81 FR 18668 - 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, To Amend Interpretation and Policy .01 to Rule 1.1(ggg) Relating to the Professional Customer Definition
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 62 (March 31, 2016)
Federal Register Volume 81, Issue 62 (March 31, 2016)
| Page Range | 18668-18671 | |
| FR Document | 2016-07204 |
[Federal Register Volume 81, Number 62 (Thursday, March 31, 2016)] [Notices] [Pages 18668-18671] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-07204] [[Page 18668]] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-77450; File No. SR-CBOE-2016-005] 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, To Amend Interpretation and Policy .01 to Rule 1.1(ggg) Relating to the Professional Customer Definition March 25, 2016. I. Introduction On January 27, 2016, 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 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to amend the methodology for counting average daily order submissions in listed options to determine whether a person or entity meets the definition of a Professional \3\ (``Professional order counting''). The Commission published the proposed rule change for comment in the Federal Register on February 10, 2016.\4\ The Commission received one comment letter on the proposed rule change.\5\ The Exchange filed Amendment No. 1 to the proposed rule change on March 15, 2016,\6\ and submitted a response to comments on March 18, 2016.\7\ This order provides notice of filing of Amendment No. 1 and approves the proposal, as modified by Amendment No. 1, on an accelerated basis. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ Under CBOE rules, the term ``Professional'' means any 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). See CBOE Rule 1.1(ggg). \4\ See Securities Exchange Act Release No. 77049 (February 4, 2016), 81 FR 7173 (``Notice''). \5\ See Joint Letter from SpiderRock EXC, LLC and SpiderRock Advisors, LLC, to Brent J. Fields, Secretary, Commission, dated February 22, 2016 (``SpiderRock Letter''). \6\ In Amendment No. 1, the Exchange changed how complex orders will be computed with respect to Professional order counting. Amendment No. 1 modified the proposal to provide that a complex order compromised of nine legs or more will count as multiple orders with each option leg counting as its own separate order while complex orders with eight legs or less will count as a single order. The Exchange previously proposed that complex orders compromised of five legs or more would count as multiple orders while complex orders with four legs or less would count as a single order. In addition, Amendment No. 1 provided that any complex order with nine or more legs that is canceled and replaced would count as multiple new orders unless the child orders resulting from the parent order were canceled and replaced on the same side and series as the parent order. The Exchange previously proposed that complex orders with five legs or more that were canceled and replaced would count as multiple new orders. 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-2016-005 (available at http://www.sec.gov/comments/sr-cboe-2016-005/cboe2016005-2.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. \7\ See Letter from William P. Wallenstein, Senior Counsel, CBOE, to Brent J. Fields, Secretary, Commission, dated March 18, 2016 (``CBOE Response Letter''). --------------------------------------------------------------------------- II. Description of the Proposal The Exchange proposes to amend Interpretation and Policy .01 to Rule 1.1(ggg) relating to the definition of Professionals. Specifically, the Exchange proposes to delete current Interpretation and Policy .01 to Rule 1.1(ggg) and adopt new Interpretation and Policy .01 to Rule 1.1(ggg), setting forth a new methodology for calculating average daily order submissions for Professional order counting purposes.\8\ --------------------------------------------------------------------------- \8\ See Notice, supra note 4, at 7173. --------------------------------------------------------------------------- Background Prior to 2009, the Exchange designated all orders as either customer orders or non-customer orders based solely on whether or not the order was placed for the account of a customer or for the account of a registered securities broker-dealer.\9\ According to CBOE, the Exchange granted public customers certain advantages, including priority to trade and reduced or no transaction fees, in order to attract public customer order flow and to account for such customers' lack of sophistication along with their lack of access to market data services, analytics technology, and other trading devices more common to broker-dealers.\10\ As non-broker-dealer traders gained access to electronic trading platforms, analytics technology, and market data services previously available only to broker-dealers, the distinction between public customers and non-customers became, in CBOE's opinion, less effective in promoting the intended purposes of the Exchange's customer priority rules because certain customers increasingly were more similarly situated to broker-dealers.\11\ Accordingly, in 2009, the Exchange adopted a definition of Professional under Rule 1.1(ggg) to further distinguish different types of orders placed on the Exchange.\12\ In November 2014, the Exchange clarified its Professional order rule by adopting Interpretation and Policy .01 to Rule 1.1(ggg).\13\ --------------------------------------------------------------------------- \9\ See id. at 7174. \10\ See id. \11\ See id. \12\ According to CBOE, its Professional customer rule originally was based upon a similar rule from the International Securities Exchange, LLC (``ISE''). See Securities Exchange Release 59287 (January 23, 2009), 74 FR 5694 (January 30, 2009) (SR-ISE- 2006-26) (``ISE Approval Order''); see also Notice, supra note 4, at 7174, n.8. \13\ See CBOE Regulatory Circular RG09-148 (Professional Orders). Specifically, the Exchange codified its interpretation that, for Professional order counting purposes, ``parent'' orders that are placed on a single ticket and entered for the beneficial account(s) of a person or entity that is not a broker or dealer in securities and that are broken into multiple parts by a broker or dealer, or by an algorithm housed at a broker or dealer, or by an algorithm licensed from a broker or dealer that is housed with the customer in order to achieve a specific execution strategy, including, but not limited to basket trades, program trades, portfolio trades, basis trades, and benchmark hedges, should count as one single order for Professional order counting purposes. --------------------------------------------------------------------------- According to the Exchange, the advent of new multi-leg spread products and the proliferation of the use of complex orders and algorithmic execution strategies by both institutional and retail market participants raise questions as to what should be counted as an ``order'' for Professional order counting purposes.