[Federal Register Volume 78, Number 55 (Thursday, March 21, 2013)]
[Notices]
[Pages 17452-17454]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-06480]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69147; File No. SR-CBOE-2013-029]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Comply With the Requirements of the National 
Market System Plan To Address Extraordinary Market Volatility

March 15, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on March 4, 2013 Chicago Board Options Exchange, Incorporated (the 
``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I and II below, which Items have been prepared by the 
Exchange. The 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 Substance 
of the Proposed Rule Change

    The Exchange proposes to amend CBOE Stock Exchange, Inc. (``CBSX'') 
rules to comply with the National Market System Plan to Address 
Extraordinary Market Volatility (as amended, the ``Plan''). 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, on the Commission's Web site 
(http://www.sec.gov), 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to amend CBSX rules to conform with the 
Plan. Specifically, the Exchange is proposing to add CBSX Rule 52.15, 
``Special Conditions due to Extraordinary Market Volatility'' and make 
other administrative changes. CBSX believes these amendments will allow 
CBSX to appropriately conform to the market-wide requirements under the 
Plan. CBSX believes similar rule changes will be adopted by other 
markets in the national market system in a coordinated manner.
    In an attempt to address extraordinary market volatility in NMS 
Stock, and, in particular, events like the severe volatility on May 6, 
2010, the Exchange, in conjunction with the other national securities 
exchanges and the Financial Industry Regulatory Authority, Inc. 
(collectively, ``Participants'') drafted the Plan pursuant to Rule 608 
of Regulation NMS and under the Securities Exchange Act of 1934 (the 
``Act'').\3\ The Plan is primarily designed to, among other things, 
address extraordinary market volatility in NMS stocks, protect 
investors, and promote fair and orderly markets. The Plan provides for 
market-wide limit up-limit down requirements that prevent trades in 
individual NMS Stocks from occurring outside of specified price bands, 
as defined in Section I(N) of the Plan. These requirements would be 
coupled with trading pauses, as defined in Section I(Y) of the Plan, to 
accommodate more fundamental price moves (as opposed to erroneous 
trades or monetary gaps of liquidity).
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    \3\ See Securities Exchange Act Release No. 64547 (May 25, 
2011), 76 FR 31647 (June 1, 2011) (File No. 4-631).
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    The Plan was filed on April 5, 2011 by the Participants for 
publication and comment.\4\ The Participants requested the Commission 
approve the Plan as a one-year pilot. On May 24, 2012, the Participants 
filed an amendment to the Plan which clarified, among other things, the 
calculation of the reference price, as defined in Section I(T) of the 
Plan, potential for order type exemption, and the creation of an 
Advisory Committee.\5\ On May 31, 2012, the Commission approved the 
Plan, as amended, on a one-year pilot basis.\6\
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    \4\ Id.
    \5\ See Securities and Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631).
    \6\ See Securities and Exchange Act Release No. 67091 (May 31, 
2012) 77 FR 33498 (June 6, 2012).
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    Under the Plan, Participants are required to adopt certain rules in 
order to comply. Specifically, Section II(B) requires each Participant 
to adopt a rule requiring compliance by its members with the provision 
of the Plan. In addition, Section VI of the Plan sets forth the limit 
up-limit down requirements of the Plan, and in particular, that all 
trading centers in NMS Stocks, including both those operated by the 
Participants and those operated by member of Participants, shall 
establish, maintain, and enforce written policies and procedures that 
are reasonably designed to prevent trades at prices that are below the 
lower price band or above the upper price band for an NMS Stock, 
consistent with the Plan. Price bands would be calculated by Securities 
Information Processors (``SIPs'') responsible for consolidation of 
information for an NMS Stock pursuant to Rule 603(b) of Regulation NMS 
under the Act. As proposed, and approved, the Plan would be 
implemented, as a one year pilot program, in two phases.\7\ Phase I 
would become effective immediately and apply to Tier I NMS Stock per 
Appendix A of the Plan, and Phase II would become effective six months 
later, or earlier if announced by the SIPs 30 days prior, and would 
apply to all NMS Stocks.
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    \7\ Id.
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    To comply with the above stated provisions of the Plan, the 
Exchange is proposing to add CBSX Rule 52.15, ``Special Conditions due 
to Extraordinary Market Volatility'' and make other administrative 
conforming changes. As stated above, CBSX believes similar rule changes 
will be adopted by other markets in the national market system in a 
coordinated manner.
    First, the Exchange is proposing to add CBSX Rule 52.15, ``Special 
Conditions due to Extraordinary Market Volatility.'' Under the Plan, 
Section II(B) requires each Participant to adopt a rule requiring 
compliance by its members with the provision of the Plan. Thus, the 
Exchange is proposing to add a new CBSX Rule 52.15(c)(1) to add such 
language. In addition, the proposed rule change would add CBSX Rule 
52.15(a) to refer Trading Permit Holders (``TPHs'') to Exchange rules 
addressing ``Market-wide Trading Halts Due to Extraordinary Market 
Volatility'' \8\ as

