81_FR_32076 81 FR 31978 - Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving Proposed Rule Change, as Modified by Amendment No. 2 Thereto, Relating to AIM Retained Orders

81 FR 31978 - Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving Proposed Rule Change, as Modified by Amendment No. 2 Thereto, Relating to AIM Retained Orders

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 98 (May 20, 2016)

Page Range31978-31979
FR Document2016-12015

Federal Register, Volume 81 Issue 98 (Friday, May 20, 2016) 
[Federal Register Volume 81, Number 98 (Friday, May 20, 2016)]
[Notices]
[Pages 31978-31979]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-12015]



[[Page 31978]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77848; File No. SR-CBOE-2016-024]


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

May 17, 2016.

I. Introduction

    On March 22, 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 codify the Exchange's 
Automated Improvement Mechanism (``AIM'') Retained Order functionality 
in its rules. 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 proposed rule change, as modified by Amendment No. 
2, was published for comment in the Federal Register on April 8, 
2016.\4\ No comment letters were received on the proposed rule change. 
This order approves the proposed rule change, as modified by Amendment 
No. 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 2 superseded Amendment No. 1 in its entirety.
    \4\ See Securities Exchange Act Release No. 77511 (April 4, 
2016), 81 FR 20697 (``Notice'').
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II. Description of the Proposed Rule Change

    Under CBOE Rule 6.74A, 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. 
If certain eligibility requirements contained in CBOE Rule 6.74A(a) \5\ 
are not satisfied, then both the Agency Order and the matching contra 
order(s) will be cancelled.
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    \5\ 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. 
See CBOE Rule 6.74A(a).
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    The AIM Retained Order (``A:AIR'') functionality allows TPHs the 
ability to choose, on an order-by-order basis, whether an Agency Order 
should continue into the Hybrid Trading System \6\ for processing 
rather than cancel in the event that an Auction cannot occur.\7\ 
Specifically, the Exchange proposes to define an AIM Retained Order as 
the transmission of two or more orders for crossing pursuant to CBOE 
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 CBOE Rule 6.74A(a) are not met).
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    \6\ The Hybrid Trading System refers to the Exchange's trading 
platform as defined in Rule 1.1(aaa) (Hybrid Trading System).
    \7\ According to the Exchange, 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, a TPH may 
submit an order for AIM processing that 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. See Notice, supra note 4, at 
20698.
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    CBOE also proposes that orders marked ``A:AIR'' containing 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. The Exchange proposes this 
interpretation 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.\8\
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    \8\ See Notice, supra note 4, at 20698.
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    CBOE proposes to make the A:AIR order functionality available on 
those order management platforms as determined by the Exchange and 
announced via Regulatory Circular. The Exchange also proposes to 
clarify that in the event that a TPH 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 CBOE Rule 
6.74A(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 CBOE Rule 6.74A.\9\
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    \9\ According to the Exchange, the current 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. See Notice, supra note 4, at 
20698. 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, the Exchange states that smart routers are 
generally all electronic algorithmic systems that may not allow for 
manual handling of cancelled orders. See id.
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    Finally, the Exchange proposes to make changes to Interpretation 
and Policy .08 to CBOE Rule 6.53C regarding price reasonability checks 
on complex orders to harmonize non-specific references to the current 
A:AIR functionality in CBOE Rule 6.53C with the language in proposed 
Interpretation and Policy .09 to CBOE Rule 6.74A. The Exchange states 
that these changes are non-substantive and intended only to harmonize 
existing references to A:AIR functionality in its rules with the 
definition of A:AIR orders set forth in proposed Interpretation and 
Policy .09 to CBOE Rule 6.74A.\10\
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    \10\ See Notice, supra note 4, at 20698.
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III. Discussion and Commission Findings

    After careful review, 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.\11\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\12\ 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 foster 
cooperation and coordination with persons engaged in 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 and that the 
rules not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers. In particular, the Commission 
notes that, according to the Exchange, the A:AIR functionality provides 
an execution opportunity for customer orders that a TPH submitted for 
crossing via AIM but

[[Page 31979]]

cannot be executed via AIM.\13\ Such opportunity could help protect the 
interest of investors by helping to ensure that ineligible AIM Agency 
Orders are processed, rather than cancelled.
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    \11\ 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).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ See Notice, supra note 4, at 20699.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-CBOE-2016-024), as modified 
by Amendment No. 2, be, and hereby is, approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-12015 Filed 5-19-16; 8:45 am]
 BILLING CODE 8011-01-P

