[Federal Register Volume 82, Number 55 (Thursday, March 23, 2017)]
[Notices]
[Pages 14926-14929]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05741]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80270; File No. SR-CBOE-2016-082]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove a Proposed Rule Change Related to Rules Regarding 
the Responsibility for Ensuring Compliance With Priority and Allocation 
Requirements and Trade-Through Prohibitions in Open Outcry Trading

March 17, 2017.

I. Introduction

    On December 1, 2016, the 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 (``Exchange Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change to amend Exchange rules 
regarding responsibility

[[Page 14927]]

for ensuring compliance with open outcry priority and allocation 
requirements and trade-through prohibitions. The proposed rule change 
was published for comment in the Federal Register on December 19, 
2016.\3\ The Commission received two comments on the proposed rule 
change, plus a response letter from CBOE.\4\ On January 31, 2017, 
pursuant to Section 19(b)(2) of the Exchange Act,\5\ the Commission 
designated a longer period within which to approve the proposed rule 
change, disapprove the proposed rule change, or institute proceedings 
to determine whether to disapprove the proposed rule change.\6\
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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. 79540 (December 13, 
2016), 81 FR 91967 (``Notice'').
    \4\ See Letter to Brent J. Fields, Secretary, Commission, from 
Joan C. Conley, Senior Vice President and Corporate Secretary, 
Nasdaq, dated December 22, 2016 (``Nasdaq Letter'') and Letter to 
Brent J. Fields, Secretary, Commission from Steve Crutchfield, Head 
of Market Structure, CTC Trading Group, LLC; Kevin Coleman, Chief 
Compliance Officer, Belvedere Trading LLC; Scott Kloin, Chief 
Compliance Officer, Citadel Securities LLC; Steven Gaston, Chief 
Compliance Officer, Consolidated Trading LLC; Rob Armour, Chief 
Compliance Officer, DRW Securities, LLC; John Kinahan, Chief 
Executive Officer, Group One Trading L.P.; Daniel Overmyer, Chief 
Compliance Officer, IMC Financial Markets; Steven Gaston, Chief 
Compliance Officer, Lamberson Capital LLC; and Patrick Hickey, Head 
of Market Structure, Optiver US LLC, dated February 16, 2017 
(``Market Makers Letter''). See also Letter to Brent J. Fields, 
Secretary, Commission, from Kyle Edwards, Counsel, CBOE, dated March 
14, 2017 (``CBOE Response Letter''). The comment letters and CBOE's 
response are available at https://www.sec.gov/comments/sr-cboe-2016-082/cboe2016082.shtml.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 79910, 82 FR 9464 
(February 6, 2017). The Commission designated March 19, 2017, as the 
date by which the Commission shall either approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
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    The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and to institute 
proceedings under Section 19(b)(2)(B) of the Exchange Act \7\ to 
determine whether to approve or disapprove the proposed rule change, as 
discussed in Section III below. The institution of proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved, nor does it mean that the Commission 
will ultimately disapprove the proposed rule change. Rather, as 
described in Section III below, the Commission seeks and encourages 
interested persons to provide additional comment on the proposed rule 
change in order to inform the Commission's analysis of whether to 
approve or disapprove the proposed rule change.
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    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of Proposal

