Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 6.53, Certain Types of Orders Defined and Rule 6.53C, Complex Orders on the Hybrid System, 42949-42954 [2018-18295]
Download as PDF
<![CDATA[
daltland on DSKBBV9HB2PROD with NOTICES
Federal Register / Vol. 83, No. 165 / Friday, August 24, 2018 / Notices
Investment Company Act (270 CFR
270.30b1–5), funds are required to file
quarterly reports with the Commission
on Form N–Q not more than 60 days
after the close of the first and third
quarters of each fiscal year containing
their complete portfolio holdings.
Additionally, fund management is
required to evaluate the effectiveness of
the fund’s disclosure controls and
procedures within the 90-day period
prior to the filing of a report on Form
N–Q, and such report must also be
signed and certified by the fund’s
principal executive and financial
officers.
We estimate that there are 11,960
funds required to file reports on Form
N–Q. Based on staff experience and
conversations with industry
representatives, we estimate that it takes
approximately 26 hours per fund to
prepare reports on Form N–Q annually.
Accordingly, we estimate that the total
annual burden associated with Form N
Q is 310,960 hours (26 hours per fund
× 11,960 funds) per year.
The estimates of average burden hours
are made solely for the purposes of the
Paperwork Reduction Act and are not
derived from a comprehensive or even
representative survey or study of the
cost of Commission rules and forms.
The collection of information under
Form N–Q is mandatory. The
information provided by the form is not
kept confidential. An agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless it displays a
currently valid control number.
Written comments are invited on: (a)
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the
agency, including whether the
information will have practical utility;
(b) the accuracy of the agency’s estimate
of the burden of the collection of
information; (c) ways to enhance the
quality, utility, and clarity of the
information collected; and (d) ways to
minimize the burden of the collection of
information on respondents, including
through the use of automated collection
techniques or other forms of information
technology. Consideration will be given
to comments and suggestions submitted
in writing within 60 days of this
publication.
Please direct your written comments
to Pamela Dyson, Director/Chief
Information Officer, Securities and
Exchange Commission, C/O Candace
Kenner, 100 F Street NE, Washington,
DC 20549; or send an email to: PRA_
Mailbox@sec.gov.
VerDate Sep<11>2014
19:17 Aug 23, 2018
Jkt 244001
Dated: August 21, 2018.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–18362 Filed 8–23–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83891; File No. SR–CBOE–
2018–058]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend Rule 6.53,
Certain Types of Orders Defined and
Rule 6.53C, Complex Orders on the
Hybrid System
August 20, 2018.
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 August
10, 2018, Cboe Exchange, Inc. (the
‘‘Exchange’’) 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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rule 6.53 (Certain Types of Orders
Defined) and Rule 6.53C (Complex
Orders on the Hybrid System) to add
Qualified Contingent Cross (‘‘QCC’’)
with Stock Order functionality.
(additions are italicized; deletions are
[bracketed])
*
*
*
*
*
Cboe Exchange, Inc. Rules
*
*
*
*
*
Rule 6.53. Certain Types of Orders
Defined
One or more of the following order
types may be made available on a classby-class basis. Certain order types may
not be made available for all Exchange
systems. The classes and/or systems for
which the order types shall be available
will be as provided in the Rules, as the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(6).
2 17
PO 00000
Frm 00091
Fmt 4703
Sfmt 4703
42949
context may indicate, or as otherwise
specified via Regulatory Circular.
(a)–(t) No Change.
(u) Qualified Contingent Cross Order:
A qualified contingent cross (‘‘QCC’’)
order is an initiating order to buy (sell)
at least 1,000 standard option contracts
or 10,000 mini-option contracts that is
identified as being part of a qualified
contingent trade coupled with a contraside order or orders totaling an equal
number of contracts. [Qualified
contingent cross]QCC orders with one
option leg may only be entered in the
standard increments applicable to
simple orders in the options class under
Rule 6.42. [Qualified contingent
cross]QCC orders with more than one
option leg may be entered in the
increments specified for complex orders
under Rule 6.42. For purposes of this
order type:
(i)–(ii) No Change.
(iii) QCC with Stock Orders. A ‘‘QCC
with Stock Order’’ is a qualified
contingent cross order, as defined
above, entered with a stock component
to be electronically communicated by
the Exchange to a designated brokerdealer for execution on behalf of the
submitting Trading Permit Holder
pursuant to Rule 6.53C, Interpretation
and Policy .06(g).
*
*
*
*
*
Rule 6.53C. Complex Orders on the
Hybrid System
*
*
*
*
*
. . . Interpretations and Policies:
.01–.05 No Change.
.06 Special Provisions Applicable to
Stock-Option Orders: Stock-option
orders may be executed against other
automated stock-option orders. Stockoption orders will not be legged against
the individual component legs, except
as provided in paragraph (d) below, and
leg orders will not be generated
pursuant to paragraph (c)(iv) of this
Rule for stock-option orders.
(a)–(f) No Change.
(g) QCC with Stock Orders. The
System processes QCC with Stock
Orders as follows:
(1) Entry of QCC with Stock Order.
When a Trading Permit Holder enters a
QCC with Stock Order on the Exchange,
it enters a QCC order pursuant to Rule
6.53(u) with a stock component
(pursuant to Rule 6.53(u)(iii)). When
entering a QCC with Stock Order, the
Trading Permit Holder must:
(A) include a net price for the stock
and option components;
(B) give up a Clearing Trading Permit
Holder in accordance with Rule 6.21;
and
(C) designate a specific broker-dealer
to which the stock components will be
E:\FR\FM\24AUN1.SGM
24AUN1
42950
Federal Register / Vol. 83, No. 165 / Friday, August 24, 2018 / Notices
daltland on DSKBBV9HB2PROD with NOTICES
communicated, which broker-dealer the
Exchange must have identified as
having connectivity to electronically
communicate the stock components of
QCC with Stock Orders to stock trading
venues and with which the TPH must
have entered into a brokerage agreement
(the ‘‘designated broker-dealer’’). The
Exchange will have no financial
arrangements with the broker-dealers it
has identified with respect to
communicating stock orders to them.
(2) Option Component.
(A) If the option component (i.e., the
QCC order) of a QCC with Stock Order
can execute, the System executes it in
accordance with Rule 6.45(a) or
6.53C(c), as applicable, but does not
immediately send the Trading Permit
Holder a trade execution report. The
System then automatically
communicates the stock component to
the designated broker-dealer for
execution.
(B) If the option component of a QCC
with Stock Order cannot execute, the
System cancels the QCC with Stock
Order, including both the stock and
option components.
(3) Stock Component.
(A) If the System receives an
execution report for the stock
component of a QCC with Stock Order
from the designated broker-dealer, the
Exchange sends the Trading Permit
Holder the trade execution report for the
QCC with Stock Order, including
execution information for both the stock
and option components.
(B) If the System receives a report
from the designated broker-dealer that
the stock component of a QCC with
Stock Order cannot execute, the
Exchange nullifies the option
component trade and notifies the
Trading Permit Holder of the reason for
the nullification.
QCC with Stock Orders are available
to Trading Permit Holders on a
voluntary basis.
*
*
*
*
*
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/CBOELegalRegulatory
Home.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
VerDate Sep<11>2014
19:17 Aug 23, 2018
Jkt 244001
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 purpose of the proposed rule
change is to offer QCC with Stock Order
functionality to Trading Permit Holders
(‘‘TPHs’’). QCC with Stock Order
functionality facilitates the execution of
the stock component of qualified
contingent trades (‘‘QCTs’’).
