[Federal Register Volume 78, Number 222 (Monday, November 18, 2013)]
[Notices]
[Pages 69159-69162]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-27470]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70844; File No. SR-CBOE-2013-103]


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

November 12, 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 October 28, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 6.25 (Nullification and 
Adjustment of Options Transactions). 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
    Exchange Rule 6.25 (Nullification and Adjustment of Options 
Transactions) governs the nullification and adjustment of options 
transactions. The Exchange is proposing to amend Rule 6.25(a)(1) to 
modify how the Exchange will nullify or adjust an obvious error. The 
Exchange believes this proposal will also harmonize its rules to more 
closely align with other options exchanges.\3\
---------------------------------------------------------------------------

    \3\ See, e.g., International Securities Exchange, LLC (``ISE'') 
Rule 720(b)(2).
---------------------------------------------------------------------------

    Under the current rule 6.25(a)(1)(i), the Exchange will adjust the 
price of an erroneous transaction to the Theoretical Price when the 
transaction is between two market-makers unless such parties agree to 
adjust the transaction to a different price or bust the trade within 
fifteen minutes of being notified by Exchange Trading Officials of the 
error. Pursuant to current Exchange Rule 6.25(a)(1)(iv), transactions 
involving at least one non-CBOE market-maker will be adjusted to the 
Theoretical Price provided that the adjustment does not violate the 
non-CBOE market-maker's limit price unless both parties agree to adjust 
the transaction to a different price or agree to bust the trade within 
thirty minutes of being notified by Trading Officials of the error.
    The Exchange is now proposing to amend Rule 6.25(a)(1) to modify 
the Exchange obvious error procedures by nullifying trades for 
transactions involving at least one non-broker-dealer customer and 
adjusting all other trades between groups that do not fall into that 
category including for example, a market maker or a broker-dealer.\4\ 
The Exchange believes that the proposal will eliminate some uncertainty 
in the

[[Page 69160]]

current rule along with protect investors by eliminating confusion.
---------------------------------------------------------------------------

    \4\ The Exchange is also proposing to add text to Exchange Rule 
1.1(fff) (Voluntary Professional) and Rule 1.1(ggg) (Professional) 
to include a reference to Rule 6.25. These designations are done on 
the Exchange on an order by order basis. Thus, through reference, 
professional orders will be treated as broker-dealer orders. In 
addition certain non-broker-dealer customers may have their orders 
treated as broker-dealer orders rather than as public customer 
orders for purposes of Rule 6.25.
---------------------------------------------------------------------------

    More specifically, the Exchange is first proposing to include all 
transactions in which neither party is a non-broker-dealer customer in 
the current Rule 6.25(a)(1)(i) instead of only including transactions 
between CBOE market-makers. In addition, the Exchange is proposing to 
limit the time in which these parties have to decide to adjust to a 
price other than the Theoretical Price or nullify the trade to ten 
minutes instead of the fifteen minutes that is currently allowed.\5\ 
Next, the Exchange is proposing to add a provision to nullify all 
erroneous transactions where at least one party is a non-broker-dealer 
customer unless both parties agree to an adjusted price within thirty 
minutes. Finally, the Exchange is proposing to make cosmetic changes to 
Rule 6.25 by renumbering current provisions in 6.25(a)(1)(ii) and 
6.25(a)(1)(iii) to 6.25(a)(1)(iii) and 6.25(1)(iv), respectively, and 
to make conforming changes to the references to these provisions in 
current Rules 6.25(b)(1) and 6.25.05.
---------------------------------------------------------------------------

    \5\ Please note that that limiting the time frame to ten minutes 
would also align the Exchange with C2 Options Exchange, Incorporated 
(``C2'') Rule 6.15(b)(2).
---------------------------------------------------------------------------

    The Exchange believes that the proposal will limit obvious error 
trade nullification only to transactions involving non-broker-dealer 
customers. The Exchange believes that this approach will limit the 
number of nullifications while assuring that non-broker-dealer 
customers will not have their erroneous trades adjusted through their 
limit price forcing such customer to spend (receive) more (less) money 
on erroneous transactions. In addition, the proposed changes to the 
rule will allow any non-professional customer orders to be subject to 
professional standards if that customer decides to designate an order 
as such.\6\
---------------------------------------------------------------------------

    \6\ See note 4 supra.
---------------------------------------------------------------------------

    Non-broker-dealer customers are typically far less familiar with 
the day-to-day trading of the markets and are also less likely to be 
watching trading activity in a particular option throughout the day. 
Therefore, given the potential for drastic market swings, the Exchange 
believes that it is fair and reasonable and consistent with statutory 
standards to change the procedure for obvious errors involving at least 
one non-broker-dealer customer, and not for other market participants 
so as not to expose these customers to any additional risk. In 
addition, as stated above, these customers have the option of 
indicating they would like the treatment of their orders as if they 
originated from a professional.\7\
---------------------------------------------------------------------------

    \7\ Id.
---------------------------------------------------------------------------

    The proposed rule change is a fair way to address the issue of a 
trade executing through a non-broker-dealer customer's limit order 
price while balancing the competing interest of certainty that trades 
stand versus dealing with the true errors. The proposed rule change 
would continue to entail specific and objective procedures. 
Furthermore, the proposed rule change more fairly balances the 
potential windfall to one market participant against the potential 
reconsidering of a trading decision under the guise of an error. The 
Exchange also believes it is fair and reasonable to treat all 
professional market participants equally, e.g., market-makers, broker-
dealers, etc.
    As stated above, the Exchange believes that non-broker-dealer 
customers are far less familiar with the day-to-day trading of the 
markets and are also less likely to be watching trading activity in a 
particular option throughout the day. Therefore, the Exchange believes 
that it is fair and reasonable and consistent with statutory standards 
to change the procedure for obvious errors involving non-broker-dealer 
customers, and not for other market participants so as not to expose 
these customers to any additional risk. In addition, as stated above, 
these customers have the option of indicating they would like the 
treatment of their orders as if they were from professionals.\8\
---------------------------------------------------------------------------

