81 FR 54867 - Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change Amending Rule 6.91(b) To Provide for the Rejection of Certain Electronic Complex Orders

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 159 (August 17, 2016)

Page Range		54867-54870
FR Document		2016-19577
Federal Register, Volume 81 Issue 159 (Wednesday, August 17, 2016)
[Federal Register Volume 81, Number 159 (Wednesday, August 17, 2016)]
[Notices]
[Pages 54867-54870]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-19577]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78546; File No. SR-NYSEARCA-2016-109]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Amending Rule 6.91(b) To Provide for the 
Rejection of Certain Electronic Complex Orders

August 11, 2016.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 3, 2016, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE Arca'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 6.91(b) to provide for the 
rejection of certain Electronic Complex Orders. The proposed rule 
change is available on the Exchange's Web site at

[[Page 54868]]

www.nyse.com, at the principal office of the Exchange, 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 6.91(b) to provide for the 
rejection of certain Electronic Complex Orders (``ECOs'').\3\ 
Specifically, the Exchange proposes to reject certain ECOs that may 
undermine the effectiveness of risk limitation mechanisms designed to 
protect Market Makers.
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    \3\ Rule 6.62(e) defines a Complex Order as any order involving 
the simultaneous purchase and/or sale of two or more different 
option series in the same underlying security, for the same account, 
in a ratio that is equal to or greater than one-to-three (.333) and 
less than or equal to three-to-one (3.00) and for the purpose of 
executing [sic] particular investment strategy. Per Rule 6.91, an 
ECO is a Complex Order that has been entered into the NYSE Amex 
Options System (``System'') for execution. See Rule 6.91 (preamble).
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    The Exchange requires a Market Maker to utilize its risk limitation 
mechanisms, which automatically remove a Market Maker's quotes in all 
series of an options class when certain parameter settings are 
triggered.\4\ This functionality is designed to mitigate the risk of 
multiple executions on a Market Maker's quotes occurring simultaneously 
across multiple series and multiple option classes. Pursuant to Rule 
6.40, the Exchange establishes a time period during which the System 
calculates: (1) The number of trades executed by the Market Maker in a 
specified options class; (2) the volume of contracts traded by the 
Market Maker in a specified options class; or (3) the percentage of the 
Market Maker's quoted size in the specified class that has been 
executed (the ``risk settings'').\5\ When a Market Maker has breached 
its risk settings (i.e., has traded more than the contract or volume 
limit or cumulative percentage limit of a class during the specified 
measurement interval), the System will cancel all of the Market Maker's 
quotes in that class until the Market Maker notifies the Exchange it 
will resume submitting quotes.\6\ The purpose of the risk settings, 
therefore, is to allow Market Makers to provide liquidity across 
potentially thousands of options series without being at risk of 
executing the full cumulative size of all such quotes before being 
given adequate opportunity to adjust their quotes.
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    \4\ See Rule 6.40(b)(3), (c)(3) and (d)(3). Market Makers are 
required to utilize one of the three risk settings for their quotes. 
See Commentary .04 to Rule 6.40. Market Makers and OTP Holders may 
utilize the risk limitation mechanisms for certain orders, but they 
are not required to do so. See, e.g., Rule 6.40(b)(1), (2); (c)(1), 
(c)(2).
    \5\ See Rule 6.40(b)(3), (c)(3) and (d)(3). Market Makers are 
required to utilize one of the three risk settings for its quotes. 
See Commentary .04 to Rule 6.40.
    \6\ See Commentary .01 to Rule 6.40 (requiring that a Market 
Maker request that it be re-enabled after a breach of its risk 
settings).
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    An incoming ECO may execute against quotes or individual orders 
comprising the Complex Order (the ``leg markets'') or against ECOs 
resting in the Consolidated Book.\7\ An ECO trading against the leg 
markets is commonly referred to as ``legging out.'' Current Rule 
6.91(a)(2)(ii) provides that an incoming ECO will execute first with 
the leg markets, ahead of resting ECOs at the same price (i.e., the 
