short, the Exchange believes this
proposal is consistent with the Act and
SR–CBOE–2003–007 because in the
same way that the Commission held that
‘‘ratio orders within certain permissible
ratios may provide market participants
with greater flexibility and precision in
effectuating trading and hedging
strategies[,]’’ 19 complex orders that are
fully hedged may provide market
participants with greater flexibility and
precision in effectuating trading and
hedging strategies. The Exchange also
believe this proposal is consistent with
the Act and SR–CBOE–2003–007
because in the same way that the
Commission held that ‘‘including such
ratio orders in the exception to the
priority rules provided in CBOE Rule
19 See
Approval Order at 68128.
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6.45(e) 20 will facilitate the execution of
ratio orders[,]’’ 21 including fully hedged
complex orders in the exception to the
priority rules provided in CBOE Rule
6.45(b)(ii) will facilitate the execution of
fully hedged complex orders. Finally, in
the same way that the Commission held
that ‘‘the procedures governing the
execution of complex orders, such as
ratio orders, serve to reduce the risk of
incomplete or inadequate executions
while increasing efficiency and
competitive pricing by requiring price
improvement before the order can
receive priority over other orders[,]’’ 22
the Exchange believes the procedures
governing the execution of fully hedged
complex orders serve to reduce the risk
of incomplete or inadequate executions
while increasing efficiency and
competitive pricing by requiring price
improvement before the order can
receive priority over other orders.
Upon approval of this rule change
filing, the Exchange will announce the
implementation date of the proposed
rule change in a Regulatory Circular to
be published no later than 90 days
following the approval date. The
implementation date will be no later
than 180 days following the approval
date.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the Act
and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.23 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 24 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 25 requirement that
the rules of an exchange not be designed
20 As previously noted, pursuant to SR–CBOE–
2017–009, Rule 6.45(e) was replaced by Rule
6.45(b)(ii).
21 See Id.
22 See Id.
23 15 U.S.C. 78f(b).
24 15 U.S.C. 78f(b)(5).
25 Id.
PO 00000
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15089
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the Exchange believes
that (1) removing the definitions of
spread order, combination order,
straddle order and ratio order from Rule
6.53 and incorporating the more general
definition of a complex order (including
a stock-option order (and the
elimination of a redundant definition of
stock-option order) and a security
future-option order) into the Rule and
(2) harmonizing rules that reference
such definitions simplifies and provides
more clarity and uniformity to the rules,
which ultimately benefits investors. The
Exchange believes the proposed
nonsubstantive changes to the rules,
include the alphabetization of the order
type definitions, further benefits
investors, as they improve the
readability of and further simplify the
rules.
Additionally, the Exchange believes
the proposed rule change to limit
complex order priority, complex order
increments, and complex order tradethrough principals to complex orders
that satisfy the proposed ratio
requirements will, in general, help
protect investors by ensuring that
market participants receiving complex
order benefits are executing bona-fide
multi-legged trading or hedging
strategies. Furthermore, the Exchange
believes this proposal is consistent with
the Act and SR–CBOE–2003–007
because in the same way that the
Commission held that ‘‘ratio orders
within certain permissible ratios may
provide market participants with greater
flexibility and precision in effectuating
trading and hedging strategies[,]’’ 26
complex orders that are fully hedged
may provide market participants with
greater flexibility and precision in
effectuating trading and hedging
strategies. The Exchange also believe
this proposal is consistent with the Act
and SR–CBOE–2003–007 because in the
same way that the Commission held that
‘‘including such ratio orders in the
exception to the priority rules provided
in CBOE Rule 6.45(e) will facilitate the
execution of ratio orders[,]’’ 27 including
fully hedged complex orders in the
exception to the priority rules provided
in CBOE Rule 6.45(b)(ii) will facilitate
the execution of fully hedged complex
orders. Finally, in the same way that the
Commission held that ‘‘the procedures
governing the execution of complex
orders, such as ratio orders, serve to
reduce the risk of incomplete or
inadequate executions while increasing
efficiency and competitive pricing by
26 See
27 See
E:\FR\FM\24MRN1.SGM
Approval Order at 68128.
Id.
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jstallworth on DSK7TPTVN1PROD with NOTICES
requiring price improvement before the
order can receive priority over other
orders[,]’’ 28 the Exchange believes the
procedures governing the execution of
fully hedged complex orders serve to
reduce the risk of incomplete or
inadequate executions while increasing
efficiency and competitive pricing by
requiring price improvement before the
order can receive priority over other
orders.
In addition, making explicit the open
outcry priority applicable when there
are other complex orders or quotes
represented at the same net price,
whether such other orders or quotes are
in the COB or being represented in open
outcry, provides added clarity to the
rule text in a manner that is consistent
with the existing methodology
applicable for prioritizing multiple
simple orders for open outcry trading
and how the Exchange has interpreted
and applied complex order priority. The
Exchange notes that it is not proposing
to amend how complex orders are
allocated or the priority afforded to
complex orders in open outcry; it is
merely modifying the requirements for a
complex order to be eligible for the
existing open outcry complex order
priority.