Specifically, a QCC with Stock Order is
a QCC order entered with a stock
component to be communicated to a
designated broker-dealer for execution.
QCC with Stock Orders will assist TPHs
in maintaining compliance with rules
regarding the execution of the stock
components of QCTs, and help maintain
an audit trail for surveillance of TPHs
for compliance with such rules.
Currently, although the Exchange offers
QCC order functionality, it does not
facilitate electronic communication of
the stock component of QCC orders for
execution. The proposed rule change
provides TPHs with the option to
electronically submit the stock
component of QCC orders to the
Exchange, and describes how the
Exchange will electronically
communicate the stock component to a
designated broker-dealer for execution
on behalf of TPHs.
A QCC order is comprised of an
originating order to buy or sell at least
1000 contracts that is identified as being
part of a QCT,5 coupled with a contra5 See Rule 6.53(u)(i). The proposed rule change
also modifies Rule 6.53(u) to define Qualified
Contingent Cross orders as ‘‘QCC orders’’. A
‘‘qualified contingent trade’’ is a transaction
consisting of two or more component orders,
executed as agent or principal, where: (1) At least
one component is an NMS stock, as defined in Rule
600 of Regulation NMS under the Exchange Act; (2)
all components are effected with a product or price
contingency that either has been agreed to by all 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 by
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 cancelled; and (6) the
transaction is fully hedged (without regard to any
prior existing position) as a result of other
components of the contingent trade.
PO 00000
Frm 00092
Fmt 4703
Sfmt 4703
side order or orders totaling an equal
number of contracts. QCC orders may
execute without exposure provided the
execution (1) is not at the same price as
a public customer order resting in the
electronic book and (2) is at or between
the NBBO.6 QCC orders will be
cancelled if they cannot be executed.7
Since QCC orders represent one
component of a QCT, each QCC order
must be paired with a stock order. When
a TPH enters a QCC order, the TPH is
responsible for executing the associated
stock component of the QCT within a
reasonable period of time after the QCC
order is executed. The Exchange
conducts surveillance of TPHs to ensure
that TPHs execute the stock component
of a QCT at or near the same time as the
options component. While the Exchange
does not specify how the TPH should go
about executing the stock component of
the trade, this process is often manual
and is therefore a compliance risk for
TPHs if they do not execute the stock
component within a reasonable time
period of execution of the options
component. Thus, the Exchange is
proposing to offer QCC with Stock
Order functionality, pursuant to which
the Exchange will automatically
communicate the stock component of a
QCT to a designated broker-dealer for
execution in connection with the
execution of a QCC order on the
Exchange. This functionality will
reduce the compliance burden on TPHs
by providing an automated means of
executing the stock component of a
QCT, and also will provide benefits for
the Exchange’s surveillance by
providing an audit trail for the
execution of the stock component. QCC
with Stock Orders can be entered by
TPHs through a front-end order and
execution management system or
through a TPH’s own electronic
connection to the Exchange.
QCC with Stock Orders will be
available to all TPHs on a voluntary
basis.8 Under the proposed rule, when
a TPH enters a QCC with Stock Order
on the Exchange, it enters a QCC order
pursuant to current Rule 6.53(u) with a
stock component (pursuant to proposed
Rule 6.53(u)(iii)). When entering a QCC
with Stock Order, the TPH must:
• Enter a net price for the stock and
option components. Net-priced QCC
with Stock Orders reduce the chance
that TPHs will miss the market since the
Exchange will calculate a price for the
stock and options components that
honors the net price of the package and
6 See
Rule 6.53(u)(ii).
7 Id.
8 See proposed Rule 6.53C, Interpretation and
Policy .06(g).
E:\FR\FM\24AUN1.SGM
24AUN1
Federal Register / Vol. 83, No. 165 / Friday, August 24, 2018 / Notices
daltland on DSKBBV9HB2PROD with NOTICES
current market prices, if possible. It is
also consistent with the use of QCTs.9
The Exchange will not allow QCC with
Stock Orders with a specified price for
the stock component or the option
component;
• give up a Clearing TPH in
accordance with Rule 6.21. Pursuant to
Rule 6.21, a TPH must give up a
Clearing TPH it previously identified to
the Exchange as Designated Give Up for
that TPH for all orders it submits to the
Exchange. This is currently required for
all stock-option orders pursuant to Rule
6.53C, Interpretation and Policy .06(a);
and
• designate a specific broker-dealer to
which the stock components will be
communicated, which broker-dealer the
Exchange must have identified as
having connectivity to electronically
communicate the stock components of
QCC with Stock Orders to stock trading
venues and with which the TPH must
have entered into a brokerage agreement
(the ‘‘designated broker-dealer’’). The
Exchange will have no financial
arrangements with any broker-dealer it
has identified with respect to
communicating stock orders to them.10
This is currently required for the
submission of all stock-option orders
pursuant to Rule 6.53C, Interpretation
and Policy .06(a). The Exchange
currently has one broker-dealer that has
established connectivity for executing
the stock component of QCC with Stock
Orders. If the Exchange adds more in
the future, and the TPH enters into
brokerage agreements with multiple of
the broker-dealers designated by the
Exchange, the TPH must specify to
which broker-dealer the Exchange
should communicate the stock
components of its QCC with Stock
Orders when entering QCC with Stock
Orders.
9 See Securities Exchange Act Release No. 54389
(August 31, 2006), 71 FR 52829, 52831 (September
7, 2006) (Order Granting an Exemption for
Qualified Contingent Trades from Rule 611(a) of
Regulation NMS Under the Securities Exchange Act
of 1934) (‘‘QCT Exemption Order’’). In its
exemption request, the Securities Industry
Association (‘‘SIA’’) indicated parties to a
contingent transaction are focused on the spread or
ratio between the transaction prices for each of the
component instruments, rather than on the absolute
price of any single component instrument. The SIA
also noted the economics of a contingent trade are
based on the relationship between the prices of the
security and related derivative or security. See
Letter to Nancy M. Morris, Secretary, Commission,
from Andrew Madoff, SIA Trading Committee, SIA,
dated June 21, 2006 (‘‘SIA Exemption Request’’), at
2.
10 The Exchange also represents that broker
dealers it identifies as having connectivity to
electronically communicate the stock components
of QCC with Stock Orders to stock trading venues
do not receive other special benefits related to
trading on the exchange.
VerDate Sep<11>2014
19:17 Aug 23, 2018
Jkt 244001
Current Exchange fees applicable to
stock-option orders will apply to the
stock component of QCC with Stock
Orders.11 Further, current Exchange fees
applicable to QCC orders will apply to
the options component of QCC with
Stock Orders.12
If the option component of a QCC
with Stock Order satisfies the
conditions of Rule 6.53(u) upon entry,
the System executes the order in
accordance with Rule 6.45(a) (which
describes how simple option orders
execute) or 6.53C(c) (which describes
how complex orders execute). However,
the Exchange does not immediately
send the TPH a trade execution report
for this option execution.13 Because the
TPH submitted a QCC with Stock Order
to execute as a package, the Exchange
waits to send a trade execution report to
the TPH until after it has determined
whether all components of the QCC
with Stock Order have executed, as
described below. After the QCC order is
executed, the Exchange will then
automatically communicate the stock
component to the designated brokerdealer for execution.