same total net debit or credit), provided the leg markets can execute 
the ECO in full or in a permissible ratio.
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    \7\ See Rule 6.91(a)(2)(ii).
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    The execution of certain ECOs against the leg markets can be 
problematic because ECOs that leg out may execute before triggering a 
Market Maker's risk settings. Specifically, because the execution of 
each leg of an ECO is contingent on the execution of the other legs, 
the execution of all individual leg markets is processed as a single 
transaction, not as a series of individual transactions. Thus, while 
the risk settings allow a Market Maker to manage the risks associated 
with providing liquidity across multiple series of an options class, 
the settings do not adequately provide this risk protection because the 
legs of an ECO execute in a single transaction package before 
processing any subsequent messages. The practical result is that 
because all legs of an ECO execute before a Market Marker has an 
opportunity to react, such ECO executions are essentially able to 
bypass the Market Maker's risk settings.
    Of particular concern to the Exchange are ECOs where two or more 
legs are buying (selling) calls (puts), which are commonly referred to 
as ``directional complex orders.'' Such directional complex orders are 
typically geared towards an aggressive directional capture of 
volatility. Specifically, through a combination of buying or selling of 
multiple option legs at once, a market participant using one of these 
strategies is aggressively buying or selling volatility. By contrast, 
other types of complex strategies are designed to gain exposure to a 
particular option class' movement.\8\ The Exchange has seen a recent 
increase in the use of directional complex orders as a way to trade 
against multiple series on the same side of the market without 
triggering Market Maker risk settings. If the same legs were sent as 
individual orders, rather than as components of a directional complex 
order, Market Maker risk settings may have been triggered.\9\ The 
Exchange is concerned that the use of directional complex orders is 
undermining the important purpose of the Market Makers risk settings, 
which the Exchange requires Market Makers to use for all quotes.
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    \8\ The Exchange notes that the majority of ECOs are calendar 
and vertical spreads, butterflies and straddles, which are designed 
to hedge the potential move of the underlying security or to capture 
premium from an anticipated market event.
    \9\ For example, if individual orders to buy 10 contracts for 
the Jan 30 call, Jan 35 call and Jan 40 call are entered, each is 
processed as it is received and the Market Maker risk settings are 
calculated following the execution of each 10-contract order. Thus, 
if either the first order or the second order trigger a Market 
Maker's risk settings, the System would cancel all of the Market 
Maker's quotes in that class until the Market Maker notifies the 
Exchange it will resume submitting quotes (see Commentary .01 to 
Rule 6.40). However, if an ECO to buy all three of these options 
with a quantity of 10 contracts is entered and is executed against 
the leg markets, the Market Maker risk settings for quotes in the 
leg market are calculated only after the execution of all 30 
contracts (the sum of the three legs of 10 contracts each) because 
the execution of all individual leg markets is processed as a single 
transaction, not as a series of individual transactions.
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    To address the potential for directional ECOs to undermine the 
purposes of the Market Maker risk settings, the Exchange proposes to 
amend Rule 6.91(b)(4). Specifically, the Exchange proposes to reject an 
ECO if:
    (i) Composed of two legs that are (a) both buy orders or both sell 
orders, and (b) both legs are calls or both legs are puts; or
    (ii) composed of three or more legs and (a) all legs are buy 
orders; or (b) all legs are sell orders.\10\
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    \10\ See proposed Rule 6.91(b). The Exchange also proposes to 
delete the words ``Types of'' in the first paragraph because sub-
paragraphs (1)-(4) of paragraph (d) do not describe the ``types of'' 
ECOs, but rather describe the requirements for such orders.
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    The proposed rule change would not impact the processing of ECOs 
trading against other ECOs or the priority and

