80 FR 37700 - Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving Proposed Rule Change Relating to Floor Broker Due Diligence

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 126 (July 1, 2015)

[Federal Register Volume 80, Number 126 (Wednesday, July 1, 2015)]
[Notices]
[Pages 37700-37701]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-16087]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75299; File No. SR-CBOE-2015-047]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving Proposed Rule Change Relating to Floor 
Broker Due Diligence

June 25, 2015.

I. Introduction

    On May 5, 2015, Chicago Board Options Exchange, Incorporated (the 
``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission''), pursuant to Section 19(b)(1) \1\ of 
the Securities Exchange Act of 1934 (the ``Act''),\2\ and Rule 19b-4 
thereunder,\3\ a proposed rule change to amend Exchange rules related 
to Floor Broker due diligence. The proposed rule change was published 
for comment in the Federal Register on May 22, 2015.\4\ The Commission 
received no comment letters on the proposed rule change. This order 
approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 74990 (May 18, 
2015), 80 FR 29767 (``Notice'').
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II. Description of the Proposal

    CBOE proposes to amend several rules to address certain order 
handling obligations on the part of its Floor Brokers. Specifically, 
whether orders sent to Floor Brokers are presumed to be ``Held'' or 
``Not Held.'' A ``Not Held'' order generally is one where the customer 
gives the Floor Broker discretion in executing the order, both with 
respect to the time of execution and the price (though the customer may 
specify a limit price), and the Floor Broker works the order over a 
period of time to avoid market impact while seeking best execution of 
the order. A ``Held'' order generally is one where the customer seeks a 
prompt execution at the best currently available price or prices.
    Currently, CBOE Rule 6.53 (Certain Order Types Defined) defines a 
``Not Held Order'' as an order that is marked as ``not held'' or ``take 
time,'' or ``which bears any qualifying notation giving discretion as 
to the price or time at which such order is to be executed.'' CBOE Rule 
6.75 (Discretionary Transactions) further provides that ``[u]nder 
normal market conditions, and in the absence of a `not held' 
instruction, a Floor Broker may not exercise time discretion on market 
or marketable limit orders and shall immediately execute such orders at 
the best price or prices available.''
    CBOE now proposes to amend Exchange Rule 6.75, as well as Rules 
6.53 and 6.73, to establish a different default status for orders sent 
to Floor Brokers. Specifically, CBOE proposes to add a new 
Interpretation and Policy .06 to CBOE Rule 6.73 (Responsibilities of 
Floor Brokers) to specify that an order entrusted to a Floor Broker 
will be considered a Not Held Order unless (i) a Floor Broker's 
customer otherwise specifies or (ii) the order was electronically 
received by the Exchange and subsequently routed to a Floor Broker or 
PAR Official pursuant to the order entry firm's routing instructions. 
The Exchange also proposes to add additional language to the Not Held 
Order definition in CBOE Rule 6.53(g) that mirrors the language it 
proposes to add to Rule 6.73. Finally, the Exchange proposes to amend 
CBOE Rule 6.75, which addresses a Floor Broker's discretion in 
executing orders, to delete the sentence that specifies that a Floor 
Broker may not exercise time discretion on an order under normal market 
conditions unless the order was marked ``not held.''
    The consequence of these proposes changes, taken together, will 
result in a change to the default order handling obligations for orders 
sent to Floor Brokers. Whereas Floor Brokers are currently obligated by 
CBOE Rule 6.75 to immediately execute orders at the best available 
prices under normal market conditions unless the customer provides a 
Not Held instruction on the order, CBOE's proposal will consider all 
orders sent to Floor Brokers to be ``Not Held'' by default unless the 
customer specifies or if the order is delivered to CBOE electronically 
in such a manner as to suggest that the customer is seeking a prompt 
execution of a marketable order at the best available prices.
    In its filing, the Exchange states that CBOE Rules 6.73 and 6.75 
were adopted prior to electronic trading and thus did not contemplate 
the interaction between an electronic trading environment and a manual 
trading floor.\5\ The Exchange believes that, at present, customers who 
submit orders to Floor Brokers likely are seeking to rely on a Floor 
Broker's expertise and discretion.\6\ The Exchange believes that 
customers place orders with Floor Brokers because Floor Brokers can 
exercise discretion in executing a client's order and can potentially 
provide higher execution quality.\7\ The Exchange states that a 
customer would otherwise electronically submit an order to the Exchange 
for automatic handling and an electronic execution.\8\
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    \5\ See Notice, supra note 4, 80 FR at 29768.
    \6\ See id.
    \7\ See id.
    \8\ See id.
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    III. Discussion and Commission Findings
    After careful review, the Commission finds that the proposed rule 
change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\9\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\10\ which requires that the 
rules of the exchange be designed, among other things, to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, 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.
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    \9\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78(b)(5).
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    The Commission believes that the Exchange has articulated a 
reasonable basis for changing the current default presumption of 
whether a customer intends to provide a Floor Broker with the ability 
to exercise time and price discretion on its behalf as long as the 
order is not otherwise marked, or received electronically, in a manner 
to suggest that the customer did not intend for its order to be treated 
as Not Held. Other than changing the default presumption to ``Not 
Held'' for most orders sent to Floor Brokers, CBOE is not proposing to 
change any other order handling obligations applicable to Floor 
Brokers. CBOE's proposal responds to its understanding of the changing 
role of Floor Brokers on its trading floor since it adopted Rule 6.75, 
and its understanding of how customers today use, and intend to 
continue to use, the services of Floor Brokers on the CBOE exchange. 
Accordingly, the Commission finds that the proposed rule change is 
consistent with the Act and is designed

[[Page 37701]]

to promote just and equitable principles of trade and remove 
impediments to and perfect the mechanism of a free and open market.

IV. Conclusion

    IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-CBOE-2015-047) be, and hereby is, 
approved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
Robert W. Errett,
Deputy Secretary.
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    \11\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2015-16087 Filed 6-30-15; 8:45 am]
BILLING CODE 8011-01-P