31978 Federal Register / Vol. 81, No. 98 / Friday, May 20, 2016 / Notices SECURITIES AND EXCHANGE not satisfied, then both the Agency Interpretation and Policy .09 to CBOE COMMISSION Order and the matching contra order(s) Rule 6.74A.9 will be cancelled. Finally, the Exchange proposes to [Release No. 34–77848; File No. SR–CBOE– 2016–024] The AIM Retained Order (‘‘A:AIR’’) make changes to Interpretation and functionality allows TPHs the ability to Policy .08 to CBOE Rule 6.53C regarding Self-Regulatory Organizations; choose, on an order-by-order basis, price reasonability checks on complex Chicago Board Options Exchange, whether an Agency Order should orders to harmonize non-specific Incorporated; Order Approving continue into the Hybrid Trading references to the current A:AIR Proposed Rule Change, as Modified by System 6 for processing rather than functionality in CBOE Rule 6.53C with Amendment No. 2 Thereto, Relating to cancel in the event that an Auction the language in proposed Interpretation AIM Retained Orders cannot occur.7 Specifically, the and Policy .09 to CBOE Rule 6.74A. The Exchange proposes to define an AIM Exchange states that these changes are May 17, 2016. Retained Order as the transmission of non-substantive and intended only to I. Introduction two or more orders for crossing harmonize existing references to A:AIR On March 22, 2016, Chicago Board pursuant to CBOE Rule 6.74A, with the functionality in its rules with the Options Exchange, Incorporated (the Agency Order priced at the market or a definition of A:AIR orders set forth in ‘‘Exchange’’ or ‘‘CBOE’’) filed with the limit price in the standard increment for proposed Interpretation and Policy .09 Securities and Exchange Commission the option series and marked with a to CBOE Rule 6.74A.10 (‘‘Commission’’) pursuant to Section contingency instruction to route the III. Discussion and Commission 19(b)(1) of the Securities Exchange Act Agency Order for processing and cancel Findings of 1934 (‘‘Act’’) 1 and Rule 19b–4 any contra orders if an Auction cannot thereunder,2 a proposed rule change to occur (including if the conditions After careful review, the Commission codify the Exchange’s Automated described in CBOE Rule 6.74A(a) are not finds that the proposed rule change is Improvement Mechanism (‘‘AIM’’) met). consistent with the requirements of the Retained Order functionality in its rules. Act and the rules and regulations CBOE also proposes that orders On April 1, 2016, the Exchange filed thereunder applicable to a national marked ‘‘A:AIR’’ containing Agency Amendment No. 1 to the proposal. On securities exchange.11 In particular, the April 4, 2016, the Exchange filed Orders that are not priced at the market, Commission finds that the proposed Amendment No. 2 to the proposal.3 The or that are priced with a limit price not rule change is consistent with Section proposed rule change, as modified by in the standard increment for the option 6(b)(5) of the Act,12 which requires, Amendment No. 2, was published for series in which they are entered, would among other things, that the rules of a comment in the Federal Register on be cancelled. The Exchange proposes national securities exchange be April 8, 2016.4 No comment letters were this interpretation to ensure that A:AIR designed to prevent fraudulent and received on the proposed rule change. orders are properly priced to allow the manipulative acts and practices, to This order approves the proposed rule Exchange to book the Agency Order in promote just and equitable principles of change, as modified by Amendment No. the event an Auction cannot occur.8 trade, to foster cooperation and 2. CBOE proposes to make the A:AIR coordination with persons engaged in II. Description of the Proposed Rule order functionality available on those facilitating transactions in securities, to Change order management platforms as remove impediments to and perfect the determined by the Exchange and mechanism of a free and open market Under