\14\ In light of this, the Exchange now proposes to adopt an amended interpretation to specifically address the counting of multi-leg spread products, algorithm generated orders, and complex orders for purposes of determining Professional customer status.\15\ --------------------------------------------------------------------------- \14\ See Notice, supra note 4, at 7175. \15\ See id. --------------------------------------------------------------------------- Proposal The Exchange's proposal deletes current Interpretation and Policy .01 to Rule 1.1(ggg) and replaces it with a new Interpretation and Policy that sets forth a new methodology for counting complex orders, parent/child orders, and cancel/replace orders for Professional order counting purposes.\16\ Pursuant to Rule 1.1(ggg), all orders will count as one single order for Professional customer counting purposes, unless one of the exceptions enumerated in the new Interpretation and Policy stipulates otherwise.\17\ --------------------------------------------------------------------------- \16\ See id. at 7176. \17\ See id. Under current Exchange Rule 1.1(ggg), Trading Permit Holders are required to indicate whether their public customer orders are Professional orders. This existing requirement remains unchanged under this proposed rule change. See id. at 7178. According to the Exchange, a Trading Permit Holder must conduct a review of all orders received from non-broker-dealers on at least a quarterly basis in order to make the appropriate designation. See id. --------------------------------------------------------------------------- [[Page 18669]] Paragraph (a) of proposed new Interpretation and Policy .01 will govern the computation rules for complex orders. Under subparagraph (a)(1), a complex order of eight legs or less will count as one order.\18\ In contrast, under subparagraph (a)(2), a complex order of nine legs or more will count as multiple orders with each option leg counting as its own separate order.\19\ The Exchange stated that this dividing line is appropriate because complex orders with eight or fewer legs are more often associated with retail strategies such as strangles, straddles, butterflies, collars, and condor strategies.\20\ In contrast, the Exchange believes that Professionals may be more likely than retail customers to use complex orders of nine legs or more, as CBOE believes that such orders are demonstrative of sophisticated trading activity.\21\ --------------------------------------------------------------------------- \18\ See Notice, supra note 4, at 7176; see also Amendment No. 1, supra note 6. \19\ See Notice, supra note 4, at 7176; see also Amendment No. 1, supra note 6. \20\ See Notice, supra note 4, at 7176. \21\ See id. --------------------------------------------------------------------------- Paragraph (b) of proposed new Interpretation and Policy .01 will govern the calculations for parent/child orders.\22\ Under subparagraph (b)(1), if a parent order submitted for the beneficial account(s) of a person or entity other than a broker or dealer is subsequently broken up into multiple child orders on the same side (buy/sell) and series by a broker or dealer, or by an algorithm housed at the broker or dealer, or by an algorithm licensed from the broker or dealer but housed with the customer, then the order will count as one order even if the child orders are routed across several exchanges.\23\ According to the Exchange, this subparagraph is designed to allow the orders of public customers to be ``worked'' by a broker (or a broker's algorithm) in order to achieve best execution without counting the activity as multiple child orders for Professional order counting purposes.\24\ Conversely, under subparagraph (b)(2), if a parent order, including a strategy order,\25\ is broken into multiple child orders on both sides (buy/sell) of a series and/or multiple series, then each child order will count as a separate new order.\26\ The Exchange believes that strategy orders are most often utilized by Professionals and therefore are appropriately counted as multiple orders for Professional order counting purposes.\27\ The Exchange further noted that paragraph (b) is not designed to capture larger-size orders that are broken into multiple orders to achieve an execution consistent with the principles of best execution.\28\ Instead, the Exchange stated that paragraph (b) is aimed at capturing orders generated by an algorithm operated by a Professional that continuously updates its orders in tandem with market changes.\29\ According to the Exchange, these orders are most appropriately counted as multiple orders for Professional order counting purposes.\30\ --------------------------------------------------------------------------- \22\ See id. \23\ See id. \24\ See id. \25\ In its filing, CBOE noted that the term ``strategy order'' is intended to mean an execution strategy, trading instruction, or algorithm whereby multiple ``child'' orders on both sides of a series and/or multiple series are generated prior to being sent to an options exchange(s). See id. at 7176, n.17. \26\ See id. at 7176. The Exchange noted that non-professional customers that simultaneously or nearly simultaneously enter multiple limit orders to buy and sell the same security may violate CBOE Rule 6.8C, the prohibition against acting as a Market Maker. See id. at 7176, n.18; see also Exchange Rule 6.8C. \27\ See Notice, supra note 4, at 7176 (containing examples of types of strategy orders including vega and volatility orders). \28\ See id. at 7177. \29\ See id. \30\ See id. --------------------------------------------------------------------------- Paragraph (c) of new Interpretation and Policy .01 will govern the counting methodology for cancel/replace orders.\31\ Subparagraph (c)(1) states, as a general rule that any order that cancels and replaces an existing order will count as a separate order (or multiple orders in the case of complex orders of nine legs or more).\32\ Subparagraph (c)(2) contains an exception from this general rule. Under subparagraph (c)(2), an order to cancel and replace a child order would not count as a new order if the parent order that was placed for the beneficial account(s) of a non-broker or dealer had been subsequently broken into multiple child orders on the same side and series as the parent order by a broker or dealer, algorithm at a broker or dealer, or algorithm licensed from a broker or dealer but housed at the customer.