[Federal Register Volume 80, Number 199 (Thursday, October 15, 2015)]
[Notices]
[Pages 62125-62129]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-26156]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76106; File No. SR-CBOE-2015-081]


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

October 8, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the

[[Page 62126]]

``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 2, 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 Exchange filed the proposal as a ``non-controversial'' 
proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 
\3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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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 its rules related to complex orders. 
The text of the proposed rule change is provided below.

(additions are in italics; deletions are [bracketed])

* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *
Rule 6.53C. Complex Orders on the Hybrid System

    (a) Definition: No change.
    (b) Types of Complex Orders: No change.
    (c) Complex Order Book
    No change.
    (d) Process for Complex Order RFR Auction: Prior to routing to 
the COB or once on PAR, eligible complex orders may be subject to an 
automated request for responses (``RFR'') auction process.
    (i) For purposes of paragraph (d):
    (1) ``COA'' is the automated complex order RFR auction process.
    (2) A ``COA-eligible order'' means a complex order that, as 
determined by the Exchange on a class-by-class basis, is eligible 
for a COA considering the order's marketability (defined as a number 
of ticks away from the current market), size, complex order type (as 
defined in paragraphs (a) and (b) above) and complex order origin 
types (as defined in subparagraph (c)(i) above). Complex orders 
processed through a COA may be executed without consideration to 
prices of the same complex orders that might be available on other 
exchanges.
    (ii) Initiation of a COA: On receipt of (1) a COA-eligible order 
with two legs and request from the Trading Permit Holder 
representing the order or the PAR operator handling the order, as 
applicable, that it be COA'd or (2) a complex order with three or 
more legs that (A) meets the class, marketability, size, and complex 
order type parameters of subparagraph (d)(i)(2) or (B) is designated 
as immediate or cancel and meets the class, marketability, and size 
parameters of subparagraph (d)(i)(2), in both cases regardless of 
the order's routing parameters or handling instructions (except for 
orders routed for manual handling), the System will send an RFR 
message to all Trading Permit Holders who have elected to receive 
RFR messages. Notwithstanding clause (2) of this subparagraph (ii), 
the System will reject back to a Trading Permit Holder any complex 
order with three or more legs that includes a request pursuant to 
Interpretation and Policy .04 that the order not COA. Any complex 
order described in subparagraph (d)(ii)(2) [with three or more legs] 
on PAR will COA even if the PAR operator requests that the order not 
COA. The RFR message will identify the component series, the size 
and side of the market of the COA-eligible order and any 
contingencies, if applicable.
    (iii)-(ix) 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
Introduction
    On September 4, 2014, the Securities and Exchange Commission (the 
``Commission'') approved a proposal to amend Exchange rules related to 
complex orders (``SR-CBOE-2014-017'').\5\ SR-CBOE-2014-017 was intended 
to limit a potential source of unintended Market-Maker risk related to 
how the Exchange's Hybrid Trading System (the ``System'') \6\ 
calculates risk parameters under Rule 8.18 when complex orders leg into 
the market.\7\ SR-CBOE-2014-017 accomplished this by, among other 
things, providing that a COA \8\ would be initiated ``[o]n receipt of 
(1) a COA-eligible order with two legs and request from the Trading 
Permit Holder representing the order or the PAR operator handling the 
order, as applicable, that it be COA'd or (2) a complex order with 
three or more legs, regardless of the order's routing parameters or 
handling instructions (except for orders routed for manual handling), 
the System will send an RFR message to all Trading Permit Holders who 
have elected to receive RFR messages.'' \9\ However, the System was 
designed to filter complex orders

[[Page 62127]]

