[Federal Register Volume 78, Number 127 (Tuesday, July 2, 2013)]
[Notices]
[Pages 39807-39810]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-15847]



[[Page 39807]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69861; File No. SR-CBOE-2013-064]


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

June 26, 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 June 19, 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, 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 Substance 
of the Proposed Rule Change

    The Exchange proposes to codify certain definitions, practices and 
requirements related to System connectivity and message types to 
promote transparency and maintain clarity in the rules. 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'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 codify certain definitions, practices and 
requirements related to System connectivity and message types to 
promote transparency and maintain clarity in the rules. Specifically, 
the Exchange is proposing to (i) amend Rule 1.1 (Definitions) to define 
``API,'' ``Order,'' and ``Quote''; (ii) amend Rule 6.23A to clarify 
that authorized market participants connect electronically to the 
Exchange via an ``Application Programming Interface'' (``API'') and 
specify which APIs are available; (iii) adopt new Rule 6.23B to clarify 
that a Trading Permit shall entitle the holder to a maximum number of 
orders and quotes per second(s) as determined by the Exchange and that 
Trading Permit Holders (``TPHs'') seeking to exceed that number of 
messages per second(s) may purchase additional message packets at 
prices set forth in the Exchange's Fees Schedule; and, adopt new Rule 
6.53A to describe the types of order formats available to TPHs to 
facilitate order entry. The proposed rule change also amends similar 
rules applicable to the CBOE Stock Exchange, LLC (``CBSX'').\3\ 
Particularly, the Exchange is proposing to amend (i) CBSX Rule 53.25 to 
clarify that authorized market participants connect electronically to 
the Exchange via an ``Application Programming Interface'' (``API'') and 
specify which APIs are available and (ii) adopt new CBSX Rule 51.8A to 
describe the types of order formats available to facilitate order entry 
on CBSX. Finally the Exchange seeks to revise Appendix A to the CBSX 
Rules to account for the revised title of and renumbering to CBOE Rule 
6.23A.
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    \3\ CBSX is a stock trading facility of the Exchange.
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    The Exchange first proposes to define ``Application Programming 
Interface'' (``API''), ``Order'' and ``Quote'' in its rules. While 
there are various references to these three terms throughout the 
Exchange Rules, nowhere in the CBOE rules are the definitions codified. 
Therefore, the Exchange believes it would be useful to explicitly 
define these terms within the rule text to reduce confusion. First, the 
Exchange proposes to define ``API'' as a computer interface that allows 
market participants with authorized access to interface electronically 
with the Exchange. This proposed definition is substantially similar to 
the definition of API previously adopted by CBSX.\4\ Next the Exchange 
will define the term ``quote'' or ``quotation'' as a bid or offer 
entered by a Market-Maker that is firm and that updates the Market-
Maker's previous quote, if any. The proposed definition will also make 
clear that electronic quotes may be updated in block quantities. The 
proposed definition of the term ``quote'' is similar to the definition 
previously adopted by the C2 Options Exchange, Incorporated 
(``C2'').\5\ Finally, the Exchange seeks to clarify that the term 
``order'' means a firm commitment to buy or sell option contracts.
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    \4\ See CBSX Rule 50.1 (Definitions).
    \5\ See C2 Rule 1.1 (Definitions).
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    Next, the Exchange believes it would be useful to codify how 
authorized market participants may access the Exchange System. 
Specifically, the Exchange will make clear that authorized market 
participants access the Exchange via an API. Currently, the Exchange 
offers two APIs: (1) CBOE Market Interface (``CMi'') and (2) Financial 
Information eXchange (``FIX'') Protocol. Multiple versions of each API 
may exist and be made available to all authorized market 
participants.\6\ Authorized market participants may select which of the 
available APIs they would like to use to connect to the System. The 
Exchange believes it is important to provide market participants with 
this flexibility so that they can determine the API that will be most 
compatible with their systems and maximize the efficiency of their 
interface. Connection to the System allows authorized market 
participants to engage in order and quote entry, as well as auction 
participation.
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    \6\ Currently, two versions of CMi exist and are available; CMi 
and CMi2.
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    The Exchange seeks to codify a similar description of market 
participant connectivity in the CBSX rules. More specifically, the 
proposed rule change will amend CBSX Rule 53.25 (Market Participant 
Connectivity) to clarify that authorized market participants connect 
electronically to the CBSX System via an API and specify which APIs are 
available. Authorized market participants may select which of the 
available APIs they would like to use to connect to the CBSX System. 
The only distinction between the proposed CBOE and CBSX connectivity 
rule is that the CBSX rule does not reference auction processing, as 
CBSX does not utilize electronic auctions as part of the CBSX market.
    The Exchange believes that while information relating to 
connectivity and available APIs for both CBOE and CBSX