    \8\ Id.
---------------------------------------------------------------------------

    Finally, the Exchange believes that the proposal to change the time 
to ten minutes, instead of fifteen minutes, for professional parties to 
agree to a different price or nullify the transaction under Exchange 
Rule 6.25(a)(1)(i) not only gives ample time for review by the parties 
to the trades, but it more closely aligns the Exchange's rule to other 
options exchanges.\9\ The Exchange also believes that the 
administrative re-numbering of the provisions in Rule 6.25 eliminate 
further confusion in the current rule.
---------------------------------------------------------------------------

    \9\ See note 3 supra. See also note 5 supra.
---------------------------------------------------------------------------

 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.\10\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \11\ 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) \12\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ Id.
---------------------------------------------------------------------------

    In particular, the proposal to nullify all erroneous transactions 
in which at least one non-broker-dealer customer is a party to the 
transaction and adjusting all other trades will help market 
participants to better hedge risk associated with these potentially 
erroneous transactions. By nullifying erroneous transactions which 
involve a non-broker-dealer customer, the Exchange is assuring that 
these non-professional customers will not receive a trade at a higher 
(lower) price than a limit price placed upon the transaction. In 
addition, the proposal is requiring trades in most circumstances to be 
honored. The proposal also allows for all parties to nullify any 
erroneous transaction as long as the two parties come to an agreement 
within ten minutes. The Exchange believes that the shorten time will 
require the agreement to be made more quickly, and thus a nullification 
or adjustment to a different price create less of a disruption to the 
overall market.
    The Exchange believes that adjusting all transactions that do not 
involve a non-broker-dealer customer is just and equitable because 
professional customers are more sophisticated and familiar with the day 
to day trading swings. Though, as proposed, a professional that is not 
a market-maker may be adjusted through its limit price, the Exchange 
believes these professionals have adequate resources in place to manage 
this adjustment and would prefer the certainty of the proposed changes 
and to adjust these transactions (rather than nullify) to continue to 
hedge their risk. In addition, the Exchange believes that market-makers 
and other professionals are similarly situated, and, thus, it is

[[Page 69161]]

consistent to treat these groups in the same manner. Moreover, the 
market benefits from the least amount of nullifications because parties 
have more certainty about their executions. The Exchange also believes 
that assessing an adjustment penalty will encourage professionals to 
adjust and nullify a lesser amount of transactions which will benefit 
the market as a whole. Thus, the Exchange believes that the treatment 
of all professional orders in the same manner is consistent with the 
Act as it will allow the market to suffer fewer disruptions, in the 
form of adjustments or nullifications of trades after the fact, and 
treats similarly situated groups, namely market-makers and other 
professionals, in the same manner. The Exchange also notes that 
aligning the Exchange with other options exchanges will ensure less 
disruption to market participants as they will be treated consistently 
across the markets.\13\
---------------------------------------------------------------------------

    \13\ See note 7 supra.
---------------------------------------------------------------------------

    Though the proposal will treat groups of market participants 
differently, the Exchange believes that the proposal is not unfairly 
discriminating because it treats similarly situated groups in the same 
manner. More specifically, all professionals will be treated in a 
similar manner while non-professional customers will also be left with 
the choice to designate an order as professional, under Exchange Rule 
1.1(fff) and thus have the ability to be treated in the same manner as 
a professional. With this choice, all groups may be treated in the same 
manner. In addition, the proposal creates a safeguard for a non-
professional customer that may not be as familiar with the specifics of 
every day trading (and does not choose to be treated as a professional) 
by nullifying all erroneous transactions in which they are a party.
    The Exchange acknowledges that the proposal may allow for some 
uncertainty to regarding whether a trade will be adjusted or nullified 
depending upon the nature of the parties to the transaction. More 
specifically, the contra party will not know the category of the other 
party. Nonetheless, the Exchange believes the proposal continues to 
promote just and equitable principles of trade and protect investors 
and the public interest because it eliminates a more serious 
uncertainty of price uncertainty which is inherent in the current 
Exchange rule because the current rule takes the non-broker-dealer 
customer's limit price into consideration while this proposal does not 
as it will be nullified unless agreed upon by the two parties. The 
Exchange also notes that this rule is substantially similar to another 
option exchange.\14\ Thus, market participants will receive similar 
treatment in the [sic] across the markets which eliminates confusion 
and promotes just and equitable principles of trade.
---------------------------------------------------------------------------

    \14\ See note 31 supra.
---------------------------------------------------------------------------

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. Specifically, the proposal is 
meant to eliminate market participant confusion along with help market 
participants to better hedge the risk associated with erroneous options 
trades. CBOE believes that the proposed rule change will relieve any 
burden on, or otherwise promote, competition because it creates less 
uncertainty about the treatment of erroneous trades which may encourage 
market participants to trade on the Exchange.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not:
    A. Significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \15\ and 
Rule 19b 4(f)(6) \16\ thereunder. 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.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

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-2013-113 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-2013-103. 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 the 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 Number SR-CBOE-2013-103 and should be 
submitted on or before December 9, 2013.


[[Page 69162]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-27470 Filed 11-15-13; 8:45 am]
BILLING CODE 8011-01-P