[[Page 54869]]

allocation of ECOs. The following examples illustrate the types of ECOs 
that would be rejected under proposed Rule 6.91(b):
Example #1: Illustrating Proposed Rule 6.91(b)(4)(i)
 Buy Call 1, Buy Call 2
 Sell Call 1, Sell Call 2
 Buy Put 1, Buy Put 2
 Sell Put 1, Sell Put 2
Example #2: Illustrating Proposed Rule 6.91(b)(4)(ii)
 Buy Call 1, Buy Call 2, Buy Put 1
 Buy Put 1, Buy Put 2, Buy Put 3
 Buy Call 1, Buy Call 2, Buy Call 3
 Buy Put 1, Buy Put 2, Buy Call 3
 Sell Put 1, Sell Put 2, Sell Call 1
    As proposed, the specified directional complex orders would be 
automatically rejected. Market participants would continue to be able 
to enter each leg of such complex orders as separate orders. The 
Exchange believes that the potential risk of these types of directional 
complex orders undermining the effectiveness of Market Maker risk 
settings outweighs any potential benefit to OTP Holders or OTP Firms 
submitting such orders.
    Finally, the Exchange notes that both the Chicago Board Options 
Exchange, Inc. (``CBOE'') and International Securities Exchange, LLC 
(``ISE'') have recently received Commission approval to revise their 
rules governing complex orders to implement functionality designed to 
prevent complex orders from effectively bypassing market maker risk 
parameters.\11\
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    \11\ See Securities Exchange Act Release Nos. 73023 (September 
9, 2014) 79 FR 55033 (September 15, 2014) (SR-ISE-2014-10) and 72986 
(September 4, 2014) 79 FR 53798 (September 10, 2014) (SR-CBOE-2014-
017) (Approval Order). See also Securities Exchange Act Release Nos. 
76106 (October 8, 2015) 80 FR 62125 (October 15, 2015) (SR-CBOE-
2014-081); 77297 (March 4, 2016), 81 FR 12764 (March 10, 2016) (SR-
CBOE-2016-014) (further amending the complex order rule, as modified 
by the Approval Order, to limit a potential source of unintended 
market maker risk). The Exchange acknowledges that, unlike this 
proposal, CBOE and ISE do not reject the offending ECOs outright.
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Implementation
    The Exchange will announce the implementation date of the proposed 
rule change by Trader Update.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Securities Exchange Act of 1934 (the ``Act''),\12\ in 
general, and furthers the objectives of section 6(b)(5) of the Act,\13\ 
in particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, 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.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change would prevent fraudulent and manipulative 
acts and practices and would remove impediments to and perfect the 
mechanism of a free and open market because it would enable the 
Exchange to reject (and therefore prevent the execution of) certain 
directional complex order strategies that may undermine important 
Market Maker risk settings, which are required for all Market Maker 
quotes. The Exchange believes that rejecting the specified directional 
orders outright provides clarity as to the disposition of ECOs 
submitted by market participants and assures that the Market Maker risk 
settings will operate as intended. The Exchange notes that other 
markets have amended their rules to prevent directional complex orders 
from undermining market maker risk settings and do not allow such 
orders to leg out.\14\ Because of the non-traditional nature of these 
directional complex orders, the Exchange believes it unlikely that they 
would execute against complex interest. Accordingly, the Exchange 
believes rejecting the orders outright (as opposed to simply preventing 
them from legging out) would have the same practical impact for the 
order-sending firms and would be the most effective and transparent 
means of handling these orders. Furthermore, the Exchange believes that 
the risk of the specified directional complex orders undermining the 
efficacy of Market Maker risk settings outweighs any potential benefit 
to OTP Holders or OTP Firms submitting such orders packaged as ECOs. 
The Exchange notes that market participants would continue to be able 
to enter each leg of such complex orders as separate orders. The 
Exchange also believes this proposal would protect investors and the 
public interest because it would help eliminate a degree of unnecessary 
risk borne by Market Makers when fulfilling their quoting obligations 
to the markets and would encourage them to contribute liquidity on the 
Exchange. The Exchange believes the strengthened risk settings would 
encourage Market Makers to provide tighter and deeper markets, to the 
benefit of all market participants.
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    \14\ See supra n. 11.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change would prevent fraudulent and manipulative 
acts and practices and would remove impediments to and perfect the 
mechanism of a free and open market because, by rejecting (and 
therefore preventing the execution of) certain directional complex 
order strategies that may undermine important Market Maker risk 
settings, which are required for all Market Maker quotes. The Exchange 
believes that rejecting the specified directional orders outright 
provides clarity as to the disposition of ECOs submitted by market 
participants and assures that the Market Maker risk settings will 
operate as intended. The Exchange notes that other markets have amended 
their rules to prevent directional complex orders from undermining 
market maker risk settings and do not allow such orders to leg out.\15\ 
Because of the non-traditional nature of these directional complex 
orders, the Exchange believes it unlikely that they would execute 
against complex interest. Accordingly, the Exchange believes rejecting 
the orders outright (as opposed to simply preventing them from legging 
out) would have the same practical impact for the order-sending firms 
and would be the most effective and transparent means of handling these 
orders. Furthermore, the Exchange believes that the risk of the 
specified directional complex orders undermining the efficacy of Market 
Maker risk settings outweighs any potential benefit to OTP Holders or 
OTP Firms submitting such orders packaged as ECOs. The Exchange notes 
that market participants would continue to be able to enter each leg of 
such complex orders as separate orders. The Exchange also believes this 
proposal would protect investors and the public interest because it 
would help eliminate a degree of unnecessary risk borne by Market 
Makers when fulfilling their quoting obligations to the markets and 
would encourage them to contribute liquidity on the Exchange. The 
Exchange believes the strengthened risk settings would encourage Market 
Makers to provide tighter and deeper markets, to the benefit of all 
market participants.
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    \15\ See supra n. 11.

