[Federal Register Volume 81, Number 27 (Wednesday, February 10, 2016)]
[Notices]
[Pages 7173-7179]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-02602]



[[Page 7173]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77049; File No. SR-CBOE-2016-005]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Relating to 
Professionals

February 4, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''), and Rule 19b-4 thereunder, notice is hereby given that 
on January 27, 2016, 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.

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

    The Exchange proposes to amend Interpretation and Policy .01 to 
Rule 1.1(ggg) relating to Professionals. The text of the proposed rule 
change is provided below.
    (Additions are italicized; deletions are [bracketed])
* * * * *
    Chicago Board Options Exchange, Incorporated Rules
* * * * *
    CHAPTER I Definitions
    Rule 1.1. Definitions
    When used in these Rules, unless the context otherwise requires:
    (a) Any term defined in the Bylaws and not otherwise defined in 
this Chapter shall have the meaning assigned to such term in the 
Bylaws.
    (b)--(fff) No change.
    Professional
    (ggg) The term ``Professional'' means any person or entity that (i) 
is not a broker or dealer in securities, and (ii) places more than 390 
orders in listed options per day on average during a calendar month for 
its own beneficial account(s). A Professional will be treated in the 
same manner as a broker or dealer in securities for purposes of Rules 
6.2A, 6.2B, 6.8C, 6.9, 6.13A, 6.13B, 6.25, 6.45, 6.45A (except for 
Interpretation and Policy .02), 6.45B (except for Interpretation and 
Policy .02), 6.53C(c)(ii), 6.53C(d)(v), subparagraphs (b) and (c) under 
Interpretation and Policy .06 to Rule 6.53C, 6.74 (except Professional 
orders may be considered public customer orders subject to facilitation 
under paragraphs (b) and (d)), 6.74A, 6.74B, 8.13, 8.15B, 8.87, 24.19, 
43.1, 44.4, 44.14. The Professional designation is not available in 
Hybrid 3.0 classes. All Professional orders shall be marked with the 
appropriate origin code as determined by the Exchange.
    . . . Interpretations and Policies:
    .01 [For purposes of this Rule 1.1(ggg), an order which is placed 
for the beneficial account(s) of a person or entity that is not a 
broker or dealer in securities that is broken into multiple parts by a 
broker or dealer or by an algorithm housed at a broker or dealer or by 
an algorithm licensed from a broker or dealer, but which is housed with 
the customer in order to achieve a specific execution strategy 
including, for example, a basket trade, program trade, portfolio trade, 
basis trade, or benchmark hedge, constitutes a single order and shall 
be counted as one order.] Except as noted below, each order of any 
order type counts as one order for Professional order counting 
purposes.
    (a) Complex Orders:
    (1) A complex order comprised of four (4) legs or fewer counts as a 
single order;
    (2) A complex order comprised of five (5) legs or more counts as 
multiple orders with each option leg counting as its own separate 
order;
    (b) ``Parent''/``Child'' Orders:
    (1) Same Side and Same Series: A ``parent'' order that is placed 
for the beneficial account(s) of a person or entity that is not a 
broker or dealer in securities that is broken into multiple ``child'' 
orders on the same side (buy/sell) and series as the ``parent'' order 
by a broker or dealer, or by an algorithm housed at a broker or dealer 
or by an algorithm licensed from a broker or dealer, but which is 
housed with the customer, counts as one order even if the ``child'' 
orders are routed across multiple exchanges.
    (2) Both Sides and/or Multiple Series: A ``parent'' order 
(including a strategy order) that is broken into multiple ``child'' 
orders on both sides (buy/sell) of a series and/or multiple series 
counts as multiple orders, with each ``child'' order counting as a new 
and separate order.
    (c) Cancel/Replace:
    (1) Except as provided in paragraph (c)(2) below, any order that 
cancels and replaces an existing order counts as a separate order (or 
multiple new orders in the case of a complex order comprised of five 
(5) legs or more).
    (2) Same Side and Same Series: An order that cancels and replaces 
any ``child'' order resulting from a ``parent'' order that is placed 
for the beneficial account(s) of a person or entity that is not a 
broker, or dealer in securities that is broken into multiple ``child'' 
orders on the same side (buy/sell) and series as the ``parent'' order 
by a broker or dealer, by an algorithm housed at a broker or dealer, or 
by an algorithm licensed from a broker or dealer, but which is housed 
with the customer, does not count as a new order.
    (3) Both Sides and/or Multiple Series: An order that cancels and 
replaces any ``child'' order resulting from a ``parent'' order 
(including a strategy order) that generates ``child'' orders on both 
sides (buy/sell) of a series and/or in multiple series counts as a new 
order.
    (4) Pegged Orders: Notwithstanding the provisions of paragraph 
(c)(2) above, an order that cancels and replaces any ``child'' order 
resulting from a ``parent'' order being ``pegged'' to the BBO or NBBO 
or that cancels and replaces any ``child'' order pursuant to an 
algorithm that uses BBO or NBBO in the calculation of ``child'' orders 
and attempts to move with or follow the BBO or NBBO of a series counts 
as a new order each time the order cancels and replaces in order to 
attempt to move with or follow the BBO or NBBO.
* * * * *
    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
    The Exchange proposes to amend Interpretation and Policy .01 to 
Rule 1.1(ggg) (Professional) relating to Professionals. Specifically, 
the

[[Page 7174]]