CBOE Rule 6.74A, a Trading announced via Regulatory Circular. The and a national market system, and, in Permit Holder (‘‘TPH’’) that represents Exchange also proposes to clarify that in general, to protect investors and the agency orders may electronically the event that a TPH submits a matched public interest and that the rules not be execute an order it represents as agent Agency Order for electronic execution designed to permit unfair (‘‘Agency Order’’) against principal into the Auction that is ineligible for discrimination between customers, interest or against a solicited order processing because it does not meet the issuers, brokers, or dealers. In provided it submits the Agency Order conditions described in CBOE Rule particular, the Commission notes that, for electronic execution into the AIM 6.74A(a), both the Agency Order and according to the Exchange, the A:AIR auction (‘‘Auction’’) for processing. If functionality provides an execution any solicited contra orders will be certain eligibility requirements opportunity for customer orders that a cancelled unless marked as an AIM contained in CBOE Rule 6.74A(a) 5 are TPH submitted for crossing via AIM but Retained Order pursuant to proposed 1 15 U.S.C. 78s(b)(1). 6 The Hybrid Trading System refers to the 9 According to the Exchange, the current A:AIR 2 17 CFR 240.19b–4. 3 Amendment No. 2 superseded Amendment No. Exchange’s trading platform as defined in Rule functionality is used primarily by smart router 1.1(aaa) (Hybrid Trading System). technology to ensure that ineligible AIM orders are 1 in its entirety. 4 See Securities Exchange Act Release No. 77511 7 According to the Exchange, there are a variety submitted into the Hybrid Trading System for of circumstances in which an AIM order may be processing and not cancelled. See Notice, supra (April 4, 2016), 81 FR 20697 (‘‘Notice’’). 5 Specifically, to be eligible for processing via submitted to the Exchange for processing, but an note 4, at 20698. Whereas traditional brokers and auction may not occur. For example, a TPH may dealers are equipped to manually handle cancelled AIM, the Agency Order must be: (1) In a class orders that are returned to them and may revise the designated as eligible for Auctions and within the submit an order for AIM processing that is not AIM eligible because one or more of the conditions cancelled orders’ terms or contact their customers designated eligibility size parameters as determined for further instructions, the Exchange states that by the Exchange; (2) stopped with a principal or required for an AIM auction to occur pursuant to mstockstill on DSK3G9T082PROD with NOTICES Rule 6.74A(a) is not present. In addition, an order smart routers are generally all electronic solicited order priced at the national best bid or that is otherwise AIM eligible may not be able to algorithmic systems that may not allow for manual offer (‘‘NBBO’’) (if 50 standard option contracts or process for a variety of reasons, including, but not handling of cancelled orders. See id. 500 mini-option contracts or greater) or one cent/ 10 See Notice, supra note 4, at 20698. one minimum increment better than the NBBO (if limited to circumstances in which AIM functionality is suspended. In either of such cases, 11 In approving this proposed rule change, the less than 50 standard option contracts or 500 mini- option contracts); and (3) submitted in a series in A:AIR functionality may allow the Agency Order to Commission has considered the proposed rule’s which at least three Market-Makers are quoting if process despite the overall order not being AIM impact on efficiency, competition, and capital submitted during regular trading hours. See CBOE eligible. See Notice, supra note 4, at 20698. formation. See 15 U.S.C. 78c(f). Rule 6.74A(a). 8 See Notice, supra note 4, at 20698. 12 15 U.S.C. 78f(b)(5). VerDate Sep<11>2014 17:40 May 19, 2016 Jkt 238001 PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 E:\FR\FM\20MYN1.SGM 20MYN1

