81 FR 20697 - Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change, as Modified by Amendment No. 2 Thereto, Relating to AIM Retained Orders

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 68 (April 8, 2016)

[Federal Register Volume 81, Number 68 (Friday, April 8, 2016)]
[Notices]
[Pages 20697-20699]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-08045]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77511; File No. SR-CBOE-2016-024]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change, as Modified 
by Amendment No. 2 Thereto, Relating to AIM Retained Orders

April 4, 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 March 22, 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. On April 1, 2016, the Exchange filed Amendment No. 1 to the 
proposal. On April 4, 2016, the Exchange filed Amendment No. 2 to the 
proposal.\3\ 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    \3\ In Amendment No. 2, which superseded Amendment No. 1 in its 
entirety, the Exchange proposed changes to amend the proposed rule 
text of Interpretation and Policy .08 to Rule 6.53C in Exhibit 5 to 
include references to Rule 6.74A when referring to proposed 
Interpretation and Policy .09 to Rule 6.74A.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The text of the proposed rule change is 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 proposes to amend Rule 6.74A (Automated Improvement 
Mechanism (``AIM'')) to clarify how orders submitted for electronic 
crossing into the AIM auction are treated if an auction cannot occur, 
to adopt Interpretation and Policy .09 to Rule 6.74A (AIM Retained 
Order Functionality) to describe the Exchange's AIM Retained Order 
(``A:AIR'') functionality in the Rules, and make minor edits to 
Interpretation and Policy .08 to Rule 6.53C (Price Check Parameters) 
relating to the treatment of complex AIM orders marked A:AIR and 
correct certain typographical errors.
    Under Rule 6.74A (Automated Improvement Mechanism (``AIM'')), a 
Trading Permit Holder (``TPH'') that represents agency orders may 
electronically execute an order it represents as agent (``Agency 
Order'') against principal interest or against a solicited order 
provided it submits the Agency Order for electronic execution into the 
AIM auction (``Auction'') for processing. Matched Agency Orders may be 
processed via AIM subject to certain eligibility requirements contained 
in Rule 6.74A(a). Specifically, to be eligible for processing via AIM, 
the Agency Order must be: (1) In a class designated as eligible for 
Auctions and within the designated eligibility size parameters as 
determined by the Exchange; (2) stopped with a principal or solicited 
order priced at the national best bid or offer (``NBBO'') (if 50 
standard option contracts or 500 mini-option contracts or greater) or 
one cent/one minimum increment better than the NBBO (if less than 50 
standard option contracts or 500 mini-option contracts); and (3) 
submitted in a series in which at least three Market-Makers are quoting 
if submitted during regular trading hours.\4\ Orders submitted for 
crossing into AIM, which are ineligible for Auction processing will 
result in both the Agency Order and the matching contra order(s) being 
cancelled.
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    \4\ See Rule 6.74A(a).
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    A:AIR functionality is an enhancement to AIM that allows TPHs the 
flexibility to choose, on an order-by-order basis, whether an Agency 
Order should continue into the Hybrid Trading System \5\ for processing 
rather

[[Page 20698]]

