[Federal Register Volume 80, Number 55 (Monday, March 23, 2015)]
[Notices]
[Pages 15264-15267]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-06514]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74519; File No. SR-CBOE-2015-026]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Relating to 
Rules 6.74A and 6.74B

March 17, 2015.
    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 6, 2015, 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 seeks to amend CBOE Rules 6.74A and 6.74B. 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'')

* * * * *
    . . . Interpretations and Policies:
* * * * *
    .04 [Any solicited orders submitted by the Initiating Trading 
Permit Holder to trade against the Agency Order may not be for the 
account of a Market-Maker assigned to the option class.] A Market-Maker 
submitting a solicited order to execute against a particular Agency 
Order may not modify its pre-programmed response to Request for 
Responses based on information regarding the particular Agency Order or 
solicited order.
* * * * *

Rule 6.74B. Solicitation Auction Mechanism

* * * * *
    . . . Interpretations and Policies:
* * * * *
    .03 Under Rule 6.74B, Trading Permit Holders may enter contra 
orders that are solicited. The Auction provides a facility for Trading 
Permit Holders that locate liquidity for their customer orders. Trading 
Permit Holders may not use the Auction to circumvent Rules 6.45A.01, 
6.45B.01 or 6.74A limiting principal transactions. This may include, 
but is not limited to, Trading Permit Holders entering contra orders 
that are solicited from (a) affiliated broker-dealers, or (b) broker-
dealers with which the Trading Permit Holder has an arrangement that 
allows the Trading Permit Holder to realize similar economic benefits 
from the solicited transaction as it would achieve by executing the 
customer order in whole or in part as principal. Additionally, 
[solicited contra orders entered by Trading Permit Holders to trade 
against Agency Orders may not be for the account of a CBOE Market-Maker 
assigned to the options class.] a Market-Maker submitting a solicited 
order to execute against a particular Agency Order may not modify its 
pre-programmed response to Request for Responses based on information 
regarding the particular Agency Order or solicited order.
* * * * *
    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.

