81 FR 66105 - Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Relating to SPX Combo Orders
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 186 (September 26, 2016)
Federal Register Volume 81, Issue 186 (September 26, 2016)
| Page Range | 66105-66109 | |
| FR Document | 2016-23044 |
[Federal Register Volume 81, Number 186 (Monday, September 26, 2016)] [Notices] [Pages 66105-66109] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-23044] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-78885; File No. SR-CBOE-2016-064] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Relating to SPX Combo Orders September 20, 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 September 8, 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 Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange seeks to amend its rules related to SPX Combo Orders. The text of the proposed rule change is available on the Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the Secretary, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend Rules 24.20, SPX Combo Orders, and 6.42, Minimum Increment for Bids and Offers, to specify the manner in which the minimum increment provision of Rule 6.42 applies to SPX Combo Orders. Background An SPX Combo Order consists of an order to purchase or sell one or more SPX option series (hereinafter the ``non-SPX combination'') and the offsetting number of ``SPX combinations'' defined by the delta.\3\ For purposes of an SPX Combo Order, an SPX combination is a purchase (sale) of an SPX call and sale (purchase) of an SPX put having the same expiration date and strike price. Additionally, the delta is the positive (negative) number of SPX combinations that must be sold (bought) to establish a market neutral hedge with one or more SPX option series (i.e., the non-SPX combination).\4\ --------------------------------------------------------------------------- \3\ See Rule 24.20(a)(3). \4\ See Rule 24.20(a)(1) and (2). --------------------------------------------------------------------------- SPX traders commonly hedge their options positions with SPX combinations, also called ``synthetic futures,'' which, as the above definition provides, are created by combining long(short) SPX calls with short(long) SPX puts of the same series, in lieu of hedging with the actual S&P 500 futures contract trading at CME. The individual legs of the SPX combination are priced such that a value for the SPX combination is established which is equivalent to the value of a future at a level at which the trader wishes to make the underlying futures market ``static.'' Then, based on the static value established by the SPX combination that has been quoted, the trader will request a market for the non-SPX combination that he wishes to trade, and will indicate the delta of the non-SPX combination. An SPX trader will execute the SPX combination in conjunction with the non-SPX combination, taking into account the delta of the particular options making up the non-SPX combination, such that the combined positions will create a [[Page 66106]] ``delta neutral'' hedge.\5\ For example, a customer that wants to purchase 100 SPX calls that have a delta of ``30'' (30% or .30) may hedge against a downward movement in the S&P 500 Index by selling 30 SPX combinations (.30 x 100). In other words, the SPX combination in this example will be to sell 30 SPX calls and buy 30 SPX puts with the same strike price and expiration date. --------------------------------------------------------------------------- \5\ The entire SPX Combo Order consisting of the SPX combination portion and the non-SPX combination portion must be executed as a package. --------------------------------------------------------------------------- When the non-SPX combination is paired with an SPX combination the non-SPX combination can be described as being ``tied'' to the value of a future because the non-SPX combination is tied to an SPX combination that is equivalent to the value of a future. The concept of an option being ``tied'' to an underlying value extends to stock-option orders.\6\ For example, floor brokers may represent an order to buy an AAPL call tied to the sale of AAPL stock at a specified price. The price at which the crowd is willing to sell the call is dependent on the specified price of the AAPL stock. For purposes of this example, assume the specified price is $99. The crowd may be willing to sell the call for $5.00 tied to AAPL stock at $99. If the specified price of AAPL stock was instead $100, the crowd's market for the call would change. If the broker is unable to execute the stock portion of the order at the specified price of $99, the option portion of the order also cannot be executed. Similarly, a broker representing an SPX Combo Order may be unable to execute the SPX combination portion of the order at the desired futures level because the individual leg