[Federal Register Volume 78, Number 143 (Thursday, July 25, 2013)]
[Notices]
[Pages 44994-44997]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-17862]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70011; File No. SR-CBOE-2013-074]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to CBSX Rule 53.2

July 19, 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 July 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 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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend CBOE Stock Exchange, LLC (``CBSX'') 
Rule 53.2, which relates to the prohibition against trading ahead of 
customer orders. The text of the proposed rule change is provided 
below.

(additions are italicized; deletions are [bracketed])
* * * * *

Chicago Board Options Exchange, Incorporated

Rules

* * * * *

Rule 53.2. Prohibition Against Trading Ahead of Customer Orders

    No change.
    * * * Interpretations and Policies:
    .01--No change.
    .02 No-Knowledge Exception. With respect to NMS stocks, as 
defined in Rule 600 of SEC Regulation NMS, if a Trading Permit 
Holder implements and utilizes an effective

[[Page 44995]]

system of internal controls, such as appropriate information 
barriers, that operate to prevent one trading unit from obtaining 
knowledge of customer orders held by a separate trading unit, those 
other trading units trading in a proprietary capacity may continue 
to trade at prices that would satisfy the customer orders held by 
the separate trading unit. A Trading Permit Holder that structures 
its order handling practices in NMS stocks to permit its proprietary 
and/or market-making desk to trade at prices that would satisfy 
customer orders held by a separate trading unit must disclose in 
writing to its customers, at account opening and annually 
thereafter, a description of the manner in which customer orders are 
handled by the Trading Permit Holder and the circumstances under 
which the Trading Permit Holder may trade proprietarily at its 
proprietary and/or market-making desk at prices that would satisfy 
the customer order. If a Trading Permit Holder intends to rely on 
this exception by implementing information barriers, those 
information barriers should at a minimum (i) [must ]provide for the 
organizational separation of a Trading Permit Holder's customer 
order trading unit and proprietary trading unit; (ii) [must ]ensure 
that one trading unit does not exert influence over the other 
trading unit; (iii) [must ]ensure that information relating to each 
trading unit's stock positions[,] and trading activities[, and 
clearing and margin arrangements] is not improperly shared (except 
with persons in senior management who are involved in exercising 
general managerial oversight of one or both entities); (iv) [must 
require each trading unit to maintain separate books and records 
(and separate financial accounting); (v) must require each trading 
unit to separately meet all required capital requirements; (vi) must 
]ensure the confidentiality of the trading unit's book as provided 
by Exchange rules; and (v[ii]) [must ]ensure that any other 
material, non-public information (e.g. information related to any 
business transactions between the trading unit and an issuer or any 
research reports or recommendations issued by the trading unit) is 
not made improperly available to the other trading unit in any 
manner that would allow that trading unit to take undue advantage of 
that information while trading on CBSX. A Trading Permit Holder must 
submit the proposed information barriers in writing to the Exchange 
upon request. Trading Permit Holders must maintain records that 
indicate which orders rely on this exception and submit these 
records to the Exchange upon request.
    .03-.07 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
    CBSX Rule 53.2 governs the treatment of customer orders and 
prohibits a CBSX Trading Permit Holder from proprietarily trading ahead 
of a customer order. The Securities and Exchange Commission (the 
``Commission'') recently approved a rule filing to, among other things, 