through the COA eligibility requirements of subparagraph (d)(i)(2) 
prior to initiating a COA pursuant to paragraph (d)(ii). Therefore, the 
rule change from SR-CBOE-2014-017 was not implemented; instead, the 
Exchange immediately began drafting this corrective filing, which 
proposes to amend Rule 6.53C(d)(ii) to provide that a COA will be 
initiated upon receipt of a complex order with three or more legs that 
(A) meets the class, marketability, size, and complex order type 
parameters of subparagraph (d)(i)(2) or (B) is designated as immediate 
or cancel and meets the class, marketability, and size parameters of 
subparagraph (d)(i)(2), in both cases (i.e., both (A) or (B)) 
regardless of the order's routing parameters or handling instructions 
(except for orders routed for manual handling).
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    \5\ The Exchange filed the proposed rule change with the 
Securities and Exchange Commission (the ``Commission'') on February 
19, 2014. On March 3, 2014, the Exchange filed Amendment No. 1 to 
the proposed rule change. The proposed rule change, as modified by 
Amendment No. 1 thereto, was published for comment in the Federal 
Register on March 10, 2014. See Securities Exchange Act Release No. 
71648 (March 5, 2014), 79 FR 13359 (March 10, 2014) (SR-CBOE-2014-
017) (``Notice''). On June 5, 2014, the Commission instituted 
proceedings to determine whether to approve or disapprove the 
proposed rule change. After receiving two comment letters in support 
of the proposal, the Commission approved the proposed rule change on 
September 4, 2014. See Securities Exchange Act Release No. 72986, 79 
FR 53798 (September 10, 2014) (SR-CBOE-2014-017).
    \6\ The System is a trading platform that allows automatic 
executions to occur electronically and open outcry trades to occur 
on the floor of the Exchange. To operate in this ``hybrid'' 
environment, the Exchange has a dynamic order handling system that 
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 generally located in booths 
on the trading floor for manual handling. Where an order is routed 
for processing by the Exchange order handling system depends on 
various parameters configured by the Exchange and the order entry 
firm itself.
    \7\ As noted by the Amendment, Rule 6.53C(c)(ii)(1) provides 
that complex orders in the complex order book (``COB'') may execute 
against individual orders or quotes in the book provided the complex 
order can be executed in full (or a permissible ratio) by the orders 
and quotes in the book. Rule 6.53C(d)(v)(1) provides that orders 
that are eligible for the complex order auction (``COA'') may trade 
with individual orders and quotes in the book provided the COA-
eligible order can be executed in full (or a permissible ratio) by 
the orders and quotes in the book. COA is an automated request for 
responses (``RFR'') auction process. Upon initiation of a COA, the 
Exchange sends an RFR message to all Trading Permit Holders who have 
elected to receive RFR messages, which RFR message identifies the 
series, size and side of the market of the COA-eligible order and 
any contingencies. Eligible market participants may submit responses 
during a response time interval. At the conclusion of the response 
time interval, COA-eligible orders are allocated in accordance with 
Rule 6.53C(d)(v), including against individual orders and quotes in 
the book.
    \8\ COA is the automated complex order RFR auction process. See 
Rule 6.53C(d)(i)(1).
    \9\ See Securities Exchange Act Release No. 71648 (March 5, 
2014), 79 FR 13359 (March 10, 2014) (SR-CBOE-2014-017) (``Notice'')
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Proposal
    Prior to implementing SR-CBOE-2014-017, it was discovered that the 
filing did not reference certain System requirements that must be met 
before a COA would be initiated (e.g., the marketability and size 
requirements of Rule 6.53C(d)(i)(2), which are determined by the 
Exchange on a class-by-class basis). This was not the Exchange's 
intent. In fact, the Exchange stated in SR-CBOE-2014-017 that the 
Exchange may determine on a class-by-class basis which complex orders 
are eligible for COA, including by complex order type and origin 
type.\10\ The Exchange simply failed to reference the size and 
marketability parameters also set forth in Rule 6.53C(d)(i)(2). In 
addition, the System was not designed to initiate a COA even if a 
complex order did not meet the marketability and size requirements 
determined by the exchange in accordance with paragraph (d)(i)(2). The 
System was designed to filter complex orders through the COA 
eligibility requirements of paragraph (d)(i)(2) prior to initiating a 
COA pursuant to paragraph (d)(ii).\11\ As it was never the intention of 
the Exchange to COA all complex orders with three or more legs 
irrespective of the COA eligibility requirements of paragraph 
(d)(i)(2), the Exchange proposes to amend Rule 6.53(d)(ii) to provide 
that a COA will be initiated:
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    \10\ See SR-CBOE-2014-017 at 29 (referencing some of the 
parameters that determine whether a complex order is eligible for 
COA, including order type and origin code).
    \11\ As noted in SR-CBOE-2014-017, Rule 6.53C(d)(i)(2) provides 
that the Exchange may determine on a class-by-class basis which 
complex orders are eligible for COA, including by complex order type 
and origin type; however, SR-CBOE-2014-017 inadvertently failed to 
reference the marketability and size of a complex order which is 
also a parameter under paragraph (d)(i)(2). Id.

