[Federal Register Volume 77, Number 218 (Friday, November 9, 2012)]
[Notices]
[Pages 67421-67424]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-27361]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68155; File No. SR-CBOE-2012-100]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to System Access, Connectivity, and 
Testing

November 5, 2012.
    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 October 23, 2012, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its rules regarding Hybrid Trading 
System (the ``System'') \3\ access, connectivity, and testing by 
Trading Permit Holders. The text of the proposed rule change is 
available on the Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission.
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    \3\ The System is a trading platform that allows automatic 
executions to occur electronically and open outcry trades to occur 
on the floor of the Exchange. To operate in this ``hybrid'' 
environment, the Exchange has a dynamic order handling system that 
has the capability to route orders to the trade engine for automatic 
execution and book entry, to Trading Permit Holder and PAR Official 
workstations located in the trading crowds for manual handling, and/
or to other order management terminals generally located in booths 
on the trading floor for manual handling. Where an order is routed 
for processing by the Exchange order handling system depends on 
various parameters configured by the Exchange and the order entry 
firm itself.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend its rules regarding System access, 
connectivity, and testing by Trading Permit Holders. The Exchange makes 
available to Trading Permit Holders various application programming 
interfaces (``APIs''),\4\ such as CBOE Market Interface (``CMi'') and 
Financial Information eXchange (``FIX'') Protocol, for authorized 
Trading Permit Holders to use to access the System.\5\ Trading Permit 
Holders may select which of these APIs they would like to use to 
connect to the System when registering with the Exchange for System 
access. The Exchange believes it is important to provide Trading Permit 
Holders with this flexibility so that they can determine the API that 
will be most compatible with their systems and maximize the efficiency 
of their systems' connection to the System. Connection to the System 
allows authorized Trading Permit Holders to enter and execute orders, 
as well as submit certain order and trade data to the Exchange, which 
data the Exchange uses to conduct surveillances of its markets and 
Trading Permit Holders.
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    \4\ APIs are computer programs that allow Trading Permit Holders 
to interface with the Exchange.
    \5\ Only Trading Permit Holders may access the System. The 
Commission adopted Rule 15c3-5 under the Act, which, among other 
things, requires broker-dealers providing others with access to an 
exchange or alternative trading system to establish, document, and 
maintain a system of risk management controls and supervisory 
procedures reasonably designed to manage the financial, regulatory, 
and other risks of providing such access. See Securities Exchange 
Act Release No. 63241 (November 3, 2010), 75 FR 69792 (November 15, 
2010). Rule 15c3-5 effectively eliminated ``naked access'' (i.e. 
``Sponsored Users'') to the Exchange by non-Trading Permit Holders 
and effectively requires Trading Permit Holders to filter all non-
Trading Permit Holder orders prior to being sent to the Exchange. 
The Exchange expects to eliminate the concept of Sponsored Users 
under its Rules in connection with the adoption of Rule 15c3-5 in a 
separate rule filing.
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    After a Trading Permit Holder registers with the Exchange to use a 
specific API, the Exchange may require the Trading Permit Holder to use 
a specific connectivity protocol that, among other things, may require 
the input of certain information (e.g. trading acronym, category of 
Trading Permit Holder) during the connectivity process in accordance 
with technical specifications established by the Exchange. The Exchange 
may prescribe a specific connectivity protocol for all Trading Permit 
Holders, or for certain categories of similarly situated Trading Permit 
Holders (e.g. Floor Brokers, Designated Primary Market-Makers 
(``DPMs''), or Market-Makers).
    It is imperative for the Exchange to receive during the 
connectivity process information regarding a Trading Permit Holder's 
identification so that the Exchange can ensure that the connecting 
party is a Trading Permit Holder authorized to access the System and 
that the Exchange is aware of what type of Trading Permit Holder the 
connecting party is. Requiring a specific connectivity protocol allows 
the Exchange to receive this information in a uniform manner for all 
Trading Permit Holders, or categories of similarly situated Trading 
Permit Holders, as the Exchange deems necessary. This information 
allows the Exchange to, among other things, perform the necessary 
surveillances applicable to the Trading Permit Holder and determine 
whether the Trading Permit Holder is complying with all relevant 
Exchange Rules. Many of the Exchange's surveillances are conducted by 
type of Trading Permit Holders, as different types have different 
responsibilities they must meet under the Exchange rules.\6\ The 
Exchange believes that receiving trade data in an organized and uniform 
format from all Trading Permit Holders, or types of Trading Permit 
Holders, allows it to efficiently identify Trading Permit Holders and 
monitor and conduct surveillances of its markets and Trading Permit 
Holder, and thus effectively fulfill its regulatory responsibilities. 
Additionally, the Exchange believes that prescribing connectivity 
protocols on either all Trading Permit Holders or categories of 
similarly situated Trading Permit Holders ensures that the Exchange 
makes these prescriptions in an objective manner.
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    \6\ For example, a DPM must satisfy quoting obligations that are 
different than those that a Market-Maker must satisfy, and the 
Exchange reviews their quoting activity to determine whether they 
have satisfied their respective obligations. See Rule 8.85 
(obligations of DPMs) and Rule 8.7 (obligations of Market-Makers).
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    The Exchange also periodically requires Trading Permit Holders that 
have been authorized to access the System to conduct or participate in 
the testing of their computer systems to ascertain the compatibility of 
these systems with the System. The Exchange believes that it is 
critical that Trading