Exchange proposes to delete current Interpretation and Policy .01 to 
Rule 1.1(ggg) and adopt new Interpretation and Policy .01 to Rule 
1.1(ggg), setting forth amended standards for calculating average daily 
order submissions for Professional order counting purposes. The 
Exchange believes that the proposed rule change would provide 
additional clarity in the Rules and serve to promote the purposes for 
which the Exchange originally adopted Rule 1.1(ggg) relating to 
Professionals.
Background
    In general, ``public customers'' are granted certain marketplace 
advantages over other market participants, including Market-Makers, 
brokers and dealers of securities, and industry ``Professionals'' on 
most U.S. options exchanges. The U.S. options exchanges, including 
CBOE, have adopted materially similar definitions of the term 
``Professional,'' \1\ which commonly refers to persons or entities that 
are not a brokers or dealers in securities and who or which place more 
than 390 orders in listed options per day on average during a calendar 
month for their own beneficial account(s).\2\ Various exchanges adopted 
similar Professional rules for many of the same reasons, including, but 
not limited to the desire to create more competitive marketplaces and 
attract retail order flow.\3\ In addition, as several of the exchanges 
noted in their original Professional rule filings, their beliefs that 
disparate Professional rules and a lack of uniformity in the 
application of such rules across the options markets would not promote 
the best regulation and may, in fact, encourage regulatory 
arbitrage.\4\
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    \1\ Some U.S. options exchanges refer to ``Professionals'' as 
``Professional Customers'' or non-``Priority Customers.'' Compare 
BATS Exchange, Inc. (``BZX'') Rule 16.1(a)(45) (Professional); BOX 
Options Exchange LLC (``BOX'') Rule 100(a)(50) (Professional); CBOE 
Rule 1.1(ggg) (Professional); C2 Rule 1.1; BX Chapter I, Sec. 1(49) 
(Professional); NASDAQ OMX PHLX LLC (``PHLX'') Rule 1000(b)(14) 
(Professional); Nasdaq Options Market (``NOM'') Chapter I, Sec. 
1(a)(48) (Professional); with ISE Rule 100(a)(37A) (Priority 
Customer); Gemini Rule 100(a)(37A) (Priority Customer); Miami 
International Securities Exchange LLC (``MIAX'') Rule 100 (Priority 
Customer); NYSE MKT LLC (``NYSE MKT'') Rule 900.2NY(18A) 
(Professional Customer); NYSE Arca, Inc. (``Arca'') Rule 6.1A(4A) 
(Professional Customer).
    \2\ See, e.g., BZX Rule 16.1(a)(45); BOX Rule 100(a)(50); CBOE 
Rule 1.1(ggg); C2 Rule 1.1; BX Chapter I, Sec. 1(49); PHLX Rule 
1000(b)(14); NOM Chapter I, Sec. 1(a)(48); see also ISE Rule 
100(a)(37A) (Priority Customer); Gemini Rule 100(a)(37A) (Priority 
Customer); MIAX Rule 100 (Priority Customer); NYSE MKT Rule 
900.2NY(18A) (Professional Customer); Arca Rule 6.1A(4A) 
(Professional Customer).
    \3\ See, e.g., Securities Exchange Act Release No. 60931 
(November 4, 2009), 74 FR 58355, 58356 (November 12, 2009) (Notice 
of Filing of Proposed Rule Change, as Modified by Amendment No. 1, 
Related to Professional Orders) (SR-CBOE 2009-078); Securities 
Exchange Act Release No. 59287 (January 23, 2009), 74 FR 5694, 5694 
(January 30, 2009) (Notice of Filing of Amendment No. 2 and Order 
Granting Accelerated Approval of the Proposed Rule Change, as 
Modified by Amendment Nos. 1 and 2 Thereto, Relating to Professional 
Account Holders) (SR-ISE-2006-026); Securities Exchange Act Release 
No. 61802 (March 30, 2010), 75 FR 17193, 17194 (April 5, 2010) 
(Notice of Filing of Amendment No. 2 and Order Granting Accelerated 
Approval of the Proposed Rule Change, as Modified by Amendment No. 2 
Thereto, Relating to Professional Orders) (SR-PHLX-2010-005); 
Securities Exchange Act Release No. 61629 (March 2, 2010), 75 FR 
10851, 10851 (March 9, 2010) (Notice of Filing of Proposed Rule 
Change Relating to the Designation of a ``Professional Customer'') 
(SR-NYSEMKT-2010-018).
    \4\ See, e.g., Securities and Exchange Act Release No. 62724 
(August 16, 2010), 75 FR 51509 (August 20, 2010) (Notice of Filing 
of a Proposed Rule Change by the NASDAQ Stock Market LLC To Adopt a 
Definition of Professional and Require That All Professional Orders 
Be Appropriately Marked) (SR-NASDAQ-2010-099); Securities and 
Exchange Act Release No. 65500 (October 6, 2011), 76 FR 63686 
(October 13, 2011) (Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Adopt a Definition of Professional and 
Require That All Professional Orders Be Appropriately Marked) (SR-
BATS-2011-041); Securities Exchange Act Release No. 65036 (August 4, 
2011), 76 FR 49517, 49518 (August 10, 2011) (Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change To Adopt a 
Definition of ``Professional'' and Require That Professional Orders 
Be Appropriately Marked by BOX Options Participants) (SR-BX-2011-
049); Securities Exchange Act Release No. 60931 (November 4, 2009), 
74 FR 58355, 58357 (November 12, 2009) (Notice of Filing of Proposed 
Rule Change, as Modified by Amendment No. 1, Related to Professional 
Orders) (SR-CBOE 2009-078); see also Securities Exchange Act Release 
73628 (November 18, 2014), 79 FR 69958, 69960 (November 24, 2014) 
(Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change Relating to Professional Orders) (SR-CBOE-2014-085).
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    Similar to other U.S. options exchanges, the Exchange grants 
``public customers'' certain marketplace advantages over other market 
participants pursuant to the Exchange's Fees Schedule \5\ and the 
Rules.\6\ In general, public customers receive allocation and execution 
priority above equally priced competing interests of Market-Makers, 
broker-dealers, and other market participants. In addition, customer 
orders are generally exempt from transaction fees and certain Exchange 
surcharges. Similar to other U.S. options exchanges, the Exchange 
affords these marketplace advantages to public customers based on 
various business- and regulatory-related objectives, including, for 
example, to attract retail order flow to the Exchange and to provide 
competitive pricing.
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    \5\ See, e.g., Fees Schedule (Options Transaction Fees).
    \6\ See, e.g., Rules 6.45A (Priority and Allocation of Equity 
Option Trades on the CBOE Hybrid System), 6.45B (Priority and 
Allocation of Trades in Index Options and Options on ETFs on the 
CBOE Hybrid System).
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    Prior to 2009, the Exchange designated all orders as either 
customer orders or non-customer orders based solely on whether or not 
the order was placed for the account of a registered securities broker 
or dealer. As non-broker-dealer investors gained more access to 
electronic trading platforms, analytics technology, and market data 
services previously available only to securities brokers and dealers, 
the distinction between public customers and non-customers became less 
effective in promoting the intended purposes of the Exchange's customer 
priority rules because certain customers were more similarly situated 
to broker-dealers. As the Exchange noted at the time, the Exchange no 
longer believed that the definitions of customer and non-customer 
properly distinguished between the kind of nonprofessional retail 
investors that the order priority rules and fee exemptions were 
intended to benefit and non-broker-dealer professional traders with 
access to advanced market data information and sophisticated trading 
platforms that were not intended to benefit from those rules and 
exemptions.\7\ Furthermore, the Exchange believed that distinguishing 
solely between registered broker-dealers and non-broker-dealers with 
respect to order priority and fee exemptions was inconsistent with 
principles of fair competition and inappropriate in the marketplace 
given professional traders' access to the same trading tools and market 
data services as broker-dealers while taking advantage of the same 
order priority and fee exemptions as retail investors. Accordingly, in 
2009, the Exchange adopted a definition of ``Professional'' under Rule 
1.1(ggg) to further distinguish different types of orders placed on the 
Exchange.\8\
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    \7\ See Securities Exchange Act Release No. 60931 (November 4, 
2009), 74 FR 58355, 58356 (November 12, 2009) (Notice of Filing of 
Proposed Rule Change, as Modified by Amendment No. 1, Related to 
Professional Orders) (SR-CBOE 2009-078).
    \8\ Notably, the Exchange's Professional order rule was 
materially based upon a similar proposal by the International 
Securities Exchange, LLC (``ISE'') as set forth in SR-ISE-2006-026. 
See id. at 58356, note 6.
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    Under Rule 1.1(ggg), a Professional is defined as a person or 
entity that is not a securities broker or dealer that places more than 
390 listed options orders per day on average during a calendar month 
for its own beneficial account(s). As discussed above, in large part, 
the Exchange's Professional order rules were adopted to distinguish 
non-broker dealer individuals and entities that have access to 
information and technology

