[Federal Register Volume 81, Number 98 (Friday, May 20, 2016)]
[Notices]
[Pages 31978-31979]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12015]



[[Page 31978]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77848; File No. SR-CBOE-2016-024]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving Proposed Rule Change, as Modified by 
Amendment No. 2 Thereto, Relating to AIM Retained Orders

May 17, 2016.

I. Introduction

    On March 22, 2016, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (``Commission'') pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to codify the Exchange's 
Automated Improvement Mechanism (``AIM'') Retained Order functionality 
in its rules. On April 1, 2016, the Exchange filed Amendment No. 1 to 
the proposal. On April 4, 2016, the Exchange filed Amendment No. 2 to 
the proposal.\3\ The proposed rule change, as modified by Amendment No. 
2, was published for comment in the Federal Register on April 8, 
2016.\4\ No comment letters were received on the proposed rule change. 
This order approves the proposed rule change, as modified by Amendment 
No. 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 2 superseded Amendment No. 1 in its entirety.
    \4\ See Securities Exchange Act Release No. 77511 (April 4, 
2016), 81 FR 20697 (``Notice'').
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II. Description of the Proposed Rule Change

    Under CBOE Rule 6.74A, a Trading Permit Holder (``TPH'') that 
represents agency orders may electronically execute an order it 
represents as agent (``Agency Order'') against principal interest or 
against a solicited order provided it submits the Agency Order for 
electronic execution into the AIM auction (``Auction'') for processing. 
If certain eligibility requirements contained in CBOE Rule 6.74A(a) \5\ 
are not satisfied, then both the Agency Order and the matching contra 
order(s) will be cancelled.
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    \5\ Specifically, to be eligible for processing via AIM, the 
Agency Order must be: (1) In a class designated as eligible for 
Auctions and within the designated eligibility size parameters as 
determined by the Exchange; (2) stopped with a principal or 
solicited order priced at the national best bid or offer (``NBBO'') 
(if 50 standard option contracts or 500 mini-option contracts or 
greater) or one cent/one minimum increment better than the NBBO (if 
less than 50 standard option contracts or 500 mini-option 
contracts); and (3) submitted in a series in which at least three 
Market-Makers are quoting if submitted during regular trading hours. 
See CBOE Rule 6.74A(a).
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    The AIM Retained Order (``A:AIR'') functionality allows TPHs the 
ability to choose, on an order-by-order basis, whether an Agency Order 
should continue into the Hybrid Trading System \6\ for processing 
rather than cancel in the event that an Auction cannot occur.\7\ 
Specifically, the Exchange proposes to define an AIM Retained Order as 
the transmission of two or more orders for crossing pursuant to CBOE 
Rule 6.74A, with the Agency Order priced at the market or a limit price 
in the standard increment for the option series and marked with a 
contingency instruction to route the Agency Order for processing and 
cancel any contra orders if an Auction cannot occur (including if the 
conditions described in CBOE Rule 6.74A(a) are not met).
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    \6\ The Hybrid Trading System refers to the Exchange's trading 
platform as defined in Rule 1.1(aaa) (Hybrid Trading System).
    \7\ According to the Exchange, there are a variety of 
circumstances in which an AIM order may be submitted to the Exchange 
for processing, but an auction may not occur. For example, a TPH may 
submit an order for AIM processing that is not AIM eligible because 
one or more of the conditions required for an AIM auction to occur 
pursuant to Rule 6.74A(a) is not present. In addition, an order that 
is otherwise AIM eligible may not be able to process for a variety 
of reasons, including, but not limited to circumstances in which AIM 
functionality is suspended. In either of such cases, A:AIR 
functionality may allow the Agency Order to process despite the 
overall order not being AIM eligible. See Notice, supra note 4, at 
20698.
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    CBOE also proposes that orders marked ``A:AIR'' containing Agency 
Orders that are not priced at the market, or that are priced with a 
limit price not in the standard increment for the option series in 
which they are entered, would be cancelled. The Exchange proposes this 
interpretation to ensure that A:AIR orders are properly priced to allow 
the Exchange to book the Agency Order in the event an Auction cannot 
occur.\8\
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    \8\ See Notice, supra note 4, at 20698.
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    CBOE proposes to make the A:AIR order functionality available on 
those order management platforms as determined by the Exchange and 
announced via Regulatory Circular. The Exchange also proposes to 
clarify that in the event that a TPH submits a matched Agency Order for 
electronic execution into the Auction that is ineligible for processing 
because it does not meet the conditions described in CBOE Rule 
6.74A(a), both the Agency Order and any solicited contra orders will be 
cancelled unless marked as an AIM Retained Order pursuant to proposed 
Interpretation and Policy .09 to CBOE Rule 6.74A.\9\
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    \9\ According to the Exchange, the current A:AIR functionality 
is used primarily by smart router technology to ensure that 
ineligible AIM orders are submitted into the Hybrid Trading System 
for processing and not cancelled. See Notice, supra note 4, at 
20698. Whereas traditional brokers and dealers are equipped to 
manually handle cancelled orders that are returned to them and may 
revise the cancelled orders' terms or contact their customers for 
further instructions, the Exchange states that smart routers are 
generally all electronic algorithmic systems that may not allow for 
manual handling of cancelled orders. See id.
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    Finally, the Exchange proposes to make changes to Interpretation 
and Policy .08 to CBOE Rule 6.53C regarding price reasonability checks 
on complex orders to harmonize non-specific references to the current 
A:AIR functionality in CBOE Rule 6.53C with the language in proposed 
Interpretation and Policy .09 to CBOE Rule 6.74A. The Exchange states 
that these changes are non-substantive and intended only to harmonize 
existing references to A:AIR functionality in its rules with the 
definition of A:AIR orders set forth in proposed Interpretation and 
Policy .09 to CBOE Rule 6.74A.\10\
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    \10\ See Notice, supra note 4, at 20698.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\11\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\12\ which 
requires, among other things, that the rules of a national securities 
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 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 and that the 
rules not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers. In particular, the Commission 
notes that, according to the Exchange, the A:AIR functionality provides 
an execution opportunity for customer orders that a TPH submitted for 
crossing via AIM but

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cannot be executed via AIM.\13\ Such opportunity could help protect the 
interest of investors by helping to ensure that ineligible AIM Agency 
Orders are processed, rather than cancelled.
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    \11\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ See Notice, supra note 4, at 20699.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-CBOE-2016-024), as modified 
by Amendment No. 2, be, and hereby is, approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-12015 Filed 5-19-16; 8:45 am]
 BILLING CODE 8011-01-P