Although the option component
(which is a QCC order) of a QCC with
Stock Order is eligible for automatic
execution, it is possible that the option
component order may not be executable
based on market prices at the time the
order is entered (e.g. the order would
execute at the same price as a customer).
If the QCC order cannot execute after
one attempt, the System cancels the
QCC with Stock Order, including both
the stock and options components. This
prevents execution of the stock
component of a QCT where the options
component has not been successfully
executed, consistent with the purpose of
contingent trades and the QCT
exemption.
As noted above, if the option
component executes, the System then
automatically communicates the stock
component to the designated brokerdealer for execution. If the System
receives an execution report for the
stock component of a QCC with Stock
Order from the designated brokerdealer, the Exchange sends the TPH the
trade execution report for the QCC with
Stock Order, including execution
information for both the stock and
option components. However, if the
System receives a report from the
11 See
Cboe Exchange, Inc. Fees Schedule.
12 Id.
13 Even though the Exchange does not send the
Trading Permit Holder an execution report
immediately following execution of the option
component, the Exchange disseminates the trade at
that time pursuant to the OPRA Plan and creates a
record to be sent to the Clearing Corporation.
PO 00000
Frm 00093
Fmt 4703
Sfmt 4703
42951
designated broker-dealer that the stock
component of the QCC with Stock Order
cannot execute,14 the Exchange nullifies
the option component trade and notifies
the TPH of the reason for the
nullification.15 This proposed rule
change prevents execution of the option
component of a QCT where the stock
component has not been successfully
executed, just as the proposed rule
change prevents execution of the stock
component of a QCT where the option
component has not been successfully
executed by cancelling the stock
component if the option component
cannot execute.
Currently, whenever a stock trading
venue nullifies the stock leg of a stockoption order or whenever the stock leg
cannot execute, the Exchange will
nullify the option leg upon request of
one of the parties to the transaction or
on an Exchange Official’s own motion
in accordance with the Rules.16 As
noted above, to qualify as a QCT, the
execution of one component is
contingent upon the execution of all
other components at or near the same
time.17 Given this requirement, if the
stock component does not execute at or
near the same time as the option
component, it is reasonable to expect a
TPH that submitted a QCC with Stock
Order to request such nullification.18 If
14 For example, if the stock execution venue to
which the designated broker-dealer routed the stock
component is experiencing system issues, the stock
component may not be able to execute.
Additionally, the Exchange understands certain
stock execution venues apply risk controls to the
stock components of QCTs, which may prevent
execution of the stock components at certain prices.
15 The Exchange will nullify the option
component trade in the same manner as it currently
nullifies any other trades (when nullification is
permitted under the Rules).
16 See Rule 6.25, Interpretation and Policy .07(c).
Pursuant to Rule 6.25, other nullifications may
generally occur only if both parties agree.
17 See QCT Exemption Order, which requires the
execution of one component of the QCT to be
contingent upon the execution of all other
components at or near the same time to qualify for
the exemption. In the SIA Exemption Request, the
SIA stated that for contingent trades, the execution
of one order is contingent upon the execution of the
other order. SIA further stated that, by breaking up
one or more components of a contingent trade and
requiring that such components be separately
executed, one or more parties may trade ‘‘out of
hedge.’’ See SIA Exemption Request at 3. In other
words, it takes two (executions) to make a thing (a
QCT) go right.
18 As set forth in Rule 6.53(u), when submitting
a QCC order, a Trading Permit Holder submits an
order as well as a contra-side order or orders
totaling an equal number of contracts, which
execute against each other if they satisfy the
conditions set forth in that Rule. As a result, if that
Trading Permit Holder requests nullification of the
QCC order execution (or as proposed, if the
Exchange automatically nullifies the QCC order
execution) if the stock component cannot execute,
no other party is impacted by the nullification.
E:\FR\FM\24AUN1.SGM
24AUN1
42952
Federal Register / Vol. 83, No. 165 / Friday, August 24, 2018 / Notices
daltland on DSKBBV9HB2PROD with NOTICES
the stock component does not execute,
rather than require the TPH that
submitted the QCC with Stock Order to
contact the Exchange to request the
nullification of the option component
execution pursuant to Rule 6.25 if the
stock component cannot execute, the
proposed rule change simply eliminates
this requirement for the submitting TPH
to make such a request. Instead, the
proposed rule states the Exchange will
automatically nullify the option
transaction if the stock component does
not execute. The Exchange believes
such nullification without a request
from the TPH is consistent with the
definitions of QCC and QCT orders. The
proposed rule change merely automates
a process that TPHs can manually do
today.
Additionally, the Exchange believes
this automatic nullification will reduce
any compliance risk for the TPH
associated with execution of a QCC
order and lack of execution of a stock
order at or near the same time.19 The
Exchange conducts surveillance to
ensure a TPH executes the stock
component of a QCT, which will also
apply to QCC with Stock Orders, if the
option component executed. As a result,
if the stock component does not execute
when initially submitted to a stock
trading venue by the designated brokerdealer, a TPH may be subject to
compliance risk if it does not execute
the stock component within a
reasonable time period of the execution
of the option component. The proposed
rule change reduces this compliance
risk for TPHs.
Example 1:
Stock NBBO: $100 × $101
Option NBBO: $1 × $2
A TPH submits a QCC with Stock
Order buying 1,000 puts and 100,000
shares of stock with a net price of
$101.50. A QCC order is entered on the
Exchange and executed at a price of
$1.50. The Exchange reports this trade
to OPRA. The Exchange routes the stock
component to an Exchange-designed
broker-dealer at a price of $100. The
Exchange receives a trade execution
report from the designated broker-dealer
that the stock component executed at
$100, and sends a trade execution report
19 In the SIA Exemption Request, the SIA stated
that parties to a contingent trade will not execute
one side of the trade without the other component
or components being executed in full (or in ratio)
and at the specified spread or ratio. See SIA
Exemption Request at 2. While a broker-dealer
could re-submit the stock component to a stock
trading venue or execution after it initially fails to
execute, there is a compliance risk that the time at
which the stock component executes is not close
enough to the time at which the option component
executed.
VerDate Sep<11>2014
19:17 Aug 23, 2018
Jkt 244001
for both components of the QCC with
Stock Order to the TPH.
Example 2:
Stock NBBO: $100 × $101
Option NBBO: $1 × $2
A TPH submits a QCC with Stock
Order buying 1,000 puts and 100,000
shares of stock with a net price of
$101.50. A QCC order is entered on the
Exchange and executed at a price of
$1.50. The Exchange reports this trade
to OPRA. The Exchange routes the stock
component to an Exchange-designed
broker-dealer at a price of $100. The
Exchange receives a report from the
designated broker-dealer that the stock
component did not execute. The
Exchange nullifies the option
component trade, and sends a report to
the TPH of the reason for the
nullification.
Example 3:
Stock NBBO: $100 × $101
ABBO: $1.00 × $1.05
Exchange BBO: $1.00 (Priority
Customer) × 1.01 (Priority Customer)
A TPH submits a QCC with Stock
Order buying 1,000 puts and 100,000
shares of stock with a net price of
101.01. A QCC order is entered on the
Exchange at a price of $1.01. Because
the QCC order is at the same price as a
priority customer order resting on the
Exchange, the Exchange cancels the
QCC with Stock Order.