\33\ By contrast, subparagraph (c)(3) provides that an order that cancels and replaces a child order resulting from a parent order, including a strategy order, that generated child orders on both sides (buy/sell) of a series and/or in multiple series would count as a new order per side and series.\34\ Finally, subparagraph (c)(4) states that, notwithstanding subparagraph (c)(2), an order that cancels and replaces any child order resulting from a parent order being pegged to the Exchange's best bid or offer (``BBO'') or the national best bid or offer (``NBBO'') or that cancels and replaces any child order pursuant to an algorithm that uses the BBO or NBBO in the calculation of child orders and attempts to move with or follow the BBO or NBBO of a particular options series would count as a new order each time the order cancels and replaces in order to attempt to move with or follow the BBO or NBBO.\35\ --------------------------------------------------------------------------- \31\ See id. \32\ See id.; see also Amendment No. 1, supra note 6. \33\ See Notice, supra note 4, at 7177. \34\ See id. \35\ See id. --------------------------------------------------------------------------- Implementation The Exchange has proposed an effective date of April 1, 2016 for this proposed rule change.\36\ The proposal would not be applied retroactively.\37\ --------------------------------------------------------------------------- \36\ See id. \37\ See id. at 7178. --------------------------------------------------------------------------- III. Comment Summary and CBOE's Response The Commission received one comment letter regarding the proposed rule change, which opposed the proposal.\38\ Among other things, the commenter expressed concern that the proposal would ``unfairly require the professional categorization of certain other customers that do not otherwise seem to be market professionals and are not systematically attempting to compete with market makers . . . .'' \39\ Specifically, the commenter believed that the proposal would classify as Professionals, persons or entities that increasingly use complex orders and other multi-legged orders or who have ``hired a more market savvy and technologically sophisticated firm to handle their interactions with the market.'' \40\ In response, CBOE stated that customers trading with a frequency sufficient to meet the Professional customer definition, as modified by the current proposal, evidence a level of sophistication similar to that of broker-dealers and Market-Makers and therefore do compete with those market participants.\41\ The Exchange asserted that many of those customers include hedge funds, proprietary trading firms, large bank trading desks, and wealth [[Page 18670]] management firms who employ sophisticated algorithms to execute more than the Professional customer threshold, which is equivalent to one order per minute.\42\ Therefore, CBOE believes that it is not unfair or anti-competitive to designate as Professionals those participants who, when executing the requisite number of orders, share similar levels of sophistication with broker-dealers or Market-Makers while maintaining customer priority for true traditional retail investors.\43\ --------------------------------------------------------------------------- \38\ See SpiderRock Letter, supra note 5, at 3-4. The commenter made several recommendations to the Commission, and expressed concern over the concept of customer priority, Market Maker payment for order flow, order routing, and Market Maker preferencing. The Commission notes that these issues are beyond the scope of CBOE's present proposal, which applies to a modified calculation of order activity for Professional order counting purposes. \39\ See id. at 8. The Commenter argued that a ``new generation'' of customer is increasingly using more sophisticated trading techniques. See id. at 4. \40\ See id. at 4. \41\ See CBOE Response Letter, supra note 7, at 4. \42\ See id. \43\ See id. The Exchange further noted that, subject to applicable regulatory requirements, it has discretion to decide the best way to encourage competitive markets and how best to attract retail order flow to the exchange, and its proposed rule change seeks to accomplish those business objectives. See id. --------------------------------------------------------------------------- The commenter also expressed a concern that the proposed rule change ``would effectively ban'' the use of certain multi-part orders in priority customer accounts.\44\ In response, CBOE stated that it is not banning any order type that is permitted under its rules, including the order types referenced by the commenter.\45\ More specifically, the Exchange noted that ``[p]ublic customers and Professionals alike are free to employ these strategies on the Exchange as they see fit, the only difference being that, unlike a public customer, a Professional may not receive execution priority over broker-dealer orders and Market-Maker quotes at the same price and may incur transaction fees.'' \46\ Therefore, CBOE asserted that the choice whether to use any particular strategy is within the business judgment of the particular customer and not the result of an Exchange-imposed restriction.\47\ --------------------------------------------------------------------------- \44\ See SpiderRock Letter, supra note 5, at 7. \45\ See CBOE Response Letter, supra note 7, at 2-3. \46\ See id. at 3. \47\ See id. --------------------------------------------------------------------------- The commenter next noted that customers are becoming ``increasingly sophisticated and technology enabled.'' \48\ The commenter stated that there are varying types of investors with different levels of sophistication using multi-part orders to trade on their own behalf or hire firms to carry out such trading strategies on their behalf.\49\ Therefore, the commenter asserted that the assumption that only ``true'' Professionals have access to more sophisticated trading techniques is misguided.\50\ The commenter believed that ``there is no agreed definition of retail customer, rather, there is a complex collection of accounts that can be categorized along a number of not- mutually-exclusive dimensions.'' \51\ In response, CBOE noted that it does not seek to dissuade the use of technology by any investor, nor use technology as the benchmark for deciding whether an investor who uses it crosses the threshold of public customer to Professional.\52\ Rather, the Exchange noted that its proposal will look to the number of orders produced through that technology and if the number of orders is fewer than 390 average orders per day on average over the applicable period then that investor will not be a Professional despite the use of the technology-enabled strategies.