    On receipt of (1) a COA-eligible order with two legs and request 
from the Trading Permit Holder representing the order or the PAR 
operator handling the order, as applicable, that it be COA'd or (2) 
a complex order with three or more legs that (A) meets the class, 
marketability, size, and complex order type parameters of 
subparagraph (d)(i)(2) or (B) is designated as immediate or cancel 
and meets the class, marketability, and size parameters of 
subparagraph (d)(i)(2), in both cases regardless of the order's 
routing parameters or handling instructions (except for orders 
routed for manual handling), the System will send an RFR message to 
all Trading Permit Holders who have elected to receive RFR messages. 
Notwithstanding clause (2) of this subparagraph (ii), the System 
will reject back to a Trading Permit Holder any complex order with 
three or more legs that includes a request pursuant to 
Interpretation and Policy .04 that the order not COA. Any complex 
order described in subparagraph (d)(ii)(2) on PAR will COA even if 
the PAR operator requests that the order not COA. The RFR message 
will identify the component series, the size and side of the market 
of the COA-eligible order and any contingencies, if applicable.\12\
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    \12\ This proposed change applies to Hybrid classes only, and 
not Hybrid 3.0 classes. The Exchange does not believe the risk 
discussed in this rule filing is present in Hybrid 3.0 classes. The 
proposed rule change amends Rule 6.53C, Interpretation and Policy 
.10 to indicate that complex orders in Hybrid 3.0 classes, 
regardless of the number of legs, will COA in the same manner they 
currently do.

    The Exchange notes that complex orders that are not COA-eligible 
are either routed to the Public Automatic Routing System (``PAR'') 
(e.g., orders that do not meet the size, order type, and origin type 
parameters are routed to PAR) or routed to COB (e.g., orders that do 
not meet the marketability parameter).
    As noted in the rule text above, the Exchange is proposing to 
hardcode the complex order type parameter as it relates to complex 
orders with three or more legs that are entered as immediate or cancel 
(``IOC''). Currently, the Exchange does not COA complex orders that are 
entered as IOC. The effect of this proposed rule will be that complex 
orders with three or more legs that are designated as IOC and meet the 
class, marketability, and size parameters will always be eligible to 
COA. Complex orders with three or more legs that are entered as IOC are 
the orders that primarily create the Market-Maker risk described in SR-
CBOE-2014-017.\13\ Therefore, the Exchange believes it is appropriate 
for complex orders with three or more legs that are entered as IOC to 
COA. The Exchange notes that the class, marketability, size, and 
complex order type parameters will have the same settings whether the 
complex order has two or three or more legs, except, as noted, complex 
orders with three or more legs will not be prohibited from accessing 
COA based on an IOC designation. The Exchange notes that all market 
participants submitting complex orders with three or more legs that are 
marked IOC are treated the same--that is, assuming the complex orders 
with three or more legs that are marked IOC meet the class, 
marketability and size parameters, the orders shall COA. The Exchange 
also notes that market participants determine whether an order is 
marked IOC; thus, it is market participants that decide whether an 
order with three or more legs will COA.
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    \13\ The Exchange notes that the rule text provided for in SR-
CBOE-2014-017 essentially required all complex orders with three or 
more legs to COA (including orders entered as IOC), but the Exchange 
never implemented the requirement with regards to complex orders 
with three or more legs because, as previously noted, it was not the 
Exchange's intention to COA all complex orders with three or more 
legs irrespective of the COA eligibility requirements. As soon as 
the Exchange realized SR-CBOE-2014-017 did not accurately reflect 
the Exchange's intentions, the Exchange began drafting this rule 
filing.
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    Additionally, the proposed rule does not affect the outcome of SR-
CBOE-2014-017 as it relates to complex orders with three or more legs 
that are entered as IOC because neither SR-CBOE-2014-017 nor this 
proposal allow the Exchange to limit access to COA for orders with 
three or more legs based on the IOC designation. In other words, a 
market participant entering a complex order with three or more legs 
designated as IOC would expect (based on SR-CBOE-2014-017 providing 
that all complex orders with three or more legs shall COA) the order to 
COA. This proposed rule does not change that expectation. The only 
difference is that this proposed rule specifies that the complex order 
with three or more legs that is marked IOC must also meet the class, 
marketability, and size parameters in order to COA.
    Further, the proposed rule does not materially affect the outcome 
or purpose of SR-CBOE-2014-017; rather, the proposed rule seeks to 
clarify that a complex order must meet the eligibility requirements of 
Rule 6.53C(d)(i)(2) prior to the Exchange initiating a COA. The 
Exchange still believes the proposed rule will allow Market-Makers to 
better manage their risk in their appointments and that the reduced 
risk will encourage Market-Makers to quote larger size, which will 
increase liquidity and enhance competition in those classes. The 
Exchange also notes that regardless of marketability requirements of 
paragraph (d)(i)(2), an order that is not