At a time following the effective and
operative date of this rule change, the
Exchange will announce the availability
of QCC with Stock Orders via Exchange
Notice.
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.20 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 21 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 facilitation 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.
20 15
21 15
PO 00000
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
Frm 00094
Fmt 4703
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 22 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
The Exchange believes the proposed
rule change is designed to promote just
and equitable principles of trade
because it will provide TPHs with
optional functionality to facilitate the
stock component of a QCT. The QCC
with Stock Order is an optional piece of
functionality offered to TPHs to
communicate the stock component of a
QCT to a designated broker-dealer for
execution. A TPH that does not wish to
use QCC with Stock Order functionality
can continue to execute a QCT by
entering a QCC order on the Exchange
and separately executing the stock
component of the QCT [sic] another
venue, as it may do today. A TPH can
also build its own technology to
electronically communicate the stock
component of any QCT to a brokerdealer for execution.
QCC with Stock Orders reduce TPHs’
compliance burden because it allows for
the automatic submission of the stock
component of a QCT in connection with
the execution of the options
component(s) as a QCC order on the
Exchange. QCC with Stock Order
functionality also provides benefits to
the Exchange by establishing an audit
trail for the execution of the stock
component of a QCT within a
reasonable period of time after the
execution of the QCC order. The
proposed rule change further reduces
TPHs’ compliance risk by providing that
the Exchange will, in addition to
cancelling the stock component if the
option component cannot execute,
nullify any option component execution
when the stock component does not
execute without a request from the TPH.
Nullification of the option trade is
consistent with the requirement that a
TPH must execute the stock component
of a QCT within a reasonable period of
time after executing the option
component on the Exchange as a QCC
order. The proposed rule change simply
eliminates the requirement that one
party to the transaction request
nullification of the option component
trade before the Exchange nullifies the
option trade, because such nullification
is consistent with the definitions of QCC
orders and QCT. The proposed rule
change merely automates a process that
TPHs can manually do today. As noted
above, to qualify as a QCT, the
execution of one component is
contingent upon the execution of all
22 Id.
Sfmt 4703
E:\FR\FM\24AUN1.SGM
24AUN1
daltland on DSKBBV9HB2PROD with NOTICES
Federal Register / Vol. 83, No. 165 / Friday, August 24, 2018 / Notices
other components at or near the same
time.23 Since the purpose of a QCC with
Stock Order is for all components to
trade at or near the same time, if the
stock component does not execute at or
near the same time as the option
component, it is reasonable to expect a
TPH that submitted a QCC with Stock
Order to request such nullification to
avoid any compliance risk associated
with execution of a QCC order and lack
of execution of a stock order at or near
the same time.24
The Exchange conducts surveillance
to ensure a TPH executes the stock
component of a QCT, which will also
apply to QCC with Stock Orders, if the
option component executed. As a result,
if the stock component does not execute
when initially submitted to a stock
trading venue by the designated brokerdealer, a TPH may be subject to
compliance risk if it does not execute
the stock component within a
reasonable time period of the execution
of the option component. The proposed
rule change reduces this compliance
risk for TPHs. The Exchange therefore
believes the proposed rule change
removes impediments to and perfects
the mechanisms of a free and open
market and a national market system,
and in general, protects investors and
the public interest.
The Exchange believes the proposed
rule change to require a TPH to submit
a QCC with Stock Order with a net price
will also perfect the mechanism of a free
and open market and a national market
system and protect investors, because a
net price will reduce the chance that
TPHs will miss the market since the
Exchange will calculate a price for the
stock and options components that
honors the net price of the package and
current market prices, if possible. As
noted above, a TPH that wants to enter
a net price for the stock and option
components can execute a QCT by
entering a QCC order on the Exchange
and separately executing the stock
component of the QCT another venue,
as it may do today. As noted above,
submission of a QCC with Stock Order
is consistent with the use of QCTs.25
Additionally, the proposed
functionality is similar to functionality
offered by another options exchange 26
and consistent with the QCT exemption
previously approved by the
Commission.27
23 See
supra note 13.
supra note 14.
25 See supra note 8.
26 See Nasdaq ISE, LLC (‘‘ISE’’) Rules 715(t) and
721(c) and Supplementary Material.
27 See QCT Exemption Order.
24 See
VerDate Sep<11>2014
19:17 Aug 23, 2018
Jkt 244001
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. QCC with
Stock Orders facilitate TPHs’
compliance with the requirements
associated with executing QCC orders
on the Exchange, and are not designed
to impose any unnecessary burden on
competition. QCC with Stock Order
functionality is available to TPHs on a
voluntary basis, and TPHs are not
required to use QCC with Stock Orders
when executing QCTs. The proposed
rule change has no impact on TPHs that
elect to execute QCTs without using
QCC with Stock Order functionality.
Those TPHs may continue to execute
QCTS in the same manner as they do
today by entering a QCC order on the
Exchange and separately executing the
stock component of the QCT another
venue. A TPH can also build its own
technology to electronically
communicate the stock component of
any QCT to a broker-dealer for
execution. For TPHs that elect to use
QCC with Stock Order functionality to
execute QCTs, the proposed rule change
reduces those TPHs’ compliance
burdens to satisfy their obligation to
execute the related stock component of
the QCT within a reasonable period of
time after the QCC order is executed on
the Exchange, as this functionality
provides an automated means for
satisfying this obligation.
QCC with Stock Orders are available
to all TPHs either through a front-end
order and execution management
system or through a TPH’s own
electronic connection to the Exchange.
Additionally, the proposed functionality
is similar to functionality offered by
another options exchange 28 and
consistent with the QCT exemption
previously approved by the
Commission.29
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
28 See ISE Rules 715(t) and 721(c) and
Supplementary Material.
29 See QCT Exemption Order.
PO 00000
Frm 00095
Fmt 4703
Sfmt 4703
42953
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
A proposed rule change filed under
Rule 19b–4(f)(6) normally does not
become operative for 30 days after the
date of filing. However, Rule 19b–
4(f)(6)(iii) 32 permits the Commission to
designate a shorter time if such action
is consistent with the protection of
investors and the public interest. In its
filing with the Commission, the
Exchange requests that the Commission
waive the 30-day operative delay. The
Exchange states that its proposal is
consistent with QCT rules and is
designed to (1) help reduce a TPH’s
compliance burdens by providing an
automated means to facilitate
compliance with the obligations
applicable to QCC with stock orders and
(2) assist the Exchange with maintaining
an audit trail and conducting
surveillance of TPHs for compliance
with the rules governing these types of
trades. In addition, the Exchange noted
that this functionality is optional, and
TPHs can continue to execute QCTs
manually or though alternative means as
they do today. According to the
Exchange, waiving the operative delay
will allow the Exchange to update its
rules immediately to reflect this
functionality, to the benefit of members
and other market participants. The
Commission believes that waiving the
30-day operative delay is consistent
with the protection of investors and the
public interest because the QCC with
Stock Order functionality is designed to
help Exchange members that choose to
use the functionality comply with their
qualified contingent trade obligations in
connection with a QCC Order,33 as well
as help the Exchange surveil its
members for compliance with the
Exchange’s rules for QCC Orders.
Therefore, the Commission designates
the proposed rule change operative
upon filing.34
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.
32 17 CFR 240.19b–4(f)(6)(iii).