[[Page 15265]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend its rules regarding the ability of a 
Market-Maker assigned to an options class to be solicited as the contra 
party to an Agency Order in that class on the Exchange's Automated 
Improvement Mechanism (``AIM'') and Solicitation Auction Mechanism \3\ 
(``SAM'' and, together with AIM, the ``Auctions''). Currently, 
Interpretation and Policy .04 to Rule 6.74A (AIM) states that ``Any 
solicited orders submitted by the Initiating Trading Permit Holder to 
trade against the Agency Order may not be for the account of a Market-
Maker assigned to the option class.'' Similarly, the last sentence of 
Interpretation and Policy .03 to Rule 6.74B (SAM) states that 
``Additionally, solicited contra orders entered by Trading Permit 
Holders to trade against Agency Orders may not be for the account of a 
CBOE Market-Maker assigned to the options class.'' This rule language 
acts to limit a Trading Permit Holder (``TPH'') initiating Auctions 
from access to liquidity that should otherwise be available.
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    \3\ The Exchange notes that the SAM Auction is currently 
deactivated. See CBOE Regulatory Circular RG14-076--Deactivation of 
the Solicitation Auction Mechanism (SAM) (May 16, 2014).
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    On the Exchange, there are a number of large, global Market-Making 
firms that have market-making and proprietary operations. In addition, 
there are small market-making firms that only have market-making 
operations. The current rule neither prohibits the proprietary arm of a 
global firm from submitting a contra order in these Auctions nor 
prohibits the global firm's market-making operation from responding to 
an Auction in which the proprietary desk has submitted a contra order. 
More importantly, if two Market-Makers are nominees of the same firm--
one appointed to a class on CBOE and the other appointed in the same 
class on another exchange (PHLX for example)--the current rule allows 
the PHLX Market-Maker to be solicited to participate on an AIM order 
and the CBOE Market-Maker to respond to the AIM auction. The rule does, 
however, effectively prohibit the small market-making firms from 
providing liquidity in the form of contra orders. In preventing a 
Market-Maker assigned to an options class from being solicited by TPHs 
to trade against Agency Orders in that class, the small Market-Making 
firms are effectively prohibited from being solicited by TPHs to trade 
against nearly all Agency Orders. Because a TPH initiating an auction 
using AIM or SAM can thusly not solicit contra orders from these 
Market-Making firms, the TPH is unable to access the greater liquidity 
that these firms can provide. The Market-Makers, TPHs, and customers 
are harmed by this rule language, and the Exchange therefore proposes 
to delete it.\4\ The Exchange believes this is a reasonable 
modification designed to provide additional flexibility for the 
Exchange's TPHs to obtain executions on behalf of their customers and 
to provide CBOE Market-Makers assigned to a given option class with the 
same opportunity as other solicited parties to participate in the 
auction process through means of solicited orders submitted by the 
Initiating TPH. Absent this rule change, CBOE Market-Makers assigned to 
a given option class are not able to achieve solicited contra order 
priority status when trading against Agency Orders executed through 
AIM/SAM while all other parties solicited by the Initiating TPH may 
have such priority status. Additionally, the Exchange does not believe 
the rule change will deplete the liquidity available through Auctions; 
rather, the Exchange believes that by allowing more individuals to 
participate in the Auction process liquidity will increase.
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    \4\ The Exchange proposes to delete all of the language 
currently in Interpretation and Policy .04 to Rule 6.74A and replace 
it with the word ``Reserved.'' The Exchange also proposes to delete 
the last sentence of Interpretation and Policy .03 to Rule 6.74B, 
which states that ``Additionally, solicited contra orders entered by 
Trading Permit Holders to trade against Agency Orders may not be for 
the account of a CBOE Market-Maker assigned to the options class.''
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    It is important to note that the rule language that the Exchange 
proposes to delete applies only to AIM and SAM transactions. As such, a 
Market-Maker assigned to an options class can currently be solicited to 
trade against an Agency Order in that class for non-AIM/SAM 
transactions. Therefore, because Market-Makers only face this 
prohibition for AIM and SAM transactions, the rules for whether a 
Market-Maker assigned to an options class can currently be solicited to 
trade against an Agency Order in that class differ depending on the 
execution mechanism. The proposed change would eliminate this 
difference.
    In addition, the Boston Options Exchange LLC (``BOX'') rules 
include a ``Directed Order'' process that is functionally equivalent to 
the solicitation of orders, and also does not prevent Market-Makers 
from being solicited to trade against an Agency Order in a class in 
which the Market-Maker is appointed.\5\ As such, the Exchange merely 
proposes to put Market-Makers at CBOE on a similar competitive footing 
vis-[agrave]-vis the directed orders on BOX.
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    \5\ See BOX Options Exchange LLC Rule 7150--Price Improvement 
Period (``PIP Auction''). The PIP Auction's Directed Order process 
allows broker-dealers to route orders to BOX Market-Makers for 
possible PIP Auction execution. The Market-Maker that receives the 
Directed Order has three seconds to initiate a PIP Auction or 
decline.
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    Furthermore, the Exchange does not believe there is a meaningful 
regulatory purpose behind the prohibition against Market-Makers being 
solicited to trade against an Agency Order in a class in which the 
Market-Maker is appointed because for the firms with appointments on 
multiple exchanges, the solicited order can simply come from a Market-
Maker on a different exchange. More importantly, a Market-Maker that is 
solicited to trade against an Agency Order in a class in which the 
Market-Maker is appointed would still be required to abide by Exchange 
Rules 4.1 (Just and Equitable Principles of Trade), 4.18 (Prevention of 
the Misuse of Material, Nonpublic Information), and 6.9 (Solicited 
Transactions) (as well as all other Exchange rules, of course). As 
such, a Market-Maker would still be prohibited from, for example, 
learning (via solicitation) that a large order is being sent to the 
Exchange and therefore widening its quotes. Moreover, because upon 
entry, an AIM/SAM order is ``stopped'' for its full quantity at the 
contra order's price, if a Market-Maker were to widen his quotes, it 
would not impact the price of the trade. Also, because many classes on 
the Exchange have a number of Market-Makers appointed, the widening of 
quotes by one Market-Maker would likely have limited impact on the NBBO 
(and indeed, it is possible that the solicited Market-Maker that is 
widening quotes would not be on the NBBO in the first place). 
Regardless, the Exchange notes that it does not believe the changes 
contemplated in this filing will have an adverse effect on Market-Maker 
quoting because the Exchange believes Market-Makers will continue to 
seek access to order flow that comes into the Exchange outside of the 
auction process. In order to access that order flow, Market-Makers will 
need to continue to quote aggressively.\6\ The same is true for 
Auctions in that the solicited Market-Maker will still need to price 
aggressively in order to trade with an Agency Order because Auctions 
are

