[Federal Register Volume 81, Number 218 (Thursday, November 10, 2016)]
[Notices]
[Pages 79063-79068]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27153]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79244; File No. SR-CBOE-2016-053]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1, Relating to Price Protection Mechanisms and Risk 
Controls

November 4, 2016.

I. Introduction

    On September 1, 2016, Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') 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 amend current and adopt new 
price protection mechanisms and risk controls for orders and quotes. 
The Commission published the proposed rule change for comment in the 
Federal Register on September 20, 2016.\3\ On September 21, 2016, the 
Exchange filed Amendment No. 1 to the proposed rule change.\4\ The 
Commission received no comments on the proposal. This order provides 
notice of filing of Amendment No. 1 and approves the proposed rule 
change, as modified by Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 78839 (September 14, 
2016), 81 FR 64521 (September 20, 2016) (``Notice'').
    \4\ In Amendment No. 1, the Exchange conformed the text of 
proposed Rule 6.13(b)(v)(B) to CBOE's description in the Notice of 
the drill through price check parameter. Specifically, the amendment 
added detail into the rule to reflect that, pursuant to the drill 
through price check parameter, CBOE will expose the unexecuted 
portion of an order via HAL at the better of the NBBO and the drill 
through price. In addition, CBOE also proposed to amend its 
discussion of existing quote risk monitor functionality to 
accurately match the existing rule text (which involved background 
discussion of functionality that CBOE did not propose to amend in 
the current proposal). To promote transparency of its proposed 
amendment, when CBOE filed Amendment No. 1 with the Commission, it 
also submitted Amendment No. 1 as a comment letter to the file, 
which the Commission posted on its Web site and placed in the public 
comment file for SR-CBOE-2016-053 (available at https://www.sec.gov/comments/sr-cboe-2016-053/cboe2016053-1.pdf). The Exchange also 
posted a copy of its Amendment No. 1 on its Web site (http://www.cboe.com/aboutcboe/legal/submittedsecfilings.aspx) when it filed 
the amendment with the Commission.
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II. Description of the Proposed Rule Change \5\
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    \5\ A more detailed description of the proposed rule change 
appears in the Notice. See supra note 3.
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    The Exchange currently has in place various price check mechanisms 
and risk controls that are designed to prevent incoming orders and 
quotes from automatically executing at potentially erroneous prices or 
to assist TPHs with managing their risk.\6\ The Exchange proposed to 
amend CBOE Rules 6.12(a)(3), 6.13(b)(v), 6.14 and 8.18 to add new, as 
well as amend current, price protection mechanisms and risk controls to 
further assist brokers in their efforts to prevent errors and avoid 
trading activity that could potentially be unwanted or even disruptive 
to the market.\7\
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    \6\ See, e.g., CBOE Rules 6.12(a)(3) through (5) (limit order 
price parameters), 6.13(b)(v) (market-width and drill through price 
check parameters), 6.14 (price protections), 6.53C, Interpretation 
and Policy .08 (price check parameters for complex orders), and 8.18 
(QRM Mechanism).
    \7\ The proposed rule change also made conforming changes to 
CBOE Rules 6.2B, 6.13A, and 6.14A. A full discussion of those 
changes may be found in the Notice. See supra note 3.
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A. Limit Order Price Parameter for Simple Orders