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Permit Holders work closely with the Exchange in testing new software 
releases and other System changes. System testing allows the Exchange 
to ensure that Trading Permit Holders' systems are continuously 
compatible with the System in the event of System changes and that the 
Exchange continues to receive all necessary data from Trading Permit 
Holders in a timely manner and efficient format. Additionally, System 
testing allows Trading Permit Holders to make any necessary adjustments 
to their systems in the event of System changes to ensure that their 
connections to the System are functioning properly and that they are 
able to submit order and trade information in compliance with all 
applicable Exchange Rules.
    The Exchange proposes to codify these current Exchange practices 
and requirements related to System access and connectivity. Proposed 
Rule 6.23A(c) clarifies in the Rules that only Trading Permit Holders 
(and their associated persons) may be authorized to access the System 
to enter and execute orders. This proposed provision also provides that 
the Exchange will require a Trading Permit Holder to enter into a 
software user or license agreement with the Exchange in a form or forms 
prescribed by the Exchange in order to obtain authorized access to the 
System if the Trading Permit Holder elects to use an API for which the 
Exchange has determined that this type of an agreement is necessary. In 
other words, whether the Exchange requires a Trading Permit Holder to 
enter into a user or license agreement will depend solely on the 
objective criteria of what type of API the Trading Permit Holder opts 
to use.\7\ The proposed rule change also amends Rule 6.23A(a) to 
clarify that the term API means application programming interface.
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    \7\ For example, the Exchange developed CMi and currently 
requires all Trading Permit Holders that opt to connect to the 
System using CMi to enter into a software license agreement with the 
Exchange to use CMi. The Exchange has determined that Trading Permit 
Holders that opt to connect to the System using FIX do not currently 
have to enter into any type of software user or license agreement, 
which is a universally available application for which the developer 
does not require a user agreement.
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    Proposed Rule 6.23A(d) provides that the Exchange may prescribe 
technical specifications pursuant to which all Trading Permit Holders, 
or categories of similarly situated Trading Permit Holders (e.g., Floor 
Brokers, DPMs, Market-Makers), may establish an electronic connection 
to the System and its facilities. The Exchange will announce to Trading 
Permit Holders via Regulatory Circular any connectivity protocol 
prescription.
    Proposed Rule 6.23A(e)(i) provides that each Trading Permit Holder 
that the Exchange designates as required to participate in a system 
test must conduct or participate in the testing of its computer systems 
to ascertain the compatibility of such systems with the System in the 
manner and frequency prescribed by the Exchange. The Exchange will 
designate Trading Permit Holders as required to participate in a system 
test based on: (1) The category of the Trading Permit Holder (e.g. 
Floor Broker, DPM, Market-Maker); (2) the computer system(s) the 
Trading Permit Holder uses; and (3) the manner in which the Trading 
Permit Holder connects to the System. The Exchange will give Trading 
Permit Holders reasonable notice of any mandatory systems test, which 
notice will specify the nature of the test and Trading Permit Holders' 
obligations in participation in the test.
    In connection with this mandatory system testing, proposed Rule 
6.23A(e)(ii) provides that every Trading Permit Holder required by the 
Exchange to conduct or participate in testing of computer systems must 
provide to the Exchange any reports relating to the testing as the 