A. Description of Proposal

    According to the Exchange, currently, if a transaction executed on 
the trading floor is executed at a price that violates the priority and 
allocation provisions of 6.45A(b) and 6.45B(b) (``Book Priority'') or 
the trade-through prohibitions set forth in CBOE Rule 6.81 (``Trade-
Through''), the Exchange enforces the violations against both parties 
to the transaction.\8\ Under the proposed rule change, with respect to 
an open outcry transaction between a Floor Broker and a Market-Maker, 
only the party that initiated the transaction on the trading floor 
would be held responsible for Book Priority and Trade-Through 
violations.\9\ With respect to an open outcry transaction between a 
Floor Broker and another Floor Broker, or a Market-Maker and another 
Market-Maker, the Exchange would hold both parties responsible for Book 
Priority and Trade-Through violations, consistent with the Exchange's 
current practice.\10\
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    \8\ See Notice, supra note 3, at 91968.
    \9\ See proposed Interpretation and Policy .05 to Rule 6.45A, 
Interpretation and Policy .06 to Rule 6.45B, and Interpretation and 
Policy .07 to Rule 6.73.
    \10\ See id. See also Notice, supra note 3, at 91969.
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    The Exchange observes that generally, Floor Brokers initiate 
transactions on the Exchange's trading floor by representing orders and 
executing the orders against bids and offers of other in-crowd market 
participants, including Market-Makers.\11\ The Exchange asserts that 
when Floor Brokers trade with Market-Makers, the Floor Brokers are in a 
better position to prevent Trade-Through and Book Priority violations 
because, unlike Market-Makers, Floor Brokers have access to the Public 
Automatic Routing System (``PAR'') offered by CBOE that provides Floor 
Brokers with the necessary market data to avoid Trade-Through and Book 
Priority violations, as well as provides alerts that warn Floor Brokers 
in advance that a proposed execution price for a given order may 
violate Book Priority rules or result in a potential Trade-Through.\12\ 
The Exchange states that generally, a Floor Broker will verbally 
communicate a request for quote for a given order to the trading crowd, 
and the Market-Makers will then provide a responsive quote without the 
aid of PAR.\13\ The Exchange states that Market-Makers evaluate a Floor 
Broker's request for a quote against the Market-Maker's theoretical 
values for the given options series, a process which the Exchange 
observes becomes increasingly complicated when there are multiple 
options series that must be evaluated for a complex order.\14\ The 
Exchange asserts that it is therefore reasonable for a Market-Maker to 
rely on the Floor Broker initiating a trade to ensure that an open 
outcry transaction is executed in accordance with the Book Priority and 
Trade-Through provisions.\15\
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    \11\ See Notice, supra note 3, at 91968.
    \12\ See id. at 91969.
    \13\ See id.
    \14\ See id.
    \15\ See id. In the event a Market-Maker initiates a transaction 
with a Floor Broker, the Market-Maker would be responsible for 
ensuring that the transaction is executed in accordance with the 
Book Priority and Trade-Through provisions. See id.
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    The Exchange represents that this rule change, consistent with the 
Options Intermarket Linkage Plan,\16\ is reasonably designed to prevent 
Trade-Throughs, as well as Book Priority violations, because it would 
place the responsibility for ensuring transactions are executed in 
accordance with the Exchange's rules on the ``specific party or parties 
in a good position to ensure compliance.'' \17\ The Exchange also 
believes that the proposed rule change ``may help limit the number of 
[Book Priority] and Trade-Through violations because the proposal 
identifies a particular party or parties to each transaction (as 
opposed to all parties) as responsible for ensuring compliance with the 
rules.'' \18\
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    \16\ See generally Securities Exchange Act Release No. 43086 
(July 28, 2000), 65 FR 48023 (August 4, 2000) (Order approving 
Options Intermarket Linkage Plan).
    \17\ See Notice, supra note 3, at 91969.
    \18\ See id.
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B. Summary of Comments

    As previously noted, the Commission received two comment letters on 
the proposed rule change, and a response from CBOE.\19\ One commenter 
states that it neither supports nor opposes the Exchange's 
proposal,\20\ and the other commenter expresses support for the 
proposed rule change.\21\
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    \19\ See supra note 4.
    \20\ See Nasdaq Letter, supra note 4.
    \21\ See Nasdaq Letter, supra note 4. See Market Makers Letter, 
supra note 4.
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    One commenter suggests that the Exchange explain how PAR operates, 
and how the Exchange validates trades and conducts surveillances for 
purposes of regulating Book Priority and Trade-Through violations.\22\ 
In addition, the commenter suggests that the Commission articulate a 
principle of governing enforcement of book priority and trade-through 
requirements to floor trading in standardized options.\23\ Though 
beyond the scope of CBOE's

[[Page 14928]]