33 See supra note 5 and accompanying text.
34 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
31 17
E:\FR\FM\24AUN1.SGM
Continued
24AUN1
42954
Federal Register / Vol. 83, No. 165 / Friday, August 24, 2018 / Notices
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:
daltland on DSKBBV9HB2PROD with NOTICES
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CBOE–2018–058 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–2018–058. 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 website (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 website 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.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CBOE–2018–058 and
should be submitted on or before
September 14, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.35
Eduardo A. Aleman
Assistant Secretary.
[FR Doc. 2018–18295 Filed 8–23–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83888; File No. SR–
NASDAQ–2018–069]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Codify the
Definitions of the Protocols to Enter
Quotes and Orders
August 20, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on August
17, 2018, The Nasdaq Stock Market LLC
(‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to adopt new
rule text within The Nasdaq Options
Market LLC Rules at Chapter VI, Section
21. Specifically, the Exchange proposes
to codify the definitions of the current
protocols that Participants can use to
enter quotes and orders on the Exchange
and introduce a new protocol.
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaq.cchwallstreet.com, at the
principal office of the Exchange, and at
35 17
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
VerDate Sep<11>2014
19:17 Aug 23, 2018
Jkt 244001
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
PO 00000
Frm 00096
Fmt 4703
Sfmt 4703
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 adopt new
rule text at Chapter VI, Section 21 to
codify the Financial Information
eXchange (‘‘FIX’’) and Specialized
Quote Feed (‘‘SQF’’) protocols. The
Exchange proposes to adopt a new
protocol and name it ‘‘Ouch to Trade
Options’’ (‘‘OTTO’’) and rename and
amend the current OTTO protocol on
NOM as ‘‘Quote Using Orders’’ or
‘‘QUO’’.3 The Exchange believes that
codifying definitions of current and new
protocols in its rules will increase
transparency around its operations.
Furthermore, the proposed definitions
will be harmonized where appropriate
with definitions contained in the rules
of the Exchange’s affiliated options
markets,4 by using consistent terms to
define the buckets of information
transmitted, or the features available, on
each protocol. The protocols used by
NOM Participants to submit quotes and
orders play an important role in the
operation of the System.
The Exchange notes it has two
protocols today, SQF and proposed to
be renamed QUO (formerly known as
OTTO), that NOM Market Makers can
use to meet their quoting obligations.
All quotes on SQF are counted toward
market making obligations. While a
NOM Market Maker may enter an
Immediate-or-Cancel Order through
SQF this order does not rest on the
Exchange’s order book and therefore
does not count toward quoting
3 Today the Exchange offers FIX, SQF and QUO
(formerly known as OTTO) to its Participants.
4 Rules have been filed for Nasdaq ISE, LLC
(‘‘ISE’’), Nasdaq GEMX, LLC (‘‘GEMX’’), Nasdaq
MRX, LLC (‘‘MRX’’), Nasdaq BX, Inc. and Nasdaq
Phlx, LLC.
E:\FR\FM\24AUN1.SGM
24AUN1
]]>Agencies
[Federal Register Volume 83, Number 165 (Friday, August 24, 2018)]
[Notices]
[Pages 42949-42954]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18295]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83891; File No. SR-CBOE-2018-058]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Rule 6.53, Certain Types of Orders Defined and Rule 6.53C, Complex
Orders on the Hybrid System
August 20, 2018.
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 August 10, 2018, Cboe Exchange, Inc. (the ``Exchange'') 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 6.53 (Certain Types of Orders
Defined) and Rule 6.53C (Complex Orders on the Hybrid System) to add
Qualified Contingent Cross (``QCC'') with Stock Order functionality.
(additions are italicized; deletions are [bracketed])
* * * * *
Cboe Exchange, Inc. Rules
* * * * *
Rule 6.53. Certain Types of Orders Defined
One or more of the following order types may be made available on a
class-by-class basis. Certain order types may not be made available for
all Exchange systems. The classes and/or systems for which the order
types shall be available will be as provided in the Rules, as the
context may indicate, or as otherwise specified via Regulatory
Circular.
(a)-(t) No Change.
(u) Qualified Contingent Cross Order: A qualified contingent cross
(``QCC'') order is an initiating order to buy (sell) at least 1,000
standard option contracts or 10,000 mini-option contracts that is
identified as being part of a qualified contingent trade coupled with a
contra-side order or orders totaling an equal number of contracts.
[Qualified contingent cross]QCC orders with one option leg may only be
entered in the standard increments applicable to simple orders in the
options class under Rule 6.42. [Qualified contingent cross]QCC orders
with more than one option leg may be entered in the increments
specified for complex orders under Rule 6.42. For purposes of this
order type:
(i)-(ii) No Change.
(iii) QCC with Stock Orders. A ``QCC with Stock Order'' is a
qualified contingent cross order, as defined above, entered with a
stock component to be electronically communicated by the Exchange to a
designated broker-dealer for execution on behalf of the submitting
Trading Permit Holder pursuant to Rule 6.53C, Interpretation and Policy
.06(g).
* * * * *
Rule 6.53C. Complex Orders on the Hybrid System
* * * * *
. . . Interpretations and Policies:
.01-.05 No Change.
.06 Special Provisions Applicable to Stock-Option Orders: Stock-
option orders may be executed against other automated stock-option
orders. Stock-option orders will not be legged against the individual
component legs, except as provided in paragraph (d) below, and leg
orders will not be generated pursuant to paragraph (c)(iv) of this Rule
for stock-option orders.
(a)-(f) No Change.
(g) QCC with Stock Orders. The System processes QCC with Stock
Orders as follows:
(1) Entry of QCC with Stock Order. When a Trading Permit Holder
enters a QCC with Stock Order on the Exchange, it enters a QCC order
pursuant to Rule 6.53(u) with a stock component (pursuant to Rule
6.53(u)(iii)). When entering a QCC with Stock Order, the Trading Permit
Holder must:
(A) include a net price for the stock and option components;
(B) give up a Clearing Trading Permit Holder in accordance with
Rule 6.21; and
(C) designate a specific broker-dealer to which the stock
components will be
[[Page 42950]]
communicated, which broker-dealer the Exchange must have identified as
having connectivity to electronically communicate the stock components
of QCC with Stock Orders to stock trading venues and with which the TPH
must have entered into a brokerage agreement (the ``designated broker-
dealer''). The Exchange will have no financial arrangements with the
broker-dealers it has identified with respect to communicating stock
orders to them.
(2) Option Component.
(A) If the option component (i.e., the QCC order) of a QCC with
Stock Order can execute, the System executes it in accordance with Rule
6.45(a) or 6.53C(c), as applicable, but does not immediately send the
Trading Permit Holder a trade execution report. The System then
automatically communicates the stock component to the designated
broker-dealer for execution.
(B) If the option component of a QCC with Stock Order cannot
execute, the System cancels the QCC with Stock Order, including both
the stock and option components.
(3) Stock Component.
(A) If the System receives an execution report for the stock
component of a QCC with Stock Order from the designated broker-dealer,
the Exchange sends the Trading Permit Holder the trade execution report
for the QCC with Stock Order, including execution information for both
the stock and option components.
(B) If the System receives a report from the designated broker-
dealer that the stock component of a QCC with Stock Order cannot
execute, the Exchange nullifies the option component trade and notifies
the Trading Permit Holder of the reason for the nullification.