[[Page 62128]]

marketable will not be executed. The proposed rule change is simply 
intended to clarify when a COA will be initiated and to reflect the 
design of the System, which is set-up to filter complex orders through 
the COA eligibility requirements prior to the initiation of a COA. 
Additionally, the Exchange believes the proposed rule is non-
controversial because, as with the current rule, all market 
participants submitting orders with three or more legs will be treated 
equally (i.e., for orders with three or more legs the Exchange will not 
have the flexibility to limit COA-eligibility to certain origin types; 
rather, the Exchange will, by rule, accept all origin types for complex 
orders with three or more legs).
    The Exchange will announce the implementation date of the proposed 
rule change in a Regulatory Circular to be published no later than 90 
days following the effective date of this filing. The implementation 
date will be no later than 180 days following the effective date of 
this filing.
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.\14\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \15\ 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)\16\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ Id.
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    In particular, the Exchange believes the proposed rule change 
serves to clarify SR-CBOE-2014-017 and does not materially affect the 
outcome of SR-CBOE-2014-017. As noted above, it was not the intent of 
SR-CBOE-2014-017 to COA all complex orders irrespective of the 
eligibility parameters of Rule 6.53C(d)(i)(2); rather, the filing was 
intended to reflect the System's design, which filters complex orders 
through the COA eligibility requirements of paragraph (d)(i)(2) prior 
to initiating a COA. Therefore, under the proposed rule, complex orders 
with three or more legs will need to meet the class, marketability, 
size, and order type parameters of subparagraph (d)(i)(2) in order to 
COA, except the Exchange, by rule, will not be able to limit COA-
eligibility based on a complex order with three or more legs being 
entered as IOC. Additionally, complex Orders with three or more legs 
will filter through the origin type parameter of subparagraph 
(d)(i)(2); however, for complex orders with three or more legs the 
Exchange, by rule, will not have the flexibility to limit COA-
eligibility to certain origin types. This is consistent with SR-CBOE-
2014-017 because SR-CBOE-2014-017 also did not provide the Exchange the 
flexibility to limit COA-eligibility for complex orders with three or 
more legs to certain origin types.

B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on intramarket or intermarket competition that is not necessary 
or appropriate in furtherance of the purposes of the Act because the 
rule change does not materially affect the outcome or purpose of SR-
CBOE-2014-017. SR-CBOE-2014-017 was designed to reduce risk to Market-
Makers that are quoting in the regular market, and this proposed rule 
change will not affect that outcome. In addition, Rule 6.53C(d)(ii), as 
amended by SR-CBOE-2014-017, clearly provides that the origin type of a 
complex order with three or more legs has no bearing on whether the 
complex order will COA, and this proposed rule does not modify how 
different origin types will be treated for purposes of COA. This 
proposed rule also does not affect the outcome of SR-CBOE-2014-017 as 
it relates to complex orders with three or more legs that are entered 
as IOC because neither SR-CBOE-2014-017 nor this proposal allow the 
Exchange to limit access to COA for orders with three or more legs 
based on the IOC designation. In other words, a market participant 
entering a complex order with three or more legs designated as IOC 
would expect (based on SR-CBOE-2014-017 providing that all complex 
orders with three or more legs shall COA) the order to COA. This 
proposed rule does not change that expectation. The only difference is 
that this proposed rule specifies that the complex order with three or 
more legs that is marked IOC must also meet the class, marketability, 
and size parameters in order to COA. This proposed rule simply seeks to 
apply the class, marketability, size, and complex order type parameters 
of Rule 6.53C(d)(i)(2) to complex orders with three or more legs.

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 \17\ and 
Rule 19b-4(f)(6) \18\ 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.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6).
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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-2015-081 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange

[[Page 62129]]

Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2015-081. 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-2015-081 and should be 
submitted on or before November 5, 2015.
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    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-26156 Filed 10-14-15; 8:45 am]
 BILLING CODE 8011-01-P