81 FR 41626 - Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Related to Order Marking

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 123 (June 27, 2016)

[Federal Register Volume 81, Number 123 (Monday, June 27, 2016)]
[Notices]
[Pages 41626-41628]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-15074]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78110; File No. SR-CBOE-2016-050]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Related to Order Marking

June 21, 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 June 16, 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 update certain order marking requirements. 
The text of the proposed rule change is provided below.

(additions are italicized; deletions are [bracketed])
* * * * *
Chicago Board Options Exchange, Incorporated Rules
* * * * *
Rule 6.9. Solicited Transactions
    A Trading Permit Holder or TPH organization representing an order 
respecting an option traded on the Exchange (an ``original order''), 
including a spread, combination, or straddle order as defined in Rule 
6.53, a stock-option order as defined in Rule 1.1(ii), a security 
future-option order as defined in Rule 1.1(zz), or any other complex 
order as defined in Rule 6.53C, may solicit a Trading Permit Holder or 
TPH organization or a non-Trading Permit Holder customer or broker-
dealer (the ``solicited person'') to transact in-person or by order (a 
``solicited order'') with the original order. In addition, whenever a 
floor broker who is aware of, but does not represent, an original order 
solicits one or more persons or orders in response to an original 
order, the persons solicited and any resulting orders are solicited 
persons or solicited orders subject to this Rule. Original orders and 
solicited orders are subject to the following conditions.
    (a)-(e) No change.
    (f) All orders initiated as a result of a solicitation must be 
marked [``SL.''] in a manner and form prescribed by the Exchange and 
announced via Regulatory Circular. [If the solicited person is on the 
trading floor and elects to participate by order, the solicited person 
must retain a copy of the solicited order on the trading floor so long 
as the order is active.]
* * * * *
Rule 6.53. Certain Types of Orders Defined
    One or more of the following order types may be made available on a 
class-by-class basis. Certain order types may not be made available for 
all Exchange systems. The classes and/or systems for which the order 
types shall be available will be as provided in the Rules, as the 
context may indicate, or as otherwise specified via Regulatory 
Circular.
    (a)-(f) No change.
    (g) Not Held Order. A not held order is an order marked ``not 
held'', ``take time'' or which bears any qualifying notation giving 
discretion as to the price or time at which such order is to be 
executed. An order entrusted to a Floor Broker will be considered a Not 
Held Order, unless otherwise specified by a Floor Broker's client or 
the order was received by the Exchange electronically and subsequently 
routed to a Floor Broker or PAR Official pursuant to the order entry 
firm's routing instructions. Not Held Orders and/or ``held'' orders 
must be marked in a manner and form prescribed by the Exchange and 
announced via Regulatory Circular.
* * * * *
    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

[[Page 41627]]