    The Exchange proposed to amend the limit order price parameter for 
simple orders in Rule 6.12(a)(3). Currently, a simple limit order is 
routed directly from an order entry firm to an order management 
terminal (``OMT'') designated by the order entry firm if a limit order 
to buy (sell) is more than an acceptable tick distance (``ATD'') \8\ 
above (below): (i) The Exchange's previous day's closing price prior to 
the opening of a series, or (ii) the disseminated Exchange offer (bid) 
once a series has opened.\9\
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    \8\ Currently, the Exchange determines the ATD, which may be no 
less than 5 minimum increment ticks, on a series-by-series and 
premium basis. Under the proposed rule change, the ATD, which may be 
no less than two minimum increment ticks, will be determined on a 
class-by-class and premium basis. In addition, different ATDs may be 
applied to orders entered during the pre-opening, a trading 
rotation, a trading halt, or Extended Trading Hours. See proposed 
CBOE Rule 6.12(a)(3) and Notice, supra note 3, at 64523 n. 8
    \9\ See CBOE Rule 6.12(a)(3).
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    The Exchange has now proposed to amend CBOE Rule 6.12(a)(3) to 
reject a simple limit order to buy (sell) generally when it is more 
than an ATD above (below) the last disseminated national best offer 
(``NBO'') (national best bid (``NBB'')).\10\ According to the Exchange, 
using the NBBO or NBO (NBB), if available, will more accurately reflect 
the then current market, rather than the previous day's closing price 
or Exchange BBO.\11\ The Exchange, however, will continue to use the 
previous day's closing price or Exchange BBO in certain instances, such 
as when the NBBO is locked or crossed, or when there is no NBO (NBB) 
and the closing price does not cross the disseminated NBB (NBO).\12\
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    \10\ Specifically, CBOE will reject the order if it is more than 
the ATD above (below): (i) prior to the opening of a series, (A) the 
last disseminated national best offer (``NBO'') (national best bid 
(``NBB'')), if a series is open on another exchange, or (B) the 
Exchange's previous day's closing price, if a series is not yet open 
on any other exchange; if the NBBO is locked, crossed, or 
unavailable; or if there is no NBO (NBB) and the previous day's 
closing price is greater (less) than or equal to the NBB (NBO); (ii) 
intraday, the last disseminated NBO (NBB), or the Exchange's best 
offer (bid) if the NBBO is locked, crossed or unavailable; or (iii) 
during a trading halt, the last disseminated NBO (NBB).
    \11\ See Notice, supra note 3 at 64522.
    \12\ See id.
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    CBOE also proposed to apply the limit order price parameter to 
immediate-or-cancel orders. According to the Exchange, such orders also 
are at risk of execution at extreme and potentially erroneous prices 
and thus will benefit from applicability of these checks.\13\ However, 
the limit order price parameter will not apply to orders routed from a 
PAR workstation or OMT. According to the Exchange, orders routed from a 
PAR workstation or OMT are subject to manual handling, and therefore, 
the Exchange believes the PAR or OMT operator will have evaluated the 
price of an order based on then-existing market conditions prior to 
submitting the order for electronic execution.\14\ Thus, there is 
minimal risk of execution at an erroneous price. The limit order price 
parameter also will not apply to orders with a stop contingency.\15\ 
According to the Exchange, buy orders with a stop contingency are 
generally submitted at a triggering price that is above the NBO, and 
sell orders with a stop contingency are generally submitted at a 
triggering price that is below the NBB.\16\ As a result, the Exchange 
believes these orders are expected to be priced outside the NBBO.\17\
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    \13\ See id. at 64523.
    \14\ See id.
    \15\ See CBOE Rule 6.53. A stop contingency is triggered for a 
buy order if there is a last sale or bid at or above the stop price 
and for a sell order if there is a last sale or offer at or below 
the stop price.
    \16\ See Notice, supra note 3 at 64523.
    \17\ See id.

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[[Page 79064]]