\53\ The Exchange further emphasized that it is the number of orders that determines whether a trader is a Professional and not the technology to which a trader has access.\54\ --------------------------------------------------------------------------- \48\ See SpiderRock Letter, supra note 5, at 9. \49\ See id. at 7-8. \50\ See id. \51\ See id. at 8. \52\ See CBOE Response Letter, supra note 7, at 3. \53\ See id. \54\ See id. at 3-4. --------------------------------------------------------------------------- IV. Discussion and Commission Findings After careful review of the proposed rule change, as well as the comment letter and the CBOE response, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.\55\ In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,\56\ which requires, among other things, that the rules of a national securities exchange be designed 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; and not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. In addition, the Commission finds that the proposed rule change is consistent with Section 6(b)(8) of the Act, which requires the rules of the exchange not to impose any burden on competition not necessary or appropriate in furtherance of the Act.\57\ --------------------------------------------------------------------------- \55\ In approving this proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). \56\ 15 U.S.C. 78f(b)(5). \57\ 15 U.S.C. 78f(b)(8). --------------------------------------------------------------------------- The Commission previously has articulated its position regarding the application of Section 6 of the Act in evaluating distinctions among market participants proposed by exchanges and the discretion available to an exchange to set an appropriate level of advantages and responsibilities of persons trading on its market.\58\ In particular, the Commission previously indicated that it does not believe that priority for public customer orders is a statutorily-required attribute of an exchange and therefore the grant of such priority is within an exchange's prerogative and business judgement, as long as such provision is otherwise consistent with the requirements of the Act.\59\ --------------------------------------------------------------------------- \58\ See ISE Approval Order, supra note 12, at 5699, n. 59. \59\ See id. at 5700. --------------------------------------------------------------------------- The Commission notes that the Exchange is not amending the threshold of 390 orders in listed options per day but is revising the method for counting Professional orders in the context of multi-part orders and cancel/replace activity. The Exchange noted that it has received questions regarding the classification of these types of orders when calculating Professional customer activity.\60\ The Commission believes that the proposal is designed to set forth a reasonable and objective approach to determine Professional customer status. --------------------------------------------------------------------------- \60\ See Notice supra note 4, at 7175. --------------------------------------------------------------------------- Specifically, the proposal addresses how to account for complex orders, parent/child orders, and cancel/replace orders. The Commission believes that distinguishing between complex orders with 9 or more options legs and those orders with 8 or fewer options legs is a reasonable and objective approach. The Commission notes that, in Amendment No. 1, the Exchange increased the number of complex order legs considered for multiple order counting purposes from five or more legs to nine or more legs in response to the concerns of the commenter, who noted that some retail customers are increasingly using trading techniques with multi-part orders. In addition, the Commission believes that CBOE's proposal appropriately distinguishes between parent/child orders that are generated by a broker's efforts to obtain an execution on a larger size order while minimizing market impact and multi-part orders that used by more sophisticated market participants. Similarly, the Commission believes that the proposed guidance that cancel/replace orders will count as separate orders with limited exceptions is a reasonable and objective approach to distinguish the orders of retail customers that are ``worked'' by a broker from orders generated by algorithms used by more sophisticated market [[Page 18671]] participants. Similar to what it has noted in past Professional customer filings, the Commission believes that the line that CBOE now seeks to draw between ``priority'' customers and Professional customers reflects CBOE's belief that the orders of a person who submits, on average, more than one order every minute of the trading day need not (or should not) be granted the same benefit or incentive that is granted to customers who do not trade on such a scale.\61\ --------------------------------------------------------------------------- \61\ See ISE Approval Order, supra note 12, at 5701. --------------------------------------------------------------------------- The Commission believes that the grant of priority to certain participants over others in a manner that is consistent with the Act is most reasonably viewed as within the discretion of the Exchange.\62\ Thus, the Commission believes that CBOE's proposal, which establishes an objective methodology for counting average daily order submissions for Professional order counting purposes, is consistent with the Act. --------------------------------------------------------------------------- \62\ See id. at 5700. --------------------------------------------------------------------------- V. 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 CommentsUse the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File No. SR-CBOE-2016-005 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 No. SR-CBOE-2016-005. 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 will also 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 No. SR-CBOE-2016-005 and should be submitted on or before April 21, 2016. VI. 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. The revisions made to the proposal in Amendment No. 1 \63\ changed how complex orders will be counted with respect to Professional order counting. Amendment No. 1 modified the proposal to provide that a complex order compromised of nine legs or more will count as multiple orders with each option leg counting as its own separate order instead of five legs or more as previously proposed by the Exchange.