proposal, the commenter believes that disparities between how markets 
enforce these requirements could impact intramarket and intermarket 
competition.\24\
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    \22\ See Nasdaq Letter, supra note 4, at 3.
    \23\ See id. at 4.
    \24\ See id. at 3.
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    Other commenters (in a joint letter submitted by nine CBOE market 
participants) support the proposal and assert that the proposed rule 
change seeks to assign responsibility for ensuring compliance with open 
outcry priority and allocation requirements and trade-through 
prohibitions in a ``fair, reasonable, and logical manner,'' 
particularly in the case of an open-outcry trade initiated by a Floor 
Broker and responded to by a Market-Maker, because Market-Makers 
``generally lack access to'' the tools and alerts CBOE offers to Floor 
Brokers that help assure compliance with those rules.\25\ The 
commenters observe that pursuant to the Exchange's rules, it is a Floor 
Broker's responsibility to use due diligence to execute an order at the 
best price available, and to ascertain whether a better price than the 
one displayed is being quoted by another party, and that therefore, a 
Market-Maker should be able to assume that the Floor Broker has cleared 
the customer limit order book of any order at a better price in 
accordance with applicable rules.\26\ The commenters assert that ``the 
Floor Broker--as the party controlling the precise timing of any 
execution he or she initiates--is definitively in the best position to 
ascertain whether a Trade-Through or other rule violation would occur 
up to the instant of trade consummation, and should therefore 
appropriately hold sole responsibility for compliance with the 
applicable rules.'' \27\ The commenters believe that by clearly 
allocating this responsibility, the proposal would remove impediments 
to and better align with the mechanism of a free and open market.\28\
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    \25\ See Market Makers Letter, supra note 4, at 1-2. In 
addition, the commenter asserted that the issues raised by the 
Nasdaq letter ``have no bearing on'' the Exchange's proposal. See 
id.
    \26\ See id. at 2.
    \27\ See id.
    \28\ See id.
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    In its response letter, the Exchange asserts that the Nasdaq Letter 
does not address the substance of the proposal but rather offers 
general comment regarding open outcry trading.\29\ In addition, in 
response to the Nasdaq Letter, the Exchange notes that its proposal 
does not describe how PAR operates or its surveillance parameters 
because this information is described in its rules.\30\
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    \29\ See CBOE Response Letter, supra note 4, at 1.
    \30\ See id. at 3.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2016-082 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act \31\ to determine whether the proposed 
rule change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as stated below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change to inform the Commission's analysis of 
whether to approve or disapprove the proposed rule change.
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    \31\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\32\ the 
Commission is providing notice of the grounds for disapproval under 
consideration, as discussed below. The Commission believes that 
instituting proceedings will allow for additional analysis of, and 
input from commenters with respect to, the proposed rule change's 
consistency with Section 6(b)(1) of the Exchange Act, which requires 
that a national securities exchange is so organized and has the 
capacity to be able to carry out the purposes of the Exchange Act and 
to comply, and to enforce compliance by its members and persons 
associated with its members, with the provisions of the Exchange Act, 
the rules and regulations thereunder, and the rules of the 
exchange.\33\
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    \32\ Id.
    \33\ 15 U.S.C. 78f(b)(1).
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    The Commission also is instituting proceedings to allow for 
additional analysis and input concerning the proposed rule change's 
consistency with Section 6(b)(5) of the Exchange Act,\34\ which 
requires that the rules of a national securities exchange be designed, 
among other things, to promote just and equitable principles of trade 
and, in general, to protect investors and the public interest and not 
be designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \34\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Commission is concerned whether the proposed rule 
change could adversely impact the ability of the Exchange, consistent 
with Section 6(b)(1) of the Exchange Act, to comply, and to enforce 
compliance by its members on the CBOE trading floor, with applicable 
rules and regulations, including the Book Priority and Trade-Through 
provisions. In particular, the Commission wishes to consider further 
whether CBOE has sufficiently demonstrated how absolving from liability 
for Book Priority and Trade-Through rule violations one party to a 
trade (i.e., the responder, for trades involving a Floor Broker on one 
side and a Market Maker on the other) while placing sole liability on 
the other party (i.e., the initiator, for trades involving a Floor 
Broker on one side and a Market Maker on the other) will foster 
compliance with those rules by its members and not diminish the 
Exchange's ability to ensure compliance with these critically important 
rules.
    Further, the Exchange's stated justification for its proposal, 
which relies on the control an initiator has over the execution and 
price of the order as well as the fact that CBOE supplies its Floor 
Brokers with a system (PAR) that helps automate the necessary pre-trade 
checks, appears inconsistent with continuing to hold both parties to a 
trade liable when the trade is between two Market Makers or two Floor 
Brokers. Similarly, the proposal raises questions under Section 6(b)(5) 
of the Exchange Act, in that not enforcing Trade-Through and Book 
Priority violations against a party based on the identity of its 
counter-party (i.e., not enforcing against the responder when a Market-
Maker trades with a Floor Broker, but enforcing against both parties 
when a Market-Maker trades with a Market-Maker or a Floor Broker trades 
with a Floor Broker) may be unfairly discriminatory.

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Sections 6(b)(1), 6(b)(5), or any other provision of 
the Exchange Act, or the rules and regulations thereunder. Although 
there do not appear to be any issues relevant to approval or 
disapproval that would be facilitated by an oral presentation of views, 
data, and arguments, the Commission will consider, pursuant to Rule 
19b-4, any request for an

[[Page 14929]]

opportunity to make an oral presentation.\35\
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    \35\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Act Amendments of 
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 
75, 94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by April 13, 2017. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by April 27, 
2017. The Commission asks that commenters address the sufficiency of 
the Exchange's statements in support of the proposal, in addition to 
any other comments they may wish to submit about the proposed rule 
change.
    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-2016-082 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 Numbers SR-CBOE-2016-082. 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 these filings 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-2016-082 and should be 
submitted on or before April 13, 2017. Rebuttal comments should be 
submitted by April 27, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05741 Filed 3-22-17; 8:45 am]
 BILLING CODE 8011-01-P