B. Drill Through Price Check Parameter

    The Exchange proposed to amend the drill through price check 
parameter in CBOE Rule 6.13(b)(v). Currently, the Exchange's trading 
system (``System'') will not automatically execute a market or 
marketable limit order\18\ if the execution would follow an initial 
partial execution on the Exchange at a price not within an ATD\19\ from 
the initial execution. Instead, the remaining unexecuted portion of a 
HAL-eligible order will be exposed pursuant to the HAL process in CBOE 
Rule 6.14A using the ATD as the exposure price and any remainder will 
route via the order handling system pursuant to CBOE Rule 6.12.\20\
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    \18\ Currently, the Exchange applies the market-width check to 
market orders and the drill through check to market and marketable 
limit orders. The Exchange proposed to codify this current practice 
into the rules. See Notice, supra note 3, at 64523 n. 12.
    \19\ Currently, the ATD is determined by the Exchange on a 
series-by-series and premium basis for market orders and/or 
marketable limit orders and may be no less than two minimum 
increment ticks. Under the proposed rule change, the Exchange will 
determine the ATD on a class and premium basis (which may be no less 
than two minimum increment ticks), which the Exchange will announce 
via Regulatory Circular. See proposed CBOE Rule 6.13(b)(v)(B)(I).
    \20\ See CBOE Rule 6.13(b)(v).
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    The Exchange now has proposed to amend CBOE Rule 6.13(b)(v) to add 
detail to the rule describing how the System will handle orders that 
were not exposed prior to trading up to the drill through price and 
orders that traded up to the drill through price following exposure. In 
particular, orders not previously exposed would be exposed via HAL and 
orders previously exposed via HAL or SAL would rest in the book for a 
period of time and thereafter be cancelled if they do not execute.\21\
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    \21\ Specifically, if a buy (sell) order not yet exposed via HAL 
partially executes, and the System determines the unexecuted portion 
would execute at a price higher (lower) than the price that is an 
ATD above (below) the NBO (NBB) (``drill through price''), the 
System will not automatically execute the remaining portion but will 
instead expose it via HAL at the better of the NBBO and the drill 
through price (if eligible for HAL). If a buy (sell) order exposed 
via HAL (other than pursuant to the previous sentence) or the 
Solicitation Auction Mechanism (``SAL'') would, following the 
exposure period, execute at a price higher (lower) than the drill 
through price, the System will not automatically execute the order 
(or unexecuted portion). These orders (or unexecuted portions) will 
rest in the book (based on the time at which they enter the book for 
priority purposes) for a time period in milliseconds (which the 
Exchange will determine and announce via Regulatory Circular and 
will not exceed three seconds--the Exchange will initially set the 
time at two seconds) with a price equal to the drill through price. 
If the order (or any unexecuted portion) does not execute during 
that time period, the System cancels it. In classes in which SAL is 
activated, an order eligible for SAL will be exposed immediately and 
would not partially execute prior to being exposed via SAL. For this 
reason, SAL is not included in proposed CBOE Rule 6.13(v)(B)(I). See 
Notice, supra note 3, at 64523 n. 15. Any order (or unexecuted 
portion) that by its terms cancels if it does not execute 
immediately (including immediate-or-cancel, fill-or-kill, 
intermarket sweep, and market-maker trade prevention orders) will be 
cancelled rather than rest in the book for this time period in 
accordance with the definition of those order types. See proposed 
CBOE Rule 6.13(b)(v)(B)(III).
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    Buy (sell) orders (or any unexecuted portion) that are not eligible 
for HAL or SAL and do not otherwise cancel by their terms will route 
via the order handling system pursuant to Rule 6.12. In addition, the 
drill through price check parameter at the open will be handled 
pursuant to the separate process set forth in Rule 6.2B, Interpretation 
and Policy .03.\22\
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    \22\ The proposed rule change also amended the market width 
price check parameter in CBOE Rule 6.13(b)(v) (proposed CBOE Rule 
6.13(b)(v)(A)) to be determined on a class-by-class basis rather 
than series-by-series, as well as made additional non-substantive 
changes to Rule 6.13(b)(v), such as separating the provisions 
regarding the market-width price check parameter from those 
regarding the drill through price check parameter.
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C. TPH-Designated Risk Settings

    The Exchange proposed to amend CBOE Rule 6.14 to authorize it to 
share TPH-designated risk settings with a TPH's Clearing TPH. The risk 
settings that the Exchange may share with Clearing TPHs include, but 
are not limited to, settings under Rule 8.18 (related to QRM) and 
proposed CBOE Rule 6.14(d) (related to order entry and execution rate 
checks) and (e) (related to maximum contract size). The Exchange 
represented that other options exchanges have similar rules permitting 
them to share member-designated risk settings with other members that 
clear transactions on the member's behalf.\23\
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    \23\ See Notice, supra note 3 at 64525. See also, e.g., Miami 
International Securities Exchange, LLC (``MIAX'') Rule 500; NASDAQ 
OMX BX, Inc. (``BX'') Chapter VI, Section 20; NYSE Arca, Inc. 
(``Arca'') Rule 6.2A(a); NYSE MKT LLC (``MKT'') Rule 902.1NY(a); and 
NASDAQ OMX PHLX LLC (``PHLX'') Rule 1016.
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D. Put Strike Price/Call Underlying Value Checks