amend CBSX Rule 53.2.\3\ The amendments to Rule 53.2 included, among 
other things, the addition of a number of exceptions to the customer 
order protection rule. One of the new exceptions is a ``no-knowledge'' 
exception, which allows a proprietary trading unit of a Trading Permit 
Holder organization to continue trading in a proprietary capacity and 
at prices that would satisfy customer orders that were being held by 
another, separate trading unit at the Trading Permit Holder 
organization.\4\ In order to avail itself of the ``no-knowledge'' 
exception, a Trading Permit Holder organization must first implement 
and utilize an effective system of internal controls (such as 
appropriate information barriers) that operate to prevent the 
proprietary trading unit from obtaining knowledge of the customer 
orders that are held at a separate trading unit.\5\
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    \3\ See Securities Exchange Act Release No. 34-69504 (May 2, 
2013), 78 FR 26828 (May 8, 2013) (SR-CBOE-2013-027). Pursuant to 
that rule filing, the Exchange issued Regulatory Circular RG 13-098 
on July 10, 2013, which announced that the amendments to Rule 53.2 
would become effective on July 22, 2013.
    \4\ See Rule 53.2, Interpretation and Policy .03. The ``no-
knowledge'' exception is applicable with respect to NMS stocks, as 
defined in Rule 600 of SEC Regulation NMS.
    \5\ The ``no-knowledge'' exception also provides that a Trading 
Permit Holder organization that structures its order handling 
practices in NMS stocks to permit its proprietary and/or market-
making desk to trade at prices that would satisfy customer orders 
held as a separate trading unit must disclose in writing to its 
customers, at account opening and annually thereafter, a description 
of the manner in which customer orders are handled by the Trading 
Permit Holder and the circumstances under which the Trading Permit 
Holder may trade proprietarily at its market-making desk at prices 
that would satisfy the customer order.
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    If a Trading Permit Holder intends to rely on the ``no-knowledge'' 
exception by implementing information barriers, those information 
barriers must (i) Provide for the organization separation \6\ of a 
Trading Permit Holder's trading unit that holds customer orders and a 
proprietary trading unit; (ii) ensure that one trading unit does not 
exert influence over the other trading unit; (iii) ensure that 
information relating to each trading unit's stock positions, trading 
activities, and clearing and margin arrangements is not improperly 
shared (except with person in senior management who are involved in 
exercising general managerial oversight of one or both entities); (iv) 
require each trading unit to maintain separate books and records (and 
separate financial accounting); (v) require each trading unit to 
separately meet all required capital requirements; (vi) ensure the 
confidentiality of each trading unit's book as provided by the Exchange 
rules; and (vii) ensure that any other material non-public information 
(e.g. information related to any business transactions between a 
trading unit and an issuer or any research reports or recommendations 
issued by the trading unit) is not made improperly available to the 
other trading unit in any manner that would allow that trading unit to 
take undue advantage of that information while trading on CBSX. A 
Trading Permit Holder must submit the proposed information barriers in 
writing to the Exchange upon request.
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    \6\ Organizational separation includes physical separation of 
the trading units.
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    The Exchange proposes to amend the information barrier requirements 
of the ``no-knowledge'' exception as follows:
     Remove from requirement (iii) the need to ensure that 
information relating to each trading unit's clearing and margin 
arrangements is not improperly shared;
     eliminate information barrier requirements (iv) and (v); 
and
     renumber requirements (vi) and (vii) as (iv) and (v).