[[Page 7175]]

that enable them to professionally trade listed options in a manner 
similar to brokers or dealers in securities from retail investors for 
order priority and/or transaction fees purposes. In general, 
Professionals are treated as brokers or dealers in securities under the 
Exchange's rules, including, but not limited to with respect to order 
priority and fees.\9\ Rule 1.1(ggg) is substantially similar to the 
Professional order rules of other exchanges and was materially based 
upon the preexistent Professional order rules of other exchanges.\10\
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    \9\ See Rule 1.1(ggg). Notably, however, Professional orders are 
treated as public customer orders pursuant to certain rules, such as 
if the order is held by a broker and the broker crosses it with a 
facilitation order on the floor.
    \10\ See Securities Exchange Act Release No. 60931 (November 4, 
2009), 74 FR 58355, 58356 (November 12, 2009) (Notice of Filing of 
Proposed Rule Change, as Modified by Amendment No. 1, Related to 
Professional Orders) (SR-CBOE 2009-078); see, e.g., ISE Rule 
100(a)(31A).
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    After adopting Rule 1.1(ggg), the Exchange issued a Regulatory 
Circular, interpreting Rule 1.1(ggg).\11\ In particular, with respect 
to the counting of single original orders that are then broken up into 
multiple orders to achieve a specific execution strategy, the Exchange 
interpreted Rule 1.1(ggg) to allow such orders to be counted as one 
single order for Professional order counting purposes.\12\ Over time, 
however, the Exchange began to receive more and more questions as to 
what constitutes an ``order'' for Professional order counting purposes, 
including, but not limited to questions about how to count certain 
types of strategy orders and how to count ``child'' orders generated as 
part of specific ``parent'' execution strategies.
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    \11\ See Regulatory Circular RG09-148 (Professional Orders).
    \12\ See id. at Question 14.
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    In November 2014, in response to these questions, the Exchange 
clarified its Professional order rule by adopting Interpretation and 
Policy .01 to Rule 1.1(ggg). Specifically, the Exchange codified its 
interpretation that, for Professional order counting purposes, 
``parent'' orders that are placed on a single ticket and entered for 
the beneficial account(s) of a person or entity that is not a broker or 
dealer in securities and that are broken into multiple parts by a 
broker or dealer, or by an algorithm housed at a broker or dealer, or 
by an algorithm licensed from a broker or dealer that is housed with 
the customer in order to achieve a specific execution strategy, 
including, but not limited to basket trades, program trades, portfolio 
trades, basis trades, and benchmark hedges, should count as one single 
order for Professional order counting purposes. This interpretation was 
a clarification in the Rules based on the Exchange's past 
interpretations of Rule 1.1(ggg) and similar interpretations set forth 
in a previously issued ISE/ISE Gemini, LLC (``Gemini'') Joint 
Regulatory Information Circular.\13\
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    \13\ See ISE Regulatory Information Circular 2014-007/Gemini 
Regulatory Information Circular 2014-011 (Priority Customer Orders 
and Professional Orders (FAQ)).
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    The Exchange's adoption of Interpretation and Policy .01 to Rule 
1.1(ggg), however, has not clarified the Exchange's Professional rule 
completely. The advent of new multi-leg spread products and the 
proliferation of the use of complex orders and algorithmic execution 
strategies by both institutional and retail market participants 
continue to raise questions as to what constitutes an ``order'' for 
Professional order counting purposes. For example, do multi-leg spread 
orders (which on the Exchange may be up to 12 legs) or strategy orders 
such as volatility orders constitute a single order or multiple orders 
for Professional order counting purposes? The Exchange's Professional 
rule does not fully address these issues and there is no common 
interpretation across the U.S. options markets. In fact, CBOE is the 
only U.S. options exchange to have adopted any interpretation of how 
certain types of orders should be counted under its Professional rule. 
The Exchange believes that additional clarity is needed regarding the 
application of Rule 1.1(ggg). Accordingly, the Exchange is proposing to 
amend Interpretation and Policy .01 to Rule 1.1(ggg) to address how 
various new execution and order strategies should be treated under the 
Exchange's Professional rule.
    Moreover, the Exchange believes that a new Interpretation and 
Policy would better serve to accomplish the Exchange's stated goals for 
its Professional rule. Under current Interpretation and Policy .01 to 
Rule 1.1(ggg) many market participants using sophisticated execution 
strategies and trading algorithms who would typically be considered 
professional traders are not identified under the Exchange's 
Professional rule. The Exchange believes that these types of market 
participants have access to technology and market information akin to 
broker-dealers. The Exchange also believes that a new Interpretation 
and Policy to Rule 1.1(ggg) is warranted to ensure that public 
customers are afforded the marketplace advantages that they are 
intended to be afforded over other types of market participants on the 
Exchange.
    The Exchange notes that despite the adoption of materially similar 
Professional rules across the markets, exchanges' interpretations of 
their respective Professional rules vary. Although Professionals are 
similarly defined by exchanges as non-broker-dealer persons or entities 
that place more than 390 orders in listed options for their own 
beneficial account(s) per day on average during a calendar month, there 
is no consistent definition across the markets as to what constitutes 
an ``order'' for Professional order counting purposes. While several 
options exchanges, including CBOE, have attempted to clarify their 
interpretations of their Professional rules through regulatory and 
information notices and circulars,\14\ many of the options exchanges 
have not issued any guidance regarding the application of their 
Professional rules. Furthermore, where exchanges have issued such 
interpretive guidance, those interpretations have not necessarily been 
consistent.\15\ As a result, the Exchange believes that the rather than 
helping to promote the best regulation and discourage regulatory 
arbitrage, the Professional rules have become a basis of intermarket 
competition. As noted above, CBOE is the only U.S. options exchange 
that has adopted interpretive guidance regarding its Professional rule 
in its rules.
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    \14\ See Regulatory Circular RG09-148 (Professional Orders); ISE 
Regulatory Information Circular 2014-007/Gemini Regulatory 
Information Circular 2014-011 (Priority Customer Orders and 
Professional Orders (FAQ)); MIAX Regulatory Circular 2014-69 
(Priority Customer and Professional Interest Order Summary); NYSE 
Joint Regulatory Bulletin, NYSE Acra RBO-15-03, NYSE Amex RBO-15-06) 
(Professional Customer Orders); BOX Regulatory Circular RC-2015-21 
(Professional Orders).
    \15\ Compare NYSE Joint Regulatory Bulletin, NYSE Acra RBO-15-
03, NYSE Amex RBO-15-06) (Professional Customer Orders) with 
Interpretation and Policy .01 to Rule 1.1(ggg); Regulatory Circular 
RG09-148 (Professional Orders); ISE Regulatory Information Circular 
2014-007/Gemini Regulatory Information Circular 2014-011 (Priority 
Customer Orders and Professional Orders (FAQ)); and ISE Regulatory 
Information Circular 2009-179 (Priority Customer Orders and 
Professional Orders (FAQ)).
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    The Exchange believes that a new set of standards and a more 
detailed counting regime than the Exchange's current Professional order 
rules provide would allow the Exchange to better compete for order flow 
and help ensure deeper levels of liquidity on the Exchange. The 
Exchange also believes that the proposed rule change would help to 
remove impediments to and help perfect the mechanism of a free and open 
market and a national market system by increasing competition in the 
marketplace. Accordingly, the Exchange proposes to amend the Rules by 
deleting