The Exchange notes that TPHs may
continue to represent and execute in
open outcry a complex order with any
number of legs and in any ratio.
However, if a complex order does not
satisfy the applicable ratio requirements
as set forth above, then it will not be
eligible for the complex order benefits
listed in Table 1. Additionally, even if
a complex order is fully hedged market
participants do not have to utilize the
complex order benefits listed in Table 1
if they choose not to. The Exchange
believes the proposed changes will
increase opportunities for execution of
complex orders and lead to tighter
spreads on CBOE, which will benefit
investors. The Exchange also believes
that the proposed rule change is
designed to not permit unfair
discrimination among market
participants, as all market participants
may trade complex orders, and the
priority eligibility requirements apply to
complex orders of all market
participants.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange believes that simplifying and
28 See
Id.
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expanding its rules related to complex
orders helps provide clarity with
regards to the execution of complex
orders and increases the likelihood that
market participants will execute bonafide complex orders on CBOE. This
proposal promotes fair and orderly
markets as well as assists the Exchange
in its ability to effectively attract order
flow and liquidity to its market, which
ultimately benefits all TPHs and all
investors. Complex orders are available
to all TPHs (and all non-TPH market
participants through TPHs), and the
Exchange believes any perceived burden
on customers is outweighed by
customers’ ability to execute complex
orders as proposed.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will:
A. By order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml);or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CBOE–2017–019 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–2017–019. This file
PO 00000
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Fmt 4703
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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–
2017–019 and should be submitted on
or before April 14, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.29
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–05852 Filed 3–23–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
32536; 812–14710]
Investment Managers Series Trust II
and Vivaldi Asset Management, LLC
March 20, 2017.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice.
AGENCY:
Notice of an application under
Section 6(c) of the Investment Company
Act of 1940 (‘‘Act’’) for an exemption
from Section 15(a) of the Act and Rule
18f-2 under the Act, as well as from
certain disclosure requirements in Rule
20a-1 under the Act, Item 19(a)(3) of
Form N–1A, Items 22(c)(1)(ii),
29 17
E:\FR\FM\24MRN1.SGM
CFR 200.30–3(a)(12).
24MRN1
]]>Agencies
[Federal Register Volume 82, Number 56 (Friday, March 24, 2017)]
[Notices]
[Pages 15085-15090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05852]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80279; File No. SR-CBOE-2017-019]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change Related to
Complex Orders
March 20, 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 7, 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, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend its rules related to complex orders.
The text of the proposed rule change is available on the Exchange's Web
site (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at
the Exchange's Office of the Secretary, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend its rules related to complex orders
to: (i) Simplify the definitions of the complex order types that may be
made available on a class-by-class basis and remove references to
certain specific complex order types that will no longer be defined;
(ii) with respect to complex orders in open outcry, set forth
applicable ratios for an order to be eligible for complex order
priority within applicable priority rules; (iii) with respect to
complex orders in open outcry, make explicit the priority applicable
when there are other complex orders or quotes represented at the same
net price, whether such other orders or quotes are in the complex order
book (``COB'') or being represented in open outcry; and (iv) with
respect to complex orders in open outcry, clarify the applicable
minimum increment.
First, with respect to definitions, the Exchange proposes to amend
Rule 6.53 to remove the definitions of spread order, combination order,
straddle order and ratio order and replace them with a more general
definition of a complex
[[Page 15086]]
order (which includes a stock-option order and a security future-option
order) to simplify the descriptions of the complex order types that may
be made available on a class-by-class basis. The proposed definition of
a ``complex order'' is any order for the same account as defined below:
A ``complex order'' is any order involving the execution
of two or more different options series in the same underlying security
occurring at or near the same time for the purpose of executing a
particular investment strategy.
A ``stock-option order'' is an order to buy or sell a
stated number of units of an underlying stock or a security convertible
into the underlying stock (``convertible security'') coupled with
either (i) the purchase or sale of options contract(s) on the opposite
side of the market representing either (A) the same number of units of
the underlying stock or convertible security, or (B) the number of
units of the underlying stock or convertible security necessary to
create a delta neutral position, or (ii) the purchase or sale of an
equal number of put and call option contracts, each having the same
exercise price, expiration date and each representing the same number
of units of stock as, and on the opposite side of the market from, the
underlying stock or convertible security portion of the order.\3\
---------------------------------------------------------------------------
\3\ Rule 1.1(ii) currently defines a ``stock-option order'' as
an order to buy or sell a stated number of units of an underlying or
a related security coupled with either (i) the purchase or sale of
option contract(s) on the opposite side of the market representing
either the same number of units of the underlying or related
security or the number of units of the underlying security necessary
to create a delta neutral position or (ii) the purchase or sale of
an equal number of put and call option contracts, each having the
same exercise price, expiration date and each representing the same
number of units of stock as, and on the opposite side of the market
from, the underlying or related security portion of the order.
