81 FR 1980 - Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Related to Limit Order Price Protections for Stock-Option Orders

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 9 (January 14, 2016)

[Federal Register Volume 81, Number 9 (Thursday, January 14, 2016)]
[Notices]
[Pages 1980-1983]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-00568]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76857; File No. SR-CBOE-2016-003]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Related to Limit Order Price Protections for 
Stock-Option Orders

January 8, 2016.
    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 January 5, 2016, 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 Exchange filed the proposal as a ``non-controversial'' 
proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 
\3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange seeks to amend Exchange rules related to limit order 
price protections for stock-option orders. The text of the proposed 
rule change is provided below.

(additions are italicized; deletions are [bracketed])
* * * * *
Chicago Board Options Exchange, Incorporated
Rules
* * * * *
Rule 6.12. CBOE Hybrid Order Handling System
    This rule describes the process for routing orders through the 
Exchange's order handling system in classes designated for trading on 
the CBOE Hybrid System. The order handling system is a feature within 
the Hybrid System to route orders for automatic execution, book entry, 
open outcry, or further handling by a broker, agent, or PAR Official, 
in a manner consistent with Exchange Rules and the Act (e.g., resubmit 
the order to the Hybrid System for automatic execution, route the order 
from a booth to a PAR workstation, cancel the order, contact the 
customer for further instructions, and/or otherwise handle the order in 
accordance with Exchange Rules and the order's terms.).
    (a) Orders may route through the order handling system for 
electronic processing in the Hybrid System or to a designated order 
management terminal or PAR Workstation in any of the circumstances 
described below. Routing designations may be established based on 
various parameters defined by the Exchange, order entry firm or Trading 
Permit Holder, as applicable.
* * * * *
    (5) Limit Order Price Parameter for Stock-Option Orders: Limit 
orders received after a series is opened will be cancelled if the order 
is priced at a net debit that is more than an acceptable tick distance 
above the opposite side derived net market using the Exchange's best 
bid or offer in the individual series leg and the national best bid or 
offer of the stock component comprising the stock-option order or the 
order is priced at a net credit that is more than an acceptable tick 
distance below the opposite side derived net market based on the 
Exchange's best bid or offer in the individual series leg and the 
national best bid or offer of the stock component comprising the stock-
option order.
    For purposes of this subparagraph (a)(5): An ``acceptable tick 
distance'' (which is also referred to as an ``ATD''), as determined by 
the Exchange on a class by class and net premium basis and announced to 
the Trading Permit Holders via Regulatory Circular, shall be no less 
than 5 minimum net price increment ticks for stock-option orders. The 
Exchange may determine on a class by class basis and announce via 
Regulatory Circular whether to apply paragraph (a)(5) to immediate-or-
cancel complex orders. The limit order price parameter will take 
precedence over another routing parameter to the extent that both are 
applicable to an incoming limit order.
    [(5)] (6) Direct Routing: Orders may route directly from an order 
entry firm for electronic processing or to an order management terminal 
or a PAR workstation based on parameters prescribed by the order entry 
firm.
    [(6)] (7) System Disruptions or Malfunctions: Orders will route to 
an order management terminal designated by the order entry firm or 
Trading Permit Holder, or a terminal designated and maintained by the 
Exchange as a

[[Page 1981]]