prices of the SPX combination that would create the equivalent futures value are outside the market for the leg prices. --------------------------------------------------------------------------- \6\ A stock-option order is an order to buy or sell a stated number of units of an underlying or a related security coupled with either (a) the purchase or sale of option contract(s) on the opposite side of the market representing either the same number of units of the underlying or related security or the number of units of the underlying security necessary to create a delta neutral position or (b) the purchase or sale of an equal number of put and call option contracts, each having the same exercise price, expiration date and each representing the same number of units of stock as, and on the opposite side of the market from, the underlying or related security portion of the order. Rule 1.1(ii). --------------------------------------------------------------------------- Minimum Increment Applicable to SPX Combo Orders Currently, SPX Combo Orders are treated as complex orders for the purposes of the minimum increment provision of Rule 6.42(4).\7\ Although Rule 24.20 does not explicitly specify the minimum increment applicable to SPX Combo Orders,\8\ or reference how the minimum increment provision of Rule 6.42(4) applies to SPX Combo Orders, the Exchange believes the original intent was for SPX Combo Orders to be considered ``complex orders'' for the purposes of the minimum increment. In support of this conclusion the Exchange notes that Rule 6.42(4)(b) states that ``complex orders are subject to special priority requirements as described in Rules 6.45, 6.45A, 6.45B, 6.53C, 24.19 and 24.20.'' \9\ The Exchange believes referencing Rule 24.20 in this manner demonstrates the intent to include SPX Combo Orders as complex orders for purposes of the minimum increment provision. --------------------------------------------------------------------------- \7\ Rule 6.42(4) states that except as provided in Rule 6.53C, bids and offers on complex orders, as defined in Interpretation and Policy .01 [to Rule 6.42], may be expressed in any net price increment (that may not be less than $0.01) that may be determined by the Exchange on a class-by-class basis and announced to the Trading Permit Holders via Regulatory Circular, regardless of the minimum increments otherwise appropriate to the individual legs of the order. Notwithstanding the foregoing sentence, bids and offers on complex orders in options on the S&P 500 Index (SPX), p.m.- settled S&P 500 Index (SPXPM) or on the S&P 100 Index (OEX and XEO), except for box/roll spreads, shall be expressed in decimal increments no smaller than $0.05 or in any increment, as determined by the Exchange on a class-by-class basis and announced to the Trading Permit Holders via Regulatory Circular. In addition: (a) The legs of a complex order may be executed in $0.01 increments; and (b) complex orders are subject to special priority requirements as described in Rules 6.45, 6.45A, 6.45B, 6.53C, 24.19 and 24.20. \8\ Rule 24.20(b)(2) uses the term ``minimum increment'' but only in reference to the priority requirements for SPX Combo Orders, stating that: ``[w]hen a Trading Permit Holder holding an SPX Combo Order with the required combo indicator and bidding or offering in a multiple of the minimum increment on the basis of a total debit or credit for the order has determined that the order may not be executed by a combination of transaction with the bids and offers displayed in the SPX limit order book or by the displayed quotes of the crowd, then the order may be executed at the best net debit or credit so long as (A) no leg of the order would trade at a price outside the currently displayed bids or offers in the trading crowd or bids or offers in the SPX limit order book and (B) at least on leg of the order would trade at a price that is better than the corresponding bid or offer in the SPX limit order book.'' \9\ See Rule 6.42(4)(b). --------------------------------------------------------------------------- Although the Exchange believes the intent was to include SPX Combo Orders as complex orders for purposes of the minimum increment, the Exchange also believes there is confusion amongst members of the trading crowd regarding the applicable minimum increment. The Exchange believes the confusion has arisen because Interpretation and Policy .01 to Rule 6.42 does not specifically identify SPX Combo Orders as complex orders; rather, Rule 6.42.01 states: For purposes of this rule [6.42], ``complex order'' means a spread, straddle, combination or ratio order as defined in Rule 6.53,\10\ 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.