Exchange may prescribe. Trading Permit Holders must maintain adequate 
documentation of tests required by this Rule and results of this 
testing for examination by the Exchange.
    Proposed Rule 6.23A(e)(iii) states that a Trading Permit Holder 
that fails to conduct or participate in mandatory systems tests, fails 
to file the required reports, or fails to maintain the required 
documentation, as required by proposed Rule 6.23A(e)(i) and (ii), may 
be subject to summary suspension or other action taken pursuant to 
Chapter XVI (Summary Suspension) and/or disciplinary action pursuant to 
Chapter XVII (Discipline) of the Exchange Rules. Disciplinary action 
may include fines pursuant to proposed Rule 17.50(g)(19), which 
provides that Trading Permit Holders that violate proposed Rule 
6.23A(e) may be subject to fines under the Exchange's minor rule 
violation plan.\8\ As with all other violations in the Exchange's minor 
rule violation plan, the Exchange retains the ability to refer a 
violation of the system testing requirements to its Business Conduct 
Committee should the circumstances warrant such a referral. The 
Exchange believes that violations of the proposed mandatory system 
testing provision are suitable for its minor rule violation plan 
because they are generally technical in nature. Further, including 
these violations into the minor rule violation plan will allow the 
Exchange to carry out its regulatory responsibilities more quickly and 
efficiently.
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    \8\ These fines are as follows: $250 for the first offense, $500 
for the second offense, $1,000 for the third offense, $2,000 for the 
fourth offense, and referral to the Business Conduct Committee for 
any subsequent offenses. The fines are based on the number of 
offenses in one calendar year.
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    The proposed rule change also amends Rule 50.2(a) in the CBOE Stock 
Exchange, LLC (``CBSX'') \9\ Rules to clarify that references to 
``Hybrid Trading System,'' ``Hybrid System,'' and ``System'' in 
Exchange Rules that are applicable to trading on CBSX should be read to 
mean ``CBSX System.'' Additionally, the proposed rule change amends 
Appendix A to the CBSX Rules to provide that Rule 6.23A(c) through (e) 
applies to the trading of equity securities on CBSX. This change 
clarifies that the Exchange may similarly require CBSX Trading Permit 
Holders, or categories of CBSX Trading Permit Holders (e.g. Remote 
Market-Makers), to connect to the Exchange in accordance with a 
specific connectivity protocol and to participate in system testing as 
the Exchange deems necessary.
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    \9\ CBSX is a stock trading facility of the Exchange.
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    Codification of these requirements gives the Exchange the ability 
to discipline any Trading Permit Holders that fail to comply with these 
requirements. While Trading Permit Holders generally comply with these 
requirements, their inclusion in the Rules (and the resulting potential 
for discipline for noncompliance) may enhance Trading Permit Holders' 
overall compliance with them.
    Codification of these requirements is also consistent with the 
Rules of other exchanges. Proposed Rule 6.23A(c) is substantially 
similar to: BATS Exchange, Inc. (``BATS'') Rule 11.3(a); BOX Options 
Exchange LLC (``BOX'') Rule 7000(a); EDGA Exchange, Inc. (``EDGA'') 
Chapter XI, Rule 11.3(a); EDGX Exchange, Inc. (``EDGX'') Chapter XI, 
Rule 11.3(a); International Securities Exchange, LLC (``ISE'') Rule 
706(a); NASDAQ Option Market (``NOM'') Chapter V, Section 1(a); NYSE 
Arca, Inc. (``NYSE Arca'') Rule 6.2A(a); and NYSE MKT LLC (``NYSE 
MKT'') Rule 902.1NY(a). Proposed Rule 6.23A(e) is substantially similar 
to: BATS Rule 18.13; BOX Rule 3180; ISE Rule 419; and NOM Chapter III, 
Section 13. BOX Rule 12140(d)(7) and ISE Rule 1614(d)(8) also allow 
those exchanges to fine their members for violations of their 
respective mandatory system provisions