\64\ The Commission believes that this modification responds to one of the primary concerns raised by the commenter on the proposal that increasingly sophisticated customers would be adversely affected by the proposal, causing them to become Professionals and lose their priority customer status. Amendment No. 1 effectively allows retail customers to use more advanced trading strategies (i.e., complex orders with up to eight legs) without having that activity counted as multiple orders for purposes of Professional order counting. Thus, the Commission believes that the changes in Amendment No. 1 respond to one of the concerns raised by the commenter by adopting a more permissive threshold for complex orders, and ultimately could decrease the number of persons or entities that will meet the definition of Professional under the new Interpretation and Guidance. Accordingly, the Commission finds good cause, pursuant to Section 19(b)(2) of the Act,\65\ to approve the proposed rule change, as modified by Amendment No. 1, on an accelerated basis. --------------------------------------------------------------------------- \63\ See Amendment No. 1, supra note 6. \64\ See id. \65\ 15 U.S.C. 78s(b)(2) --------------------------------------------------------------------------- VII. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\66\ that the proposed rule change (SR-CBOE-2016-005), as modified by Amendment No. 1, be, and hereby is, approved on an accelerated basis. --------------------------------------------------------------------------- \66\ See id. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\67\ --------------------------------------------------------------------------- \67\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Robert W. Errett, Deputy Secretary. [FR Doc. 2016-07204 Filed 3-30-16; 8:45 am] BILLING CODE 8011-01-P
![18668 Federal Register / Vol. 81, No. 62 / Thursday, March 31, 2016 / Notices
SECURITIES AND EXCHANGE submitted a response to comments on adopted a definition of Professional
COMMISSION March 18, 2016.7 This order provides under Rule 1.1(ggg) to further
notice of filing of Amendment No. 1 and distinguish different types of orders
[Release No. 34–77450; File No. SR–CBOE–
2016–005]
approves the proposal, as modified by placed on the Exchange.12 In November
Amendment No. 1, on an accelerated 2014, the Exchange clarified its
Self-Regulatory Organizations; basis. Professional order rule by adopting
Chicago Board Options Exchange, Interpretation and Policy .01 to Rule
II. Description of the Proposal 1.1(ggg).13
Incorporated; Notice of Filing of
Amendment No. 1 and Order Granting The Exchange proposes to amend According to the Exchange, the
Accelerated Approval of a Proposed Interpretation and Policy .01 to Rule advent of new multi-leg spread products
Rule Change, as Modified by 1.1(ggg) relating to the definition of and the proliferation of the use of
Amendment No. 1, To Amend Professionals. Specifically, the complex orders and algorithmic
Interpretation and Policy .01 to Rule Exchange proposes to delete current execution strategies by both
1.1(ggg) Relating to the Professional Interpretation and Policy .01 to Rule institutional and retail market
Customer Definition 1.1(ggg) and adopt new Interpretation participants raise questions as to what
and Policy .01 to Rule 1.1(ggg), setting should be counted as an ‘‘order’’ for
March 25, 2016. forth a new methodology for calculating Professional order counting purposes.14
I. Introduction average daily order submissions for In light of this, the Exchange now
Professional order counting purposes.8 proposes to adopt an amended
On January 27, 2016, Chicago Board interpretation to specifically address the
Options Exchange, Incorporated (the Background counting of multi-leg spread products,
‘‘Exchange’’ or ‘‘CBOE’’) filed with the Prior to 2009, the Exchange algorithm generated orders, and
Securities and Exchange Commission designated all orders as either customer complex orders for purposes of
(‘‘Commission’’), pursuant to Section orders or non-customer orders based determining Professional customer
19(b)(1) of the Securities Exchange Act solely on whether or not the order was status.15
of 1934 (‘‘Act’’) 1 and Rule 19b–4 placed for the account of a customer or
thereunder,2 a proposed rule change to Proposal
for the account of a registered securities
amend the methodology for counting broker-dealer.9 According to CBOE, the The Exchange’s proposal deletes
average daily order submissions in Exchange granted public customers current Interpretation and Policy .01 to
listed options to determine whether a certain advantages, including priority to Rule 1.1(ggg) and replaces it with a new
person or entity meets the definition of trade and reduced or no transaction Interpretation and Policy that sets forth
a Professional 3 (‘‘Professional order fees, in order to attract public customer a new methodology for counting
counting’’). The Commission published order flow and to account for such complex orders, parent/child orders,
the proposed rule change for comment customers’ lack of sophistication along and cancel/replace orders for
in the Federal Register on February 10, with their lack of access to market data Professional order counting purposes.16
2016.4 The Commission received one services, analytics technology, and other Pursuant to Rule 1.1(ggg), all orders will
comment letter on the proposed rule trading devices more common to broker- count as one single order for
change.5 The Exchange filed dealers.10 As non-broker-dealer traders Professional customer counting
Amendment No. 1 to the proposed rule gained access to electronic trading purposes, unless one of the exceptions
change on March 15, 2016,6 and platforms, analytics technology, and enumerated in the new Interpretation
market data services previously and Policy stipulates otherwise.17
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
available only to broker-dealers, the 12 According to CBOE, its Professional customer
3 Under CBOE rules, the term ‘‘Professional’’ distinction between public customers rule originally was based upon a similar rule from
means any person or entity that (i) is not a broker and non-customers became, in CBOE’s the International Securities Exchange, LLC (‘‘ISE’’).
or dealer in securities, and (ii) places more than 390 opinion, less effective in promoting the See Securities Exchange Release 59287 (January 23,
orders in listed options per day on average during intended purposes of the Exchange’s 2009), 74 FR 5694 (January 30, 2009) (SR–ISE–
a calendar month for its own beneficial account(s). 2006–26) (‘‘ISE Approval Order’’); see also Notice,
See CBOE Rule 1.1(ggg). customer priority rules because certain supra note 4, at 7174, n.8.