back-up to order entry firms' and Trading Permit Holders' designated 
order management terminals, in the event of certain system disruptions 
or malfunctions that affect the ability of orders to reach or be 
processed at their intended designation.
* * * * *
    . . . Interpretations and Policies:
    .01 For purposes of subparagraphs (a)(3), [and] (4) and (5): the 
senior official on the Exchange Help Desk or two Floor Officials may 
grant intra-day relief by widening or inactivating one or more of the 
applicable ATD parameter settings in the interest of a fair and orderly 
market.
* * * * *
    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
    The Exchange is proposing to amend Rule 6.12--CBOE Hybrid Order 
Handling System in order to institute limit order price protections for 
stock-option orders.
Background
    The CBOE Hybrid System \5\ is a trading platform that allows 
automatic executions to occur electronically and open outcry trades to 
occur on the floor of the Exchange. To operate in this ``hybrid'' 
environment, the Exchange has made available to Trading Permit Holders 
(``TPHs'') a dynamic order handling system, also referred herein as 
OHS, that has the capability to route orders to the Hybrid System for 
automatic execution and book entry, to PAR workstations located in the 
trading crowds for open outcry and other manual handling by TPHs and 
Exchange PAR Officials, and/or to other order management terminals 
generally located in booths on the trading floor for manual handling. 
Where an order is routed for processing by the Exchange order handling 
system depends on various parameters configured by the Exchange and the 
order entry firm itself. Thus, the OHS provides TPHs with some 
flexibility to determine how to process their orders in the CBOE Hybrid 
System.
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    \5\ The CBOE ``Hybrid System'' or ``Hybrid Trading System'' 
refers to the Exchange's trading platform that allows Market-Makers 
to submit electronic quotes in their appointed classes. The ``Hybrid 
3.0 Platform'' is an electronic trading platform on the Hybrid 
Trading System that allows one or more quoters to submit electronic 
quotes which represent the aggregate Market-Maker quoting interest 
in a series for the trading crowd. Classes authorized by the 
Exchange for trading on the Hybrid Trading System shall be referred 
to as Hybrid classes. Classes authorized by the Exchange for trading 
on the Hybrid 3.0 Platform shall be referred to as Hybrid 3.0 
classes. References to ``Hybrid,'' ``Hybrid System,'' or ``Hybrid 
Trading System'' in the Exchange's Rules shall include all platforms 
unless otherwise provided by rule. See, e.g., Rule 1.1(aaa).
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    In February 2015, the Exchange adopted Rule 6.12 to, among other 
things, describe existing OHS operations.\6\ One of the operations 
described in Rule 6.12 is the Exchange's limit order price parameter 
for complex orders.\7\ The limit order price parameter is a price 
protection parameter that helps mitigate potential risks associated 
with orders executing at potentially erroneous prices. However, the 
limit order price parameter applied to complex orders does not apply to 
stock-option orders.\8\
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    \6\ Securities Exchange Act Release No. 74351 (February 23, 
2015), 80 FR 10738 (February 27, 2015) (SR-CBOE-2015-021).
    \7\ See Rule 6.12(a)(4).
    \8\ Rule 6.12(4)(i) and (ii) explicitly excludes stock-option 
orders from the limit order price protections applicable to complex 
orders.
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Proposal
    The Exchange seeks to adopt limit order price protections 
applicable to stock-option orders. To that end, the Exchange proposes 
to add the following provisions to Rule 6.12:
     Limit Order Price Parameter for Stock-Option Orders: Limit 
orders received after a series is opened will be cancelled \9\ if the 
order is priced at a net debit that is more than an acceptable tick 
distance above the opposite side derived net market using the 
Exchange's best bid or offer in the individual series leg and the 
national best bid or offer of the stock component comprising the stock-
option order or the order is priced at a net credit that is more than 
an acceptable tick distance below the opposite side derived net market 
based on the Exchange's best bid or offer in the individual series leg 
and the national best bid or offer of the stock component comprising 
the stock-option order.\10\ For purposes of this subparagraph (a)(5): 
An ``acceptable tick distance'' (which is also referred to as an 
``ATD''), as determined by the Exchange on a class by class and net 
premium basis and announced to the Trading Permit Holders via 
Regulatory Circular, shall be no less than 5 minimum net price 
increment ticks for stock-option orders.\11\ The Exchange may determine 
on a class by class basis and announce via Regulatory Circular whether 
to apply paragraphs (a)(5) to immediate-or-cancel complex orders. The 
limit order price parameter will take precedence over another routing 
parameter to the extent that both are applicable to an incoming limit 
order. In addition, the senior official on the Exchange Help Desk or 
two Floor

[[Page 1982]]