---------------------------------------------------------------------------
A ``security future-option order'' is an order to buy or
sell a stated number of units of a security future or a related
security convertible into a security future (``convertible security
future'') coupled with either (i) the purchase or sale of option
contract(s) on the opposite side of the market representing either the
same number of the underlying for the security future or convertible
security future or the number of units of the underlying for the
security future or convertible security future necessary to create a
delta neutral position or (ii) the purchase or sale of an equal number
of put and call option contracts, each having the same exercise price,
expiration date and each representing the same number of the underlying
for the security future or convertible security future, as and on the
opposite side of the market from, the underlying for the security
future or convertible security future portion of the order. \4\
---------------------------------------------------------------------------
\4\ Rule 1.1(zz) defines a ``security future-option order,''
which is deemed a type of Inter-regulatory Spread Order as that term
is defined in Rule 1.1(ll), as an order to buy or sell a stated
number of units of a security future or a related security
convertible into a security future (``convertible security future'')
coupled with either (i) the purchase or sale of option contract(s)
on the opposite side of the market representing either the same
number of the underlying for the security future or convertible
security future or the number of units of the underlying for the
security future or convertible security future necessary to create a
delta neutral position or (ii) the purchase or sale of an equal
number of put and call option contracts, each having the same
exercise price, expiration date and each representing the same
number of the underlying for the security future or convertible
security future, as and on the opposite side of the market from, the
underlying for the security future or convertible security future
portion of the order. Rule 1.1(ll) defines an ``Inter-regulatory
Spread Order'' as an order involving the simultaneous purchase and/
or sale of at least one unit in contracts each of which is subject
to different regulatory jurisdictions at stated limits, or at a
stated differential, or at market prices on the floor of the
Exchange.
---------------------------------------------------------------------------
The proposed rule change moves the definitions of a ``stock-option
order'' from Rule 1.1(ii) and ``security future-option order'' from
Rule 1.1(zz) to Rule 6.53 (and replaces them in Rule 1.1 with cross-
references to the new location of the definitions) so that all
definitions of the various types of complex orders are located in the
same place within the rules. The current and proposed definitions of
stock-option order are substantially similar. However, the Exchange
believes the language in the proposed definition of stock-option order
is more consistent with the language in other rules, including Rules
6.53C (related to electronic handling of complex orders) and 6.80
(related to order protection, which relates to the Options Order
Protection and Locked/Crossed Markets Plan, also commonly referred to
as the Options Distributive Linkage Plan). The current and proposed
definitions of security future-option order have no substantive
differences. The proposed complex order definition is in part modeled
after the definition of a complex order (including a stock-option
order) already contained in Rule 6.53C(a).
The Exchange proposes conforming changes to Rules 6.9 (including
Interpretation and Policy .03), 6.42(4) (including Interpretation and
Policy .01), 6.45(b)(ii), 6.48(b), 6.73(c), 6.74(d)(iii) and 8.51 to
harmonize these rules with the proposed changes in Rule 6.53 to
consistently reference the proposed new definition of a complex
order.\5\ As a result of the proposed changes to Rule 6.53, the
Exchange proposes to update related cross-references in Rules 6.53C.08,
6.74(d)(iii), 7.12(b)(i)(E), 24A.5 and 24B.5. The Exchange notes that,
while Trading Permit Holders (``TPHs'') may represent in open outcry a
complex order with any number of legs, and in any ratio, only complex
orders in the proposed applicable ratios are eligible for complex order
priority (subject to certain exceptions, including multi-class spreads
and SPX Combo Orders (see Rules 24.19 and 24.20, respectively) set
forth in Rule 6.45 and minimum increment relief set forth in Rule
6.42(4).
---------------------------------------------------------------------------
\5\ The proposed rule change also deletes the paragraph
lettering from the order type definitions and puts the order types
in alphabetical order, which the Exchange believes will allow
investors to more easily locate the order type definitions within
the rules. Other than proposed changes to the definition of complex
orders as described above, the proposed rule change makes no
substantive changes to the order type definitions.