[[Page 7176]]

current Interpretation and Policy .01 to Rule 1.1(ggg) and, in its 
place, adopt a new Interpretation and Policy with respect to 
Professional order counting.
Proposal
    The Exchange proposes to delete current Interpretation and Policy 
.01 to Rule 1.1(ggg) and replace it with a new Interpretation and 
Policy setting forth a more detailed counting regime for calculating 
average daily orders for Professional order counting purposes. 
Specifically, the Exchange's proposed Interpretation and Policy would 
make clear how to count complex orders, ``parent/child'' orders that 
are broken into multiple orders, and ``cancel/replace'' orders for 
Professional order counting purposes.
    Under the Exchange's proposed Interpretation and Policy .01 to Rule 
1.1(ggg), all orders would count as one single order for Professional 
counting purposes, unless otherwise specified under the Rules. Proposed 
Interpretation and Policy .01 to Rule 1.1(ggg) would provide that 
except as noted below, each order of any order type counts as one order 
for Professional order counting purposes. Paragraph (a) of proposed 
Interpretation and Policy .01 to Rule 1.1(ggg) would discuss complex 
orders. Under paragraph (a)(1) of proposed Interpretation and Policy 
.01 to Rule 1.1(ggg), a complex order comprised of four (4) legs or 
fewer would count as a single order. Conversely, paragraph (a)(2) of 
proposed Interpretation and Policy .01 to Rule 1.1(ggg) would provide 
that a complex order comprised of five (5) legs or more counts as 
multiple orders with each option leg counting as its own separate 
order. The Exchange believes the distinction between complex orders 
with up to four legs from those with five or more legs is appropriate 
in light of the purposes for which Rule 1.1(ggg) was adopted. In 
particular, the Exchange notes that multi-leg complex order strategies 
with five or more legs are more complex in nature and thus, more likely 
to be used by professional traders than traditional two, three, and 
four leg complex order strategies such as the strangle, straddle, 
butterfly, collar, and condor strategies, which are oftentimes used by 
retail investors. Thus, the types of complex orders traditionally 
placed by retail investors would continue to count as only one order 
while the more complex strategy orders that are typically used by 
professional traders would count as multiple orders for Professional 
order counting purposes.
    Paragraph (b) of proposed Interpretation and Policy .01 to Rule 
1.1(ggg) would provide details relating to the counting of ``parent/
child'' orders. Under paragraph (b)(1) of proposed Interpretation and 
Policy .01 to Rule 1.1(ggg), a ``parent'' order that is placed for the 
beneficial account(s) of a person or entity that is not a broker or 
dealer in securities that is broken into multiple ``child'' orders on 
the same side (buy/sell) and series as the ``parent'' order by a broker 
or dealer, or by an algorithm housed at a broker or dealer or by an 
algorithm licensed from a broker or dealer, but which is housed with 
the customer, counts as one order even if the ``child'' orders are 
routed across multiple exchanges. Essentially, this paragraph would 
describe how orders placed for public customers, which are ``worked'' 
by a broker in order to receive best execution should be counted for 
Professional order counting purposes. Paragraph (b)(1) of proposed 
Interpretation and Policy .01 to Rule 1.1(ggg) would permit larger 
``parent'' orders (which may be simple orders or complex orders 
consisting of up to four legs), to be broken into multiple smaller 
orders on the same side (buy/sell) and in the same series (or complex 
orders consisting of up to four legs) in order to attempt to achieve 
best execution for the overall order.
    For example, if a customer were to enter an order to buy 1,000 XYZ 
$5 January calls at a limit price of $1, which the customer's broker 
then broke into four separate orders to buy 250 XYZ $5 January calls at 
a limit price of $1 in order to achieve a better execution, the four 
``child'' orders would still only count as one order for Professional 
order counting purposes (whether or not the four separate orders were 
sent to the same or different exchanges for execution).\16\ Similarly, 
in the case of a complex order, if a customer were to enter an order to 
buy 1,000 XYZ $5 January(sell)/March(buy) calendar spreads (with a 1:1 
ratio on the legs), at a net debit limit price of $0.20, which the 
customer's broker then broke into four separate orders to buy 250 XYZ 
$5 January/March calendar spreads (each with a 1:1 ratio on the legs), 
each at a net debit limit price of $0.20, the four ``child'' orders 
would still only count as one order for Professional order counting 
purposes (whether or not the four separate orders were sent to the same 
or different exchanges for execution).
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    \16\ Notably, however, if the customer herself were to enter the 
same four identical orders to buy 250 XYZ $5 January calls at a 
limit price of $1 prior to sending the orders, those orders would 
count as four separate orders for Professional order counting 
purposes because the orders would not have been broken into multiple 
``child'' orders on the same side (buy/sell) and series as the 
``parent'' order by a broker or dealer, or by an algorithm housed at 
a broker or dealer or by an algorithm licensed from a broker or 
dealer, but which is housed with the customer.
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    Conversely, under paragraph (b)(2) of proposed Interpretation and 
Policy .01 to Rule 1.1(ggg), a ``parent'' order (including a strategy 
order) \17\ that is broken into multiple ``child'' orders on both sides 
(buy/sell) of a series \18\ and/or multiple series counts as multiple 
orders, with each ``child'' order counting as a new and separate order. 
Accordingly, under this provision, strategy orders, which are most 
often used by sophisticated traders best characterized as 
``Professionals,'' would count as multiple orders for each child order 
entered as part of the overall strategy. For example, if a customer 
were to enter a volatility order \19\ or ``vega'' order \20\ with her 
broker by

