81 FR 46975 - Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Related to the Automated Improvement Mechanism

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 138 (July 19, 2016)

[Federal Register Volume 81, Number 138 (Tuesday, July 19, 2016)]
[Notices]
[Pages 46975-46978]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-16972]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78316; File No. SR-CBOE-2016-056]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Related to the Automated Improvement Mechanism

July 13, 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 July 13, 2016, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule

[[Page 46976]]

change as described in Items I and II 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 extend the pilots associated with the 
Automated Improvement Mechanism. The text of the proposed rule change 
is provided below.

(additions are italicized; deletions are [bracketed])

Chicago Board Options Exchange, Incorporated Rules

    Rule 6.74A. Automated Improvement Mechanism (``AIM'')
    Notwithstanding the provisions of Rule 6.74, a Trading Permit 
Holder that represents agency orders may electronically execute an 
order it represents as agent (``Agency Order'') against principal 
interest or a solicited order provided it submits the Agency Order for 
electronic execution into the AIM auction (``Auction'') pursuant to 
this Rule.
    (a)-(b) No change.
    . . . Interpretations and Policies:
    .01-.02 No change.
    .03 Initially, and for at least a Pilot Period expiring on [July 
18, 2016] January 18, 2017, there will be no minimum size requirement 
for orders to be eligible for the Auction. During this Pilot Period, 
the Exchange will submit certain data, periodically as required by the 
Commission, to provide supporting evidence that, among other things, 
there is meaningful competition for all size orders and that there is 
an active and liquid market functioning on the Exchange outside of the 
Auction mechanism. Any raw data which is submitted to the Commission 
will be provided on a confidential basis.
    .04-.05 No change.
    .06 Subparagraph (b)(2)(E) of this rule will be effective for a 
Pilot Period until [July 18, 2016] January 18, 2017. During the Pilot 
Period, the Exchange will submit certain data, periodically as required 
by the Commission, relating to the frequency with which early 
termination of the Auction occurs pursuant to this provision as well as 
any other provision, and also the frequency with which early 
termination pursuant to this provision results in favorable pricing for 
the Agency Order. Any raw data which is submitted to the Commission 
will be provided on a confidential basis.
    .07-.08 No change.
    Rule 24B.5A. FLEX Automated Improvement Mechanism
    Notwithstanding the provisions of Rule 24B.5, a FLEX Trader that 
represents agency orders may electronically execute an order it 
represents as agent (``Agency Order'') against principal interest and/
or against solicited orders provided it submits the Agency Order for 
execution into the automated improvement mechanism auction (``AIM 
Auction'') pursuant to this Rule.
    (a)-(b) No change.
    This rule supersedes Exchange Rule 6.74A.
    . . . Interpretations and Policies:
    .01-.02 No change.
    .03 Initially, and for at least a Pilot Period expiring on [July 
18, 2016] January 18, 2017, there will be no minimum size requirement 
for orders to be eligible for the AIM Auction. During this Pilot 
Period, the Exchange will submit certain data, periodically as required 
by the Commission, to provide supporting evidence that, among other 
things, there is meaningful competition for all size orders and that 
there is an active and liquid market functioning on the Exchange 
outside of the AIM Auction. Any raw data which is submitted to the 
Commission will be provided on a confidential basis.
    .04-.07 No change.

    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
    In February 2006, CBOE obtained approval from the Securities and 
Exchange Commission (the ``Commission'') to adopt the AIM auction 
process.\5\ AIM exposes certain orders electronically to an auction 
process to provide these orders with the opportunity to receive an 
execution at an improved price. The AIM auction is available only for 
orders that a Trading Permit Holder represents as agent (``Agency 
Order'') and for which a second order of the same size as the Agency 
Order (and on the opposite side of the market) is also submitted 
(effectively stopping the Agency Order at a given price).
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    \5\ See Securities Exchange Release No. 53222 (February 3, 
2006), 71 FR 7089 (February 10, 2006) (SR-CBOE-2005-60).
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    The Commission approved two components of AIM on a pilot basis: (1) 
That there is no minimum size requirement for orders to be eligible for 
the auction; and (2) that the auction will conclude prematurely anytime 
there is a quote lock on the Exchange pursuant to Rule 6.45A(d).\6\ In 
connection with the pilot programs, the Exchange has submitted to the 
Commission reports providing detailed AIM auction and order execution 
data.
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    \6\ A quote lock occurs when a CBOE Market-Maker's quote 
interacts with the quote of another CBOE Market-Maker (i.e. when 
internal quotes lock).
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    Ten one-year extensions to the pilot programs have previously 
become effective.\7\ The proposed rule change merely extends the 
duration of the pilot programs until January 18, 2017. Extending the 
pilots for an additional six months will allow the Commission more time 
to consider the impact of the pilot programs on AIM order executions.
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    \7\ See Securities Exchange Act Release Nos. 54147 (July 14, 
2006), 71 FR 41487 (July 21, 2006) (SR-CBOE-2006-64); 56094 (July 
18, 2007), 72 FR 40910 (July 25, 2007) (SR-CBOE-2007-80); 58196 
(July 18, 2008), 73 FR 43803 (July 28, 2008) (SR-CBOE-2008-76); 
60338 (July 17, 2009), 74 FR 36803 (July 24, 2009) (SR-CBOE-2009-
051); 62522 (July 16, 2010), 75 FR 43596 (July 26, 2010) (SR-CBOE-
2010-067); 64930 (July 20, 2011), 76 FR 44636 (July 26, 2011) (SR-
CBOE-2011-066); 67302 (June 28, 2012), 77 FR 39779 (July 5, 2012) 
(SR-CBOE-2012-061); 69867 (June 27, 2013), 78 FR 40230 (July 3, 
2013) (SR-CBOE-2013-066); and 72570 (July 9, 2014), 79 FR 41337 
(July 15, 2014) (SR-CBOE-2014-054); and 75476 (July 16, 2015), 80 FR 
43548 (July 22, 2015) (SR-CBOE-2015-068).
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    Additionally, in March 2012, CBOE obtained approval from the 
Commission to adopt the AIM auction process for