    The Exchange proposed to amend the put strike price and call 
underlying value checks in CBOE Rule 6.14(a). Currently, the System 
rejects back to the TPH a quote or buy limit order for (i) a put if the 
price of the quote bid or order is greater than or equal to the strike 
price of the option, or (ii) a call if the price of the quote bid or 
order is greater than or equal to the consolidated last sale price of 
the underlying security, with respect to equity and exchange-traded 
fund options, or the last disseminated value of the underlying index, 
with respect to index options. The Exchange proposed to extend this 
check to apply to market orders (and any remaining size after a partial 
execution).\24\
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    \24\ The Exchange will not apply these checks to market orders 
that execute during the opening process, however, in order to avoid 
impacting the determination of the opening price. According to the 
Exchange, separate price protections apply during the opening 
process, including the drill through protection in CBOE Rule 6.2B. 
See Notice, supra note 3, at 64525. The Exchange also proposed to 
amend CBOE Rule 6.14(a) to eliminate discretion afforded to the 
Exchange to determine to apply the call check to a class during 
Extended Trading Hours. The Exchange represented that it currently 
does not apply the check during Extended Trading Hours and is 
eliminating its ability to do so in the future. See id.
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E. Quote Inverting NBBO Check

    The Exchange proposed to amend Rule CBOE 6.14(b) regarding the 
quote inverting NBBO check. Currently, if the Exchange is at the NBO 
(NBB), the System rejects a quote back to a Market-Maker if the quote 
bid (offer) crosses the NBO (NBB) by more than a number of ticks 
specified by the Exchange. If CBOE is not at the NBO (NBB), the System 
rejects a quote back to a Market-Maker if the quote bid (offer) locks 
or crosses the NBO (NBB). If the NBBO is unavailable, locked, or 
crossed, then this check compares the quote to the BBO (if available). 
The rule is currently silent on what happens if the BBO is unavailable.
    The Exchange has now proposed to amend Rule 6.14(b) to not apply 
this check to incoming quotes when the BBO is unavailable. The Exchange 
also proposed to amend the rule to state that it will not apply the 
check to incoming quotes prior to the opening of a series if the series 
is not open on another exchange, as well as during a trading halt.\25\
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    \25\ See proposed CBOE Rule 6.14(ii) and (iii).
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F. Execution of Quotes That Lock or Cross NBBO

    The Exchange further proposed to amend the provision concerning the 
execution of quotes that lock or cross the NBBO.\26\ The rule currently 
states that if the System accepts a quote that locks or crosses the 
NBBO, it executes the quote and either (i) cancels any remainder or 
(ii) books any remainder if the price of the quote does not lock or 
cross the price of an away exchange.\27\ Further, CBOE currently will 
not disseminate an internally crossed market, and if a Market-Maker 
submits a quote that would invert an existing quote, the System will 
change the

[[Page 79065]]

incoming quote so it locks the existing quote.\28\ The Exchange then 
disseminates the locked market, and both quotes will be deemed firm. 
When the market locks, a counting period will begin during which 
Market-Makers may update those quotes (provided a Market-Maker will be 
obligated to execute orders eligible for automatic execution at its 
disseminated quote). If at the end of the counting period the quotes 
remain locked, the locked quotes will automatically execute against 
each other.
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    \26\ The Exchange proposed to move this provision from current 
CBOE Rule 6.14(b)(iii) to proposed CBOE Rule 6.14(c).
    \27\ If a quote inverts another quote, it is subject to CBOE 
Rules 6.45A(d)(ii) or 6.45B(d)(ii).
    \28\ See CBOE Rules 6.45A(d)(ii) and 6.45B(d)(ii).
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    Under current CBOE Rule 6.14(b)(iii), any counting period under the 
quote lock rule may cause the Exchange to disseminate a quote that 
locks that of an away exchange. The Exchange has now proposed to amend 
the rule to no longer disseminate a lock, and instead will reject an 
incoming Market-Maker quote (or unexecuted portion thereof) that locks 
or crosses a resting Market-Maker quote at the NBBO.\29\
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    \29\ The Exchange also proposed to amend the rule to not apply 
the check when the NBBO is locked, crossed, or unavailable. In 
addition, the Exchange proposed to authorize a senior official at 
the Exchange's Help Desk to determine not to apply this check in the 
interest of maintaining a fair and orderly market. For example, the 
Exchange believes it is appropriate to disable this check in 
response to a market event or market volatility to avoid 
inadvertently cancelling quotes not erroneously priced but rather 
priced to reflect potentially rapidly changing prices. See Notice, 
supra note 3, at 64526. The Exchange represented that, pursuant to 
Exchange procedures, any decision to not apply the check and the 
reason for such decision will be documented, retained, and 
periodically reviewed. See id.
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G. Order Entry, Execution, and Price Parameter Checks