[[Page 15266]]

competitive with other Market-Makers actively responding.
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    \6\ The Exchange notes that Market-Makers that make markets on 
multiple exchanges will also have to continue to quote aggressively 
to access order flow on those other exchanges.
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    The Exchange is also proposing to add language that explicitly 
states that ``a Market-Maker submitting a solicited order to execute 
against a particular Agency Order may not modify its pre-programmed 
response to Request for Responses based on information regarding the 
particular Agency Order or solicited order.'' This language prohibits a 
Market-Maker from using any information regarding a particular Agency 
Order or the Market-Maker's solicited order for purposes of modifying 
the Market-Maker's Request for Responses. However, this language also 
recognizes that a Market-Maker's quotes may change for many reasons 
other than an Agency order or the Market-Maker's solicited order (e.g., 
a non-exclusive list of reasons that a Market-Maker may choose to 
adjust the size and/or price of quotes, irrespective of an Agency Order 
or a Market-Maker's solicited order, is a change in the price of the 
underlying, the Market-Maker's inventory, or interest rates) and those 
unrelated changes are not prohibited. Furthermore, this language is not 
intended to prohibit a Market-Maker from providing multiple responses 
to Request for Responses. Finally, the CBOE Department of Market 
Regulation already surveils for market participants seeking to take 
advantage of non-public information by attempting to terminate Auctions 
early in an effort to limit the number of Auction Reponses in order to 
ensure a larger allocation amount.
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.\7\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \8\ 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) \9\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ Id.
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    The Exchange believes that the proposed change will provide TPHs 
initiating auctions via AIM and SAM with the ability to access more 
liquidity by allowing them to solicit Market-Makers assigned to the 
relevant options class. This will also let Market-Makers assigned to a 
class benefit from being able to be solicited for trades in that class. 
As such, the proposed rule change both provides greater access to 
liquidity and increases the market participants that can participate in 
a trade (thereby preventing discrimination against Market-Makers 
assigned to a class). In these ways, the proposed change removes 
impediments to and perfects the mechanism of a free and open market and 
a national market system. The Exchange believes that the proposed 
change is reasonable and should promote price competition by providing 
CBOE Market-Makers with a more reasonable opportunity to compete for 
proposed crosses along with other market participants. By providing 
CBOE Market-Makers with the opportunity to be solicited on AIM/SAM 
Agency Orders in classes in which the Market-Makers are appointed, the 
proposed change prevents discrimination by providing such Market-Makers 
with the same opportunity to participate in the transaction (via 
solicitation) with which other market participants are provided. 
Furthermore, the Exchange does not believe the proposed rule change 
will alter Market-Maker incentives to respond to AIM/SAM Auctions. 
Market-Makers responding to Auctions are seeking to execute as many 
contracts as possible with the Agency order. The best way to accomplish 
that goal--currently and after the proposed rule change--is to 
aggressively respond to Auctions, regardless of who else may be 
responding or whether the contra-order is a solicited Market-Maker. An 
Auction with a solicited Market-Maker as contra should have no bearing 
on whether a competitive and interested responder will respond, nor 
should it have any bearing on which price that interested Market-Maker 
would place on his response. In addition, the Exchange does not believe 
this proposal will have an adverse effect on quoting because, as 
previously noted, in order to execute against order flow outside of 
Auctions or on other exchanges Market-Makers will have to continue to 
quote aggressively.
    The proposed rule change also removes impediments to and perfects 
the mechanism of a free and open market and a national market system, 
and prevents unfair discrimination, because a Market-Maker assigned to 
an options class can currently be solicited to trade against an Agency 
Order in that class for non-AIM/SAM transactions. Therefore, because 
Market-Makers only currently face this prohibition for AIM and SAM 
transactions, the rules for whether a Market-Maker assigned to an 
options class can currently be solicited to trade against an Agency 
Order in that class differ depending on the execution mechanism. The 
proposed change would eliminate this difference.
    The proposed rule change also removes impediments to and perfects 
the mechanism of a free and open market and a national market system, 
and prevents unfair discrimination, because BOX rules include a 
``Directed Order'' process that allows for the solicitation of orders 
and does not include a prohibition that prevents Market-Makers from 
being solicited to trade against an Agency Order in a class in which 
the Market-Maker is appointed. As such, the Exchange merely proposes to 
put Market-Makers at CBOE on a similar competitive footing vis-
[agrave]-vis these solicited orders.
    The Exchange notes that the proposed rule change would not impact a 
Market-Maker's requirements to abide by Exchange Rules 4.1 (Just and 
Equitable Principles of Trade), 4.18 (Prevention of the Misuse of 
Material, Nonpublic Information), and 6.9 (Solicited Transactions). As 
such, a Market-Maker would still be prohibited from, for example, 
learning (via solicitation) that a large order is being sent to the 
Exchange and therefore widening its quotes. Indeed, while this could 
theoretically occur regarding non-AIM/SAM solicitation orders, the 
Exchange currently prohibits this activity. Moreover, because upon 
entry, an AIM/SAM order is ``stopped'' for its full quantity at the 
contra order's price, if a Market-Maker were to widen his quotes, it 
would not impact the price of the trade. Also, because many classes on 
the Exchange have a number of Market-Makers appointed, the widening of 
quotes by one Market-Maker would likely have limited impact on the NBBO 
(and indeed, it is possible that the solicited Market-Maker that is 
widening quotes would not on the NBBO in the first place). As 
previously noted, however, the Exchange does not believe the changes in 
this proposal will adversely effect Market-Maker quoting.
    Finally, in addition to the above general prohibitions, the 
proposed

