[Federal Register Volume 78, Number 93 (Tuesday, May 14, 2013)]
[Notices]
[Pages 28265-28267]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-11359]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69528; File No. SR-CBOE-2013-048]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend Rule 6.74A

May 7, 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 May 02, 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 Rule 6.74A. The text of the proposed 
rule change is provided below.
    (Additions are italicized; deletions are [bracketed].)
* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *

Rule 6.74A. Automated Improvement Mechanism (``AIM'')

    Notwithstanding the provisions of Rule 6.74, a Trading Permit 
Holder that represents agency orders may electronically execute an 
order it represents as agent (``Agency Order'') against principal 
interest or against a solicited order provided it submits the Agency 
Order for electronic execution into the AIM auction (``Auction'') 
pursuant to this Rule.
    (a) No change
    (b) Auction Process. Only one Auction may be ongoing at any given 
time in a series and Auctions in the same series may not queue or 
overlap in any manner. The Auction may not be cancelled and shall 
proceed as follows:
    (1) Auction Period and Request for Responses (RFRs).
    (A) To initiate the Auction, the Initiating Trading Permit Holder 
must mark the Agency Order for Auction processing, and specify (i) a 
single price at which it seeks to cross the Agency Order (with 
principal interest or a solicited order) (a ``single-price 
submission''), including whether the Initiating Trading Permit Holder 
elects to have last priority in allocation, or (ii) that it is willing 
to automatically match (``auto-match'') as principal the price and size 
of all Auction responses up to an optional designated limit 
price[(``auto-match'')] in which case the Agency Order will be stopped 
at the NBBO (if 50 standard option contracts or 500 mini-option 
contracts or greater) or one cent/one minimum increment better than the 
NBBO (if less than 50 standard option contracts or 500 mini-option 
contracts). Once the Initiating Trading Permit Holder has submitted an 
Agency Order for processing pursuant to this subparagraph, such 
submission may not be modified or cancelled.
    (B)-(I) No change
    (2)-(3) No change
     * * * Interpretations and Policies:
    .01-.08 No change
* * * * *
    The text of the proposed rule change is also 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'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 amend Rule 6.74A 
related to the Automated Improvement Mechanism (``AIM''). AIM allows a 
Trading Permit Holder (the ``Initiating Trading Permit Holder'') to 
submit an order it represents as agent (the ``Agency Order'') along 
with a contra-side second order (a principal order or a solicited order 
for the same size as the Agency Order) into an auction (an ``Auction'') 
for electronic execution.\3\ During the Auction, other participants can 
compete with the Initiating Trading Permit Holder's second order to 
execute against the Agency Order, which guarantees that the Agency 
Order will receive an execution.\4\ Initiating Trading Permit Holders 
must stop the Agency Order at the better of the national best bid or 
offer (``NBBO'') or the Agency Order's limit price, if the Agency Order 
is for 50 standard contracts or 500 mini-option contracts or more, or 
at the better of one minimum increment better than the NBBO or the 
Agency Order's limit price, if the Agency Order is for fewer than 50 
standard contracts or 500 mini-option contracts.\5\ Once an Auction 
commences, the Initiating Trading Permit Holder cannot cancel it.\6\ 
Upon receipt of an Agency Order (and the Initiating Trading Permit 
Holder's second order), the Exchange will commence the Auction by 
issuing a request for responses (``RFR'') detailing