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[[Page 54870]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The Exchange believes that the proposal qualifies for accelerated 
effectiveness in accordance with section 19(b)(2) of the Act. The 
Exchange believes that there is good cause for the Commission to 
accelerate effectiveness because the proposed rule change is consistent 
with the rules of at least two competing options markets, which have 
amended their rules to prevent directional complex orders from 
undermining market maker risk settings and do not allow such orders to 
leg out.\16\ The Exchange would like to similarly enhance the 
protection it provides to Market Makers. Because of the non-traditional 
nature of these directional complex orders, the Exchange believes it 
unlikely that they would execute against complex interest. Accordingly, 
the Exchange believes rejecting the orders outright (as opposed to 
simply preventing them from legging out) would have the same practical 
impact for the order-sending firms and would be the most effective and 
transparent means of handling these orders. Thus, accelerated approval 
of this proposal would enable the Exchange to implement the rule change 
without delay, thereby strengthening market maker risk settings and 
enhancing the competitiveness of the Exchange.
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    \16\ See supra n. 11.
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    In addition, the Exchange believes that the proposed rejection of 
the specified directional complex orders would prevent such orders from 
executing before triggering (and thus, bypassing) the Market Maker risk 
settings. The Exchange believes that the potential risk of these types 
of directional complex orders undermining the effectiveness of Market 
Maker risk settings outweighs any potential benefit to OTP Holders or 
OTP Firms submitting such orders. Market participants would continue to 
be able to enter each leg of such complex orders as separate orders. 
Thus, the Exchange believes good cause exists to accelerate 
effectiveness of this proposal because it would help eliminate a degree 
of unnecessary risk borne by Market Makers when fulfilling their 
quoting obligations to the markets, which would in turn benefit all 
market participants because Market Makers would be encouraged to 
provide tighter and deeper markets.
    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 self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the 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 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-NYSEARCA-2016-109 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-NYSEARCA-2016-109. 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 will also 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-NYSEARCA-2016-109 and should 
be submitted on or before September 7, 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. 2016-19577 Filed 8-16-16; 8:45 am]
 BILLING CODE 8011-01-P
Federal Register / Vol. 81, No. 159 / Wednesday, August 17, 2016 / Notices 54867