Federal Register / Vol. 81, No. 98 / Friday, May 20, 2016 / Notices 31979 cannot be executed via AIM.13 Such II. Self-Regulatory Organization’s opportunities for the DROs. RTFY may opportunity could help protect the Statement of the Purpose of, and remove liquidity from the Exchange interest of investors by helping to Statutory Basis for, the Proposed Rule book after routing to other destinations. ensure that ineligible AIM Agency Change Any non-marketable RTFY orders will Orders are processed, rather than post on the Exchange book. In its filing with the Commission, the Under the SCAN 6 routing strategy cancelled. Exchange included statements orders can check the System for IV. Conclusion concerning the purpose of and basis for available shares and simultaneously the proposed rule change and discussed route the remaining shares to It is therefore ordered, pursuant to any comments it received on the destinations on the System routing Section 19(b)(2) of the Act,14 that the proposed rule change. The text of these table. Shares that remain unexecuted proposed rule change (SR–CBOE–2016– statements may be examined at the after routing are posted on the Exchange 024), as modified by Amendment No. 2, places specified in Item IV below. book. Once on the Exchange book, if the be, and hereby is, approved. Nasdaq has prepared summaries, set order is subsequently locked or crossed For the Commission, by the Division of forth in Sections A, B, and C below, of by another market center, the System Trading and Markets, pursuant to delegated the most significant aspects of such will not route the order to the locking authority.15 statements. or crossing market center. Robert W. Errett, A. Self-Regulatory Organization’s Currently, RFTY users may enter Statement of the Purpose of, and extended hours orders, which may Deputy Secretary. Statutory Basis for, the Proposed Rule execute, route, or post to the book prior [FR Doc. 2016–12015 Filed 5–19–16; 8:45 am] Change to the beginning of regular hours BILLING CODE 8011–01–P trading. Extended hours orders are 1. Purpose accepted starting at 4 a.m. ET. SCAN Nasdaq is proposing to amend Rule users may also send extended hours SECURITIES AND EXCHANGE orders which are eligible for execution, 4703(a)(7). This rule currently provides COMMISSION routing, and posting prior to regular that a market participant entering an order using the SCAN routing strategy market hours trading. However, SCAN [Release No. 34–77839; File No. SR– prior to 8:00 a.m. Eastern time (‘‘ET’’) users may also designate that their NASDAQ–2016–066] may designate the order to activate upon extended hours orders not activate until entry or at 8:00 a.m. ET. The Exchange 8 a.m. Some market participants Self-Regulatory Organizations; The proposes to extend this functionality to maintain systems that do not allow NASDAQ Stock Market LLC; Notice of the recently approved Retail Order executions prior to 8 a.m. The Exchange Filing and Immediate Effectiveness of Process (‘‘RTFY’’) order routing option.3 believes this functionality for SCAN Proposed Rule Change To Amend The RTFY order routing option is orders supports market participants by Nasdaq Rule 4703 designed to enhance execution quality giving them the ability to allow orders and benefit retail investors by providing to flow through to the Exchange while May 16, 2016. price improvement opportunities to keeping them inactive until 8 a.m. Pursuant to Section 19(b)(1) of the retail order flow. Previously, retail order The Exchange believes that the market Securities Exchange Act of 1934 firms often sent non-marketable order participants who currently use this (‘‘Act’’),1 and Rule 19b–4 thereunder,2 flow, that is—orders that are not functionality for the SCAN order routing notice is hereby given that on May 4, executable against the best prices option, as described in Nasdaq Rule 2016, The Nasdaq Stock Market LLC available in the market place based on 4703(a)(7), are similar to the market (‘‘Nasdaq’’ or the ‘‘Exchange’’) filed with their limit price—to post and display on participants who use the new RTFY the Securities and Exchange exchanges. Some of the orders that have order routing option. While the users of Commission (‘‘Commission’’) the been deemed to be non-marketable by the SCAN routing strategy are diverse, proposed rule change as described in the entering firm become marketable by the users of the 8 a.m. activation Items I and II below, which Items have the time the exchange receives them and functionality are generally retail focused been prepared by Nasdaq. The ultimately remove liquidity from the broker-dealers. RTFY is an order routing Commission is publishing this notice to exchange order book. The RTFY routing option designed specifically for DROs in solicit comments on the proposed rule option is an alternative method for order to provide more opportunities for change from interested persons. posting non-marketable order flow on price improvement to individual retail the Exchange order book. Rather than investor’s orders. Because the firms that I. Self-Regulatory Organization’s choose to utilize the 8 a.m. activation allowing the marketable Designated Statement of the Terms of Substance of feature of SCAN are generally firms that Retail Orders (‘‘DROs’’) 4 to immediately the Proposed Rule Change represent retail orders, the Exchange remove liquidity from the Exchange order book (unless explicitly instructed believes that it makes sense to provide The Exchange proposes to amend to do so), the order is routed to this functionality to the retail firms that Rule 4703 (Order Attributes). destinations in the System routing make use of the RTFY routing option. The text of the proposed rule change table 5 to increase price improvement The Exchange proposes to update the is available at http:// fifth bullet point under Nasdaq Rule nasdaq.cchwallstreet.com/, at Nasdaq’s 3 See Securities Exchange Act Release No. 76335 4703(a) for consistency as to this point mstockstill on DSK3G9T082PROD with NOTICES principal office, and at the (Nov. 3, 2015), 80 FR 69256 (Nov. 9, 2015) (SR– as well. Commission’s Public Reference Room. NASDAQ–2015–112). The proposed rule change will allow 4 See Nasdaq Rule 7018. market participants using RTFY to 5 The term ‘‘System routing table’’ refers to the 13 See Notice, supra note 4, at 20699. proprietary process for determining the specific benefit by having the added flexibility 14 15 U.S.C. 78s(b)(2). trading venues to which the System routes orders 15 17 CFR 200.30–3(a)(12). and the order in which it routes them. NASDAQ modify the System routing table at any time without 1 15 U.S.C. 78s(b)(1). notice. See NASDAQ Rule 4758(a)(1)(A). reserves the right to maintain a different System 2 17 CFR 240.19b–4. routing table for different routing options and to 6 See Nasdaq Rule 4758(a)(1)(A)(iv). VerDate Sep<11>2014 17:40 May 19, 2016 Jkt 238001 PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 E:\FR\FM\20MYN1.SGM 20MYN1


Document Created: 2016-05-20 02:00:09
Document Modified: 2016-05-20 02:00:09
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
FR Citation81 FR 31978 
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