[[Page 28266]]

the side and size of the Agency Order.\7\ The RFR will last for one 
second.\8\ At the conclusion of an Auction, an Agency Order will be 
allocated at the best price(s) in accordance with the applicable 
matching algorithm rules for that class, subject to the allocation 
provisions of Rule 6.74A(b)(3).
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    \3\ See Rule 6.74A.
    \4\ Id.
    \5\ Rule 6.74A(a)(2) and (3).
    \6\ Rule 6.74A(b)(1)(A).
    \7\ Rule 6.74A(b)(1)(B).
    \8\ Rule 6.74A(b)(1)(C). Several types of events will cause an 
Auction to conclude. See Rule 6.74A(b)(2).
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    Rule 6.74A(b)(1)(A) currently allows an Initiating Trading Permit 
Holder to enter its contra-side second order in one of two formats: (1) 
A single price or (2) a non-price specific commitment to auto-match all 
Auction responses received during the Auction. In this second case, the 
Initiating Trading Permit Holder would have no control over the match 
price. The Exchange is proposing to provide Initiating Trading Permit 
Holders with the additional option to auto-match competing prices from 
other market participants up to a designated limit price. The 
Initiating Trading Permit Holder will still not be able to cancel the 
auto-match instruction after an Auction commences and will have no 
control over the prices at which it receives an allocation of the 
Auction other than the outside boundary established by the designated 
limit price.
    The Exchange notes that when an Initiating Trading Permit Holder 
selects the auto-match feature prior to the start of an Auction (with 
or without a designated limit price), the available liquidity at 
improved prices increases, and the competitive final pricing is out of 
the Initiating Trading Permit Holder's control. The Exchange believes 
this proposed rule change will incent more Trading Permit Holders to 
initiate Auctions, because the additional flexibility encourages 
Trading Permit Holders willing to trade with Agency Orders at a price 
better than the NBBO, but only up to a certain price, to initiate an 
Auction. Additionally, this proposal provides the possibility that 
other TPHs may receive increased order allocations through AIM, which 
the Exchange believes could increase participation in Auctions. As a 
result, the Exchange expects the proposal will increase the number of 
Auctions, which would enhance competition in the Auctions and 
ultimately provide additional opportunities for price improvement over 
the NBBO for the Exchange's customers.
    In support of this proposed rule change, the Exchange notes that 
each of the Automated Improvement Mechanism (``C2 AIM'') of C2 Options 
Exchange, Incorporated (``C2''),\9\ Price Improvement Period (``PIP'') 
of Boston Options Exchange LLC (``BOX''),\10\ and the Price Improvement 
Mechanism (``PIM'') of International Securities Exchange, LLC (``ISE'') 
\11\ permits initiating participants to elect to auto-match up to a 
designated limit price.\12\ The Exchange believes that AIM, and in turn 
the customers that benefit from AIM, would be disadvantaged if Trading 
Permit Holders are not provided with the option to auto-match up to a 
designated limit price because this lack of flexibility reduces the 
number of Auctions and, as a result, opportunities for price 
improvement. Because C2, BOX, and ISE currently allow initiating 
participants the option to auto-match up to the best-priced response 
received during an auction or up to a designated limit price, the 
Exchange believes it is important for competitive purposes that it be 
able to offer the same opportunities for price improvement on CBOE 
through AIM.
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    \9\ See C2 Rule 6.51(b)(1)(A); see also Securities Exchange Act 
Release No. 34-66552 (March 9, 2012), 77 FR 15438 (March 15, 2012) 
(SR-C2-2011-043) (order approving, among other things, the option to 
auto-match up to a designated limit price).
    \10\ See BOX Rule 7150(f); see also Securities Exchange Act 
Release No. 34-61805 (March 31, 2010), 75 FR 17454 (April 6, 2010) 
(SR-BX-2010-022) (notice of filing and immediate effectiveness of 
rule change to implement the auto-match feature with the option to 
auto-match up to a designated limit price).
    \11\ See ISE Rule 723(d)(4); see also Securities Exchange Act 
Release No. 34-62644 (August 4, 2010), 75 FR 48395 (August 10, 2010) 
(SR-ISE-2010-61) (notice of filing and immediate effectiveness of 
rule change to implement the auto-match feature with the option to 
auto-match up to a designated limit price).
    \12\ AIM, C2 AIM, PIP and PIM have certain characteristics in 
common with each other. All three mechanisms (a) provide for the 
opportunity for customer price improvement, (b) have certain periods 
where the initial orders are exposed for potential price 
improvement, (c) have certain guidelines regarding the types of 
orders that may be eligible for price improvement, and (d) have 
certain defined rules related to the allocation of trades within 
price improvement auctions.
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    The Exchange will provide the Commission with the following data: 
(1) The percentage of trades effected through AIM in which the 
Initiating Trading Permit Holder submitted an Agency Order with an 
auto-match instruction that included a designated limit price and the 
percentage that did not include a designated limit price; and (2) the 
average amount of price improvement provided to Agency Orders when the 
Initiating Trading Permit Holder submitted an auto-match instruction 
that included a designated limit price and the average amount that did 
not include a designated limit price, versus the average amount of 
price improvement provided to Agency Orders when the Initiating Trading 
Permit Holder submitted a single price (with no auto-match 
instruction).
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.\13\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \14\ requirements that the rules 
of an exchange be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \15\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ Id.
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    In particular, the Exchange believes the proposed rule change is a 
reasonable modification designed to provide additional flexibility for 
Trading Permit Holders to obtain executions on behalf of their 
customers while continuing to provide meaningful, competitive Auctions. 
The Exchange also believes that the proposed rule change will increase 
the number of and participation in Auctions, which will ultimately 
enhance competition in the Auctions and provide customers with 
additional opportunities for price improvement. The proposed rule 
change is consistent with the rules of other exchanges related to price 
improvement auctions and thus serves to remove impediments to and to 
perfect the mechanism for a free and open market and a national market 
system.