all parties in all new cases that wish to register, with 4,711 agreeing to do so (a those that may be withheld from the
use it on a voluntary basis. 76 percent registration rate). public in accordance with the
As of May 11, 2016, FINRA has provisions of 5 U.S.C. 552, will be
C. Self-Regulatory Organization’s
processed 4,932 cases through the Party available for Web site viewing and
Statement on Comments on the
Portal. FINRA has invited 13,562 parties printing in the Commission’s Public
Proposed Rule Change Received From Reference Room, 100 F Street NE.,
(customers, and firms and associated Members, Participants, or Others
persons) to register and use the Party Washington, DC 20549–1090, on official
Portal. Of the 13,562 parties, 76 percent Written comments were neither business days between the hours of 10
of customers, including pro se solicited nor received. a.m. and 3 p.m. Copies of such filing
customers, have been using the Party III. Date of Effectiveness of the also will be available for inspection and
Portal voluntarily and 82 percent of Proposed Rule Change and Timing for copying at the principal office of
firms and associated persons, which FINRA. All comments received will be
Commission Action
includes firm representatives, have been posted without change; the Commission
using the Party Portal voluntarily (78 Within 45 days of the date of does not edit personal identifying
percent in total). FINRA has processed publication of this notice in the Federal information from submissions. You
over 16,000 party documents through Register or within such longer period (i) should submit only information that
the Party Portal, including answers, as the Commission may designate up to you wish to make available publicly. All
motions, and correspondence. Over 83 90 days of such date if it finds such submissions should refer to File
percent of parties have used the Party longer period to be appropriate and Number SR–FINRA–2016–029 and
Portal to view their case-related publishes its reasons for so finding or should be submitted on or before
correspondence. (ii) as to which the self-regulatory September 7, 2016.
Based on the parties’ experience to organization consents, the Commission For the Commission, by the Division of
date with the Party Portal, along with will: Trading and Markets, pursuant to delegated
(A) By order approve or disapprove authority.31
the feedback provided from current
such proposed rule change, or Robert W. Errett,
users of this platform, FINRA believes
(B) institute proceedings to determine Deputy Secretary.
those parties required to use the Party
whether the proposed rule change
Portal would realize the anticipated [FR Doc. 2016–19580 Filed 8–16–16; 8:45 am]
should be disapproved.
benefits of the proposal. Further, the BILLING CODE 8011–01–P
adoption of the Party Portal by parties IV. Solicitation of Comments
on a voluntary basis suggests that they Interested persons are invited to
see benefit from its availability and use. submit written data, views and SECURITIES AND EXCHANGE
Under the proposal, most parties arguments concerning the foregoing, COMMISSION
would no longer be required to send including whether the proposed rule [Release No. 34–78546; File No. SR–
paper copies of pleadings or other change is consistent with the Act. NYSEARCA–2016–109]
documents to FINRA. Thus, these Comments may be submitted by any of
parties would experience cost savings the following methods: Self-Regulatory Organizations; NYSE
related to the preparation and mailing of Arca, Inc.; Notice of Filing of Proposed
such submissions. Further, parties Electronic Comments Rule Change Amending Rule 6.91(b)
would be able to serve each other • Use the Commission’s Internet To Provide for the Rejection of Certain
immediately through the Party Portal, comment form (http://www.sec.gov/ Electronic Complex Orders
rather than through other means, which, rules/sro.shtml); or August 11, 2016.
under current rules, may involve • Send an email to rule-comments@
Pursuant to section 19(b)(1) of the
mailing hard copies to all parties at the sec.gov. Please include File Number SR–
Securities Exchange Act of 1934
same time. FINRA acknowledges that FINRA–2016–029 on the subject line.
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
those customers or firms that have not
Paper Comments notice is hereby given that on August 3,
used the Party Portal previously may
• Send paper comments in triplicate 2016, NYSE Arca, Inc. (the ‘‘Exchange’’
incur some time and effort to learn the
to Secretary, Securities and Exchange or ‘‘NYSE Arca’’) filed with the
Party Portal system, but the technology
Commission, 100 F Street NE., Securities and Exchange Commission
requirements (i.e., a computer with
Washington, DC 20549–1090. (‘‘SEC’’ or ‘‘Commission’’) the proposed
Internet access) will be minimal, and,
rule change as described in Items I, II,
therefore, should not impede a party’s All submissions should refer to File
and III below, which Items have been
access to the dispute resolution process. Number SR–FINRA–2016–029. This file
prepared by the Exchange. The
FINRA staff understands that number should be included on the
Commission is publishing this notice to
requiring pro se customers to use the subject line if email is used. To help the
solicit comments on the proposed rule
Party Portal might impose a higher Commission process and review your
change from interested persons.
burden on these individuals given their comments more efficiently, please use
potentially limited access to and only one method. The Commission will I. Self-Regulatory Organization’s
experience with the required post all comments on the Commission’s Statement of the Terms of Substance of
technology. Thus, staff is proposing to Internet Web site (http://www.sec.gov/ the Proposed Rule Change
allow pro se customers to opt out of rules/sro.shtml). Copies of the The Exchange proposes to amend
using the Party Portal. However, pro se submission, all subsequent
mstockstill on DSK3G9T082PROD with NOTICES

Rule 6.91(b) to provide for the rejection
customers may choose to use the Party amendments, all written statements of certain Electronic Complex Orders.
Portal, which would allow them to with respect to the proposed rule The proposed rule change is available
benefit equally from the efficiencies that change that are filed with the on the Exchange’s Web site at
the Party Portal is anticipated to create. Commission, and all written
Staff notes that, as of May 11, 2016, communications relating to the 31 17 CFR 200.30–3(a)(12).
3,599 pro se customers or customer proposed rule change between the 1 15 U.S.C. 78s(b)(1).
representatives have been invited to Commission and any person, other than 2 17 CFR 240.19b–4.