than cancel in the event that an Auction cannot occur.\6\ A:AIR 
functionality essentially allows for the entry of Agency Orders into 
AIM with contingency processing instructions for handling in the event 
that the order cannot be processed via Auction. For example, using the 
A:AIR functionality, a TPH might submit a matched Agency Order for 50 
standard contracts that is stopped with a principal interest or 
solicited order priced outside of the NBBO and into AIM. In such a 
case, the order would not initiate an auction (as the eligibility 
requirement in Rule 6.74A(a)(2) would not be met),\7\ but would 
continue into the Hybrid Trading System and be booked at the Agency 
Order limit price (rather than cancelled if A:AIR functionality were 
not used) and the contra order would be cancelled.
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    \5\ The Hybrid Trading System refers to the Exchange's trading 
platform as defined in Rule 1.1(aaa) (Hybrid Trading System).
    \6\ There are a variety of circumstances in which an AIM order 
may be submitted to the Exchange for processing, but an auction may 
not occur. For example, TPH may submit an order for AIM processing, 
which is not AIM eligible because one or more of the conditions 
required for an AIM auction to occur pursuant to Rule 6.74A(a) is 
not present. In addition, an order that is otherwise AIM eligible 
may not be able to process for a variety of reasons, including, but 
not limited to circumstances in which AIM functionality is 
suspended. In either of such cases, A:AIR functionality may allow 
the Agency Order to process despite the overall order not being AIM 
eligible.
    \7\ See Rule 6.74A(a).
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    The Exchange notes that A:AIR functionality is currently available 
for use on the Exchange and is referred to in the Rules (although not 
using that term) \8\ and explained in various Information and 
Regulatory Circulars.\9\ A:AIR functionality, however, is not 
explicitly defined in the Rules. Accordingly, this filing is intended 
to further codify, clarify, and describe A:AIR functionality in the 
Rules. Specifically, the Exchange proposes to adopt Interpretation and 
Policy .09 to Rule 6.74A (AIM Retained Order Functionality), under 
which the Exchange would define an AIM Retained Order as the 
transmission of two or more orders for crossing pursuant to Rule 6.74A, 
with the Agency Order priced at the market or a limit price in the 
standard increment for the option series and marked with a contingency 
instruction to route the Agency Order for processing and cancel any 
contra orders if an Auction cannot occur (including if the conditions 
described in Rule 6.74A(a) are not met).
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    \8\ See Interpretation and Policy .08 to Rule 6.53C (Price Check 
Parameters) at paragraphs (c)(5), (d), (f)(2), and (g)(4) referring 
to orders that instruct the System to process the Agency Order as an 
unpaired order if an AIM Auction cannot be initiated.
    \9\ See, e.g., Regulatory Circular RG13-053 (Limit Up-Limit Down 
Order Handling); Regulatory Circular RG13-009 (AIM Primary Order 
Allowed in Penny Increments); Information Circular IC07-62 
(Automated Improvement Mechanism (AIM)).
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    Furthermore, to ensure that A:AIR orders are properly priced to 
allow the Exchange to book the Agency Order in the event an Auction 
cannot occur, proposed Interpretation and Policy .09 to Rule 6.74A 
would provide that orders marked ``A:AIR'' with Agency Orders that are 
not priced at the market or that are priced with a limit price not in 
the standard increment for the option series in which they are entered 
would be cancelled. For example, if a TPH were to submit a matched 
Agency Order into AIM for processing in a class with a minimum 
increment of a nickel, which was stopped with a contra order at $0.07, 
both the Agency Order and the contra order would be cancelled because 
the order, which is not priced in the minimum increment for the class, 
would not be eligible for AIM processing and because the System would 
not be able to book an order at $0.07 in a class with a minimum 
increment of a nickel. Notably, this provision of proposed 
Interpretation and Policy .09 to Rule 6.74A is consistent with previous 
descriptions of A:AIR functionality by the Exchange and Exchange rules 
that only permit orders at the standard increment to enter the 
book.\10\ Finally, proposed Interpretation and Policy .09 to Rule 6.74A 
would provide that A:AIR order functionality will be made available on 
those order management platforms as determined by the Exchange and 
announced via Regulatory Circular. This provision is intended to make 
clear that A:AIR functionality may not be available on all trading 
platforms in use on the Exchange.\11\
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    \10\ See Regulatory Circular RG13-009 (AIM Primary Order Allowed 
in Penny Increments); see also Rule 6.42.
    \11\ A:AIR functionality is not currently supported on Floor 
Broker Workstation (``FBW''), FBW2, or the PULSe trader workstation. 
FBW, FBW2, and PULSe are order handling tools used for manual 
handling of orders. Thus, when ineligible AIM orders are rejected 
back to FBW, FBW2, and PULSe users, a person is present to decide 
how best to handle such orders. FBW, FBW2, and PULSe users can 
either re-route such orders to be booked or for alternative 
electronic processing on the Exchange or to their broker on the 
floor of the Exchange.
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    The Exchange also notes that although orders submitted into AIM, 
which are not marked A:AIR and are ineligible for Auction processing 
will result in both the Agency Order and the matching contra order(s) 
being cancelled, the Rules do not explicitly provide as much. 
Accordingly, the Exchange proposes to add language to Rule 6.74A(a) to 
provide that in the event that a Trading Permit Holder submits a 
matched Agency Order for electronic execution into the Auction that is 
ineligible for processing because it does not meet the conditions 
described in paragraph (a), both the Agency Order and any solicited 
contra orders will be cancelled unless marked as an AIM Retained order 
pursuant to proposed Interpretation and Policy .09 to Rule 6.74A.\12\
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    \12\ Notably, the A:AIR functionality is used primarily by smart 
router technology to ensure that ineligible AIM orders are submitted 
into the Hybrid Trading System for processing and not cancelled. 
Whereas traditional brokers and dealers are equipped to manually 
handle cancelled orders that are returned to them and may revise the 
cancelled orders' terms or contact their customers for further 
instructions, smart routers are generally all electronic algorithmic 
systems that may not allow for manual handling of cancelled orders.
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    The Exchange also proposes to make minor changes to Interpretation 
and Policy .08 to Rule 6.53C regarding price reasonability checks on 
complex orders to harmonize references to A:AIR functionality in Rule 
6.53C with the language in proposed Interpretation and Policy .09 to 
Rule 6.74A. Specifically, the Exchange proposes to modify 
Interpretation and Policy .08(c)(5), (d), (f)(2), and (g)(4) to Rule 
6.53C (Price Check Parameters) to change references to AIM orders that 
instruct the System to process the Agency Order as an unpaired order if 
an AIM auction cannot be initiated, to instead refer to AIM Retained 
(``A:AIR'') orders as defined in proposed Interpretation and Policy .09 
to Rule 6.74A. These changes are non-substantive and intended only to 
harmonize existing references to A:AIR functionality currently in the 
Rules with the definition of A:AIR orders set forth in proposed 
Interpretation and Policy .09 to Rule 6.74A. The proposed rule change 
also makes non-substantive changes in these paragraphs to capitalize 
the defined term Agency Order, consistent with Rule 6.74A.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\13\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \14\ 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