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. All Trading Permit Holders that 
represent Agency Orders may initiate an Auction and have the option to 
auto-match up to a

[[Page 28267]]

designated limit price. Initiating Trading Permit Holders will not be 
required to designate such a limit price, and may still instead enter 
the contra-side order with a specified single price or auto-match all 
Auction responses. The Exchange believes that this additional 
flexibility for Trading Permit Holders to obtain executions on behalf 
of their customers while continuing to provide meaningful, competitive 
Auctions will increase the number of Auctions, which will ultimately 
enhance competition in the Auctions and provide customers with 
additional opportunities for price improvement. The proposed rule 
change also provides the possibility that other TPHs may receive 
increased order allocations through AIM, which the Exchange believes 
could increase participation in Auctions and further enhance 
competition.
    CBOE believes that the proposed rule change will in fact relieve 
any burden on, or otherwise promote, competition. The Exchange believes 
the proposed rule change is procompetitive because it would provide 
Initiating Trading Permit Holders with the same flexibility as the 
rules at other exchanges that also permit initiating participants to 
elect to auto-match up to a designated limit price in those exchanges' 
price improvement auctions.\16\ The Exchange believes that AIM, and in 
turn the customers that benefit from AIM, would be disadvantaged if 
Trading Permit Holders are not provided with the option to auto-match 
up to a designated limit price because this lack of flexibility reduces 
the number of Auctions and, as a result, opportunities for price 
improvement. Because C2, BOX, and ISE currently allow initiating 
participants the option to auto-match up to the best-priced response 
received during an auction or up to a designated limit price, the 
Exchange believes it is important for competitive purposes that it be 
able to offer the same opportunities for price improvement on CBOE 
through AIM. The Exchange believes adding this same flexibility will 
promote trading activity on the Exchange to the benefit of the 
Exchange, its Trading Permit Holders, and market participants.
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    \16\ See supra notes 9-11.
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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 \17\ and 
Rule 19b-4(f)(6) \18\ thereunder.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of the filing of the 
proposed rule, 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 the 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-2013-048 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 Number SR-CBOE-2013-048. 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 St. 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 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-2013-048, 
and should be submitted on or before June 4, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-11359 Filed 5-13-13; 8:45 am]
BILLING CODE 8011-01-P