[Federal Register Volume 77, Number 114 (Wednesday, June 13, 2012)]
[Notices]
[Pages 35448-35450]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-14335]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67152; File No. SR-CBOE-2012-013]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of a Proposed Rule Change To 
Adopt Self-Trade Prevention Modifiers on the CBOE Stock Exchange

June 7, 2012.

I. Introduction

    On April 12, 2012, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt Self-Trade Prevention 
modifiers on the CBOE Stock Exchange (``CBSX''). The proposed rule 
change was published for comment in the Federal Register on May 1, 
2012.\3\ The Commission received no comment letters on the proposed 
rule change.

[[Page 35449]]

This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 66860 (April 25, 
2012), 77 FR 25767 (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposal

    The Exchange proposes to adopt Cancel Newest, Cancel Oldest, and 
Cancel Both Self-Trade Prevention modifiers on CBSX. As proposed, a 
CBSX trader may elect for none, or all, of his proprietary orders and 
quotes to be marked with one of these types of Self-Trade Prevention 
modifiers.\4\ If a CBSX trader makes an election, any quote or order he 
submits will be prevented from executing against a resting opposite 
side order or quote that is labeled as originating from the same 
associated acronym and trading for the same account (``Same CBSX 
Trader'').
---------------------------------------------------------------------------

    \4\ According to the Exchange, a CBSX trader may only elect for 
one of the three types of Self-Trade Prevention modifiers, as the 
CBSX system may only be configured to permit one such election. In 
addition, Self-Trade Prevention elections cannot be made on a per-
order, per-quote, or security-by-security basis due to CBSX system 
limitations.
---------------------------------------------------------------------------

    If a CBSX trader elects the Cancel Newest Self-Trade Prevention 
modifier, any incoming order or quote submitted by that CBSX trader 
will not execute against opposite side resting interest from the Same 
CBSX Trader. The incoming order or quote (or any portion thereof) will 
be canceled back to the originating CBSX trader if such order or quote 
cannot trade with another eligible order or quote originating from any 
origin other than the Same CBSX Trader (``Another CBSX Trader''). The 
incoming order or quote may only trade with an eligible order or quote 
originating from Another CBSX Trader if the order or quote originating 
from Another CBSX Trader is at as good a price as the order or quote 
from the Same CBSX Trader that is being ``skipped over.'' The resting 
order or quote from the Same CBSX Trader will remain on the book. In 
the case of an opening or re-opening, the newer of the two orders or 
quotes submitted by the Same CBSX Trader will be canceled. The older 
order or quote will be permitted to trade with eligible orders or 
quotes originating from Another CBSX Trader, and any remaining portion 
thereof will remain in the book.\5\
---------------------------------------------------------------------------

    \5\ The Exchange notes that orders marked with Self-Trade 
Prevention modifiers will be treated differently during openings and 
re-openings because of system limitations. The CBSX system cannot 
process orders marked with Self-Trade Prevention modifiers in the 
same manner during openings and re-openings as during regular 
trading.
---------------------------------------------------------------------------

    If a CBSX trader elects the Cancel Oldest Self-Trade Prevention 
modifier, any incoming order or quote submitted by that CBSX trader 
will not execute against opposite side resting interest from the Same 
CBSX Trader. When a CBSX trader submits an incoming order or quote that 
would trade against opposite side resting interest from the Same CBSX 
Trader, the opposite side resting interest will be canceled. The 
incoming order or quote will be eligible to trade with another eligible 
order or quote originating from Another CBSX Trader. If any portion of 
the incoming order or quote does not trade with another eligible order 
or quote originating from Another CBSX Trader, it will be entered into 
the book. In the case of an opening or re-opening, the older of the two 
orders or quotes submitted by the Same CBSX Trader will be canceled. 
The newer order or quote will be permitted to trade with eligible 
orders or quotes originating from Another CBSX Trader, and any 
remaining portion thereof will be entered into the book.\6\
---------------------------------------------------------------------------

    \6\ See id.
---------------------------------------------------------------------------

    If a CBSX trader elects the Cancel Both Self-Trade Prevention 
modifier, any incoming order or quote submitted by that CBSX trader 
will not execute against opposite side resting interest from the Same 
CBSX Trader. When a CBSX trader submits an incoming order or quote that 
would trade against opposite side resting interest from the Same CBSX 
Trader, the opposite side resting interest will be canceled. The 
incoming order or quote (or any portion thereof) will be canceled back 
to the Same CBSX Trader if such order or quote (or part of such order 
or quote) cannot trade with another eligible order or quote originating 
from Another CBSX Trader. In the case of an opening or re-opening, both 
of the two orders or quotes will be canceled.\7\
---------------------------------------------------------------------------

