80 FR 30306 - Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Relating to Rule 6.53C and Complex Orders on the Hybrid System

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 101 (May 27, 2015)

[Federal Register Volume 80, Number 101 (Wednesday, May 27, 2015)]
[Notices]
[Pages 30306-30308]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-12687]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75003; File No. SR-CBOE-2015-045]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Relating to 
Rule 6.53C and Complex Orders on the Hybrid System

May 20, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on May 12, 2015, Chicago Board Options Exchange, Incorporated (the 
``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to modify Rule 6.53C, Complex Orders on the 
Hybrid System, to give the Exchange the flexibility to distinguish 
between Professional and non-Professional orders for the purposes of 
determining eligibility for COA. The text of the proposed rule change 
is provided below.
    (additions are italicized; deletions are [bracketed])
* * * * *

Chicago Board Options Exchange, Incorporated

Rules

* * * * *

Rule 6.53C. Complex Orders on the Hybrid System

    (a)-(b) No change.
    (c) Complex Order Book
    (i) Routing of Complex orders: The Exchange will determine which 
classes and which complex order origin [types] codes (i.e., non-broker-
dealer public customers that are not Voluntary Professional Customers 
or Professional Customers, non-broker-dealer public customers that are 
Voluntary Professional Customers or Professional Customers, broker-
dealers that are not Market-Makers or specialists on an options 
exchange, and/or Market-Makers or specialists on an options exchange) 
are eligible for entry into the COB and whether such complex orders can 
route directly to the COB and/or from PAR to the COB. Complex orders 
not eligible to route to COB (either directly or from PAR to COB) will 
route to PAR or at the order entry firm's discretion to the order entry 
firm's booth.
    (ii)-(iv) No change.
    (d) Process for Complex Order RFR Auction: Prior to routing to the 
COB or once on PAR, eligible complex orders may be subject to an 
automated request for responses (``RFR'') auction process.
    (i) For purposes of paragraph (d):
    (1) No Change.
    (2) A ``COA-eligible order'' means a complex order that, as 
determined by the Exchange on a class-by-class basis, is eligible for a 
COA considering the order's marketability (defined as a number of ticks 
away from the current market), size, complex order type (as defined in 
paragraphs (a) and (b) above) and complex order origin [types] codes 
(as defined in subparagraph (c)(i) above). Complex orders processed 
through a COA may be executed without consideration to prices of the 
same complex orders that might be available on other exchanges.
* * * * *
    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.

[[Page 30307]]