[[Page 7177]]

which multiple ``child'' orders were then sent to the Exchange across 
multiple series in a particular option class, each order entered would 
count as a separate order for Professional order counting purposes. 
Likewise, if the customer instructed her broker to buy a variety of 
calls across various option classes as part of a basket trade, each 
order entered by the broker in order to obtain the positions making up 
the basket would count as a separate order for Professional counting 
purposes.\21\
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    \17\ For purposes of this proposed Interpretation and Policy, 
the term ``strategy order'' is intended to mean an execution 
strategy, trading instruction, or algorithm whereby multiple 
``child'' orders on both sides of a series and/or multiple series 
are generated prior to being sent to any or multiple U.S. options 
exchange(s).
    \18\ The Exchange recognizes that with respect to customers and, 
in particular, the counting of customer orders for Professional 
purposes, paragraphs (b)(2) and (c)(3) of proposed Interpretation 
and Policy .01 to Rule 1.1(ggg) contain language that is somewhat 
redundant and superfluous. Because non-professional customers may 
not simultaneously or nearly simultaneously enter multiple limit 
orders to buy and sell the same security (i.e. act as Market-Makers) 
(see Rule 6.8C), a ``parent'' customer order that is broken into 
multiple ``child'' orders on both sides (buy/sell) must necessarily 
be placed across multiple series. Accordingly, when considered in 
conjunction with the prohibitions in Rule 6.8C, the operation of 
paragraphs (b)(2) and (c)(3) of proposed Interpretation and Policy 
.01 to Rule 1.1(ggg) would be the same even if the proposed rule 
were only applied to ``child'' orders placed in multiple series. The 
Exchange, however, has determined to include references to ``both 
sides (buy/sell) of a series'' in the text of proposed 
Interpretation and Policy .01 to Rule 1.1(ggg) to reinforce the 
concepts underlying the Exchange's proposed Professional order 
counting structure.
    \19\ A ``volatility'' or ``volatility-type'' order may be 
characterized as an order instruction or combination to buy/sell 
contracts at a specific implied volatility rather than at a specific 
price or premium. Because implied volatility is a key determinant of 
the premium on an option, some traders may wish to take positions in 
specific contract months in an effort to take advantage of perceived 
changes in implied volatility arising before, during, or after 
earnings or in a certain company when specific or broad market 
volatility is predicted to change. In certain cases, depending on 
where a customer's account is housed or the trading capabilities of 
the participant involved, an options trader may trade and position 
for movements in the price of the option based on implied volatility 
using a ``volatility'' or ``volatility-type'' order or trading 
instruction by setting a limit for the volatility level they are 
willing to pay or receive. In such cases, premiums may be calculated 
in percentage terms rather than premiums.
    \20\ An option's vega is a measure of the impact of changes in 
the underlying volatility on the option price. Specifically, the 
vega of an option expresses the change in the price of the option 
for every 1% change in underlying volatility.
    \21\ Notably, with respect to the types of ``parent'' orders 
(including strategy orders) described in paragraph (b)(2) to 
proposed Interpretation and Policy .01 to Rule 1.1(ggg), such orders 
would be received only as multiple ``child'' orders the U.S. options 
exchange receiving such orders. The ``parent'' order would be broken 
apart before being sent by the participant to the exchange(s) as 
multiple ``child'' orders. See supra at note 19.
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    The Exchange believes that the distinctions between ``parent'' and 
``child'' orders in paragraph (b) to proposed Rule 1.1(ggg) are 
appropriate. The Exchange notes that paragraph (b) to proposed 
Interpretation and Policy .01 to Rule 1.1(ggg) is not aimed at 
capturing orders that are being ``worked'' or broken into multiple 
orders to avoid showing large orders to the market in an effort to 
elude front-running and to achieve best execution as is typically done 
by brokers on behalf of retail clients. Rather, paragraph (b) to 
proposed Interpretation and Policy .01 to Rule 1.1(ggg) is aimed at 
identifying ``child'' orders of ``parent'' orders generated by 
algorithms that are typically used by sophisticated traders to 
continuously update their orders in concert with market updates in 
order to keep their overall trading strategies in balance. The Exchange 
believes that these types of ``parent/child'' orders typically used by 
sophisticated traders should count as multiple orders.
    Paragraph (c) of proposed Interpretation and Policy .01 to Rule 
1.1(ggg), would discuss the counting of orders that are cancelled and 
replaced. Similar to the distinctions drawn in paragraph (b) of 
proposed Interpretation and Policy .01 to Rule 1.1(ggg), paragraph (c) 
of proposed Interpretation and Policy .01 to Rule 1.1(ggg) would 
essentially separate orders that are cancelled and replaced as part of 
an overall strategy from those that are cancelled and replaced by a 
broker that is ``working'' the order to achieve best execution or 