VerDate Sep<11>2014 16:39 Aug 16, 2016 Jkt 238001 PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 E:\FR\FM\17AUN1.SGM 17AUN1
Federal Register / Vol. 81, No. 159 / Wednesday, August 17, 2016 / Notices 54869

allocation of ECOs. The following to prevent fraudulent and manipulative B. Self-Regulatory Organization’s
examples illustrate the types of ECOs acts and practices, to promote just and Statement on Burden on Competition
that would be rejected under proposed equitable principles of trade, to remove
Rule 6.91(b): impediments to and perfect the The proposed rule change would
mechanism of a free and open market prevent fraudulent and manipulative
Example #1: Illustrating Proposed Rule acts and practices and would remove
and a national market system, and, in
6.91(b)(4)(i) impediments to and perfect the
general, to protect investors and the
• Buy Call 1, Buy Call 2 public interest. mechanism of a free and open market
• Sell Call 1, Sell Call 2 The proposed rule change would because, by rejecting (and therefore
• Buy Put 1, Buy Put 2 prevent fraudulent and manipulative preventing the execution of) certain
• Sell Put 1, Sell Put 2 acts and practices and would remove directional complex order strategies that
Example #2: Illustrating Proposed Rule impediments to and perfect the may undermine important Market
6.91(b)(4)(ii) mechanism of a free and open market Maker risk settings, which are required
because it would enable the Exchange to for all Market Maker quotes. The
• Buy Call 1, Buy Call 2, Buy Put 1 reject (and therefore prevent the
• Buy Put 1, Buy Put 2, Buy Put 3 Exchange believes that rejecting the
execution of) certain directional specified directional orders outright
• Buy Call 1, Buy Call 2, Buy Call 3
complex order strategies that may provides clarity as to the disposition of
• Buy Put 1, Buy Put 2, Buy Call 3
• Sell Put 1, Sell Put 2, Sell Call 1 undermine important Market Maker risk ECOs submitted by market participants
As proposed, the specified directional settings, which are required for all and assures that the Market Maker risk
complex orders would be automatically Market Maker quotes. The Exchange settings will operate as intended. The
rejected. Market participants would believes that rejecting the specified Exchange notes that other markets have
continue to be able to enter each leg of directional orders outright provides amended their rules to prevent
such complex orders as separate orders. clarity as to the disposition of ECOs directional complex orders from
The Exchange believes that the potential submitted by market participants and
undermining market maker risk settings
risk of these types of directional assures that the Market Maker risk
and do not allow such orders to leg
complex orders undermining the settings will operate as intended. The
out.15 Because of the non-traditional
effectiveness of Market Maker risk Exchange notes that other markets have
amended their rules to prevent nature of these directional complex
settings outweighs any potential benefit orders, the Exchange believes it unlikely
to OTP Holders or OTP Firms directional complex orders from
undermining market maker risk settings that they would execute against
submitting such orders. complex interest. Accordingly, the
Finally, the Exchange notes that both and do not allow such orders to leg
out.14 Because of the non-traditional Exchange believes rejecting the orders
the Chicago Board Options Exchange, outright (as opposed to simply
Inc. (‘‘CBOE’’) and International nature of these directional complex
orders, the Exchange believes it unlikely preventing them from legging out)
Securities Exchange, LLC (‘‘ISE’’) have
that they would execute against would have the same practical impact
recently received Commission approval
complex interest. Accordingly, the for the order-sending firms and would
to revise their rules governing complex
Exchange believes rejecting the orders be the most effective and transparent
orders to implement functionality
designed to prevent complex orders outright (as opposed to simply means of handling these orders.
from effectively bypassing market maker preventing them from legging out) Furthermore, the Exchange believes that
risk parameters.11 would have the same practical impact the risk of the specified directional
for the order-sending firms and would complex orders undermining the
Implementation be the most effective and transparent efficacy of Market Maker risk settings
The Exchange will announce the means of handling these orders. outweighs any potential benefit to OTP
implementation date of the proposed Furthermore, the Exchange believes that Holders or OTP Firms submitting such
rule change by Trader Update. the risk of the specified directional orders packaged as ECOs. The Exchange
complex orders undermining the notes that market participants would
2. Statutory Basis efficacy of Market Maker risk settings continue to be able to enter each leg of
The Exchange believes that its outweighs any potential benefit to OTP such complex orders as separate orders.
proposal is consistent with section 6(b) Holders or OTP Firms submitting such The Exchange also believes this
of the Securities Exchange Act of 1934 orders packaged as ECOs. The Exchange
proposal would protect investors and
(the ‘‘Act’’),12 in general, and furthers notes that market participants would
the public interest because it would
the objectives of section 6(b)(5) of the continue to be able to enter each leg of
help eliminate a degree of unnecessary
Act,13 in particular, in that it is designed such complex orders as separate orders.
The Exchange also believes this risk borne by Market Makers when
11 See Securities Exchange Act Release Nos. proposal would protect investors and fulfilling their quoting obligations to the
73023 (September 9, 2014) 79 FR 55033 (September the public interest because it would markets and would encourage them to
15, 2014) (SR–ISE–2014–10) and 72986 (September help eliminate a degree of unnecessary contribute liquidity on the Exchange.
4, 2014) 79 FR 53798 (September 10, 2014) (SR– The Exchange believes the strengthened
CBOE–2014–017) (Approval Order). See also risk borne by Market Makers when
Securities Exchange Act Release Nos. 76106 fulfilling their quoting obligations to the risk settings would encourage Market
(October 8, 2015) 80 FR 62125 (October 15, 2015) markets and would encourage them to Makers to provide tighter and deeper
(SR–CBOE–2014–081); 77297 (March 4, 2016), 81 contribute liquidity on the Exchange. markets, to the benefit of all market
mstockstill on DSK3G9T082PROD with NOTICES