[[Page 39808]]

is already widely available to all market participants via technical 
specifications, codifying this information within the rule text will 
provide additional transparency.
    The Exchange also seeks to codify and describe the types of order 
formats that are available for order entry in new Rule 6.53A (Types of 
Order Formats). Order formats are message types that are used to send 
new orders into CBOE Command \7\ through a user's selected API. 
Currently, all orders must be submitted to CBOE using the message type 
Order Format 1 (``OF1''). Orders using the OF1 format must pass through 
various processes, including validation checks in the Order Handling 
Service (``OHS'') \8\, before execution, entry into the book, 
cancellation, or routing for manual handling. Examples of such 
validation checks include validating an order's origin code or 
contingency type. Where an order is routed for processing by the OHS 
depends on various parameters configured by the Exchange and the order 
entry firm itself. Examples of such parameters are firm-specific volume 
restrictions (i.e., orders larger than a firm-imposed quantity are 
routed to booth/order management terminal) or inbound limit order price 
reasonability (i.e., orders may be rerouted to booth/order management 
terminal for manual review if ``too marketable''). OF1 supports all 
order types, including auction responses.
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    \7\ CBOE Command is the trading engine platform for CBOE, C2, 
CBSX and CBOE Futures Exchange (``CFE''). CBOE Command incorporates 
both order handling and trade processing on the same platform.
    \8\ The Order Handling System (``OHS'') performs basic 
validation checks and 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 (``OMTs'') generally located in booths on the trading 
floor for manual handling.
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    The Exchange seeks to also codify the order formats available on 
CBSX and describe the processes that inbound orders must pass through 
before execution, entry into the book, or cancellation, in new Rule 
51.8A (Types of Order Formats). CBSX currently offers two order 
formats; CBSX Order Format 1 (``CBSX OF1'') and CBSX Order Format 2 
(``CBSX OF2''). TPHs may elect to use either order format on CBSX, 
provided that the order format selected supports the given order type. 
The Exchange believes it is important to provide market participants 
with this flexibility so that they can determine the order format that 
will be most compatible with their needs.
    Similar to CBOE OF1, orders using the CBSX OF1 format pass through 
various processes, including validation checks in the OHS before 
execution, entry into the book, or cancellation. Such validation checks 
include validating an order's origin code or contingency type. Although 
all orders using the CBSX OF1 format must pass through the OHS, they 
are not subject to parameter checks related to routing, as routing for 
manual handling is not an option on CBSX. CBSX OF1 also supports all 
order types.
    Orders using the CBSX OF2 format on the other hand, bypass the OHS 
system and instead are subject to a different validation process. 
Although the OHS system is bypassed, orders using the CBSX OF2 format 
are still subject to similar validation checks as CBSX OF1 (e.g., 
validating an order's origin code). These checks however, occur in the 
trade engine rather than OHS. Additionally, fewer fields are required 
for order entry using OF2 compared to using OF1. The utilization of 
fewer fields results in a smaller message size, thereby increasing 
efficiency. CBSX OF2 supports only Immediate-Or-Cancel, ISO, ISO-Book 
and CBSX-Only orders. Accordingly, orders using the OF2 format will not 
route to other market centers.
    Although the abovementioned order formats are currently offered by 
