80 FR 79984 - Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to the Technical Disconnect Mechanism

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 246 (December 23, 2015)

[Federal Register Volume 80, Number 246 (Wednesday, December 23, 2015)]
[Notices]
[Pages 79984-79986]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-32186]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76672; File No. SR-CBOE-2015-113]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to the Technical Disconnect Mechanism

December 17, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on December 8, 2015, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (``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 amend Rule 6.23C related to the Exchange's 
Technical Disconnect Mechanism. The text of the proposed rule change is 
provided below.
(additions are italicized; deletions are [bracketed])
* * * * *
Chicago Board Options Exchange, Incorporated Rules
* * * * *
Rule 6.23C Technical Disconnect

    (a) When a CBOE Application Server (``CAS'') loses communication 
with a Client Application such that a CAS does not receive an 
appropriate response to a Heartbeat Request within ``x'' period of 
time, the Technical Disconnect Mechanism will automatically logoff the 
Trading Permit Holder's affected Client Application and automatically 
cancel all the Trading Permit Holder's Market-Maker quotes, if 
applicable, and open orders with a time-in-force of ``day'' resting in 
the Book (which excludes orders resting on a PAR workstation or order 
management terminal) (``day orders''), if the Trading Permit Holder 
enables that optional service, posted through the affected Client 
Application. The following describes how the Technical Disconnect 
Mechanism works for each of the Exchange's application programming 
interfaces (``APIs''):
    (i)-(ii) No change.
    (b)-(c) No change.
    . . . Interpretations and Policies:
    .01 No change.
* * * * *
    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.

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
    Rule 6.23C(a) provides that when a CBOE Application Server 
(``CAS'') \3\ loses communication with a Client Application \4\ such 
that a CAS does not receive an appropriate response to a Heartbeat 
Request \5\ within ``x'' period of time, the Technical Disconnect 
Mechanism will automatically logoff the Trading Permit Holder's 
(``TPH'') affected Client Application. If that occurs, the current rule 
provides that the Technical Disconnect Mechanism, if applicable, will 
automatically cancel all the TPH's Market-Maker quotes posted through 
the affected Client

[[Page 79985]]