FR 12764 (March 10, 2016) (SR–CBOE–2016–014)
(further amending the complex order rule, as The Exchange believes the strengthened participants.
modified by the Approval Order, to limit a potential risk settings would encourage Market
source of unintended market maker risk). The Makers to provide tighter and deeper
Exchange acknowledges that, unlike this proposal, markets, to the benefit of all market
CBOE and ISE do not reject the offending ECOs
outright. participants.
12 15 U.S.C. 78f(b).
13 15 U.S.C. 78f(b)(5). 14 See supra n. 11. 15 See supra n. 11.

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54870 Federal Register / Vol. 81, No. 159 / Wednesday, August 17, 2016 / Notices

C. Self-Regulatory Organization’s obligations to the markets, which would 10:00 a.m. and 3:00 p.m. Copies of the
Statement on Comments on the in turn benefit all market participants filing will also be available for
Proposed Rule Change Received From because Market Makers would be inspection and copying at the principal
Members, Participants, or Others encouraged to provide tighter and office of the Exchange. All comments
No written comments were solicited deeper markets. received will be posted without change;
Within 45 days of the date of the Commission does not edit personal
or received with respect to the proposed
publication of this notice in the Federal identifying information from
rule change.
Register or within such longer period submissions. You should submit only
III. Date of Effectiveness of the up to 90 days (i) as the Commission may information that you wish to make
Proposed Rule Change and Timing for designate if it finds such longer period available publicly. All submissions
Commission Action to be appropriate and publishes its should refer to File Number SR–
The Exchange believes that the reasons for so finding or (ii) as to which NYSEARCA–2016–109 and should be
proposal qualifies for accelerated the self-regulatory organization submitted on or before September 7,
effectiveness in accordance with section consents, the Commission will: 2016.
(A) By order approve or disapprove
19(b)(2) of the Act. The Exchange For the Commission, by the Division of
the proposed rule change, or Trading and Markets, pursuant to delegated
believes that there is good cause for the
(B) institute proceedings to determine authority.17
Commission to accelerate effectiveness
whether the proposed rule change Robert W. Errett,
because the proposed rule change is
should be disapproved.
consistent with the rules of at least two Deputy Secretary.
competing options markets, which have IV. Solicitation of Comments [FR Doc. 2016–19577 Filed 8–16–16; 8:45 am]
amended their rules to prevent Interested persons are invited to BILLING CODE 8011–01–P
directional complex orders from submit written data, views and
undermining market maker risk settings arguments concerning the foregoing,
and do not allow such orders to leg including whether the proposed rule SECURITIES AND EXCHANGE
out.16 The Exchange would like to change is consistent with the Act. COMMISSION
similarly enhance the protection it Comments may be submitted by any of [Release No. 34–78554; File No. SR–CBOE–
provides to Market Makers. Because of the following methods: 2016–059]
the non-traditional nature of these
directional complex orders, the Electronic Comments Self-Regulatory Organizations;
Exchange believes it unlikely that they • Use the Commission’s Internet Chicago Board Options Exchange,
would execute against complex interest. comment form (http://www.sec.gov/ Incorporated; Notice of Filing and
Accordingly, the Exchange believes rules/sro.shtml); or Immediate Effectiveness of a Proposed
rejecting the orders outright (as opposed • Send an email to rule-comments@ Rule Change Relating to COPS