QCC with Stock Orders are available to Trading Permit Holders on a
voluntary basis.
* * * * *
The text of the proposed rule change is also available on the
Exchange's website (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 purpose of the proposed rule change is to offer QCC with Stock
Order functionality to Trading Permit Holders (``TPHs''). QCC with
Stock Order functionality facilitates the execution of the stock
component of qualified contingent trades (``QCTs''). Specifically, a
QCC with Stock Order is a QCC order entered with a stock component to
be communicated to a designated broker-dealer for execution. QCC with
Stock Orders will assist TPHs in maintaining compliance with rules
regarding the execution of the stock components of QCTs, and help
maintain an audit trail for surveillance of TPHs for compliance with
such rules. Currently, although the Exchange offers QCC order
functionality, it does not facilitate electronic communication of the
stock component of QCC orders for execution. The proposed rule change
provides TPHs with the option to electronically submit the stock
component of QCC orders to the Exchange, and describes how the Exchange
will electronically communicate the stock component to a designated
broker-dealer for execution on behalf of TPHs.
A QCC order is comprised of an originating order to buy or sell at
least 1000 contracts that is identified as being part of a QCT,\5\
coupled with a contra-side order or orders totaling an equal number of
contracts. QCC orders may execute without exposure provided the
execution (1) is not at the same price as a public customer order
resting in the electronic book and (2) is at or between the NBBO.\6\
QCC orders will be cancelled if they cannot be executed.\7\
---------------------------------------------------------------------------
\5\ See Rule 6.53(u)(i). The proposed rule change also modifies
Rule 6.53(u) to define Qualified Contingent Cross orders as ``QCC
orders''. A ``qualified contingent trade'' is a transaction
consisting of two or more component orders, executed as agent or
principal, where: (1) At least one component is an NMS stock, as
defined in Rule 600 of Regulation NMS under the Exchange Act; (2)
all components are effected with a product or price contingency that
either has been agreed to by all 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 by 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 cancelled; and (6) the transaction is fully hedged
(without regard to any prior existing position) as a result of other
components of the contingent trade.
\6\ See Rule 6.53(u)(ii).
\7\ Id.
---------------------------------------------------------------------------
Since QCC orders represent one component of a QCT, each QCC order
must be paired with a stock order. When a TPH enters a QCC order, the
TPH is responsible for executing the associated stock component of the
QCT within a reasonable period of time after the QCC order is executed.
The Exchange conducts surveillance of TPHs to ensure that TPHs execute
the stock component of a QCT at or near the same time as the options
component. While the Exchange does not specify how the TPH should go
about executing the stock component of the trade, this process is often
manual and is therefore a compliance risk for TPHs if they do not
execute the stock component within a reasonable time period of
execution of the options component. Thus, the Exchange is proposing to
offer QCC with Stock Order functionality, pursuant to which the
Exchange will automatically communicate the stock component of a QCT to
a designated broker-dealer for execution in connection with the
execution of a QCC order on the Exchange. This functionality will
reduce the compliance burden on TPHs by providing an automated means of
executing the stock component of a QCT, and also will provide benefits
for the Exchange's surveillance by providing an audit trail for the
execution of the stock component. QCC with Stock Orders can be entered
by TPHs through a front-end order and execution management system or
through a TPH's own electronic connection to the Exchange.
QCC with Stock Orders will be available to all TPHs on a voluntary
basis.\8\ Under the proposed rule, when a TPH enters a QCC with Stock
Order on the Exchange, it enters a QCC order pursuant to current Rule
6.53(u) with a stock component (pursuant to proposed Rule
6.53(u)(iii)). When entering a QCC with Stock Order, the TPH must:
---------------------------------------------------------------------------
\8\ See proposed Rule 6.53C, Interpretation and Policy .06(g).
---------------------------------------------------------------------------
Enter a net price for the stock and option components.
Net-priced QCC with Stock Orders reduce the chance that TPHs will miss
the market since the Exchange will calculate a price for the stock and
options components that honors the net price of the package and
[[Page 42951]]
current market prices, if possible. It is also consistent with the use
of QCTs.\9\ The Exchange will not allow QCC with Stock Orders with a
specified price for the stock component or the option component;
---------------------------------------------------------------------------
\9\ See Securities Exchange Act Release No. 54389 (August 31,
2006), 71 FR 52829, 52831 (September 7, 2006) (Order Granting an
Exemption for Qualified Contingent Trades from Rule 611(a) of
Regulation NMS Under the Securities Exchange Act of 1934) (``QCT
Exemption Order''). In its exemption request, the Securities
Industry Association (``SIA'') indicated parties to a contingent
transaction are focused on the spread or ratio between the
transaction prices for each of the component instruments, rather
than on the absolute price of any single component instrument. The
SIA also noted the economics of a contingent trade are based on the
relationship between the prices of the security and related
derivative or security. See Letter to Nancy M. Morris, Secretary,
Commission, from Andrew Madoff, SIA Trading Committee, SIA, dated
June 21, 2006 (``SIA Exemption Request''), at 2.
---------------------------------------------------------------------------
give up a Clearing TPH in accordance with Rule 6.21.
Pursuant to Rule 6.21, a TPH must give up a Clearing TPH it previously
identified to the Exchange as Designated Give Up for that TPH for all
orders it submits to the Exchange. This is currently required for all
stock-option orders pursuant to Rule 6.53C, Interpretation and Policy
.06(a); and
designate a specific broker-dealer to which the stock
components will be communicated, which broker-dealer the Exchange must
have identified as having connectivity to electronically communicate
the stock components of QCC with Stock Orders to stock trading venues
and with which the TPH must have entered into a brokerage agreement
(the ``designated broker-dealer''). The Exchange will have no financial
arrangements with any broker-dealer it has identified with respect to
communicating stock orders to them.\10\ This is currently required for
the submission of all stock-option orders pursuant to Rule 6.53C,
Interpretation and Policy .06(a). The Exchange currently has one
broker-dealer that has established connectivity for executing the stock
component of QCC with Stock Orders. If the Exchange adds more in the
future, and the TPH enters into brokerage agreements with multiple of
the broker-dealers designated by the Exchange, the TPH must specify to
which broker-dealer the Exchange should communicate the stock
components of its QCC with Stock Orders when entering QCC with Stock
Orders.
---------------------------------------------------------------------------
\10\ The Exchange also represents that broker dealers it
identifies as having connectivity to electronically communicate the
stock components of QCC with Stock Orders to stock trading venues do
not receive other special benefits related to trading on the
exchange.
---------------------------------------------------------------------------
Current Exchange fees applicable to stock-option orders will apply
to the stock component of QCC with Stock Orders.\11\ Further, current
Exchange fees applicable to QCC orders will apply to the options
component of QCC with Stock Orders.\12\
---------------------------------------------------------------------------
\11\ See Cboe Exchange, Inc. Fees Schedule.
\12\ Id.
---------------------------------------------------------------------------
If the option component of a QCC with Stock Order satisfies the
conditions of Rule 6.53(u) upon entry, the System executes the order in
accordance with Rule 6.45(a) (which describes how simple option orders
execute) or 6.53C(c) (which describes how complex orders execute).