4 See Securities Exchange Act Release No. 77049 customers increasingly were more 13 See CBOE Regulatory Circular RG09–148
(February 4, 2016), 81 FR 7173 (‘‘Notice’’). similarly situated to broker-dealers.11 (Professional Orders). Specifically, the Exchange
5 See Joint Letter from SpiderRock EXC, LLC and
Accordingly, in 2009, the Exchange codified its interpretation that, for Professional
SpiderRock Advisors, LLC, to Brent J. Fields, order counting purposes, ‘‘parent’’ orders that are
Secretary, Commission, dated February 22, 2016 placed on a single ticket and entered for the
multiple new orders. To promote transparency of its beneficial account(s) of a person or entity that is not
(‘‘SpiderRock Letter’’).
6 In Amendment No. 1, the Exchange changed
proposed amendment, when CBOE filed a broker or dealer in securities and that are broken
Amendment No. 1 with the Commission, it also into multiple parts by a broker or dealer, or by an
how complex orders will be computed with respect submitted Amendment No. 1 as a comment letter
to Professional order counting. Amendment No. 1 algorithm housed at a broker or dealer, or by an
to the file, which the Commission posted on its algorithm licensed from a broker or dealer that is
modified the proposal to provide that a complex Web site and placed in the public comment file for housed with the customer in order to achieve a
order compromised of nine legs or more will count SR–CBOE–2016–005 (available at http:// specific execution strategy, including, but not
as multiple orders with each option leg counting as www.sec.gov/comments/sr-cboe-2016-005/ limited to basket trades, program trades, portfolio
its own separate order while complex orders with cboe2016005-2.pdf). The Exchange also posted a trades, basis trades, and benchmark hedges, should
eight legs or less will count as a single order. The copy of its Amendment No. 1 on its Web site count as one single order for Professional order
Exchange previously proposed that complex orders (http://www.cboe.com/aboutcboe/legal/submitted counting purposes.
compromised of five legs or more would count as secfilings.aspx) when it filed the amendment with 14 See Notice, supra note 4, at 7175.
multiple orders while complex orders with four legs
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the Commission. 15 See id.
or less would count as a single order. In addition, 7 See Letter from William P. Wallenstein, Senior
16 See id. at 7176.
Amendment No. 1 provided that any complex order
Counsel, CBOE, to Brent J. Fields, Secretary, 17 See id. Under current Exchange Rule 1.1(ggg),
with nine or more legs that is canceled and replaced
Commission, dated March 18, 2016 (‘‘CBOE
would count as multiple new orders unless the Trading Permit Holders are required to indicate
Response Letter’’).
child orders resulting from the parent order were 8 See Notice, supra note 4, at 7173.
whether their public customer orders are
canceled and replaced on the same side and series Professional orders. This existing requirement
9 See id. at 7174.
as the parent order. The Exchange previously remains unchanged under this proposed rule
10 See id.
proposed that complex orders with five legs or more change. See id. at 7178. According to the Exchange,
that were canceled and replaced would count as 11 See id. a Trading Permit Holder must conduct a review of
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![18670 Federal Register / Vol. 81, No. 62 / Thursday, March 31, 2016 / Notices
management firms who employ complex collection of accounts that can evaluating distinctions among market
sophisticated algorithms to execute be categorized along a number of not- participants proposed by exchanges and
more than the Professional customer mutually-exclusive dimensions.’’ 51 In the discretion available to an exchange
threshold, which is equivalent to one response, CBOE noted that it does not to set an appropriate level of advantages
order per minute.42 Therefore, CBOE seek to dissuade the use of technology and responsibilities of persons trading
believes that it is not unfair or anti- by any investor, nor use technology as on its market.58 In particular, the
competitive to designate as the benchmark for deciding whether an Commission previously indicated that it
Professionals those participants who, investor who uses it crosses the does not believe that priority for public
when executing the requisite number of threshold of public customer to customer orders is a statutorily-required
orders, share similar levels of Professional.52 Rather, the Exchange attribute of an exchange and therefore
sophistication with broker-dealers or noted that its proposal will look to the the grant of such priority is within an
Market-Makers while maintaining number of orders produced through that exchange’s prerogative and business
customer priority for true traditional technology and if the number of orders judgement, as long as such provision is
retail investors.43 is fewer than 390 average orders per day otherwise consistent with the
The commenter also expressed a on average over the applicable period requirements of the Act.59
concern that the proposed rule change then that investor will not be a The Commission notes that the
‘‘would effectively ban’’ the use of Professional despite the use of the Exchange is not amending the threshold
certain multi-part orders in priority technology-enabled strategies.53 The of 390 orders in listed options per day
customer accounts.44 In response, CBOE Exchange further emphasized that it is but is revising the method for counting
stated that it is not banning any order the number of orders that determines Professional orders in the context of
type that is permitted under its rules, whether a trader is a Professional and multi-part orders and cancel/replace
including the order types referenced by not the technology to which a trader has activity. The Exchange noted that it has
the commenter.45 More specifically, the access.54 received questions regarding the
Exchange noted that ‘‘[p]ublic classification of these types of orders
customers and Professionals alike are IV. Discussion and Commission
Findings when calculating Professional customer
free to employ these strategies on the activity.60 The Commission believes
Exchange as they see fit, the only After careful review of the proposed that the proposal is designed to set forth
difference being that, unlike a public rule change, as well as the comment a reasonable and objective approach to
customer, a Professional may not letter and the CBOE response, the determine Professional customer status.