---------------------------------------------------------------------------
Second, with respect to complex orders represented and executed in
open outcry, the Exchange is proposing to amend Rule 6.45 (pertaining
to order and quote priority and allocation). Specifically, the proposed
changes amend Rule 6.45(b)(ii) to set forth the following applicable
ratio requirements for complex orders to be eligible for complex order
priority and minimum increment relief when represented and executed in
open outcry: \6\
---------------------------------------------------------------------------
\6\ To be eligible for electronic processing via the CBOE Hybrid
System's COB and complex order RFR auction (``COA''), the system
requires that a complex order be entered on a single order ticket to
be electronically processed. Under existing Rule 6.53C(a)(1) and
(2), the Exchange may determine on a class-by-class basis the
applicable number of legs of a complex order or stock-option order
that is eligible for processing via COB and COA. Under the same
provisions, the Exchange may determine on a class-by-class basis
within certain parameters the applicable ratio of a complex order or
stock-option order that is eligible for processing via COB and COA.
Currently, the Exchange has limited COB and COA to orders of no more
than four (4) legs and ratios equal to or greater than one-to-three
(.333) and less than or equal to three-to-one (3.00) (and, for
stock-option orders, ratios no greater than eight-to-one (8.00)).
Under this current structure, orders with more than four (4) legs or
that do not satisfy the ratio requirements are not eligible for
electronic processing via COB or COA, but would instead be routed
for handling in open outcry. The proposed rule change adds language
to the introductory paragraph of Rule 6.53C(a) to explicitly state
that the definitions of complex orders contained in that rule apply
only for purposes of the electronic handling of complex orders
pursuant to that rule, notwithstanding the proposed broader
definition of complex order contained in Rule 6.53. Because there
are two separate definitions of complex orders, the Exchange
believes this additional language will bring clarity to the rules
about when the definition of complex orders in Rule 6.53C(a)
applies, which is in the context of electronic trading.
---------------------------------------------------------------------------
For a complex order, the order is in a ratio that is less
than or equal to three-
[[Page 15087]]
to-one (3.00) or the order is in a ratio that is larger than three-to-
one (3.00) but the order is fully hedged (without regard to any prior
existing position). An order will be considered fully hedged if the
order is delta neutral +/-10% or if the party representing the order
can demonstrate that the complex order is fully hedged using reasonable
risk-valuation methodologies;
for a stock-option order, the options leg(s) must (A)
represent the same number of units of the underlying stock or
convertible security in the stock leg or (B) represent the number of
units of the underlying stock or convertible security necessary to
create a delta neutral position, but in no case in a ratio greater than
eight-to-one (8.00), where the ratio represents the total number of
units of the underlying stock or convertible security in the options
leg to the total number of units of stock or convertible security in
the stock leg; and
for a security futures-option order, the options leg(s)
must (A) represent the same number of units of the underlying stock in
the security future leg or (B) represent the number of units of the
underlying stock necessary to create a delta neutral position, but in
no case in a ratio greater than eight-to-one (8.00), where the ratio
represents the total number of units of the underlying stock in the
options leg to the total number of units of stock or convertible
security in the security-futures leg.
The proposed rule change also adds to the respective rules that,
for the purpose of applying the aforementioned ratios to complex orders
comprised of both mini-option contracts and standard option contracts,
ten (10) mini-option contracts will represent one (1) standard option
contract.
As discussed above, proposed Rule 6.45(b)(ii)(A) sets forth the
ratio that determines whether a complex order executed in open outcry
is eligible for priority; however, proposed Rule 6.45(b)(ii)(B) sets
forth the terms of the priority for complex orders. The Exchange
proposes to add the following language to Rule 6.45(b)(ii)(B):
A complex order may be executed without consideration to
prices of the same complex order that might be available on other
exchanges. A complex order with a ratio greater than three-to-one
(3.00) may not trade through prices in the individual option series
that are available on other exchanges.\7\
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\7\ This is consistent with Rule 6.53C(c)(ii), which states that
``[c]omplex orders that are submitted to the COB may be executed
without consideration to prices of the same complex orders that
might be available on other exchanges[.]''
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The above language is consistent with the order protection rules
implemented by all options exchanges.\8\ The Exchange is simply
proposing to add the language to proposed Rule 6.45(b)(ii)(B) in order
to avoid confusion with regards to the ability of a complex order to
trade-through away markets.
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\8\ Rule 6.81(b)(7) indicates that Trading Permit Holders need
not prevent Trade-Throughs where the ``transaction that constituted
the Trade-Through was effected as a portion of a Complex Trade[.]''
Additionally, a ``Complex Trade'' is defined as ``(i) the execution
of an order in an option series in conjunction with the execution of
one or more related order(s) in different option series in the same
underlying security occurring at or near the same time in a ratio
that is equal to or greater than one-to-three (.333) and less than
or equal to three-to-one (3.0) and for the purpose of executing a
particular investment strategy (for the purpose of applying the
aforementioned ratios to complex trades comprised of both mini-
option contracts and standard option contracts, ten (10) mini-option
contracts will represent one (1) standard option contract); or (ii)
the execution of a stock-option order to buy or sell a stated number
of units of an underlying stock or a security convertible into the
underlying stock (``convertible security'') coupled with the
purchase or sale of option contract(s) on the opposite side of the
market representing either (A) the same number of units of the
underlying stock or convertible security, or (B) the number of units
of the underlying stock or convertible security necessary to create
a delta neutral position, but in no case in a ratio greater than
eight-to-one (8.00), where the ratio represents the total number of
units of the underlying stock or convertible security in the option
leg to the total number of units of the underlying stock or
convertible security in the stock leg.'' See Rule 6.80.