[[Page 15267]]

prohibition against a Market-Maker modifying its pre-programmed 
responses to Request for Responses based on information regarding a 
particular Agency Order or solicited order serves to protect investors 
and the public interest.

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.
    CBOE does not believe that the proposed rule change will impose any 
burden on intramarket competition that is not necessary or appropriate 
in furtherance of the purposes of the Act because it actually provides 
the opportunity for a market participant to be solicited on an order 
when such market participant currently does not have that opportunity 
(the Market-Maker assigned to that option class). Furthermore, the 
Exchange does not believe soliciting Market-Makers will negatively 
impact auction responses. As noted above, the Exchange believes that an 
Auction with a solicited Market-Maker as contra should have no bearing 
on whether a competitive and interested responder will respond, nor 
should it have any bearing on which price that interested Market-Maker 
would place on his response. The Exchange also believes that exposure 
to an electronic auction following a solicitation encourages 
competition; thus, expanding the pool of available solicited parties 
prior to the initiation of an Auction further exposes orders to 
competitive Auctions and results in a higher level of potential 
execution quality for customers.
    CBOE does not believe that the proposed rule change will impose any 
burden on intermarket competition that is not necessary or appropriate 
in furtherance of the purposes of the Act because the proposed change 
applies only to trading on CBOE. However, the opportunity for a Market-
Maker to be solicited on an order in a class to which he is assigned 
may make CBOE a more attractive marketplace by giving more trading 
opportunities to Market-Makers as well as providing greater volume and 
liquidity, thereby enhancing competition. As such, to the extent that 
the proposed change makes CBOE a more attractive marketplace to market 
participants on other exchanges, such market participants may elect to 
become CBOE 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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

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-2015-026 on the subject line.

Paper comments

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

All submissions should refer to File Number SR-CBOE-2015-026. 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 Number SR-CBOE-2015-026, and should be 
submitted on or before April 13, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-06514 Filed 3-20-15; 8:45 am]
 BILLING CODE 8011-01-P