the Exchange and are detailed in technical specifications available to 
all TPHs, they have never been codified in either the CBOE or CBSX 
rules. Therefore, the Exchange is proposing to introduce new CBOE Rule 
6.53A and CBSX Rule 51.8A to make it absolutely clear that these order 
formats are available to users and to provide transparency and 
certainty with respect to how orders using these order formats are 
processed.
    The Exchange next proposes to add new Rule 6.23B (Bandwidth 
Packets). New Rule 6.23B will provide that each Trading Permit shall 
entitle the holder to a maximum number of orders and quotes per 
second(s) as determined by the Exchange. The proposed new rule also 
clarifies that only Market-Makers may submit quotes. Trading Permit 
Holders seeking to exceed that number of messages per second(s) may 
purchase additional message packets at prices set forth in the 
Exchange's Fees Schedule. Additionally, the Exchange shall, upon 
request and where good cause is shown, temporarily increase a Trading 
Permit Holder's order entry bandwidth allowance at no additional cost. 
All determinations to temporarily expand bandwidth allowances will be 
made in a non-discriminatory manner and on a fair and equal basis. The 
new rule also provides that no bandwidth limits shall be in effect 
during the pre-opening prior to 8:25 a.m. CT, which shall apply to all 
Trading Permit Holders. Finally, the Exchange may determine times 
periods for which there shall temporarily be no bandwidth limits in 
effect for all Trading Permit Holders. Any such determination shall be 
made in the interest of maintaining a fair and orderly market. The 
Exchange shall notify all TPHs of any such determination.
    The Exchange does not have unlimited system bandwidth capacity to 
support an unlimited number of order and quote entry per second. For 
this reason, the Exchange limits each Trading Permit to a maximum 
number of messages per second(s). The Exchange notes that each Trading 
Permit is subject to the same maximum number of quotes and/or orders 
per second(s). A TPH can choose to have its bandwidth set at x messages 
per 1 second or 5x messages per 5 seconds. For example, if the maximum 
number of orders per second is 5 orders, a user may choose to have its 
bandwidth set so that it may send in 5 orders per 1 second, or send in 
25 orders over the course of 5 seconds. The Exchange however, also 
recognizes that different TPHs have different needs and affords any TPH 
the opportunity to purchase additional bandwidth packets at prices set 
forth in the Exchange's Fees Schedule. For example, continuing with the 
above illustration (i.e., ``x'' equals 5), if a TPH purchased one (1) 
additional bandwidth packet, the TPH would have the ability to submit, 
depending on how its bandwidth is set, either a total of 10 orders per 
1 second or a total of 50 orders over the course of 5 seconds. While 
these prices and this concept have already been codified in the Fees 
Schedule, a corresponding rule was never codified within the rule 
text.\9\ Therefore, the Exchange seeks to make clear that each Trading 
Permit entitles the holder to a maximum number of messages per 
second(s), and that additional message packets may be purchased for 
those TPHs seeking to exceed that number.
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    \9\ See Securities Exchange Act Release No. 62386 (June 25, 
2010) 75 FR 38566 (July 2, 2010) (SR-CBOE-2010-060); Securities 
Exchange Act Release No. 62704 (August 12, 2010) 75 FR 51132 (April 
18, 2010) (SR-CBOE-2010-073).
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    The Exchange also seeks to make clear that under certain 
circumstances and upon request, the Exchange may determine to 
temporarily waive the maximum number of orders per second(s) and expand 
the bandwidth settings at no additional cost to the requesting Trading 
Permit Holder. One such example in which bandwidth may