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Third, with respect to complex orders in classes where the COB is
available, the Exchange also proposes to make explicit the open outcry
priority applicable when there are other complex orders or quotes
represented at the same net price, whether such other orders or quotes
are in the COB or being represented in open outcry. Specifically, the
Exchange proposes to amend Rule 6.45(b)(ii) to provide that if a
complex order would trade in open outcry at the same net debit or
credit price as another complex order, priority would go first to
public customer orders in COB (with multiple public customer orders
ranked based on time), then to complex order bids and offers
represented in the trading crowd (with multiple bids and offers ranked
in accordance with the allocation principles applicable to in-crowd
market participants contained in Rule 6.45(b)(i)(B) and (D),
respectively), and then to all other orders and quotes in the COB (with
multiple bids and offers ranked in accordance with the allocation
algorithm in effect pursuant to Rule 6.53C).\9\ This methodology for
prioritizing multiple complex orders for open outcry trading is
consistent with the methodology applicable for prioritizing multiple
simple orders for open outcry trading and how the Exchange has
interpreted and applied complex order priority.\10\ The Exchange is
merely proposing to reflect this existing interpretation within its
rule text for added clarity. The Exchange is proposing no changes to
the existing prioritization methodology.
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\9\ The Exchange notes that, for purposes of this provision,
Voluntary Professionals and Professionals, as defined in Rules
1.1(fff) and (ggg), respectively, are treated in the same manner as
broker-dealers in classes where the Voluntary Professional and
Professional designations are available.
\10\ The Exchange notes that the provision of Rule
6.45(b)(i)(D), applicable to TPHs relying on Section 11(a)(1)(D) of
the Securities Exchange Act of 1934 (the ``Act'') and Rule 11a1-1(T)
thereunder (commonly known as the ``G'' exemption rule'') would
apply to complex orders in the same manner as it applies to simple
orders. Those rule provisions provide that in open outcry, any TPH
relying on the G exemption rule as an exemption must yield priority
to any bid (offer) at the same price of public customer orders and
broker-dealer orders resting in the electronic book, as well as any
other bids and offers that have priority over such broker-dealer
orders under those rules. Under these provisions, a TPH relying on
the G exemption rule would yield priority to simple public customer
orders and broker-dealer orders resting in the book and complex
public customer orders and broker-dealer orders resting in the COB,
as well as any other simple and complex bids and offers that have
priority over such broker-dealer orders under those rules.
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Fourth, with respect to minimum increments for bids and offers on
complex orders, the Exchange proposes to clarify in Rule 6.42(4) which
complex orders are eligible for the relief in Rule 6.42(4).
Specifically, as discussed above, the Exchange proposes to add the
below language to Rule 6.42(4):
Complex orders that do not meet the requirements of Rule
6.45(b)(ii)(A) are not eligible for the minimum increment relief in
this paragraph (4) (including the penny increment relief of
subparagraph (a) below).
In short, if a complex order is in a ratio that is larger than the
3 to 1 and the order is not fully hedged, the order would not be
eligible for the minimum increment relief.\11\ Instead, each leg would
have to satisfy the minimum increment applicable to simple orders
generally.\12\
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\11\ As previously noted, the order would also not be eligible
for complex order priority set forth in Rule 6.45(b)(ii)(B).
\12\ See Rules 6.42(1)-(3).
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Finally, the proposed rule change makes other non-substantive,
technical changes to Rules 6.45, 6.53C(a), 6.73, 24A.5 and 24B.5,
including deleting extra spaces, adding spaces where necessary,
correction of typos and revising rule headings to be consistent with
other headings.
Discussion
Table 1 below summarizes this proposal as it relates to complex
orders executed in open outcry and whether
[[Page 15088]]
those orders (based on their ratio) qualify for complex order minimum
increment relief, complex order priority, and trade-through relief.
Table 1
----------------------------------------------------------------------------------------------------------------
Eligible to trade-
Eligible for Eligible for through complex Eligible to trade-
complex order complex order order book prices through leg prices
Ratio minimum increment priority-- Rule on other on other exchanges
relief-- Rule 6.45(b)(ii)(B) exchanges-- Rules (Rule 6.81)
6.42(4) 6.45(b)(ii)(B)
----------------------------------------------------------------------------------------------------------------
<=3 to 1........................ Yes............... Yes............... Yes............... Yes.