    The Exchange proposed to adopt the following four mandatory 
activity-based risk protections under proposed CBOE Rule 6.14(d):\30\
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    \30\ Other exchanges maintain similar activity-based risk 
protections. See, e.g., International Securities Exchange, LLC 
(``ISE'') Rule 714(d) and MIAX Rule 519A.
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    (i) the total number of orders (of all order types) and auction 
responses entered and accepted by the System (``orders entered'');
    (ii) the total number of contracts (from orders and auction 
responses) executed on the System, which does not count executed 
contracts from orders submitted from a PAR workstation or an OMT or 
stock contracts executed as part of stock-option orders (``contracts 
executed'');
    (iii) the total number of orders the System books or routes via the 
order handling system \31\ pursuant to the drill through price check 
parameter (as amended by this proposed rule change) in proposed Rule 
6.13(b)(v)(B) (``drill through events''); and
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    \31\ As discussed above, orders (or unexecuted portions) that by 
their terms cancel if they do not execute immediately will be 
cancelled rather than rest in the book for a period of time (as 
proposed in this filing) pursuant to the drill through price check 
parameter if triggered. According to the Exchange, because these 
orders will not book or route pursuant to the drill through price 
check parameter, these orders will not be included in the count for 
the drill through event check. See Notice, supra note 3, at 64527 n. 
33.
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    (iv) the total number of orders the System cancels or routes via 
the order handling system pursuant to the limit order price parameter 
in Rule 6.12(a)(3) through (5) (``price reasonability events'').
    When a TPH exceeds a parameter within one of the time intervals set 
by CBOE, the System will (i) reject all subsequent incoming orders and 
quotes, (ii) cancel all resting quotes, and (iii) for the orders 
entered and contracts executed checks, if the TPH requests, cancel 
resting orders in the manner specified by the TPH (either all orders, 
orders with time-in-force of day, or orders entered on that trading 
day).\32\
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    \32\ The Exchange expects the initial time intervals for all 
these checks to be set at one and five minutes. The time intervals 
set by the Exchange will apply to all TPHs, who will not be able to 
change these time intervals. See Notice, supra note 3, at 64527 n. 
34.
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    The System will not accept new orders or quotes from a restricted 
acronym or login until the Exchange receives the TPH's manual 
notification to reactivate its ability to send orders and quotes. While 
an acronym or login is restricted, a TPH may continue to interact with 
any resting orders (i.e., orders not cancelled pursuant to this 
protection) entered prior to its acronym or login becoming restricted, 
including receiving trade execution reports and canceling resting 
orders.

H. Maximum Contract Size

    The Exchange proposed to adopt a maximum contact size risk control 
pursuant to which the System will reject a TPH's incoming order or 
quote (including both sides of a two-sided quote) if its size exceeds 
the TPH's designated maximum contract size parameter.\33\ Each TPH must 
provide a maximum contract size for each of simple orders, complex 
orders, and quotes applicable to an acronym or, if the TPH requests, a 
login.\34\
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    \33\ See proposed CBOE Rule 6.14(e). The Exchange represented 
that other options exchanges have adopted similar functionality. See 
Notice, supra note 3, at 64528 n. 40; MIAX Rule 519(b).
    \34\ For purposes of determining the contract size of an 
incoming order or quote, the proposed rule states the contract size 
of a complex order will equal the contract size of the largest 
option leg of the order (i.e., if the order is a stock-option order, 
this check will not apply to the stock leg of the order). See 
proposed CBOE Rule 6.14(e). If a TPH enters an order or quote to 
replace a resting order or update a resting quote, and the System 
rejects the incoming order or quote because it exceeds the 
applicable maximum contract size, the System also will cancel the 
resting order or any resting quote in the same series. In addition, 
the Exchange proposed to apply this check to paired orders submitted 
to AIM, SAM or as a QCC order. Further, the Exchange proposed that 
for an A:AIR order, if the System rejects the agency order, then the 
System rejects the contra-side order; however, if the System rejects 
the contra-side order, the System still accepts the agency order. 
See proposed CBOE Rule 6.14(e)(ii).
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I. Kill Switch