[[Page 39809]]

be temporarily increased is in situations where a Trading Permit 
Holder's system is experiencing technical problems, resulting in a 
large order queue. Once the problem is resolved, the queue has to be 
drained. In these instances, it may be necessary to temporarily expand 
the bandwidth limits for that particular Trading Permit Holder to 
accommodate the accumulation of orders in its system and to drain the 
queue of orders. Another example is when another exchange declares a 
trading halt and a Trading Permit Holder that has orders resting at 
that exchange redirects that order flow to CBOE. The redirected order 
flow may at times consist of thousands of orders. To enter such a large 
quantity of orders, the Trading Permit Holder's bandwidth allowance 
would require a temporary expansion, which, upon request and 
demonstrated need, the Exchange could provide at no additional charge. 
The Exchange also may temporarily expand bandwidth allowances for 
requesting Trading Permit Holders on Volatility Index (``VIX'') 
settlement days. Particularly, on VIX settlement days, it may be 
necessary to expand bandwidth during the S&P 500 Index (``SPX'') 
options opening to accommodate the increased order flow. This temporary 
bandwidth increase ends as soon as the SPX is opened.
    All determinations to temporarily expand bandwidth allowances shall 
be made in a non-discriminatory manner and on a fair and equal basis. 
Additionally, all Trading Permit Holders who make such request and 
demonstrate a need shall be entitled to a temporary expansion. The 
Exchange shall document all requests for a temporary expansion of 
bandwidth, including whether each request was granted or denied, along 
with the reasons for each grant or denial. Also, temporary increases of 
bandwidth generally are in effect for not longer than a few seconds or 
for as long as is necessary to accommodate an order queue.
    Next, the Exchange notes that no bandwidth limits shall be in 
effect for any Trading Permit Holder during pre-opening, prior to 8:25 
a.m. CT. This allows Trading Permit Holders to release, and the 
Exchange to absorb, order flow that has accumulated overnight and pre-
opening. The Exchange also notes that prior to the opening of trading, 
such bandwidth restrictions are unnecessary. The Exchange may also 
determine time periods for which there shall temporarily be no 
bandwidth limits in effect for any Trading Permit Holder. Any such 
determination shall be made in the interest of maintaining a fair and 
orderly market. The Exchange shall notify all TPHs of any such 
determination and shall keep a record of any such notification.
    The Exchange finally notes that language proposed in new Rule 6.23B 
is based off a substantially similar rule previously adopted on C2. 
Specifically, C2 has Rule 6.35 (Message Packets), which provides that a 
Trading Permit shall entitle the holder to a maximum number of orders 
and quotes per second as determined by the Exchange, that only Market-
Makers may submit quotes, and that Participants seeking to exceed that 
number of messages per second may purchase additional message packets 
at prices set forth in the Exchange's Fees Schedule.\10\
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    \10\ See C2 Rule 6.35
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    Finally, as a result of this filing, current CBOE rule 6.23A will 
be renumbered and retitled. Accordingly, the Exchange seeks to revise 
Appendix A to the CBSX Rules to account for the revised title and 
renumbering of CBOE Rule 6.23A.
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) \11\ of 
the Act. Specifically, the Exchange believes the proposed rule change 
is consistent with the requirements under Section 6(b)(5) \12\ that the 
rules of an exchange be designed to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts, 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.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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    First, clearly defining in the rules three key terms (i.e., API, 
Quote, and Order) informs market participants. Next, codifying in the 
rules how authorized market participants access the Exchange 
electronically and specifying the manner in which inbound orders are 
submitted and processed provides additional transparency in the rules 
and provides market participants an additional avenue to easily 
understand the system and processes CBOE offers. The Exchange believes 
additional transparency removes a potential impediment to and 
perfecting the mechanism for a free and open market and a national 
market system, and, in general, protecting investors and the public 
interest. Additionally, the Exchange believes that the order formats 
being codified in proposed Rule 6.53A and CBSX Rule 51.8A allows the 
Exchange to receive from 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.
    The Exchange also believes that the proposed rule changes are 
designed to not permit unfair discrimination among market participants. 
For example, under proposed CBOE Rule 6.23A(a) and CBSX Rule 53.25, all 
authorized market participants may access the Exchange via an available 
API of their choosing. Additionally, under proposed CBOE Rule 6.23B, 
all holders of a Trading Permit are limited to maximum number of orders 
and quotes per second(s) and all holders of Trading Permits are 
afforded the opportunity to exceed that number by purchasing additional 
message packets. Any determinations to temporarily expand bandwidth 
allowances would also be made on a non-discriminatory basis. Finally, 
proposed CBOE Rule 6.53A is applicable to all TPHs and CBSX Rule 51.8A 
similarly provides that any TPH may elect to use either one of the two 
available order formats.

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 not necessary or appropriate in furtherance of 
the purposes of the Act. Specifically, the Exchange believes the 
proposed rule change will not impose any burden because the Exchange is 
merely harmonizing its Rules with current functionalities and 
practices. Therefore, the proposed rule change promotes transparency in 
the rules without adding any burden on market participants.

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;

[[Page 39810]]

    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) of the Act \13\ and 
Rule 19b-4(f)(6) \14\ thereunder.\15\ 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. If the Commission takes such action, the 
Commission will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ In addition, Rule 19b-4(f)(6)(iii) 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 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. The Exchange has satisfied this 
pre-filing requirement.
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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 Number SR-CBOE-2013-064 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-2013-064. 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 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-2013-064, 
and should be submitted on or before July 23, 2013.
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    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-15847 Filed 7-1-13; 8:45 am]
BILLING CODE 8011-01-P