\11\ --------------------------------------------------------------------------- \10\ A spread order is defined as ``an order to buy a stated number of option contracts and to sell the same number of option contracts, or contracts representing the same number of shares at option, of the same class of options.'' See Rule 6.53(d). A combination order is defined as ``an order involving a number of call option contracts and the same number of put option contracts in the same underlying security. In the case of adjusted option contracts, a combination order need not consist of the same number of put and call contracts if such contracts both represent the same number of shares at option.'' See Rule 6.53(e). A straddle order is defined as ``an order to buy a number of call option contracts and the same number of put option contracts on the same underlying security which contracts have the same exercise price and expiration date; or an order to sell a number of call option contracts and the same number of put option contracts on the same underlying security which contracts have the same exercise price and expiration date. (E.g., an order to buy two XYZ July 50 calls and to buy two July 50 XYZ puts is a straddle order.) In the case of adjusted option contracts, a straddle order need not consist of the same number of put and call contracts if such contracts both represent the same number of shares at option.'' See Rule 6.53(f). A ratio order is defined as ``a spread, straddle, or combination order in which the stated number of option contracts to buy (sell) is not equal to the stated number of option contracts to sell (buy), provided that the number of contracts differ by a permissible ratio. For purposes of this section, a permissible ratio is any ratio that is equal to or greater than one-to-three (.333) and less than or equal to three-to- one (3.00). For example, a one-to-two (.5) ratio, a two-to-three (.667) ratio, or a two-to-one (2.00) ratio is permissible, whereas a one-to-four (.25) ratio or a four-to-one (4.0) ratio is not.'' See Rule 6.53(n). \11\ Rule 6.53C is inapplicable to SPX Combo Orders because SPX Combo Orders may be executed in open outcry only whereas Rule 6.53C governs complex orders submitted to the Hybrid System for electronic handling. As the definitions of spread, straddle, combination and ratio order do not specifically identify SPX Combo Orders, the Exchange believes confusion has arisen with respect to whether an SPX Combo Order is a complex order for purposes of the minimum increment. In addition, the current interpretation that an SPX Combo Order is technically a complex order for purposes of the minimum increment (meaning all legs can be executed in $0.01 increments) does not fit how SPX Combo Orders are generally executed. In general, the only time legs of an SPX Combo Order are executed in $0.01 increments is in relation to a non-SPX combination with multiple legs. When the non-SPX combination is a single leg, the trading crowd generally executes the non-SPX combination in $0.05 or $0.10 increments, even though the current interpretation allows the legs to be executed in $0.01 increments. The Exchange notes that it is not a violation to execute a single leg non-SPX combination in $0.01, $0.05 or $.10 [[Page 66107]] increments. To illustrate, if the legs were required to be executed in $0.05 increments, for example, and the legs were instead executed in $0.01 increments, it would be a violation. Here, however, the situation is reversed--$0.01 increments are allowed, which automatically allows larger increment executions. Furthermore, the Exchange believes the reason single legged non-SPX combinations are generally executed in $0.05 or $0.10 increments is because executing a single leg non-SPX combination portion in $0.01 increments makes it difficult to attain a net execution price in $0.05 increments for the entire package.\12\ For example, if the net execution price of the SPX combination is $5.00, the execution price of a single leg non-SPX combination portion cannot be $1.01, $1.02, $1.03, or $1.04 for example, because the net execution price for the entire package would be in a net price increment less than $0.05. Additionally, a single legged non-SPX combination that is tied to an SPX combination is thought of in the same way as any single leg SPX option that is tied to an S&P 500 futures position. That is--an SPX option that is tied to an actual S&P 500 futures position would have to execute in $0.05 or $0.10 increments. Similarly, a single legged non-SPX combination is tied to an SPX combination that is equivalent to the futures; thus, it follows that the single legged non- SPX combination should be executed in the same increment that would be applicable if a customer was using the actual S&P 500 futures instead of the SPX combination. Customers reasonably should expect to receive an execution price on an individual leg that is in $0.05 or $0.10 increments. --------------------------------------------------------------------------- \12\ Because the current interpretation is an SPX