receive execution priority over broker- Commission finds that the proposed Specifically, the proposal addresses
dealer orders and Market-Maker quotes rule change is consistent with the how to account for complex orders,
at the same price and may incur requirements of the Act and the rules parent/child orders, and cancel/replace
transaction fees.’’ 46 Therefore, CBOE and regulations thereunder applicable to orders. The Commission believes that
asserted that the choice whether to use a national securities exchange.55 In distinguishing between complex orders
any particular strategy is within the particular, the Commission finds that with 9 or more options legs and those
business judgment of the particular the proposed rule change is consistent orders with 8 or fewer options legs is a
customer and not the result of an with Section 6(b)(5) of the Act,56 which reasonable and objective approach. The
Exchange-imposed restriction.47 requires, among other things, that the Commission notes that, in Amendment
The commenter next noted that rules of a national securities exchange No. 1, the Exchange increased the
customers are becoming ‘‘increasingly be designed to prevent fraudulent and number of complex order legs
sophisticated and technology manipulative acts and practices, to considered for multiple order counting
enabled.’’ 48 The commenter stated that promote just and equitable principles of purposes from five or more legs to nine
there are varying types of investors with trade, to remove impediments to and or more legs in response to the concerns
different levels of sophistication using perfect the mechanism of a free and of the commenter, who noted that some
multi-part orders to trade on their own open market and a national market retail customers are increasingly using
behalf or hire firms to carry out such system, and, in general, to protect trading techniques with multi-part
trading strategies on their behalf.49 investors and the public interest; and orders.
Therefore, the commenter asserted that not be designed to permit unfair In addition, the Commission believes
the assumption that only ‘‘true’’ discrimination between customers, that CBOE’s proposal appropriately
Professionals have access to more issuers, brokers, or dealers. In addition, distinguishes between parent/child
sophisticated trading techniques is the Commission finds that the proposed orders that are generated by a broker’s
misguided.50 The commenter believed rule change is consistent with Section efforts to obtain an execution on a larger
that ‘‘there is no agreed definition of 6(b)(8) of the Act, which requires the size order while minimizing market
retail customer, rather, there is a rules of the exchange not to impose any impact and multi-part orders that used
burden on competition not necessary or by more sophisticated market
42 See id. appropriate in furtherance of the Act.57 participants. Similarly, the Commission
43 See id. The Exchange further noted that, subject The Commission previously has believes that the proposed guidance that
to applicable regulatory requirements, it has
discretion to decide the best way to encourage
articulated its position regarding the cancel/replace orders will count as
competitive markets and how best to attract retail application of Section 6 of the Act in separate orders with limited exceptions
order flow to the exchange, and its proposed rule is a reasonable and objective approach
change seeks to accomplish those business 51 See id. at 8. to distinguish the orders of retail
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objectives. See id. 52 See CBOE Response Letter, supra note 7, at 3.
44 See SpiderRock Letter, supra note 5, at 7. 53 See id.
customers that are ‘‘worked’’ by a broker
45 See CBOE Response Letter, supra note 7, at 2– 54 See id. at 3–4.
from orders generated by algorithms
3. 55 In approving this proposed rule change, the used by more sophisticated market
46 See id. at 3.
Commission has considered the proposed rule’s
47 See id.
impact on efficiency, competition, and capital 58 See ISE Approval Order, supra note 12, at 5699,
48 See SpiderRock Letter, supra note 5, at 9. formation. See 15 U.S.C. 78c(f). n. 59.
49 See id. at 7–8. 56 15 U.S.C. 78f(b)(5). 59 See id. at 5700.
50 See id. 57 15 U.S.C. 78f(b)(8). 60 See Notice supra note 4, at 7175.
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![Federal Register / Vol. 81, No. 62 / Thursday, March 31, 2016 / Notices 18671
participants. Similar to what it has communications relating to the entities that will meet the definition of
noted in past Professional customer proposed rule change between the Professional under the new
filings, the Commission believes that the Commission and any person, other than Interpretation and Guidance.
line that CBOE now seeks to draw those that may be withheld from the Accordingly, the Commission finds
between ‘‘priority’’ customers and public in accordance with the good cause, pursuant to Section 19(b)(2)
Professional customers reflects CBOE’s provisions of 5 U.S.C. 552, will be of the Act,65 to approve the proposed
belief that the orders of a person who available for Web site viewing and rule change, as modified by Amendment
submits, on average, more than one printing in the Commission’s Public No. 1, on an accelerated basis.