[[Page 17453]]

these trading halts will also occur at the same time as the Plan to 
accommodate more fundamental price moves. The Exchange is also 
proposing to add CBSX Rule 52.15(b) which references Exchange Rule 
6.3C, ``Individual Stock Trading Pause Due to Extraordinary Market 
Volatility,'' which is the current individual stock trading halts 
currently in effect. The Plan seeks to replace these halts, but by 
including reference to the current halts in the proposed Rule, TPHs 
will more fully understand which rules are applicable. For more 
clarity, the Exchange is proposing to add language to newly proposed 
Rule 52.15(c) to alert TPHs to the gradual phasing of the Plan as it 
coincides with the Trading Pauses referenced in Rule 52.15. Next, the 
Exchange is proposing to add language regarding Clearly Erroneous 
Executions. A new paragraph (i) has been added to CBSX Rule 52.4 to 
address the Plan.\9\ In implementing one rule to alert TPHs to the 
Plan, the Exchange is proposing to create a roadmap of rules related to 
the Plan to make it explicit and easy to use how the Plan will be 
incorporated into the CBSX Rules. By adding the proposed language to 
CBSX Rule 52.15, CBSX is attempting to eliminate confusion for TPHs.
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    \8\ See Rule 6.3B.
    \9\ See Securities Exchange Act Release No. 34-68800 (February 
7, 2013), 78 FR 9076 (February 21, 2013) (SR-CBOE-2013-012).
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    The Plan also requires policies and procedures including, but are 
not limited to, specific order handling rules addressing exchange-
specific order types to be put in place by each exchange in order to 
comply. CBSX is proposing to add Rule 52.15(c)(3) to fulfill these 
requirements. The proposed rule change will address how certain orders 
will function on CBSX in compliance with the Plan.
    CBSX believes the proposed rule change allows CBSX to comply with 
the Plan because it prevents trades from occurring outside of the price 
bands as the Plan specifically requires. Specifically, CBSX is 
proposing to add language to clarify that market orders \10\ will 
execute at prices ``at, or better than, the opposite side of the Price 
Band.'' If the order, or any portion of that order, would result in an 
execution outside of the Price Band, then the order will be cancelled. 
The Exchange believes the proposed changes will comply with the Plan, 
as required, as it will ensure market orders are not executed at a 
price that is outside of the applicable Price Band.
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    \10\ See Rule 51.8(a) which defines a market order as ``an order 
to buy or sell a stated number of shares at the best price available 
on the CBSX system.''
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    CBSX is also adding language to address orders that may be 
explicitly priced outside the Price Bands.\11\ Because the specified 
price on these orders might also be outside the price bands, CBSX will 
re-price these orders to be within the price bands. More specifically, 
an order that is explicitly priced outside of the Price band, will be 
re-priced by the CBSX System to the corresponding Price Band. To remain 
consistent, if a Price Band moves and an order resting in the CBSX Book 
is priced outside of the Price Band, the resting order will also be re-
priced to the corresponding Price Band. Language is also being proposed 
to clarify that re-priced orders will retain the original time price 
priority. The Exchange believes this proposed change will also prevent 
orders from executing outside of the Price Bands.
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    \11\ CBSX currently supports various order types that, by their 
nature, require a specified price (e.g. Limit Orders) or an optional 
contingency price (e.g. Silent Orders). See, e.g., CBSX Rule 51.8(b) 
and (10).
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    Next, CBSX is adding language to address Immediate-or-Cancel 
orders. Any Immediate-or-Cancel order will be accepted by the CBSX 
System, however, such orders may only execute at or within the bands. 
Consistent with Immediate-or-Cancel orders generally, any unexecuted 
portion will be cancelled. With the proposed changes, CBSX will be in 
compliance with the Plan by preventing trades from occurring outside 
the price bands during a limit state. The Exchange is also proposing to 
add language to state that any CBSX order priced passively outside of 
the Price Bands will be accepted by the CBSX System and put in the CBSX 
book. Such orders will not be executed until the Price Band moves and 
the order is now at or within the Price Band.
    The Exchange is also proposing to add language to describe how the 
Exchange will route orders. More specifically, the Exchange is 
proposing to add 52.15(c)(3)(E) to explicitly say that the Exchange 
shall not route to an away market displaying a quote that is outside of 
the applicable Price band. The Exchange believes this change will 
ensure the Exchange will not execute any orders outside of the Price 
Bands and required by the Plan.
    Next, the Exchange is proposing to add language regarding special 
handling of quotes after the Plan becomes operative. The Exchange is 
proposing to add language specifically addressing new bids and offers 
will be cancelled for those quotations are outside of the applicable 
Price Bands. In addition, any resting quotation in the CBSX book that 
becomes outside of the Price Bands due to a change in the market will 
be re-priced to the corresponding Price Band as appropriate. The 
Exchange believes that this proposed change will further ensure that 
orders will not be executed outside of the Price Bands as required by 
the Plan.
    Finally, as an administrative change, the Exchange is proposing to 
add reference to Rule 6.3C, ``Individual Stock Trading Pause Due to 
Extraordinary Market Volatility'' in CBSX Appendix A to make clear Rule 
6.3C applies to CBSX members as well. The Exchange believes this change 
creates more clarity to TPHs which rules are applicable to them.
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.\12\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \13\ 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) \14\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ Id.
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    In particular, the Exchange believes the proposed rule change will 
comply with the Plan which is intended to reduce the negative impacts 
of sudden, unanticipated price movements in NMS Stocks, thereby 
protecting investors and promoting a fair and orderly market. In 
addition, similar rule changes will be adopted by other markets in the 
national market system in a coordinated manner promoting the public 
interest. Creating a more orderly market will promote just and 
equitable principles of trade by allowing investors to feel more secure 
in their participation in the national market system. The proposed rule 
change also incorporates a market-wide plan, which has been approved by 
the