    The Exchange further proposed to adopt a kill switch, which will be 
on optional tool allowing a TPH to send a message to the System to, or 
contact the Exchange Help Desk to request that, the Exchange cancel all 
its resting quotes, resting orders (either all orders, orders with 
time-in-force of day, or orders entered on that trading day), or both, 
and thereafter reject all subsequent incoming quotes and/or orders.\35\ 
The System will send a TPH an automated message when it has processed a 
kill switch request and thereafter will not accept new orders or quotes 
from a restricted acronym or login until the Exchange receives the 
TPH's manual notification to reactivate its ability to send orders and 
quotes.
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    \35\ See proposed CBOE Rule 6.14(f). The Exchange represented 
that other options exchanges have adopted similar kill switches. See 
Notice, supra note 3, at 64529; BOX Options Exchange LLC (``BOX'') 
Rule 7280 and PHLX Rule 1019(b).
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    According to the Exchange, the kill switch message will be accepted 
by the System in the order of receipt in the queue and will be 
processed in that order so that interest already in the System will be 
processed prior to the kill switch message.\36\ Moreover, a Market-
Maker's utilization of the kill switch, and subsequent removal of its 
quotes, will not diminish or relieve the Market-Maker of its obligation 
to provide continuous two-sided quotes. Market-Makers will continue to 
be required to provide continuous two-sided quotes on a daily basis, 
and a Market-Maker's utilization of the kill switch will not prohibit 
the Exchange from taking disciplinary action against the Market-Maker 
for failing to meet the continuing quoting obligation each trading 
day.\37\
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    \36\ See Notice, supra note 3 at 64532.
    \37\ See id.
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J. Quote Risk Monitor Mechanism

    Lastly, the Exchange proposed to amend the QRM Mechanism in CBOE 
Rule 8.18. Pursuant to the QRM mechanism, a Market-Maker may establish 
a (i) maximum number of contracts, (ii) a maximum cumulative percentage 
of the original quoted size of

[[Page 79066]]