order every minute of the trading day Reference Room, 100 F Street NE.,
Washington, DC 20549, on official VII. Conclusion
need not (or should not) be granted the
same benefit or incentive that is granted business days between the hours of It is therefore ordered, pursuant to
to customers who do not trade on such 10:00 a.m. and 3:00 p.m. Copies of such Section 19(b)(2) of the Act,66 that the
a scale.61 filing will also be available for proposed rule change (SR–CBOE–2016–
The Commission believes that the inspection and copying at the principal 005), as modified by Amendment No. 1,
grant of priority to certain participants office of the Exchange. All comments be, and hereby is, approved on an
over others in a manner that is received will be posted without change; accelerated basis.
consistent with the Act is most the Commission does not edit personal For the Commission, by the Division of
reasonably viewed as within the identifying information from Trading and Markets, pursuant to delegated
discretion of the Exchange.62 Thus, the submissions. You should submit only authority.67
Commission believes that CBOE’s information that you wish to make Robert W. Errett,
proposal, which establishes an objective available publicly. All submissions Deputy Secretary.
methodology for counting average daily should refer to File No. SR–CBOE– [FR Doc. 2016–07204 Filed 3–30–16; 8:45 am]
order submissions for Professional order 2016–005 and should be submitted on
BILLING CODE 8011–01–P
counting purposes, is consistent with or before April 21, 2016.
the Act. VI. Accelerated Approval of Proposed
V. Solicitation of Comments on Rule Change, as Modified by SECURITIES AND EXCHANGE
Amendment No. 1 to the Proposed Rule Amendment No. 1 COMMISSION
Change The Commission finds good cause to [Release No. 34–77444; File No. SR–Phlx–
Interested persons are invited to approve the proposed rule change, as 2016–34]
submit written data, views, and modified by Amendment No. 1, prior to
arguments concerning the foregoing, the thirtieth day after the date of Self-Regulatory Organizations;
including whether Amendment No. 1 to publication of notice of the amended NASDAQ PHLX LLC; Notice of Filing
the proposed rule change is consistent proposal in the Federal Register. The and Immediate Effectiveness of
with the Act. Comments may be revisions made to the proposal in Proposed Rule Change To Amend the
submitted by any of the following Amendment No. 1 63 changed how Exchange’s Continuing Education Fee
methods: complex orders will be counted with Schedule
respect to Professional order counting. March 25, 2016.
Electronic Comments Amendment No. 1 modified the
Pursuant to section 19(b)(1) of the
• Use the Commission’s Internet proposal to provide that a complex
Securities Exchange Act of 1934
comment form (http://www.sec.gov/ order compromised of nine legs or more
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
rules/sro.shtml); or will count as multiple orders with each
notice is hereby given that on March 15,
• Send an email to rule-comments@ option leg counting as its own separate
2016, NASDAQ PHLX LLC
sec.gov. Please include File No. SR– order instead of five legs or more as
(‘‘Exchange’’) filed with the Securities
CBOE–2016–005 on the subject line. previously proposed by the Exchange.64
and Exchange Commission (‘‘SEC’’ or
The Commission believes that this
Paper Comments ‘‘Commission’’) the proposed rule
modification responds to one of the
• Send paper comments in triplicate change as described in Items I, II, and
primary concerns raised by the
to Secretary, Securities and Exchange commenter on the proposal that III, below, which Items have been
Commission, 100 F Street NE., increasingly sophisticated customers prepared by the Exchange. The
Washington, DC 20549–1090. would be adversely affected by the Commission is publishing this notice to
All submissions should refer to File No. proposal, causing them to become solicit comments on the proposed rule
SR–CBOE–2016–005. This file number Professionals and lose their priority change from interested persons.
should be included on the subject line customer status. Amendment No. 1 I. Self-Regulatory Organization’s
if email is used. To help the effectively allows retail customers to use Statement of the Terms of Substance of
Commission process and review your more advanced trading strategies (i.e., the Proposed Rule Change
comments more efficiently, please use complex orders with up to eight legs) The Exchange proposes to amend the
only one method. The Commission will without having that activity counted as Continuing Education fee schedule as
post all comments on the Commission’s multiple orders for purposes of described further below. The proposed
Internet Web site (http://www.sec.gov/ Professional order counting. Thus, the rule change is being filed for immediate
rules/sro.shtml). Copies of the Commission believes that the changes in effectiveness.
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submission, all subsequent Amendment No. 1 respond to one of the The text of the proposed rule change
amendments, all written statements concerns raised by the commenter by is available on the Exchange’s Web site
with respect to the proposed rule adopting a more permissive threshold
change that are filed with the for complex orders, and ultimately 65 15 U.S.C. 78s(b)(2)
Commission, and all written could decrease the number of persons or 66 See id.
67 17 CFR 200.30–3(a)(12).
61 See ISE Approval Order, supra note 12, at 5701. 63 See Amendment No. 1, supra note 6. 1 15 U.S.C. 78s(b)(1).
62 See id. at 5700. 64 See id. 2 17 CFR 240.19b–4.
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Document Created: 2016-03-31 00:55:49
Document Modified: 2016-03-31 00:55:49
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
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| Section | Notices | |
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