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 seeks to modify Rule 6.53C to allow the Exchange to 
further distinguish between the complex order origin types \3\ that are 
eligible for the Complex Order Book (``COB'') and the Complex Order 
Auction (``COA'').
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    \3\ The Exchange notes that many CBOE rules use origin ``code'' 
in the same manner as origin ``type'' is used in Rule 6.53C(c). For 
example, Rules 6.2B(a)(i), 6.13(b)(i), 6.13A(a), 6.14A(a), 6.74A.07, 
6.74B.01, 24B.5A, and 24B.5B use origin ``code'' to distinguish 
between public customer orders, non-Market Maker broker-dealer 
orders, and Market Maker broker-dealer orders). This proposal seeks 
to, among other things, amend Rule 6.53C(c) to use origin ``code'' 
instead of ``type'' in order to make the rules more consistent.
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Background
    Under CBOE rules, a ``public customer'' or ``customer'' is a person 
or entity that is neither a member nor a broker/dealer. The terms are 
used in specific CBOE rules that provide certain marketplace advantages 
to public customer orders over non-customer orders (e.g., orders for 
the account of members or broker/dealers). In particular, under CBOE 
rules, subject to certain exceptions, (i) public customer orders are 
given priority over non-customer orders and Market-Maker quotes at the 
same price,\4\ and (ii) Trading Permit Holders are generally not 
charged a transaction fee for the execution of public customer orders. 
The purpose of providing these marketplace advantages to public 
customer orders is to attract retail investor order flow to the 
Exchange by leveling the playing field for retail investors over market 
professionals \5\ and providing competitive pricing.
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    \4\ See, e.g., CBOE Rules 6.45, Priority of Bids and Offers--
Allocation of Trades, 6.45A, Priority and Allocation of Equity 
Options Trades on the CBOE Hybrid System, and 6.45B, Priority and 
Allocation of Trades in Index Options and Options on ETFs on the 
CBOE Hybrid System.
    \5\ Market professionals have access to sophisticated trading 
systems that contain functionality not available to retail 
customers, including things such as continuously updated pricing 
models based upon real-time streaming data, access to multiple 
markets simultaneously, and order and risk management tools.
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    To ensure that the above mentioned marketplace advantages for 
public customers are protected, the Exchange adopted the terms 
``Voluntary Professional'' and ``Professional'' (hereinafter 
``Professional(s)'') in Rule 1.1(fff) and (ggg) respectively, which 
provide that Professionals are not brokers or dealers but will be 
treated in the same manner as brokers or dealers for purposes of many 
CBOE rules (including, e.g., Rules 6.53C(c)(ii) and 6.53C(d)(v)).\6\
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    \6\ See Securities Exchange Act Release No. 34-61198 (December 
17, 2009), 74 FR 68880 (December 29, 2009) (SR-CBOE-2009-078) (order 
approving proposed rule change as relating to professional orders). 
A Professional is a 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 Voluntary Professional is any person or 
entity that is not a broker or dealer that elects to be treated as a 
Professional.
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    COA is a feature within CBOE's Hybrid System that exposes eligible 
complex orders for price improvement. In classes where COA is 
activated, eligible orders are electronically exposed for an exposure 
period. During the applicable exposure period, the orders that are 
subject to exposure are eligible to receive a better price. At the 
conclusion of the COA process, as applicable, the order is then 
allocated or, to the extent not executed, booked or routed as described 
in the relevant rules.
    A ``COA-eligible order'' means a complex order that, as determined 
by the Exchange on a class-by-class basis, is eligible for COA 
considering the order's marketability (defined as a number of ticks 
away from the current market), size, complex order type (as defined in 
paragraphs (a) and (b) of Rule 6.53C and complex order origin types (as 
defined in subparagraph (c)(i) of Rule 6.53C).\7\ Subparagraph (c)(i) 
of Rule 6.53C indicates that complex order origin type means orders for 
non-broker-dealer public customers, broker-dealers that are not Market-
Makers or specialists on an options exchange, and/or Market-Makers or 
specialists on an options exchange.\8\ Non-broker-dealer public 
customers include Professionals and non-professional customers. Under 
the current COA eligibility parameters, there is no distinction between 
Professionals and non-professional public customers.
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    \7\ See Rule 6.53C(d)(i)(2) (indicating that complex order 
origin type is defined in Rule 6.53C(c)(i).
    \8\ See Rule 6.53C(c)(i).
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Proposal
    Currently, Professionals are not given priority, but are allowed to 
cancel and replace their orders as often as they wish without incurring 
any cancellation fees. The issue with this current structure is that 
each of the orders as well as the cancellations and replacements 
generate a new COA. Yet, only a few of these orders actually execute in 
the auction process. Rather, the result is an excess of auction 
messages that are generated unnecessarily. The Exchange notes that a 
disproportionate number of the COA messages in comparison to COA 
executions result from Professionals. Therefore, in order to eliminate 
the clutter of unnecessary Professional COA messages, as well as to 
increase the likelihood of executions for public customers, the 
Exchange is seeking the flexibility to disable COA functionality for 
Professionals.
    In order to gain the flexibility to disable COA functionality for 
Professionals, the Exchange seeks to amend Rule 6.53C(c)(i), which 
defines the complex order origin types (hereinafter origin ``code'' as 
the Exchange is also proposing to change origin ``type'' to origin 
``code'' in order to adopt the manner in which origin ``code'' is used 
in several other Exchange rules) \9\ that are eligible for COA. As 
amended, the definition of a complex order origin code will be defined 
as either: Non-broker-dealer public customers that are not Voluntary 
Professional Customers or Professional Customers; non-broker-dealer 
public customers that are Voluntary Professional Customers or 
Professional Customers; broker-dealers that are not Market-Makers or 
specialists on an options exchange; and/or Market-Makers or specialists 
on an options exchange. The proposal would not, however, permit the 
Exchange to discriminate among individual market participants of the 
same origin code (e.g., permit certain Professional orders to the 
exclusion of orders from a different Professional).
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    \9\ See supra, note 1 [sic].
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    The Exchange is proposing these changes because the Exchange 
believes allowing Professionals to participate in COA can be 
detrimental to non-professional public customer order flow and cause a 
large amount of auctions to be processed without executions arising 
from those auctions. This is because Professionals frequently cancel 
and

[[Page 30308]]

replace their orders and prices as a means of attempting to quote with 
their orders. The Exchange believes that Professionals should not be a 
priority over non-professional public customer order flow, which is 
why, the Exchange notes, there are separate CBOE rules for 
Professionals in the first place.\10\
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    \10\ See Rules 1.1 (fff) and (ggg).
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    The proposed change modifies the definition of a ``COA-eligible 
order'' to give the Exchange the flexibility to distinguish between 
complex orders from Professionals and complex orders from non-
professional public customer order flow. Any changes to the COA-
eligible order parameters would be announced via Regulatory Circular.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\11\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \12\ 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) \13\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ Id.
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    In particular, the Exchange believes the proposed change is in 
accordance with the Act as it is merely intended to provide the 
Exchange the flexibility to distinguish between Professionals and non-
professional public customer orders for the purposes of COA, which is 
intended to benefit non-professional public customers by providing a 
more efficient COA for eligible complex orders.

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

    CBOE 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. Although the Exchange 
recognizes that the proposal will allow the Exchange to exclude 
Professionals from COA, the current rules already allow the Exchange to 
differentiate between order origin types (i.e., non-broker-dealer 
public customer, broker-dealers that are not Market-Makers or 
specialists on an options exchange, and/or Market-Makers or specialist 
on an options exchange). The Exchange believes any perceived burden on 
Professionals would be outweighed by the potential benefits to public 
customers. In addition, the proposal would not permit the Exchange to 
discriminate among individual market participants of the same origin 
code (e.g., the proposal would not allow the Exchange to permit certain 
Professional orders to the exclusion of orders from a different 
Professional).\14\ The Exchange does not believe the proposed changes 
will have any burden on intermarket competition.
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    \14\ See supra, note 5.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    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 Number SR-CBOE-2015-045 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-2015-045. 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 also will be available 
for inspection and copying at the principal offices of the Exchange. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-CBOE-2015-045, 
and should be submitted on or before June 17, 2015.

    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. 2015-12687 Filed 5-26-15; 8:45 am]
 BILLING CODE 8011-01-P