>3 to 1 But Fully Hedged........ Yes............... Yes............... Yes............... No.
>3 to 1 But Not Fully Hedged.... No................ No................ Yes \13\.......... No.
----------------------------------------------------------------------------------------------------------------
When the definition of ``ratio order'' was first instituted in 2003
(which generally defined a permissible ratio as one that is less than
or equal to 3 to 1), multi-leg strategies were in their infancy.
Regardless, the Commission held that ``ratio orders within certain
permissible ratios may provide market participants with greater
flexibility and precision in effectuating trading and hedging
strategies.'' \14\ Today, multi-leg strategies are crucial pieces of
market participants' overall trading strategies, and the permissible
ratio has not been updated to reflect the reality of today's
marketplace, which is valid, risk-reducing multi-leg orders may have
ratios larger than 3 to 1. The Exchange believes having a mechanism by
which a complex order in a ratio larger than 3 to 1 may receive the
complex order benefits listed in Table 1 will allow market participants
to execute more sophisticated multi-leg strategies, which will also
allow market participants to more efficiently and effectively craft
finely tuned risk profiles.
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\13\ Exchanges are not required to honor the prices of a complex
order on other exchanges.
\14\ See Securities Exchange Act Release 48858 (December 1,
2003), 68 FR 68128 (December 5, 2003) (SR-CBOE-2003-007) (``Approval
Order''). In approving ratio orders, the Commission stated that
``[t]he Commission believes that ratio orders within certain
permissible ratios may provide market participants with greater
flexibility and precision in effectuating trading and hedging
strategies. In addition, the Commission believes that including such
ratio orders in the exception to the priority rules provided in CBOE
Rule 6.45(e) will facilitate the execution of ratio orders. In this
regard, the Commission believes that the procedures governing the
execution of complex orders, such as ratio orders, serve to reduce
the risk of incomplete or inadequate executions while increasing
efficiency and competitive pricing by requiring price improvement
before the order can receive priority over other orders.'' Id.
Pursuant to SR-CBOE-2017-009, Rule 6.45(e) was replaced with Rule
6.45(b)(ii).
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The Exchange understands that the Commission is concerned that the
simple order market may be somehow disadvantaged by allowing certain
multi-legged orders that have ratios larger than 3 to 1 to receive the
complex order benefits listed in Table 1. The chief concern appears to
be that if the ratios are too greatly expanded market participants
will, for example, enter multi-legged strategies designed primarily to
gain priority over orders on the limit order book or in the trading
crowd, rather than to effectuate a bona fide trading or hedging
strategy. Although the marketplace may in fact be better served by a
structure that does not require multi-legged orders to, among other
things, yield priority to a simple order (which cannot on its own
satisfy the terms of a multi-leg order), this proposal does not require
the Commission to pass judgment on the issue. Instead, this proposal
strikes a balance between the Commission's concerns and the overall
benefit of giving market participants the ability to efficiently
execute bona-fide, multi-leg trading or hedging strategies. To ensure
complex orders in ratios larger than 3 to 1 are receiving the complex
order benefits listed in Table 1 only when the complex orders represent
bona-fide multi-legged trading or hedging strategies, the Exchange is
proposing that any complex order in a ratio larger than 3 to 1 must be
fully hedged in order to receive the complex order benefits listed in
Table 1.\15\
---------------------------------------------------------------------------
\15\ A Complex order in a ratio of 3 to 1 or less already
receive the benefits listed in Table 1. The Exchange is not
proposing to change the benefits as they relate to a complex order
in a ratio of 3 to 1 or less.
---------------------------------------------------------------------------
The ``fully hedged'' concept of this proposal is based, in part, on
SEC Rules related to qualified contingent trades (``QCTs'').\16\
Specifically, the Commission granted an exemption from Rule 611(a) for
any trade-throughs of quotations in NMS stocks caused by the execution
of an order involving one or more NMS stocks that are components of a
QCT. More specifically, in order for a transaction to qualify as a QCT,
the Commission requires, among other things, that the exempted NMS
Stock Transaction be ``fully hedged (without regard to any prior
existing position) as a result of the other components of the
contingent trade.'' \17\ The Exchange is simply proposing that the
fully hedged concept be used to determine whether a multi-legged order
in a ratio larger than 3 to 1 qualifies to receive the complex order
benefits described in Table 1. Consistent with the QCT exemption, for
the purposes of the complex order benefits a multi-legged order must be
evaluated without regard to any prior existing position. In addition,
in order to have a reasonable basis to conclude that an order is fully
hedged market participants must use reasonable risk-valuation
methodologies.\18\
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\16\ The Commission granted an exemption from Rule 611(a) for
any trade-throughs of quotations in NMS stocks caused by the
execution of an order involving one or more NMS stocks that are
components of a QCT. See Securities Exchange Act Release 54389
(August 31, 2006), 71 FR 52829 (September 7, 2006) and Securities
Exchange Act Release 57620 (April 4, 2008), 73 FR 19271 (April 9,
2008). The Commission defines a QCT as a transaction consisting of
two or more component orders, executed as agent or principal, where:
(1) At least one component order is in an NMS stock; (2) all
components are effected with a product or price contingency that
either has been agreed to by the respective counterparties or
arranged for by a broker-dealer as principal or agent; (3) the
execution of one component is contingent upon the execution of all
other components at or near the same time; (4) the specific
relationship between the component orders (e.g., the spread between
the prices of the component orders) is determined at the time the
contingent order is placed; (5) the component orders bear a
derivative relationship to one another, represent different classes
of shares of the same issuer, or involve the securities of
participants in mergers or with intentions to merge that have been
announced or since cancelled; and (6) the Exempted NMS Stock
Transaction is fully hedged (without regard to any prior existing
position) as a result of the other components of the contingent
trade. Id.