to simply preventing them from legging sec.gov. Please include File Number SR–
out) would have the same practical NYSEARCA–2016–109 on the subject August 11, 2016.
impact for the order-sending firms and line. Pursuant to Section 19(b)(1) of the
would be the most effective and Securities Exchange Act of 1934 (the
Paper Comments ‘‘Act’’),1 and Rule 19b–4 thereunder,2
transparent means of handling these
orders. Thus, accelerated approval of • Send paper comments in triplicate notice is hereby given that on August 1,
this proposal would enable the to Brent J. Fields, Secretary, Securities 2016, Chicago Board Options Exchange,
Exchange to implement the rule change and Exchange Commission, 100 F Street Incorporated (the ‘‘Exchange’’ or
without delay, thereby strengthening NE., Washington, DC 20549–1090. ‘‘CBOE’’) filed with the Securities and
market maker risk settings and All submissions should refer to File Exchange Commission (the
enhancing the competitiveness of the Number SR–NYSEARCA–2016–109. ‘‘Commission’’) the proposed rule
Exchange. This file number should be included on change as described in Items I, II, and
In addition, the Exchange believes the subject line if email is used. To help III below, which Items have been
that the proposed rejection of the the Commission process and review prepared by the Exchange. The
specified directional complex orders your comments more efficiently, please Commission is publishing this notice to
would prevent such orders from use only one method. The Commission solicit comments on the proposed rule
executing before triggering (and thus, will post all comments on the change from interested persons.
bypassing) the Market Maker risk Commission’s Internet Web site (http:// I. Self-Regulatory Organization’s
settings. The Exchange believes that the www.sec.gov/rules/sro.shtml). Copies of Statement of the Terms of Substance of
potential risk of these types of the submission, all subsequent the Proposed Rule Change
directional complex orders undermining amendments, all written statements
with respect to the proposed rule The purpose of the proposed rule
the effectiveness of Market Maker risk
change that are filed with the change is to re-implement the
settings outweighs any potential benefit
Commission, and all written contributor compensation structure of
to OTP Holders or OTP Firms
communications relating to the the Exchange’s Customized Option
submitting such orders. Market
proposed rule change between the Pricing Service (‘‘COPS’’),3 specifically,
participants would continue to be able
to enter each leg of such complex orders Commission and any person, other than 17 17 CFR 200.30–3(a)(12).
those that may be withheld from the
mstockstill on DSK3G9T082PROD with NOTICES

as separate orders. Thus, the Exchange 1 15 U.S.C. 78s(b)(1).
believes good cause exists to accelerate public in accordance with the 2 17 CFR 240.19b–4.

effectiveness of this proposal because it provisions of 5 U.S.C. 552, will be 3 See Securities Exchange Act Release Nos. 34–

would help eliminate a degree of available for Web site viewing and 67813 (September 10, 2012), 77 FR 56903
unnecessary risk borne by Market printing in the Commission’s Public (September 14, 2012) (SR–CBOE–2012–083); 34–
67928 (September 26, 2012), 77 FR 60161 (October
Makers when fulfilling their quoting Reference Room, 100 F Street NE., 2, 2012) (SR–CBOE–2012–090); 34–70705 (October
Washington, DC 20549, on official 17, 2013), 78 FR 63265 (October 23, 2013) (SR–
16 See supra n. 11. business days between the hours of CBOE–2013–097); 34–70845 (November 12, 2013),

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Document Created: 2018-02-09 11:35:17
Document Modified: 2018-02-09 11:35:17
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		81 FR 54867