each side of each series, and (iii) the maximum number of series for 
which either side of its quote is fully traded, that may trade within a 
rolling time period in milliseconds also established by the Market-
Maker. When these parameters are exceeded within the time interval, the 
System cancels the Market-Maker's quotes in the class and other classes 
with the same underlying on the same trading platform. In addition, 
CBOE Rule 8.18 allows Market-Makers or TPH organizations to specify a 
maximum number of QRM incidents across all classes on an Exchange-wide 
basis. When the Exchange determines that a Market-Maker or TPH 
organization has reached its QRM incident limit during the rolling time 
interval, the System will cancel all of the Market-Maker's electronic 
quotes and Market-Maker orders resting in the book in all option 
classes on the Exchange and prevent the Market-Maker or TPH 
organization from sending additional quotes or orders to the Exchange 
until the Market-Maker reactivates its ability to send quotes or 
orders.
    Currently, use of the QRM is optional. The Exchange proposed to 
amend CBOE Rule 8.18 to make it mandatory for Market-Makers to enter 
values for each parameter for all classes in which they quote.\38\
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    \38\ The Exchange represented that other options exchanges have 
made similar functionality mandatory for all Market-Makers. See 
Notice, supra note 3, at 64529; ISE Rule 804(g).
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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 Section 6 of the Act \39\ 
and the rules and regulations thereunder applicable to the 
Exchange.\40\ Specifically, the Commission finds that the proposed rule 
change is consistent with the Section 6(b)(5) \41\ 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. The Commission believes that 
the proposed rule change is designed to mitigate the likelihood of 
orders trading at potentially erroneous prices, clarify when certain 
price/risk controls will apply, avoid locking an away market, and 
assist TPHs in managing their risk exposure to avoid potentially 
harmful and disruptive trading.
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    \39\ 15 U.S.C. 78f(b).
    \40\ In approving these proposed rule changes, the Commission 
has considered the proposed rules' impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \41\ 15 U.S.C. 78f(b)(5).
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    As discussed above, CBOE is proposing to amend its limit order 
price parameter for simple orders to use the NBBO when available in 
lieu of the Exchange's previous day's closing price or BBO. To the 
extent that the use of the NBBO, when available, rather than the 
Exchange's previous day's closing price or BBO, may better reflect the 
then current market, it should provide a suitable measure for purposes 
of determining the reasonability of the prices of orders. Moreover, the 
Commission believes that it is reasonable for CBOE to exclude orders 
with a stop contingency or orders routed from a PAR workstation or OMT 
from the limit order price check parameter. In particular, application 
of the limit order price check parameter to stop contingency orders may 
interfere with the application of the stop contingency, and orders 
routed from a PAR workstation or OMT may be less likely to execute at 
an erroneous price since they are manually reviewed and processed.
    The Commission believes that the proposed rule change to expand the 
applicability of the put strike price and call underlying value checks 
to market orders \42\ may help TPHs mitigate risks associated with 
orders trading at prices that exceed a corresponding benchmark, which 
may indicate an execution at a price that is potentially erroneous. 
Furthermore, the Commission believes the proposed rule change to 
eliminate the flexibility to not apply this check to orders entered 
during Extended Trading Hours will provide market participants with 
increased certainty regarding the inapplicability of this check.
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    \42\ The checks will not apply to market orders during an 
opening rotation since separate price protections will apply during 
the opening process. See Notice, supra note 3, at 64525.
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    The proposed changes to the drill through price checks provide 
additional detail to the rule regarding how the System handles certain 
orders that were not exposed prior to trading up to the drill through 
price and orders that traded up to the drill through price following 
exposure. In addition, allowing the remainder of orders to rest in the 
book for a brief time period at the drill through price may benefit 
investors by providing an additional opportunity for execution of their 
orders. Furthermore, clarifying that an order exposed via HAL pursuant 
to the drill through price check will not be exposed at a price worse 
than the NBBO is consistent with the current treatment of other orders 
exposed via HAL at the NBBO.\43\
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    \43\ See current and proposed CBOE Rule 6.14A(b).
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    The Commission also believes that the proposed amendments to the 
quote inverting NBBO check will provide market participants with 
greater clarity that CBOE will not apply the check in the absence of an 
NBBO and BBO. In addition, the proposed rule change eliminates the 
Exchange's flexibility to apply the check prior to the opening of a 
series as well as during a trading halt. Removing this flexibility and 
clearly stating when CBOE will not apply the check considerably 
enhances the transparency of the functionality.
    With respect to CBOE's proposed changes regarding the execution of 
quotes that lock or cross the NBBO (Proposed Rule 6.14(c)), the 
Commission believes that the proposed rule change is consistent with 
the Act as it is reasonably designed to prevent the dissemination of a 
quote that locks or crosses an away market. Moreover, to the extent the 
Exchange determines to temporarily deactivate the check in the interest 
of maintaining a fair and orderly market, CBOE has represented that all 
such decisions by CBOE will be adequately justified, documented, 
retained, and periodically reviewed.\44\
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    \44\ See supra note 29 and accompanying text.
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    Further, the Commission believes that the Exchange's proposed risk 
protection parameters and mechanisms for orders and quotes are 
reasonably designed to provide TPHs with additional tools to assist 
them in managing their risk exposure. Specifically, the order entry, 
execution, and price parameter rate checks, maximum contract size risk 
control, and mandatory use of the QRM may help TPHs to mitigate the 
potential risks associated with entering too many orders or quotes, 
executing too many contracts, having too many orders rejected because 
of price protection parameters, and entering orders or quotes with size 
that may be potentially erroneous that may result from, for example, 
technology issues with the broker's electronic trading system. To this 
extent, these TPH-customizable settings may help act as a backstop to 
the TPH's own controls and provide an additional layer of protection 
customized to the TPH's self-selected parameters. Moreover, the 
Commission notes that other exchanges have

[[Page 79067]]