\17\ Id.
\18\ See QCT Exemptive Order, FN 16 (providing that a trading
center may demonstrate that an Exempted NMS Stock Transaction is
fully hedged based on the use of reasonable risk-valuation
methodologies).
---------------------------------------------------------------------------
In addition to allowing market participants to devise their own
reasonable risk-valuation methodologies to determine if an order is
fully hedged, the Exchange believes it's important to specify in the
Rules a method for market participants to determine whether a complex
order in a ratio larger than 3 to 1 is fully hedged. Thus, the Exchange
is also proposing that a multi-legged order
[[Page 15089]]
in a ratio larger than 3 to 1 that is delta neutral plus or minus 10%
will be considered fully hedged for the purposes of the complex order
benefits listed in Table 1. The Exchange believes delta hedging is one
example of a proven, longstanding risk-valuation methodology, and a
transaction that is nearly 100% delta neutral represents a bona-fide
multi-legged strategy that deserves the complex order benefits listed
in Table 1. For example, a complex order consisting of one leg to buy
30 VIX calls and another leg to sell 30 VIX puts--both in the same
series--combined with a third leg to purchase 100 VIX calls in a
separate series that have a delta of ``30'' (30% or .30) creates a
delta neutral position, and there is no reason such a transaction
should not receive the complex order benefits listed in Table 1.
Additionally, because reasonable minds may disagree as to a particular
options delta, the plus or minus 10% standard gives market participants
a reasonable margin for error when determining whether the order should
receive the complex order benefits listed in Table 1. For example, in
the above transaction, the Exchange may determine that the delta for
the 100 VIX calls is 29, which would mean the transaction is not 100%
delta neutral because the transaction represents a position that is
long 29 deltas and short 30 deltas. The difference in delta
calculations should not affect the ability of the order to qualify for
the complex order benefits listed in Table 1 because whether the
transaction is 100% delta neutral, or nearly 100% delta neutral, such
orders represent bona-fide multi-legged strategies that do not
disadvantage the simple order market because the simple order market
cannot satisfy the terms of the complex order.
In short, the Exchange believes this proposal is consistent with
the Act and SR-CBOE-2003-007 because in the same way that the
Commission held that ``ratio orders within certain permissible ratios
may provide market participants with greater flexibility and precision
in effectuating trading and hedging strategies[,]'' \19\ complex orders
that are fully hedged may provide market participants with greater
flexibility and precision in effectuating trading and hedging
strategies. The Exchange also believe this proposal is consistent with
the Act and SR-CBOE-2003-007 because in the same way that the
Commission held that ``including such ratio orders in the exception to
the priority rules provided in CBOE Rule 6.45(e) \20\ will facilitate
the execution of ratio orders[,]'' \21\ including fully hedged complex
orders in the exception to the priority rules provided in CBOE Rule
6.45(b)(ii) will facilitate the execution of fully hedged complex
orders. Finally, in the same way that the Commission held that ``the
procedures governing the execution of complex orders, such as ratio
orders, serve to reduce the risk of incomplete or inadequate executions
while increasing efficiency and competitive pricing by requiring price
improvement before the order can receive priority over other
orders[,]'' \22\ the Exchange believes the procedures governing the
execution of fully hedged complex orders serve to reduce the risk of
incomplete or inadequate executions while increasing efficiency and
competitive pricing by requiring price improvement before the order can
receive priority over other orders.
---------------------------------------------------------------------------
\19\ See Approval Order at 68128.
\20\ As previously noted, pursuant to SR-CBOE-2017-009, Rule
6.45(e) was replaced by Rule 6.45(b)(ii).
\21\ See Id.
\22\ See Id.
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Upon approval of this rule change filing, the Exchange will
announce the implementation date of the proposed rule change in a
Regulatory Circular to be published no later than 90 days following the
approval date. The implementation date will be no later than 180 days
following the approval date.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\23\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \24\ requirements that the rules
of an exchange be designed to prevent fraudulent and manipulative acts
and practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \25\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\23\ 15 U.S.C. 78f(b).