However, the Exchange does not immediately send the TPH a trade
execution report for this option execution.\13\ Because the TPH
submitted a QCC with Stock Order to execute as a package, the Exchange
waits to send a trade execution report to the TPH until after it has
determined whether all components of the QCC with Stock Order have
executed, as described below. After the QCC order is executed, the
Exchange will then automatically communicate the stock component to the
designated broker-dealer for execution.
---------------------------------------------------------------------------
\13\ Even though the Exchange does not send the Trading Permit
Holder an execution report immediately following execution of the
option component, the Exchange disseminates the trade at that time
pursuant to the OPRA Plan and creates a record to be sent to the
Clearing Corporation.
---------------------------------------------------------------------------
Although the option component (which is a QCC order) of a QCC with
Stock Order is eligible for automatic execution, it is possible that
the option component order may not be executable based on market prices
at the time the order is entered (e.g. the order would execute at the
same price as a customer). If the QCC order cannot execute after one
attempt, the System cancels the QCC with Stock Order, including both
the stock and options components. This prevents execution of the stock
component of a QCT where the options component has not been
successfully executed, consistent with the purpose of contingent trades
and the QCT exemption.
As noted above, if the option component executes, the System then
automatically communicates the stock component to the designated
broker-dealer for execution. If the System receives an execution report
for the stock component of a QCC with Stock Order from the designated
broker-dealer, the Exchange sends the TPH the trade execution report
for the QCC with Stock Order, including execution information for both
the stock and option components. However, if the System receives a
report from the designated broker-dealer that the stock component of
the QCC with Stock Order cannot execute,\14\ the Exchange nullifies the
option component trade and notifies the TPH of the reason for the
nullification.\15\ This proposed rule change prevents execution of the
option component of a QCT where the stock component has not been
successfully executed, just as the proposed rule change prevents
execution of the stock component of a QCT where the option component
has not been successfully executed by cancelling the stock component if
the option component cannot execute.
---------------------------------------------------------------------------
\14\ For example, if the stock execution venue to which the
designated broker-dealer routed the stock component is experiencing
system issues, the stock component may not be able to execute.
Additionally, the Exchange understands certain stock execution
venues apply risk controls to the stock components of QCTs, which
may prevent execution of the stock components at certain prices.
\15\ The Exchange will nullify the option component trade in the
same manner as it currently nullifies any other trades (when
nullification is permitted under the Rules).
---------------------------------------------------------------------------
Currently, whenever a stock trading venue nullifies the stock leg
of a stock-option order or whenever the stock leg cannot execute, the
Exchange will nullify the option leg upon request of one of the parties
to the transaction or on an Exchange Official's own motion in
accordance with the Rules.\16\ As noted above, to qualify as a QCT, the
execution of one component is contingent upon the execution of all
other components at or near the same time.\17\ Given this requirement,
if the stock component does not execute at or near the same time as the
option component, it is reasonable to expect a TPH that submitted a QCC
with Stock Order to request such nullification.\18\ If
[[Page 42952]]
the stock component does not execute, rather than require the TPH that
submitted the QCC with Stock Order to contact the Exchange to request
the nullification of the option component execution pursuant to Rule
6.25 if the stock component cannot execute, the proposed rule change
simply eliminates this requirement for the submitting TPH to make such
a request. Instead, the proposed rule states the Exchange will
automatically nullify the option transaction if the stock component
does not execute. The Exchange believes such nullification without a
request from the TPH is consistent with the definitions of QCC and QCT
orders. The proposed rule change merely automates a process that TPHs
can manually do today.
---------------------------------------------------------------------------
\16\ See Rule 6.25, Interpretation and Policy .07(c). Pursuant
to Rule 6.25, other nullifications may generally occur only if both
parties agree.
\17\ See QCT Exemption Order, which requires the execution of
one component of the QCT to be contingent upon the execution of all
other components at or near the same time to qualify for the
exemption. In the SIA Exemption Request, the SIA stated that for
contingent trades, the execution of one order is contingent upon the
execution of the other order. SIA further stated that, by breaking
up one or more components of a contingent trade and requiring that
such components be separately executed, one or more parties may
trade ``out of hedge.'' See SIA Exemption Request at 3. In other
words, it takes two (executions) to make a thing (a QCT) go right.
\18\ As set forth in Rule 6.53(u), when submitting a QCC order,
a Trading Permit Holder submits an order as well as a contra-side
order or orders totaling an equal number of contracts, which execute
against each other if they satisfy the conditions set forth in that
Rule. As a result, if that Trading Permit Holder requests
nullification of the QCC order execution (or as proposed, if the
Exchange automatically nullifies the QCC order execution) if the
stock component cannot execute, no other party is impacted by the
nullification.
---------------------------------------------------------------------------
Additionally, the Exchange believes this automatic nullification
will reduce any compliance risk for the TPH associated with execution
of a QCC order and lack of execution of a stock order at or near the
same time.\19\ The Exchange conducts surveillance to ensure a TPH
executes the stock component of a QCT, which will also apply to QCC
with Stock Orders, if the option component executed. As a result, if
the stock component does not execute when initially submitted to a
stock trading venue by the designated broker-dealer, a TPH may be
subject to compliance risk if it does not execute the stock component
within a reasonable time period of the execution of the option
component. The proposed rule change reduces this compliance risk for
TPHs.
---------------------------------------------------------------------------
\19\ In the SIA Exemption Request, the SIA stated that parties
to a contingent trade will not execute one side of the trade without
the other component or components being executed in full (or in
ratio) and at the specified spread or ratio. See SIA Exemption
Request at 2. While a broker-dealer could re-submit the stock
component to a stock trading venue or execution after it initially
fails to execute, there is a compliance risk that the time at which
the stock component executes is not close enough to the time at
which the option component executed.
---------------------------------------------------------------------------
Example 1:
Stock NBBO: $100 x $101
Option NBBO: $1 x $2
A TPH submits a QCC with Stock Order buying 1,000 puts and 100,000
shares of stock with a net price of $101.50. A QCC order is entered on
the Exchange and executed at a price of $1.50. The Exchange reports
this trade to OPRA. The Exchange routes the stock component to an
Exchange-designed broker-dealer at a price of $100. The Exchange
receives a trade execution report from the designated broker-dealer
that the stock component executed at $100, and sends a trade execution
report for both components of the QCC with Stock Order to the TPH.
Example 2:
Stock NBBO: $100 x $101
Option NBBO: $1 x $2
A TPH submits a QCC with Stock Order buying 1,000 puts and 100,000
shares of stock with a net price of $101.50. A QCC order is entered on
the Exchange and executed at a price of $1.50. The Exchange reports
this trade to OPRA. The Exchange routes the stock component to an
Exchange-designed broker-dealer at a price of $100. The Exchange
receives a report from the designated broker-dealer that the stock
component did not execute. The Exchange nullifies the option component
trade, and sends a report to the TPH of the reason for the
nullification.
Example 3:
Stock NBBO: $100 x $101
ABBO: $1.00 x $1.05
Exchange BBO: $1.00 (Priority Customer) x 1.01 (Priority Customer)
A TPH submits a QCC with Stock Order buying 1,000 puts and 100,000
shares of stock with a net price of 101.01. A QCC order is entered on
the Exchange at a price of $1.01. Because the QCC order is at the same
price as a priority customer order resting on the Exchange, the
Exchange cancels the QCC with Stock Order.
At a time following the effective and operative date of this rule
change, the Exchange will announce the availability of QCC with Stock
Orders via Exchange Notice.