    \7\ See id.
---------------------------------------------------------------------------

    Under the proposed Self-Trade Prevention modifier rules, orders or 
quotes may skip over orders or quotes from the Same CBSX Trader and 
trade against eligible orders or quotes with lower priority that 
originate from Another CBSX Trader, provided the prices are the same. 
Therefore, the Exchange proposes to add Interpretations and Policies 
.01 to Rule 52.1, Matching Algorithm/Priority, to provide that in 
instances in which the Self-Trade Prevention modifiers are implicated, 
the Self-Trade Prevention modifier rules will supersede other 
allocation methods only for the purpose of preventing self-trades, as 
described in the proposed Self-Trade Prevention modifier rule.
    Finally, CBSX Rule 51.8(t) provides for a Market-Maker Trade 
Prevention Order which, if combined with a Self-Trade Prevention 
modifier, could cause a conflict in order handling. Thus, the Exchange 
proposes that, in circumstances where both the Market-Maker Trade 
Prevention Order and a Self-Trade Prevention modifier are implicated, 
the Self-Trade Prevention modifier shall take precedence.
    Once the CBSX system is enabled to permit the use of Self-Trade 
Prevention modifiers, and prior to their implementation, CBSX will 
announce the availability of Self-Trade Prevention modifiers to CBSX 
traders via Regulatory Circular.

III. Discussion and Commission Findings

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\8\ 
Specifically, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\9\ which requires, among 
other things, that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, 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.
---------------------------------------------------------------------------

    \8\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Self-Trade Prevention modifiers for proprietary orders and quotes 
of CBSX traders are, according to the Exchange, designed to prevent a 
market participant from unintentionally causing a proprietary self-
trade. As such, Self-Trade Prevention modifiers could provide firms 
with the opportunity to better manage order flow and prevent 
undesirable self-executions and the potential for, or appearance of, 
``wash sales.'' \10\ The Exchange further notes that Self-Trade 
Prevention modifiers may reduce false positive results on Exchange-
generated wash trading surveillance reports when orders are executed by 
the Same CBSX Trader, which would increase regulatory efficiency.
---------------------------------------------------------------------------

    \10\ CBSX traders may have multiple connections into CBSX, and 
orders routed by the same CBSX trader via different connections may, 
in certain circumstances, trade against each other. The proposed 
Self-Trade Prevention modifiers could provide CBSX traders the 
opportunity to prevent these potentially undesirable trades. See 
Notice, 77 FR at 25769.
---------------------------------------------------------------------------

    The proposed Self-Trade Prevention modifier rules will apply to 
orders and quotes because the Exchange believes

[[Page 35450]]

the application of these rules to quotes, as well as orders, would 
allow the modifiers to be used in a more complete, comprehensive, and 
consistent manner.\11\ The Commission finds that this is reasonable and 
consistent with the Act. In addition, the Exchange states that it chose 
to limit Self-Trade Prevention modifiers to proprietary orders and 
quotes.\12\ This would allow agency orders for the Same CBSX Trader, 
which may actually be for different customers, to continue to trade 
with each other.
---------------------------------------------------------------------------

    \11\ Other exchanges apply similar modifiers to orders only. 
See, e.g., NYSE Arca Equities Rule 7.31(qq); BATS Rule 11.9(f).
    \12\ Other exchanges do not specify that their modifiers are 
limited to proprietary orders. See id.
---------------------------------------------------------------------------

    The Commission also believes that the aspect of the proposal which 
would add Interpretations and Policies .01 to Rule 52.1 to provide that 
in circumstances where Self-Trade Prevention modifiers are implicated, 
the Self-Trade Prevention modifier rules will supersede other 
allocation methods only for the purpose of preventing self-trades is 
consistent with the Act. In addition, the Commission believes that the 
proposal to amend Rule 51.8(t) to provide that in circumstances in 
which both the Market-Maker Trade Prevention Order and a Self-Trade 
Prevention modifier are implicated, the Self-Trade Prevention modifier 
shall take precedence is consistent with the Act. The Commission 
believes that these amendments would clarify the application of the 
proposed Self-Trade Prevention modifier rules to existing CBSX rules.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-CBOE-2012-013) be, and 
hereby is, approved.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-14335 Filed 6-12-12; 8:45 am]
BILLING CODE 8011-01-P