[[Page 67423]]

pursuant to their respective minor rule violation plans.\10\
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    \10\ The proposed fine amounts in proposed Rule 17.50(g)(19) are 
the same as the fine amounts in the corresponding BOX and ISE rules.
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    Additionally, proposed Rule 6.23A(c) is consistent with Rule 15c3-1 
[sic] under the Act.\11\
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    \11\ See supra note 5.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\12\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) requirements that the rules of 
an exchange be designed to promote just and equitable principles of 
trade, to prevent fraudulent and manipulative acts, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
to perfect the mechanism for a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.\13\ Additionally, the Exchange believes the proposed rule 
change is consistent with the Section 6(b)(5) requirement that the 
rules of a national securities exchange be designed to not permit 
unfair discrimination between customer, issuers, brokers or 
dealers.\14\ The Exchange also believes the proposed rule change is 
consistent with the Section 6(b)(6) \15\ requirement that the rules of 
an exchange provide that its members and persons associated with its 
members be appropriately disciplined for violation of the provisions of 
the Act, the rules and regulations thereunder, or the rules of the 
exchange, by expulsion, suspension, limitation of activities, 
functions, and operations, fine, censure, being suspended or barred 
from being associated with a member, or any other fitting sanction.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ Id.
    \15\ 15 U.S.C. 78f(b)(6).
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    The proposed rule change codifies current Exchange requirements 
that enhance CBOE's market surveillances and System functionality. 
Proposed Rule 6.23A(c) is consistent with Rule 15c3-5 under the Act, 
and the Exchange believes the proposed rule change promotes compliance 
by Trading Permit Holders with the market access requirements under 
that rule. The Exchange believes that proposed Rule 6.23A(d) allows the 
Exchange to receive from Trading Permit Holders, or categories of 
similarly situated Trading Permit Holders, information in a uniform 
format, which aids the Exchange's efforts to monitor and regulate 
CBOE's markets and Trading Permit Holders and helps prevent fraudulent 
and manipulative practices. This also helps coordinate the ability of 
Trading Permit Holders to electronically trade on the Exchange with the 
Exchange's ability to receive the necessary information to regulate 
those transactions. Proposed Rule 6.23A(e) allows the Exchange to 
ensure that Trading Permit Holders' connections to the System function 
correctly, which promotes efficiency and enhances compliance by Trading 
Permit Holders with Exchange Rules. The proposed changes to the CBSX 
Rules clarify for CBSX Trading Permit Holders that they are subject to 
and must comply with the requirements in proposed Rule 6.23A.
    In addition, codification of these requirements is consistent with 
the Act because it gives the Exchange the ability to discipline Trading 
Permit Holders that fail to comply with these requirements, which may 
enhance overall Trading Permit Holder compliance with these 
requirements. This proposed rule change will also promote consistency 
in the minor rule violation programs of other exchanges and allow the 
Exchange to carry out its regulatory responsibilities more quickly and 
efficiently by including violations of the mandatory system testing 
provision in the Exchange's minor rule violation plan.
    The Exchange believes that the proposed rule change is designed to 
not permit unfair discrimination among Trading Permit Holders, as the 
proposed rule change provides for the Exchange to impose requirements 
on Trading Permit Holders in an objective manner. For example, under 
proposed Rule 6.23A(d), the Exchange may impose connectivity protocol 
requirements on all Trading Permit Holders, or similarly situated 
Trading Permit Holders. Additionally, under proposed Rule 6.23A(c), 
whether the Exchange requires a Trading Permit Holder to enter into a 
software user or license agreement depends solely on what type of API 
the Trading Permit Holder opts to use to connect to the System.
    Finally, the proposed rule change will help remove impediments to 
and promote a free and open market and a national market system because 
it is consistent with rules in place at other exchanges and imposes 
substantially similar requirements on Trading Permit Holders as those 
rules do on those exchanges' members.

B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE 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.

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:
    A. Significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. 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) \16\ of the Act and 
Rule 19b-4(f)(6) \17\ thereunder.
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of this proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2012-100 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission,

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100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2012-100. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room on official business 
days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal offices of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-CBOE-2012-100, and should be submitted on or before 
November 30, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-27361 Filed 11-8-12; 8:45 am]
BILLING CODE 8011-01-P