[[Page 46977]]

FLEX Options.\8\ AIM for FLEX Options exposes certain FLEX Options 
orders electronically to an auction process to provide these orders 
with the opportunity to receive an execution at an improved price. The 
FLEX AIM auction is available only for Agency Orders and for which a 
second order of the same size as the Agency Order (and on the opposite 
side of the market) is also submitted (effectively stopping the Agency 
Order at a given price).
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    \8\ See Securities Exchange Release No. 66702 (March 30, 2012), 
77 FR 20675 (April 5, 2012) (SR-CBOE-2011-123).
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    The Commission approved on a pilot basis the component of AIM for 
FLEX Options that there is no minimum size requirement for orders to be 
eligible for the auction.\9\ In connection with the pilot program, the 
Exchange has submitted to the Commission reports providing detailed 
FLEX AIM auction and order execution data.
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    \9\ The pilot for the FLEX AIM auction process was modeled after 
the pilot for non-FLEX Options described above, and included an 
initial expiration date of July 18, 2012 so that the FLEX pilot 
would coincide with the existing non-FLEX pilot.
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    Four one-year extensions to the pilot program have previously 
become effective.\10\ The proposed rule change merely extends the 
duration of the pilot program until July 18, 2017. Extending the pilot 
for an additional six months will allow the Commission more time to 
consider the impact of the pilot program on AIM order executions for 
FLEX Options.
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    \10\ See Securities Exchange Act Release No. 67302 (June 28, 
2012), 77 FR 39779 (July 5, 2012) (SR-CBOE-2012-061); 69938 (July 5, 
2013), 78 FR 41481 (July 10, 2013) (SR-CBOE-2013-069); and 72570 
(July 9, 2014), 79 FR 41337 (July 15, 2014) (SR-CBOE-2014-054); and 
75476 (July 16, 2015), 80 FR 43548 (July 22, 2015) (SR-CBOE-2015-
068).
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    The Exchange also proposes to correct an inadvertent typographical 
error in Rule 24B.5A. On December 23, 2011 the Exchange filed a rule 
change to adopt Rule 24B.5A (FLEX Automated Improvement Mechanism).\11\ 
As part of that filing, a spelling error was made in the sentence that 
begins with ``RULE 24B5A. Notwithstanding . . .'' The error incorrectly 
identifies an ``AIM Auction'' as an ``AIM Action.'' The Exchange is now 
proposing to amend this typographical error.
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    \11\ See Securities Exchange Act Release No. 66702 (March 30, 
2012), 77 FR 20675 (April 5, 2012) (SR-CBOE-2011-123) (Order 
approving Proposed Rule Change to Establish an Automated Improvement 
Mechanism and a Solicitation Auction Mechanism for FLEX Options).
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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 rule change protects investors and the 
public interest by allowing for an extension of the AIM and FLEX AIM 
pilot programs, and thus allowing additional time for the Commission to 
evaluate the pilot programs. The pilot programs will continue to allow 
(1) smaller non-FLEX option and FLEX Option orders to receive the 
opportunity for price improvement pursuant to the AIM auction, and (2) 
with respect to non-FLEX options, Agency Orders in AIM auctions that 
are concluded early because of quote lock on the Exchange to receive 
the benefit of the lock price. The additional data provided will help 
the Commission determine if there is evidence of meaningful competition 
for all size orders, significant price improvement for orders going 
through the AIM and FLEX AIM and an active and liquid market 
functioning on the Exchange outside of the AIM and FLEX AIM auctions.

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

    CBOE does not believe that the proposed rule changes will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange does not believe 
the proposed rule changes impose any burden on intramarket competition 
because it applies to all Trading Permit Holders. All Trading Permit 
Holders that submit orders into an AIM or FLEX AIM auction are still 
subject to the same requirements. In addition, the Exchange does not 
believe the proposed rule changes will impose any burden on intermarket 
competition, as they merely extend the duration of an existing pilot 
programs, which are available to all market participants through 
Trading Permit Holders. AIM and FLEX AIM will continue to function in 
the same manner as they currently function for an extended period of 
time.

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: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
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 
subparagraph (f)(6) of Rule 19b-4 thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change along with a 
brief description and text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \17\ normally 
does not become operative for 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\18\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange requested 
that the Commission waive the 30-day operative delay. The Exchange 
noted that waiver of the 30-day operative delay will allow the Exchange 
to extend the pilot programs prior to their expiration on July 18, 
2016. In addition, the Exchange believes that waiver of the operative 
delay is also consistent with the protection of investors and the 
public interest because it will allow for the least amount of market 
disruption, as the pilot programs will continue as they currently do, 
maintaining the status quo.
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    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ 17 CFR 240.19b-4(f)(6)(iii).

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[[Page 46978]]

    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest, as 
it will allow the pilot programs to continue uninterrupted, thereby 
avoiding any potential investor confusion that could result from a 
temporary interruption in the pilot programs. Therefore, the Commission 
designates the proposed rule change to be operative on July 18, 
2016.\19\
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    \19\ For purposes only of waiving the operative delay, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
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    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 shall institute proceedings to 
determine whether the proposed rule should be approved or 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 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-2016-056 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-2016-056. 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-2016-056 and should be 
submitted on or before August 9, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2016-16972 Filed 7-18-16; 8:45 am]
 BILLING CODE 8011-01-P