Application.\6\ The Technical Disconnect Mechanism is intended to help 
mitigate the potential risks associated with a loss of communication 
with a Client Application, such as erroneous or unintended executions 
for stale quotes that are resting in the CBOE book. This mechanism 
serves to assist a TPH when a technical or system issue occurs, as well 
as assist the Exchange in maintaining a fair and orderly market.
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    \3\ CBOE currently has numerous CASs serving TPHs.
    \4\ For relevant purposes, a ``Client Application'' is the 
system component, such as a CBOE-supported workstation or a TPH's 
custom trading application, through which a TPH communicates its 
quotes and/or orders to a CAS. Messages are passed between a Client 
Application and a CAS. A Market-Maker may send quotes to the 
Exchange from one or more Client Applications, and a TPH may send 
orders to the Exchange from one or more Client Applications.
    \5\ A ``Heartbeat Request'' refers to a message from a CAS to a 
Client Application to check connectivity and which requires a 
response from the Client Application in order to avoid logoff. The 
Heartbeat Request acts as a virtual pulse between a CAS and a Client 
Application and allows a CAS to continually monitor its connection 
with a Client Application. Failure to receive a response to a 
Heartbeat Request within the Heartbeat Response Time is indicative 
of a technical or system issue.
    \6\ See Rule 6.23C and Securities Exchange Act Release No. 34-
70039 (July 25, 2013), 78 FR 46395 (July 31, 2013) (SR-CBOE-2013-
071) for further information regarding the Technical Disconnect 
Mechanism.
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    Recently, the Exchange amended Rule 6.23C related to the Technical 
Disconnect Mechanism to provide TPHs with an optional service that, if 
enabled by a TPH, will cause the Technical Disconnect Mechanism to also 
automatically cancel all the TPH's open orders with a time-in-force of 
``day'' (``day orders'') posted through the affected Client Application 
if the CAS loses communication with the Client Application.\7\ This 
optional service is an additional preventative risk control measure 
that CBOE is making available to TPHs. It is intended to help further 
mitigate the potential risks associated with a loss of communication 
with a TPH's Client Application. If a TPH's Client Application is 
disconnected for any period of time, it is possible that market 
conditions upon which it based its day orders may change during that 
time and make those orders stale. Consequently, any resulting 
executions of those orders may be erroneous or unintended.
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    \7\ See Securities Exchange Act Release No. 34-76489 (November 
20, 2015), 80 FR 74149 (November 27, 2015) (SR-CBOE-2015-103). The 
Exchange has not yet implemented this optional service and will 
announce the implementation date of the service, including the 
proposed rule change, by Regulatory Circular.
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    The proposed rule change provides that this optional service will 
automatically cancel open orders with a time-in-force of day that are 
resting on the book, but not resting on a PAR workstation or order 
management terminal (``OMT'').\8\ A TPH's day orders resting in the 
book may automatically execute against incoming quotes or orders and 
are thus subject to the risk of potential erroneous or unintended 
executions if the CAS loses communication with the TPH's Client 
Application, which risk the optional service is intended to mitigate. 
However, the TPH's day orders resting on a PAR workstation or OMT are 
subject to manual handling by a broker, agent or PAR official, as 
applicable, and are not subject to automatic execution against incoming 
quotes or orders. This manual handling mitigates the risk of potential 
erroneous or unintended executions of those orders, even during a time 
when the TPH is disconnected from the CAS, as an individual can 
determine how to handle the orders in accordance with CBOE's rules. The 
Exchange believes it is appropriate to have the Technical Disconnect 
Mechanism cancel only day orders resting on the book but not day orders 
resting on a PAR workstation or OMT terminal, since manual handling of 
those orders has already mitigated the applicable risk.
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    \8\ See Rule 6.12 regarding CBOE's hybrid order handling system, 
including when orders may be routed to a PAR workstation or OMT via 
the order handling system.
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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.\9\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \10\ 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) \11\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ Id.
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    In particular, the proposed rule change helps maintain a fair and 
orderly market, promotes efficiency and protects investors. While the 
optional service to have the Technical Disconnect Mechanism cancel a 
TPH's day orders mitigates the risks of potential erroneous or 
unintended executions of those orders associated with a loss in 
communication with a Client Application, those risks have already been 
mitigated for day orders resting on a PAR workstation or OMT that are 
subject to manual handling. Thus, the Exchange believes it is 
reasonable to not have the Technical Disconnect Mechanism cancel those 
orders and instead allow the broker, agent or PAR Official, as 
applicable, to handle those orders as the individual deems appropriate 
in accordance with CBOE's rules. The Exchange also believes that the 
proposed rule change is designed to not permit unfair discrimination 
among market participants, as it applies to all TPHs in the same 
manner. The Exchange believes it is appropriate to apply this optional 
cancellation functionality to day orders only resting on the book and 
not day orders resting on a PAR workstation or OMT, because the latter 
orders are not subject to the same risks of potential erroneous or 
unintended executions as the former 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. Specifically, the Exchange does 
not believe the proposed rule change will cause any burden on 
intramarket competition because the proposed rule change applies to all 
TPHs in the same manner. Use of the service to cancel day orders 
resting on the book in the event the CAS loses communication with a 
Client Application is voluntary. Additionally, whether a TPH enables 
the optional service or not, the TPH's day orders resting on a PAR 
workstation or OMT will continue to be manually handled as they are 
today, even if the CAS loses communication with a TPH's Client 
Application. The Exchange believes it is appropriate to apply this 
optional cancellation functionality to day orders resting only on the 
book and not on a PAR workstation or OMT, because, as discussed above, 
those orders are not subject to the same risks of potential erroneous 
or unintended executions as the orders resting on the book. Further, 
the Exchange does not believe that such change will impose any burden 
on intermarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change 
modifies a mechanism available on CBOE's system and applies only to 
orders resting in CBOE's book.

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.

[[Page 79986]]

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \12\ and paragraph (f) of Rule 19b-4 \13\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f).
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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-2015-113 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-2015-113. 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-2015-113 and should be 
submitted on or before January 13, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-32186 Filed 12-22-15; 8:45 am]
BILLING CODE 8011-01-P