attempting to time the market. Specifically, paragraph (c)(1) of 
proposed Interpretation and Policy .01 to Rule 1.1(ggg) would provide 
that except as otherwise provided in the rule (and specifically as 
provided under paragraph (c)(2) to proposed Interpretation and Policy 
.01 to Rule 1.1(ggg)), any order that cancels and replaces an existing 
order counts as a separate order (or multiple new orders in the case of 
a complex order comprised of five (5) legs or more). For example, if a 
trader were to enter a non-marketable limit order to buy an option 
contract at a certain net debit price, cancel the order in response to 
market movements, and then reenter the same order once it became 
marketable, those orders would count as two separate orders for 
Professional order counting purposes even though the terms of both 
orders were the same.
    Paragraph (c)(2) of proposed Interpretation and Policy .01 to Rule 
1.1(ggg) would specify the exception to paragraph (c)(1) of proposed 
Interpretation and Policy .01 to Rule 1.1(ggg) and would provide that 
an order that cancels and replaces any ``child'' order resulting from a 
``parent'' order that is placed for the beneficial account(s) of a 
person or entity that is not a broker, or dealer in securities that is 
broken into multiple ``child'' orders on the same side (buy/sell) and 
series as the ``parent'' order by a broker or dealer, by an algorithm 
housed at a broker or dealer, or by an algorithm licensed from a broker 
or dealer, but which is housed with the customer, would not count as a 
new order. For example, if a customer were to enter an order with her 
broker to buy 10,000 XYZ $5 January calls at a limit price of $1, which 
the customer's broker then entered, but could not fill and then 
cancelled to avoid having to rest the order in the book as part of a 
strategy to obtain a better execution for the customer and then 
resubmitted the remainder of the order, which would be considered a 
``child'' of the ``parent'' order, once it became marketable, such 
orders would only count as one order for Professional order counting 
purposes. Again, similar to paragraph (b) of proposed Interpretation 
and Policy .01 to Rule 1.1(ggg), the Exchange notes that paragraph (c) 
to proposed Interpretation and Policy .01 to Rule 1.1(ggg) is not aimed 
at capturing orders that are being ``worked'' or being cancelled and 
replaced to avoid showing large orders to the market in an effort to 
elude front-running and to achieve best execution as is typically done 
by brokers on behalf of retail clients. Rather, paragraph (c) to 
proposed Interpretation and Policy .01 to Rule 1.1(ggg) is aimed at 
identifying ``child'' orders of ``parent'' orders generated by 
algorithms that are typically used by sophisticated traders to 
continuously update their orders in concert with market updates in 
order to keep their overall trading strategies in balance. The Exchange 
believes that paragraph (c)(2) to proposed Interpretation and Policy 
.01 to Rule 1.1(ggg) is consistent with these goals.
    Accordingly, consistent with paragraph (c)(1) of proposed 
Interpretation and Policy .01 to Rule 1.1(ggg), under paragraph (c)(3) 
of proposed Interpretation and Policy .01 to Rule 1.1(ggg), an order 
that cancels and replaces any ``child'' order resulting from a 
``parent'' order (including a strategy order) that generates ``child'' 
orders on both sides (buy/sell) of a series and/or in multiple series 
would count as a new order. For example, if an investor were to seek to 
make a trade (or series of trades) to take a long vega position at a 
certain percentage limit on a basket of options, the investor may need 
to cancel and replace several of the ``child'' orders entered to 
achieve the overall execution strategy several times to account for 
updates in the prices of the underlyings. In such a case, each 
``child'' order placed to keep the overall execution strategy in place 
would count as a new and separate order even if the particular 
``child'' order were being used to replace a slightly different 
``child'' order that was previously being used to keep the same overall 
execution strategy in place. The Exchange believes that the 
distinctions between cancel/replace orders in paragraph (c) to proposed 
Rule 1.1(ggg) are appropriate as such orders are typically generated by 
algorithms used by sophisticated traders to keep strategy orders 
continuously in line with updates in the markets. As such, the Exchange 
believes that in most cases, cancel/replace orders should count as 
multiple orders.
    Finally, paragraph (c)(4) of proposed Interpretation and Policy .01 
to Rule 1.1(ggg) would codify the Exchange's ``pegged'' order 
interpretation in the text of the Rules. Paragraph (c)(4) of proposed 
Interpretation and Policy .01 to Rule 1.1(ggg) would provide that 
notwithstanding the provisions of paragraph (c)(2) above, an order that 
cancels and replaces any ``child'' order resulting from a ``parent'' 
order being ``pegged'' to the Exchange's best bid or offer (``BBO'') or 
national best bid or offer (``NBBO'') or that cancels and replaces any 
``child'' order pursuant to an algorithm that uses BBO or NBBO in the 
calculation of ``child'' orders and attempts to move with or follow the 
BBO or NBBO of a series would count as a new order each time the order 
cancels and replaces in order to attempt to move with or follow the BBO 
or NBBO. This interpretation is similar to the Exchange's current 
interpretation of