Combo Order is a complex order for purposes of the minimum increment, the entire SPX Combo Order package must be executed in net price increments no smaller than $0.05 in accordance with Rule 6.42(4). --------------------------------------------------------------------------- Thus, in order to provide clarity regarding the minimum increment applicable to SPX Combo Orders, as well as to modify the Exchange's above interpretation in order to match the general practice of executing SPX Combo Orders, the Exchange proposes to add Rule 24.20.02 to provide as follows: The minimum increment applicable to SPX Combo Orders under Rule 6.42 is as follows: (a) The legs of the SPX combination portion of an SPX Combo Order may be executed in $0.01 increments and the entire SPX combination must be executed in net price increments no smaller than $0.05.\13\ --------------------------------------------------------------------------- \13\ Paragraph (a) will have no effect on customers as the current practice is in accordance with paragraph (a). --------------------------------------------------------------------------- (b) If the non-SPX combination portion of an SPX Combo Order consists of one leg, the leg must be executed in increments no smaller than $0.05 if the execution price is below $3.00 and increments no smaller than $0.10 if the execution price is at or above $3.00.\14\ --------------------------------------------------------------------------- \14\ Paragraph (b) is unlikely to have any effect on customers as the current practice is generally in accordance with paragraph (b); however, on very rare occasions members of the trading crowd currently execute a single legged non-SPX combination portion of an SPX Combo Order in $0.01 increments. --------------------------------------------------------------------------- (c) If the non-SPX combination portion of an SPX Combo Order consists of multiple legs, the individual legs may be executed in $0.01 increments and the entire non-SPX combination portion of the SPX Combo Order must be executed in net price increments no smaller than $0.05.\15\ --------------------------------------------------------------------------- \15\ Paragraph (c) will have no effect on customers as the current practice is in accordance with paragraph (c). When an SPX Combo Order is treated as a complex order for purposes of the minimum increment, as is currently the case, then the entire package may be executed at $0.05 increments and each individual leg may be executed at $0.01 increments.\16\ For example, an SPX Combo Order consisting of the purchase of one SPX 2000 call for $41.35 and the offsetting SPX combination consisting of a sale of one SPX 2065 call for $23.02 and the purchase of one SPX 2065 put for $21.02 would have a net debit price of $39.35. --------------------------------------------------------------------------- \16\ See Rule 6.42(4) (stating that bids and offers on complex orders in options on the S&P 500 Index (SPX), p.m.-settled S&P 500 Index (SPXPM) or on the S&P 100 Index (OEX and XEO), except for box/ roll spreads, shall be expressed in decimal increments no smaller than $0.05 and that the legs of a complex order may be executed in $0.01 increments). --------------------------------------------------------------------------- Applying the proposed rule to the above example provides that the non-SPX combination (the SPX 2000 call) is one leg that executes above $3.00; thus, it must be executed in $0.10 increments, which means it would have to execute at $41.30 or $41.40, instead of $41.35. The Exchange notes that the customer may in fact receive a better execution price because of this rule change because, in the above example, market participants may be willing to sell to a customer at $41.30 instead of $41.35. If instead the SPX Combo Order contained a non-SPX combination with two legs--one leg to buy an SPX 2000 call and one leg to buy an SPX 2010 call--tied to an SPX combination, each leg of the non-SPX combination could be executed in $0.01 increments, and the net execution price of the non-SPX combination package could be in net price increments of $0.05.\17\ --------------------------------------------------------------------------- \17\ This is similar to how complex orders must be executed in net price increments no smaller than $0.05. See Rule 6.42(4). --------------------------------------------------------------------------- The Exchange notes that the priority requirements of Rule 24.20(b)(2) will still apply to the entire SPX Combo Order. Thus, an SPX Combo Order will still be able to execute at the best net debit or credit so long as (A) no leg of the order would trade at a price outside the currently displayed bids or offers in the trading crowd or bids or offers in the SPX limit order book and (B) at least one leg of the order would trade at a price that is better than the corresponding