established similar risk protection mechanisms.\45\ The Commission 
notes that the proposed functionality, including the cancellation of 
any resting interest, must be processed in sequence with other interest 
in the System and comply with the firm quote obligations in Rule 602 of 
Regulation NMS.
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    \45\ See ISE Rules 714(d) & 804(g); MIAX Rules 519(b) & 519A.
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    CBOE will require TPHs and Market-Makers to utilize these risk 
protection parameters and mechanisms. However, TPHs and Market-Makers 
will have discretion to customize the parameters in accordance with 
their respective risk management needs. In light of this flexibility, 
the Commission reminds TPHs to be mindful of their obligations, to 
among others, seek best execution of orders they handle on an agency 
basis and consider their best execution obligations when establishing 
parameters for the order entry, execution, price parameter rate checks, 
maximum contract size risk control, and QRM.\46\ For example, an 
abnormally low order entry parameter should be carefully scrutinized, 
particularly if a TPH's order flow to the Exchange contains agency 
orders. To the extent that a TPH chooses sensitive parameters and those 
parameters apply to connections over which it transmits customer orders 
to the Exchange, a TPH should consider the effect of its chosen 
settings on its ability to receive a timely execution on marketable 
agency orders that it sends to the Exchange in various market 
conditions. The Commission cautions brokers considering their best 
execution obligations to be aware that an agency order they represent 
may be rejected as a result of these risk protections.
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    \46\ See, e.g., Securities Exchange Act Release Nos. 37619A 
(September 6, 1996), 61 FR 48290 (September 12, 1996) (Order 
Handling Rules adopting release); 51808 (June 9, 2005), 70 FR 37496, 
37537-8 (June 29, 2005) (Regulation NMS adopting release).
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    In addition, in light of the Exchange's decision not to set maximum 
or minimum values, or default values, the Commission expects CBOE to 
periodically assess whether these risk protection measures are 
operating in a manner that is consistent with the promotion of fair and 
orderly markets, including whether not utilizing maximum and minimum 
parameters or default values continues to be appropriate and in 
accordance with the Act and the rules thereunder.
    Further, the Commission believes that Proposed Rule 6.14(f), which 
creates an optional kill switch mechanism, is consistent with the Act 
as it may further enhance risk management capabilities of TPHs by 
providing them with the ability to manage their risk exposure if they 
experience a significant system failure. To the extent that the kill 
switch mechanism provides TPHs with an appropriate backstop in this 
manner, it may encourage firms to provide liquidity on CBOE and thus 
contribute to fair and orderly markets in a manner that protects 
investors and the public interest. The Commission notes that the 
Exchange represented in its proposal that the kill switch will operate 
consistently with a broker-dealer's firm quote obligations pursuant to 
Rule 602 of Regulation NMS,\47\ and that the kill switch does not 
diminish or relieve a Market-Maker of its obligation to provide 
continuous two-sided quotes.\48\ The Exchange also represented that the 
kill switch message will be accepted by the System in the order of 
receipt in the queue and will be processed in such order. As such, the 
System will process interest already in the System prior to receipt of 
the kill switch message prior to processing the kill switch 
message.\49\ Based on these representations, the Commission believes 
that the kill switch is reasonably designed to promote just and 
equitable principles of trade and perfect the mechanism of a free and 
open market. Lastly, the Commission notes that other exchanges have 
established kill switches that operate in a manner similar to that 
proposed by CBOE.\50\
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    \47\ See Notice, supra note 3, at 64532.
    \48\ See id.
    \49\ See id.
    \50\ See, e.g., BOX Rule 7280(b) and PHLX Rule 1019(b).
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    Finally, the Commission believes that the proposal to authorize 
CBOE to share with Clearing TPHs the risk mitigation settings selected 
by a TPH for whom the Clearing TPH clears may assist Clearing TPHs 
manage their clearing risk exposure. The Commission notes that other 
exchanges have adopted similar rules authorizing the sharing of similar 
risk settings with clearing members.\51\
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    \51\ See, e.g., MIAX Rule 500; BX Chapter VI, Section 20; NYSE 
Arca Rule 6.2A(a); NYSE MKT Rule 902.1NY(a); and PHLX Rule 1016.
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IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
to 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-2016-053 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2016-053. 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-2016-053, and should be 
submitted on or before December 1, 2016.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of notice of the amended proposal in the 
Federal Register. In Amendment No. 1,\52\ CBOE clarified in its drill 
through rule text the exposure price of an order via HAL as CBOE had 
described it in the Notice. Amendment

[[Page 79068]]

No. 1 further clarified CBOE's background discussion of how quotes and 
orders are cancelled pursuant to the QRM Mechanism in order to 
harmonize the description of the existing rule with the text of Rule 
8.18. Both of these changes are consistent with the proposal as 
initially filed, and simply add detail to the filing to resolve 
internal inconsistencies. The changes do not introduce material, new, 
or novel concepts. Accordingly, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Act,\53\ to approve the proposed 
rule change, as modified by Amendment No. 1, on an accelerated basis.
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    \52\ See Amendment No. 1, supra note 4.
    \53\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\54\ that the proposed rule change (SR-CBOE-2016-053), as modified 
by Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.
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    \54\ See id.
    \55\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\55\
Brent J. Fields,
Secretary.
[FR Doc. 2016-27153 Filed 11-9-16; 8:45 am]
 BILLING CODE 8011-01-P