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 update order marking requirements 
applicable to solicited orders under Rule 6.9(f) and Not Held Orders 
under Rule 6.53(g).
    Rule 6.9 governs the procedures and priority applicable to the open 
outcry execution of an order solicited (a ``solicited order'') by a 
Trading Permit Holder or TPH organization representing an order 
respecting an option traded on the Exchange (an ``original order'').\5\ 
Rule 6.9(f) currently provides that orders initiated as a result of a 
solicitation must be marked ``SL.'' The requirement to mark an order 
``SL'' was implemented when paper order tickets were utilized on the 
floor of the Exchange, and the marking requirement has not been updated 
since paper order tickets stopped being used. Thus, the Exchange is 
proposing to update Rule 6.9(f) by proposing that all orders initiated 
as a result of a solicitation must be marked in a manner and form 
prescribed by the Exchange and announced via Regulatory Circular.\6\
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    \5\ Rule 6.9 specifically sets forth rules governing the 
priority of a solicited order when the terms of the original order 
were either disclosed to the trading crowd prior to the solicitation 
(Rule 6.9(a)(b) and (c)) or disclosed to the trading crowd after the 
solicitation (Rule 6.9(d)); prohibiting trading based on knowledge 
of an imminent undisclosed solicited transactions (Rule 6.9(e)); and 
requiring solicited orders be marked as such (Rule 6.9(f)).
    \6\ The Exchange proposes to remove the requirement that if the 
solicited person is on the trading floor and elects to participate 
by order, the solicited person must retain a copy of the solicited 
order on the trading floor so long as the order is active. The 
requirement is no longer relevant as orders are captured in the 
electronic audit trail.
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    The Exchange, through a third-party vendor, is in the process of 
updating the Exchange provided Floor Broker Workstation (``FBW2'') \7\ 
and has updated Exchange provided PULSe to enable TPHs to mark 
solicited orders upon systematization. Additionally, the Exchange is in 
the process of updating the Public Automatic Routing System (``PAR'') 
and the Order Management Terminal (``OMT'') to allow orders that are 
identified as solicited orders to be captured in the electronic audit 
trail. The Exchange will not implement any solicited order marking 
requirement changes pursuant to amended Rule 6.9(f) until the 
enhancements to FBW2, PULSe, PAR, and OMT are complete.
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    \7\ See RG16-052.
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    Rule 6.53(g) defines a ``Not Held Order'' as an order marked ``not 
held'', ``take time'' or which bears any qualifying notation giving 
discretion as to the price or time at which such order is to be 
executed.\8\ On June 25, 2015, the Securities and Exchange Commission 
(the ``Commission'') approved a rule filing providing that an order 
entrusted to a Floor Broker is considered a Not Held Order, unless 
otherwise specified by a Floor Broker's client or the order was 
received by the Exchange electronically and subsequently routed to a 
Floor Broker or PAR Official pursuant to the order entry firm's routing 
instructions.\9\
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    \8\ A ``Not Held'' order generally is one where the customer 
gives the Floor Broker discretion in executing the order, both with 
respect to the time of execution and the price (though the customer 
may specify a limit price), and the Floor Broker works the order 
over a period of time to avoid market impact while seeking best 
execution of the order.
    \9\ See Securities Exchange Act Release No. 75299 (June 25, 
2015), 80 FR 37700 (July 1, 2015) (SR-CBOE-2015-047) (Approval 
Order).
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    Although SR-CBOE-2015-047 provides that orders entrusted to Floor 
Brokers are by default Not Held Orders, the Exchange currently requires 
Not Held Orders to be proactively marked as Not Held Orders.\10\ Orders 
that are not proactively marked as Not Held Orders are treated as 
``held'' for regulatory purposes. However, the Exchange is in the 
process of updating PAR and OMT to instead allow certain orders that 
are not proactively marked as ``held'' to be considered Not Held 
Orders, which reflects the fact that orders entrusted to Floor Brokers 
are by default Not Held Orders. Although it's reasonably implied from 
current Rule 6.53(g) that an order that is ``held'' would need to be 
marked in a manner to differentiate them from Not Held Orders, the 
Exchange proposes to amend Rule 6.53(g) to explicitly provide that Not 
Held Orders and/or ``held'' orders must be marked in a manner and form 
prescribed by the Exchange and announced via Regulatory Circular. The 
Exchange will not modify the current Not Held marking requirements \11\ 
pursuant to amended Rule 6.53(g) until the enhancements to PAR and OMT 
are complete.
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    \10\ See Regulatory Circular RG15-136.
    \11\ Id.
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    The Exchange will announce the implementation date of this rule 
filing via Regulatory Circular at least 30 days prior to the 
implementation date. The implementation date will be within 180 days of 
the effective date of this filing.
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 proposed amendment to Rule 6.9(f) would promote 
just and equitable principles of trading by enhancing the Exchange's 
audit trail. An enhanced audit trail will help the Exchange to regulate 
these kinds of orders more thoroughly, which should serve to promote 
just and equitable trading of solicited orders on the Exchange. The 
Exchange also believes the proposed rule change is consistent with 
Section 6(b)(1) of the Act,\15\ which provides that the Exchange be 
organized and have the capacity to be able to carry out the purposes of 
the Act and to enforce compliance by the Exchange's TPHs and persons 
associated with its TPHs with the Act, the rules and regulations 
thereunder, and the rules of the Exchange. With an enhanced audit trail 
of solicited orders, the Exchange believes it will be able to more 
comprehensively monitor the trading of solicited orders on the 
Exchange.
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    \15\ 15 U.S.C. 78f(b)(1).
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    The proposed addition to Rule 6.53(g) removes impediments to and 
perfects the mechanism of a free and open market and a national market 
system, and, in general, protects investors and the public interest by 
eliminating any

[[Page 41628]]

potential confusion as to whether TPHs must proactively mark certain 
orders as ``held'' instead of proactively marking certain orders as Not 
Held Orders, which reflects the fact that orders entrusted to Floor 
Brokers are by default Not Held Orders.

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

    CBOE does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. In particular, the proposed 
rule change will not impose any burden on any intramarket competition 
as it will be applied to similarly situated groups trading on the 
Exchange equally. The Exchange does not believe the proposed rule 
change will impose any burden on intermarket competition as the 
proposed changes merely amends existing TPH obligations related to the 
marking of solicited orders, ``held'' orders, and Not Held Orders.

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 \16\ and 
Rule 19b-4(f)(6) \17\ 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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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 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-2016-050 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2016-050. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2016-050 and should be 
submitted on or before July 18, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-15074 Filed 6-24-16; 8:45 am]
 BILLING CODE 8011-01-P