[[Page 7178]]

its Professional order rules, but adds clarifying language to the 
Exchange's current interpretation and the Rules.\22\ The Exchange 
believes that paragraph (c)(4) is appropriate to make clear that 
``pegged'' strategy orders that are typically used by sophisticated 
traders should be counted as multiple orders even though such orders 
may cancel/replace orders in on the same side (buy/sell) of the market 
in a single series in order to achieve an overall order strategy.
---------------------------------------------------------------------------

    \22\ See CBOE Regulatory Circular RG09-148 (Professional Orders) 
at Question 12.
---------------------------------------------------------------------------

    Under current Rule 1.1(ggg), in order to properly represent orders 
entered on the Exchange according to the Professional order rules, 
Trading Permit Holders (``TPHs'') are required to indicate whether 
public customer orders are ``Professional'' orders.\23\ This 
requirement will remain the same. To comply with this requirement, TPHs 
are required to review their customers' activity on at least a 
quarterly basis to determine whether orders that are not for the 
account of a broker or dealer should be represented as customer orders 
or Professional orders.\24\ Orders for any customer that had an average 
of more than 390 orders per day during any month of a calendar quarter 
must be represented as Professional orders for the next calendar 
quarter. TPHs are required to conduct a quarterly review and make any 
appropriate changes to the way in which they are representing orders 
within five days after the end of each calendar quarter. While TPHs 
only will be required to review their accounts on a quarterly basis, if 
during a quarter the Exchange identifies a customer for which orders 
are being represented as public customer orders but that has averaged 
more than 390 orders per day during a month, the Exchange will notify 
the TPH and the TPH will be required to change the manner in which it 
is representing the customer's orders within five days. Because Rule 
1.1(ggg) only requires that TPHs conduct a look-back to determine 
whether their customers are averaging more than 390 orders per day at 
the end of each calendar quarter, the Exchange proposes an effective 
date of April 1, 2016 for proposed Interpretation and Policy .01 to 
Rule 1.1(ggg) to ensure that all orders during the next quarterly 
review will be counted in the same manner and that proposed 
Interpretation and Policy .01 to Rule 1.1(ggg) will not be applied 
retroactively.
---------------------------------------------------------------------------