The Exchange believes the remaining information barrier requirements 
provide for the necessary protections in order for a Trading Permit 
Holder to avail itself of the ``no-knowledge'' exception.

    The Exchange also proposes to amend the ``no-knowledge'' exception 
by providing that a Trading Permit Holder

[[Page 44996]]

relying on this exception should have information barriers that, at a 
minimum, satisfy the specified criteria. This change clarifies that 
Trading Permit Holders are able to include additional conditions in 
their information barriers as they deem appropriate.
    Finally, the Exchange proposes to add a requirement that Trading 
Permit Holders must maintain records that indicate which orders rely on 
this ``no-knowledge'' exception and provide these records to the 
Exchange upon request. This change will ensure that a documented audit 
trail exists to indicate which orders are subject to this exception and 
that the Exchange will have access to records in connection with its 
surveillances associated with customer order protection.
    The Exchange will implement the proposed changes on July 22, 2013, 
in conjunction with the previously approved amendments to CBSX Rule 
53.2.\7\
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    \7\ See supra note 3.
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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.\8\ Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \9\ 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) \10\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ Id.
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    In particular, the Exchange believes the proposed rule change will 
protect investors by bringing the information barriers that Trading 
Permit Holders must maintain to avail themselves of the ``no-
knowledge'' exception more in line with other trading venues while at 
the same time ensuring sufficient customer order protection.\11\ The 
Exchange also believes the proposed change to clarify that Trading 
Permit Holders should at a minimum satisfy the information barrier 
requirements, as amended, will provide Trading Permit Holders with the 
flexibility to include other conditions they believe are appropriate to 
ensure proper barriers are in place.\12\ In general, the Exchange 
believes that harmonizing customer order protection rules across self-
regulatory organizations and providing Trading Permit Holders with the 
flexibility to implement their barriers in a manner they deem 
appropriate will foster cooperation and contribute to perfecting the 
mechanism of a free and open market and national market system. In 
addition, the Exchange believes the additional requirement for Trading 
Permit Holders to maintain records that identify the orders that are 
associated with the reliance of the no-knowledge exception will further 
enhance the Exchange's ability to adequately surveil its Trading Permit 
Holders for compliance with the customer order protection rule. 
Overall, the Exchange believes that the customer order protection rule, 
as amended by the proposed rule change, will continue to maintain the 
necessary protection and priority of customer orders designed to 
prevent fraudulent and manipulative acts, without imposing any undue 
regulatory costs on industry participants.
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    \11\ See, e.g., Financial Industry Regulatory Authority (FINRA) 
Rule 5320, ``Prohibition Against Trading Ahead of Customer Orders; 
and Chicago Stock Exchange (CHX) Article 9, Rule 17, ``Prohibition 
Against Trading Ahead of Customer Orders.''
    \12\ Since each Trading Permit Holder is somewhat unique in its 
structure and business model, such flexibility will provide each 
firm with the ability to tailor their barriers in a way that is 
consistent with their needs, so long as, at a minimum, they include 
the requirements as proposed in this filing.
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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. All Trading Permit Holders that 
rely on information barriers to take advantage of the ``no-knowledge'' 
exception will have to satisfy the same criteria. The Exchange believes 
the proposed rule change will reduce the burdens on market participants 
by eliminating certain requirements in the current rule with which they 
must comply to avail themselves of the ``no-knowledge'' exception. The 
Exchange also believes the proposed rule change will reduce the burdens 
on market participants that result from their having to comply with 
varying rules related to customer order protection, thus reducing the 
complexity of customer order protection rules, particularly for those 
firms subject to the rules of multiple trading venues. The Exchange 
believes the additional requirement to maintain records of orders that 
rely on the ``no-knowledge'' exception will not impose additional 
burdens on Trading Permit Holders, as it is consistent with audit trail 
and record retention requirements that are already imposed on market 
participants. Overall, the Exchange believes the proposed rule change 
further harmonizes customer order protection rules across self-
regulatory organizations while sufficiently protecting customer orders, 
which ultimately benefits market participants and does not impose a 
burden on competition.

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 \13\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 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 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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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of filing.\15\ However, 
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter 
time if such action is consistent with the protection of investors and 
the public interest.\16\ The Exchange has requested that the Commission 
waive the 30-day operative delay because the Exchange believes the 
proposed rule change does not present

[[Page 44997]]

any new, unique or substantive issues. The proposed rule change 
eliminates some requirements that Trading Permit Holders otherwise 
would have to satisfy to take advantage of the ``no-knowledge'' 
exception; however, the Exchange believes that the amended information 
barrier requirements bring the rule further in line with the customer 
protection rule requirements of other self-regulatory organizations. In 
addition, the Exchange believes the information barriers, as amended, 
will be sufficiently adequate to allow Trading Permit Holders to avail 
themselves of the ``no-knowledge'' exception. The Exchange also 
believes that the additional requirement to maintain records of orders 
that rely on the ``no-knowledge'' exception is consistent with 
requirements already imposed on market participants and thus will not 
impose any additional burdens on Trading Permit Holders.
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    \15\ 17 CFR 240.19b-4(f)(6)(iii).
    \16\ Id.
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    The Commission believes that the waiver of the 30-day operative 
delay is consistent with the protection of investors and the public 
interest because the proposed rule will harmonize the Exchange's 
customer order protection rules with the rules of other self-regulatory 
organizations,\17\ and that the requirements that the Exchange's rules 
impose on Trading Permit Holders will continue to ensure that customer 
orders are afforded sufficient protection. Therefore, the Commission 
designates the proposal operative upon filing.\18\
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    \17\ See supra note 11.
    \18\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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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: (i) 
necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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-2013-074 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-2013-074. 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 CBOE. 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-2013-074, and should be submitted on or before 
August 15, 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. 2013-17862 Filed 7-24-13; 8:45 am]
BILLING CODE 8011-01-P