Officials may widen or inactivate the applicable ATD parameter settings 
on an intra-day basis in the interest of a fair and orderly market.
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    \9\ Although the current limit order price check parameter for 
simple and complex orders provides that orders not meeting the price 
check parameter are routed to an order management terminal 
(``OMT''), the Exchange believes market participants prefer such 
orders not be routed to an OMT. The Exchange also believes order 
entry firms have sophisticated technology that allows the firms to 
manage their orders, including orders rejected or cancelled by the 
Exchange. The proposal essentially provides that an order may be 
cancelled and sent back to the order entry firm's order management 
system instead of the Exchange's order management system (i.e., 
OMT).
    \10\ The Exchange notes that this proposal does not affect 
stock-option orders entered prior to the opening of a series 
(including before a series is opened following a halt). Stock-option 
orders entered prior to the opening of a series (including before a 
series is opened following a halt) are entered into the complex 
order book and do not flow through this limit order price protection 
after the series is opened.
    \11\ See CBOE Regulatory Circular RG13-145 for the current price 
check parameters, which is available at http://www.cboe.com/publish/RegCir/RG13-145.pdf. The senior official in the Help Desk or two 
Floor Officials may also widen or inactivate one or more of these 
price check parameters on an intra-day basis in the interest of a 
fair and orderly market. For example, if an underlying stock is high 
priced or volatile and is experiencing significant price movement 
and the existing parameters would result in an inordinate number of 
limit orders not being accepted, the senior official in the Help 
Desk may determine to widen the parameters on an intra-day basis in 
the overlying or related options series. As another example, if the 
overall market is experiencing significant volatility, the senior 
official in the Help Desk or two Floor Officials may determine to 
widen the parameters for a group of series or classes. The Exchange 
notes that these examples are non-exhaustive and for illustrative 
purposes only. (For example, see also CBOE Regulatory Circular RG14-
019, which is available at http://www.cboe.com/publish/RegCir/RG14-019.pdf and which sets forth limit order price parameters settings 
for certain option classes on volatility index product settlement 
days.) The Exchange also notes that it may determine for the 
parameters to differ among classes and between pre-open and intra-
day.
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    The Exchange believes this proposal will help the maintenance of 
fair and orderly markets and help to mitigate potential risks 
associated with orders executing at potentially erroneous prices.
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.\12\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \13\ 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) \14\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ Id.
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    In particular, the Exchange believes these routing parameters 
assist with the maintenance of fair and orderly markets and help to 
mitigate potential risks associated with orders executing at 
potentially erroneous prices. Furthermore, the Exchange believes the 
proposed rule change furthers the objective of Section 6(b)(5) of the 
Act in that it permits the Exchange to address the entry stock-option 
limit orders that are priced significantly away from the market that 
may likely have resulted from human or operational error. By being able 
to quickly and efficiently address orders that likely resulted from 
such error, the proposed use of the limit order price parameter checks 
would promote a fair and orderly market. Additionally, by having the 
flexibility to determine the series or classes where the limit order 
price parameter checks would be applied (or not applied) and the levels 
at which the ATD settings would be applied, and to grant relief on an 
intra-day basis, the Exchange is able to effectively structure and 
efficiently react to particular option characteristics and market 
conditions--including (without limitation) price, volatility, and 
significant price movements--which contributes to its ability to 
maintain a fair and orderly market. Accordingly, the Exchange believes 
that this proposal is designed to promote just and equity principles of 
trade, remove impediments to, and perfect the mechanism of, a free and 
open market.

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. The Exchange believes that the 
proposed rule change will promote competition in that the routing 
parameters assist with the maintenance of a fair and orderly market and 
help to mitigate potential risks associated with orders executing at 
potentially erroneous prices. The Exchange believes this, again, 
promotes fair and orderly markets, as well as assists the Exchange in 
its ability to effectively attract order flow and liquidity to its 
market, and ultimately benefits all CBOE TPHs and all investors. Thus, 
the Exchange does not believe the proposal creates any significant 
impact on competition.

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

    Because the foregoing proposed rule change does not:
    A. Significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \15\ and 
Rule 19b-4(f)(6) \16\ 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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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
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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-2016-003 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2016-003. 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

[[Page 1983]]

should refer to File Number SR-CBOE-2016-003 and should be submitted on 
or before February 4, 2016.
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    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-00568 Filed 1-13-16; 8:45 am]
BILLING CODE 8011-01-P