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.\20\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \21\ 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 facilitation
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) \22\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------
\20\ 15 U.S.C. 78f(b).
\21\ 15 U.S.C. 78f(b)(5).
\22\ Id.
---------------------------------------------------------------------------
The Exchange believes the proposed rule change is designed to
promote just and equitable principles of trade because it will provide
TPHs with optional functionality to facilitate the stock component of a
QCT. The QCC with Stock Order is an optional piece of functionality
offered to TPHs to communicate the stock component of a QCT to a
designated broker-dealer for execution. A TPH that does not wish to use
QCC with Stock Order functionality can continue to execute a QCT by
entering a QCC order on the Exchange and separately executing the stock
component of the QCT [sic] another venue, as it may do today. A TPH can
also build its own technology to electronically communicate the stock
component of any QCT to a broker-dealer for execution.
QCC with Stock Orders reduce TPHs' compliance burden because it
allows for the automatic submission of the stock component of a QCT in
connection with the execution of the options component(s) as a QCC
order on the Exchange. QCC with Stock Order functionality also provides
benefits to the Exchange by establishing an audit trail for the
execution of the stock component of a QCT within a reasonable period of
time after the execution of the QCC order. The proposed rule change
further reduces TPHs' compliance risk by providing that the Exchange
will, in addition to cancelling the stock component if the option
component cannot execute, nullify any option component execution when
the stock component does not execute without a request from the TPH.
Nullification of the option trade is consistent with the requirement
that a TPH must execute the stock component of a QCT within a
reasonable period of time after executing the option component on the
Exchange as a QCC order. The proposed rule change simply eliminates the
requirement that one party to the transaction request nullification of
the option component trade before the Exchange nullifies the option
trade, because such nullification is consistent with the definitions of
QCC orders and QCT. The proposed rule change merely automates a process
that TPHs can manually do today. As noted above, to qualify as a QCT,
the execution of one component is contingent upon the execution of all
[[Page 42953]]
other components at or near the same time.\23\ Since the purpose of a
QCC with Stock Order is for all components to trade at or near the same
time, if the stock component does not execute at or near the same time
as the option component, it is reasonable to expect a TPH that
submitted a QCC with Stock Order to request such nullification to avoid
any compliance risk associated with execution of a QCC order and lack
of execution of a stock order at or near the same time.\24\
---------------------------------------------------------------------------
\23\ See supra note 13.
\24\ See supra note 14.
---------------------------------------------------------------------------
The Exchange conducts surveillance to ensure a TPH executes the
stock component of a QCT, which will also apply to QCC with Stock
Orders, if the option component executed. As a result, if the stock
component does not execute when initially submitted to a stock trading
venue by the designated broker-dealer, a TPH may be subject to
compliance risk if it does not execute the stock component within a
reasonable time period of the execution of the option component. The
proposed rule change reduces this compliance risk for TPHs. The
Exchange therefore believes the proposed rule change removes
impediments to and perfects the mechanisms of a free and open market
and a national market system, and in general, protects investors and
the public interest.
The Exchange believes the proposed rule change to require a TPH to
submit a QCC with Stock Order with a net price will also perfect the
mechanism of a free and open market and a national market system and
protect investors, because a net price will reduce the chance that TPHs
will miss the market since the Exchange will calculate a price for the
stock and options components that honors the net price of the package
and current market prices, if possible. As noted above, a TPH that
wants to enter a net price for the stock and option components can
execute a QCT by entering a QCC order on the Exchange and separately
executing the stock component of the QCT another venue, as it may do
today. As noted above, submission of a QCC with Stock Order is
consistent with the use of QCTs.\25\
---------------------------------------------------------------------------
\25\ See supra note 8.
---------------------------------------------------------------------------
Additionally, the proposed functionality is similar to
functionality offered by another options exchange \26\ and consistent
with the QCT exemption previously approved by the Commission.\27\
---------------------------------------------------------------------------
\26\ See Nasdaq ISE, LLC (``ISE'') Rules 715(t) and 721(c) and
Supplementary Material.
\27\ See QCT Exemption Order.
---------------------------------------------------------------------------
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. QCC with Stock Orders
facilitate TPHs' compliance with the requirements associated with
executing QCC orders on the Exchange, and are not designed to impose
any unnecessary burden on competition. QCC with Stock Order
functionality is available to TPHs on a voluntary basis, and TPHs are
not required to use QCC with Stock Orders when executing QCTs. The
proposed rule change has no impact on TPHs that elect to execute QCTs
without using QCC with Stock Order functionality. Those TPHs may
continue to execute QCTS in the same manner as they do today by
entering a QCC order on the Exchange and separately executing the stock
component of the QCT another venue. A TPH can also build its own
technology to electronically communicate the stock component of any QCT
to a broker-dealer for execution. For TPHs that elect to use QCC with
Stock Order functionality to execute QCTs, the proposed rule change
reduces those TPHs' compliance burdens to satisfy their obligation to
execute the related stock component of the QCT within a reasonable
period of time after the QCC order is executed on the Exchange, as this
functionality provides an automated means for satisfying this
obligation.
QCC with Stock Orders are available to all TPHs either through a
front-end order and execution management system or through a TPH's own
electronic connection to the Exchange. Additionally, the proposed
functionality is similar to functionality offered by another options
exchange \28\ and consistent with the QCT exemption previously approved
by the Commission.\29\
---------------------------------------------------------------------------
\28\ See ISE Rules 715(t) and 721(c) and Supplementary Material.
\29\ See QCT Exemption Order.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative for 30 days after the date of filing. However,
Rule 19b-4(f)(6)(iii) \32\ permits the Commission to designate a
shorter time if such action is consistent with the protection of
investors and the public interest. In its filing with the Commission,
the Exchange requests that the Commission waive the 30-day operative
delay. The Exchange states that its proposal is consistent with QCT
rules and is designed to (1) help reduce a TPH's compliance burdens by
providing an automated means to facilitate compliance with the
obligations applicable to QCC with stock orders and (2) assist the
Exchange with maintaining an audit trail and conducting surveillance of
TPHs for compliance with the rules governing these types of trades. In
addition, the Exchange noted that this functionality is optional, and
TPHs can continue to execute QCTs manually or though alternative means
as they do today. According to the Exchange, waiving the operative
delay will allow the Exchange to update its rules immediately to
reflect this functionality, to the benefit of members and other market
participants. The Commission believes that waiving the 30-day operative
delay is consistent with the protection of investors and the public
interest because the QCC with Stock Order functionality is designed to
help Exchange members that choose to use the functionality comply with
their qualified contingent trade obligations in connection with a QCC
Order,\33\ as well as help the Exchange surveil its members for
compliance with the Exchange's rules for QCC Orders. Therefore, the
Commission designates the proposed rule change operative upon
filing.\34\
---------------------------------------------------------------------------
\32\ 17 CFR 240.19b-4(f)(6)(iii).
\33\ See supra note 5 and accompanying text.
\34\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------
[[Page 42954]]
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 [email protected]. Please include
File Number SR-CBOE-2018-058 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-2018-058. 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 website (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 website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CBOE-2018-058 and should be submitted on
or before September 14, 2018.
---------------------------------------------------------------------------
\35\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
Eduardo A. Aleman
Assistant Secretary.
[FR Doc. 2018-18295 Filed 8-23-18; 8:45 am]
BILLING CODE 8011-01-P