[[Page 20699]]

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) \15\ requirement that the rules 
of an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ Id.
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    The proposed rule change seeks to provide additional clarity and 
completeness in the Rules regarding functionalities in use at the 
Exchange. The Exchange is continuously updating the Rules to provide 
additional detail, clarity, and transparency regarding its operations 
and trading systems. The Exchange believes that the adoption of 
detailed, clear, and transparent rules reduces burdens on competition 
and promotes just and equitable principles of trade. The Exchange also 
believes that A:AIR functionality is valuable enhancement to AIM, which 
provides the opportunity for execution of customer orders that a TPH 
submitted for crossing via AIM but cannot be executed via AIM and helps 
prevent inadvertent mishandling of Agency Orders (i.e. customer orders) 
submitted for Auction. The Exchange believes that these outcomes serve 
to protect investors' interests by helping to ensure that ineligible 
AIM Agency Orders are processed rather than cancelled. In addition, the 
Exchange believes that price improvement mechanisms promote competition 
amongst market participants and that enhancements to such price 
improvement mechanisms promote competition between exchanges. A:AIR 
functionality makes such mechanisms easier to use and minimizes the 
risk of order submitted into AIM being mishandled. Thus, the Exchange 
believes that the A:AIR functionality is an enhancement consistent with 
the purposes of the Act.

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

    The Exchange 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 notes that 
price improvement mechanisms are widely used across the national 
options exchanges. The exchanges have developed these mechanisms in 
order to provide market participants diverse opportunities to seek 
valuable price improvement and as a means to compete with one another 
for order flow. Such price improvement mechanisms not only promote 
intermarket competition for order flow between the exchanges, but also 
intramarket competition between market participants competing for 
orders directly through the auction process. Accordingly, the exchanges 
are continuously making enhancements and adding functionalities to 
their price improvement mechanisms in order to provide more competitive 
marketplaces for market participants and better compete with one 
another. A:AIR functionality is simply one of many enhancements that 
the Exchange has made to AIM for this purpose.

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 written comments on the 
proposed rule change.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 2, 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-2016-024 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-2016-024. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal 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-2016-024, and should be 
submitted on or before April 29, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-08045 Filed 4-7-16; 8:45 am]
 BILLING CODE 8011-01-P