[[Page 17454]]

Commission under the Act.\15\ Incorporation of such Plan into the CBSX 
rules allows for explicit compliance under the Act.
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    \15\ See supra note 6.
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    The Exchange also believes the proposed rule change is consistent 
with Section 6(b)(1) of the Act,\16\ which provides that the Exchange 
be organized and have the capacity to be able to carry out the purposes 
of the Act and to enforce compliance by the Exchange's Trading Permit 
Holders and persons associated with its Trading Permit Holders with the 
Act, the rules and regulations thereunder, and the rules of the 
Exchange. The Plan was filed under the Act, and the proposed rule 
changes merely allow CBSX to comply with the Plan. Therefore, the 
proposed rule change is allowing the Exchange to have the capacity to 
carry out the purposes of the Act. In addition, it is requiring CBSX 
TPHs to comply with the Plan and, thus, the Act.
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    \16\ 15 U.S.C. 78f(b)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed changes are based 
on a market-wide plan, and, as such, the Exchange understands other 
competing exchanges plan to make similar changes. In addition, the 
proposed changes are being made to establish, maintain, and enforce 
written policies and procedures that are reasonably specified in the 
Plan. As such, the proposed changes merely provide protection to 
investors during periods of extraordinary market volatility.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \17\ and Rule 19b-4(f)(6) thereunder.\18\ 
Because the 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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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    \17\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \18\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change, along with a 
brief description and 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. The 
Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of such 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. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) of the Act \19\ to determine whether the proposed 
rule change should be approved or disapproved.
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    \19\ 15 U.S.C. 78s(b)(2)(B).
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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 No. SR-CBOE-2013-029 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. SR-CBOE-2013-029. 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, 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 such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File No. SR-CBOE-2013-029 and should be 
submitted on or before April 11, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-06480 Filed 3-20-13; 8:45 am]
BILLING CODE 8011-01-P