\24\ 15 U.S.C. 78f(b)(5).
\25\ Id.
---------------------------------------------------------------------------
In particular, the Exchange believes that (1) removing the
definitions of spread order, combination order, straddle order and
ratio order from Rule 6.53 and incorporating the more general
definition of a complex order (including a stock-option order (and the
elimination of a redundant definition of stock-option order) and a
security future-option order) into the Rule and (2) harmonizing rules
that reference such definitions simplifies and provides more clarity
and uniformity to the rules, which ultimately benefits investors. The
Exchange believes the proposed nonsubstantive changes to the rules,
include the alphabetization of the order type definitions, further
benefits investors, as they improve the readability of and further
simplify the rules.
Additionally, the Exchange believes the proposed rule change to
limit complex order priority, complex order increments, and complex
order trade-through principals to complex orders that satisfy the
proposed ratio requirements will, in general, help protect investors by
ensuring that market participants receiving complex order benefits are
executing bona-fide multi-legged trading or hedging strategies.
Furthermore, the Exchange believes this proposal is consistent with the
Act and SR-CBOE-2003-007 because in the same way that the Commission
held that ``ratio orders within certain permissible ratios may provide
market participants with greater flexibility and precision in
effectuating trading and hedging strategies[,]'' \26\ complex orders
that are fully hedged may provide market participants with greater
flexibility and precision in effectuating trading and hedging
strategies. The Exchange also believe this proposal is consistent with
the Act and SR-CBOE-2003-007 because in the same way that the
Commission held that ``including such ratio orders in the exception to
the priority rules provided in CBOE Rule 6.45(e) will facilitate the
execution of ratio orders[,]'' \27\ including fully hedged complex
orders in the exception to the priority rules provided in CBOE Rule
6.45(b)(ii) will facilitate the execution of fully hedged complex
orders. Finally, in the same way that the Commission held that ``the
procedures governing the execution of complex orders, such as ratio
orders, serve to reduce the risk of incomplete or inadequate executions
while increasing efficiency and competitive pricing by
[[Page 15090]]
requiring price improvement before the order can receive priority over
other orders[,]'' \28\ the Exchange believes the procedures governing
the execution of fully hedged complex orders serve to reduce the risk
of incomplete or inadequate executions while increasing efficiency and
competitive pricing by requiring price improvement before the order can
receive priority over other orders.
---------------------------------------------------------------------------
\26\ See Approval Order at 68128.
\27\ See Id.
\28\ See Id.
---------------------------------------------------------------------------
In addition, making explicit the open outcry priority applicable
when there are other complex orders or quotes represented at the same
net price, whether such other orders or quotes are in the COB or being
represented in open outcry, provides added clarity to the rule text in
a manner that is consistent with the existing methodology applicable
for prioritizing multiple simple orders for open outcry trading and how
the Exchange has interpreted and applied complex order priority. The
Exchange notes that it is not proposing to amend how complex orders are
allocated or the priority afforded to complex orders in open outcry; it
is merely modifying the requirements for a complex order to be eligible
for the existing open outcry complex order priority.
The Exchange notes that TPHs may continue to represent and execute
in open outcry a complex order with any number of legs and in any
ratio. However, if a complex order does not satisfy the applicable
ratio requirements as set forth above, then it will not be eligible for
the complex order benefits listed in Table 1. Additionally, even if a
complex order is fully hedged market participants do not have to
utilize the complex order benefits listed in Table 1 if they choose not
to. The Exchange believes the proposed changes will increase
opportunities for execution of complex orders and lead to tighter
spreads on CBOE, which will benefit investors. The Exchange also
believes that the proposed rule change is designed to not permit unfair
discrimination among market participants, as all market participants
may trade complex orders, and the priority eligibility requirements
apply to complex orders of all market participants.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange believes that
simplifying and expanding its rules related to complex orders helps
provide clarity with regards to the execution of complex orders and
increases the likelihood that market participants will execute bona-
fide complex orders on CBOE. This proposal promotes fair and orderly
markets as well as assists the Exchange in its ability to effectively
attract order flow and liquidity to its market, which ultimately
benefits all TPHs and all investors. Complex orders are available to
all TPHs (and all non-TPH market participants through TPHs), and the
Exchange believes any perceived burden on customers is outweighed by
customers' ability to execute complex orders as proposed.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml);or
Send an email to rule-comments@sec.gov. Please include
File Number SR-CBOE-2017-019 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-2017-019. 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-2017-019 and should be
submitted on or before April 14, 2017.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
---------------------------------------------------------------------------
\29\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05852 Filed 3-23-17; 8:45 am]
BILLING CODE 8011-01-P