    \23\ See Securities Exchange Act Release No. 60931 (November 4, 
2009), 74 FR 58355 (November 12, 2009) (Notice of Filing of Proposed 
Rule Change, as Modified by Amendment No. 1, Related to Professional 
Orders) (SR-CBOE 2009-078).
    \24\ See id.
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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.\25\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \26\ 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) \27\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78f(b).
    \26\ 15 U.S.C. 78f(b)(5).
    \27\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes that proposed Interpretation 
and Policy .01 to Rule 1.1(ggg) provides a more conservative order 
counting regime for Professional order counting purposes that would 
identify more traders as Professionals to which the Exchange's 
definition of Professional was designed to apply and create a better 
competitive balance for all participants on the Exchange, consistent 
with the Act. As the options markets have evolved to become more 
electronic and more competitive, the Exchange believes that the 
distinction between registered broker-dealers and professional traders 
who are currently treated as public customers has become increasingly 
blurred. More and more, the category of public customer today includes 
sophisticated algorithmic traders including former market makers and 
hedge funds that trade with a frequency resembling that of broker-
dealers. The Exchange believes that it is reasonable under the Act to 
treat those customers who meet the high level of trading activity 
established in the proposal differently than customers who do not meet 
that threshold and are more typical retail investors to ensure that 
professional traders do not take advantage of priority and fee benefits 
intended for public customers.
    The Exchange notes that it is not unfair to differentiate between 
different types of investors in order to achieve certain marketplace 
balances. The Rules currently differentiate between public customers, 
broker-dealers, Market-Makers, Designated Primary Market-Makers 
(``DPMs'') and the like. These differentiations have been recognized to 
be consistent with the Act. The Exchange does not believe that the 
current rules of CBOE and other exchanges that accord priority to all 
public customers over broker-dealers are unfairly discriminatory. Nor 
does the Exchange believe that it is unfairly discriminatory to accord 
priority to only those customers who on average do not place more than 
one order per minute (390 per day) under the counting regime that the 
Exchange proposes. The Exchange believes that such differentiations 
drive competition in the marketplace and are within the business 
judgment of the Exchange. Accordingly, the Exchange also believes that 
its proposal is consistent with the requirement of Section 6(b)(8) of 
the Act that the rules of an exchange not impose an unnecessary or 
inappropriate burden upon competition in that it treats persons who 
should be deemed Professionals, but who may not be under current 
Interpretation and Policy .01 to Rule 1.1(ggg) in a manner so that they 
do not receive special priority benefits.
    Furthermore, the Exchange believes that the proposed rule change 
will protect investors and the public interest by helping to assure 
that retail customers continue to receive the appropriate marketplace 
advantages in the CBOE marketplace as intended, while furthering 
competition among marketplace professionals by treating them in the 
same manner as other similarly situated market participants. The 
Exchange believes that it is consistent with Section 6(b)(5) of the Act 
not to afford market participants with similar access to information 
and technology as that of brokers and dealers of securities with 
marketplace advantages over such marketplace competitors. The Exchange 
also believes that the proposed Interpretation and Policy would help to 
remove burdens on competition and promote a more competitive 
marketplace by affording certain marketplace advantages only to those 
for whom they are intended. Finally, the Exchange believes that the 
proposed rule change sets forth a more detailed and clear regulatory 
regime with respect to calculating average daily order entry for 
Professional order

[[Page 7179]]

counting purposes. The Exchange believes that this additional clarity 
and detail will eliminate confusion among market participants, which is 
in the interests of all investors and the general public.

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

    The Exchange 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. As discussed above, the 
Exchange does not believe that the current rules of CBOE and other 
exchanges that accord priority to all public customers over broker-
dealers are unfairly discriminatory. Nor does the Exchange believe that 
it is unfairly discriminatory to accord priority to only those 
customers who on average do not place more than one order per minute 
(390 per day) under the counting regime that the Exchange proposes. The 
Exchange believes that its proposal does not impose an undue burden on 
competition. The Exchange notes that one of the purposes of the 
Professional rules is to help ensure fairness in the marketplace and 
promote competition among all market participants. The Exchange 
believes that proposed Interpretation and Policy .01 to Rule 1.1(ggg) 
would help establish more competition among market participants and 
promote the purposes for which the Exchange's Professional rule was 
originally adopted. The Exchange does not believe that the Act requires 
it to provide the same incentives and discounts to all market 
participants equally, so as long as the exchange does not unfairly 
discriminate among participants with regard to access to exchange 
systems. The Exchange believes that here, that is clearly the case.
    Rather than burden competition, the Exchange believes that the 
proposed rule change promotes competition by ensuring that retail 
investors continue to receive the appropriate marketplace advantages in 
the CBOE marketplace as intended, while furthering competition among 
marketplace professionals by treating them in the same manner under the 
Rules as other similarly situated market participants by ensuring that 
market participants with similar access to information and technology 
(i.e. Professionals and broker-dealers), receive similar treatment 
under the Rules while retail investors receive the benefits of order 
priority and fee waivers that are intended to apply to public 
customers.

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 written 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 No. SR-CBOE-2016-005 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 No. SR-CBOE-2016-005. 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 will also 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 No. SR-CBOE-2016-005 and should be 
submitted on or before March 2, 2016.
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    \28\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-02602 Filed 2-9-16; 8:45 am]
 BILLING CODE 8011-01-P