bid or offer in the SPX limit order book. Furthermore, as noted above, for an SPX Combo Order comprised of a non-SPX combination portion with one leg, the trading crowd's practice is generally to execute the non-SPX combination portion of an SPX Combo Order in $0.05 or $0.10 increments, because executing a single leg non- SPX combination portion in $0.01 increments makes it difficult to attain a net execution price in $0.05 increments for the entire package. As noted above, if the net execution price of the SPX combination is $5.00, the execution price of a single leg non-SPX combination portion cannot be $1.01, $1.02, $1.03, or $1.04 for example, because the net execution price for the entire package would be in a net price increment less than $0.05. Thus, the practice for the non-SPX combination portion, which is completely reasonable, is to provide markets in increments of $0.05 and $0.10 to ensure that the entire package is executed in a net execution price of $0.05 increments. Thus, the Exchange believes customers will not be adversely impacted by this rule change. The rules are simply being modified to meet the existing, general practice of the trading crowd. The Exchange notes that it is the trading crowd and their practices that have created a vibrant ecosystem for customers to execute SPX Combo Orders and modifying the rules to match the practice that has helped to create this ecosystem is logical and desirable. Conclusion The Exchange believes this proposal will provide clarity with regards to the minimum increment applicable to SPX Combo Orders and will prevent the inconsistent application of the minimum increment. Also, customers that want to hedge a single leg SPX option order with S&P 500 futures would be required to execute the SPX option in either $0.05 or $0.10 increments; therefore, customers reasonably should expect to be required to execute a single leg SPX option in either $0.05 or $0.10 increments when the single leg SPX option is tied to an SPX combination because the SPX [[Page 66108]] combination is equivalent to an underlying futures level. Upon approval of this rule change, the Exchange will announce the implementation date of the proposed rule change in a Regulatory Circular to be published no later than 90 days following the approval date. The implementation date will be no later than 180 days following the approval date. 2. Statutory Basis The Exchange believes the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to the Exchange and, in particular, the requirements of Section 6(b) of the Securities Exchange Act of 1934 (the ``Act'').\18\ Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) \19\ 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) \20\ requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. --------------------------------------------------------------------------- \18\ 15 U.S.C. 78f(b). \19\ 15 U.S.C. 78f(b)(5). \20\ Id. --------------------------------------------------------------------------- In particular, the Exchange believes it is not clear from the rules what minimum increment applies to SPX Combo Orders and that specifying the minimum increment applicable to SPX Combo Orders will help to remove impediments to and perfect the mechanism of a free and open market and a national market system. Furthermore, the Exchange believes that essentially treating the non-SPX combination portion and the SPX combination as separate orders for purposes of the applicable minimum increment is consistent with the nature of SPX Combo Orders, which consist of a non-SPX combination tied to an underlying S&P Index value via the SPX combination. The Exchange believes maintaining consistency throughout its rules in this manner helps eliminate confusion in the marketplace, which helps to protect investors and the public interest generally. The consistency and clarity provided by this amendment will help to protect investors and the public interest generally. Finally, the Commission has already determined that it's consistent with the Act to require orders in SPX with only one leg (i.e., orders that are not complex orders or SPX Combo Orders) to be executed in increments no smaller than $0.05 for option series below $3.00 and $.10 for all options series at or above $3.00.\21\ Thus, it follows that requiring a one legged non-SPX combination portion of an SPX Combo Order to be executed in $0.05 and $0.10 in the same manner is consistent with the Act. --------------------------------------------------------------------------- \21\ See Rule 6.42(1)-(3). --------------------------------------------------------------------------- B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The proposed rule change will apply to all SPX Combo Orders, and all TPHs that represent and compete for those orders, in the same manner. The Exchange believes that specifying the minimum increment applicable to SPX Combo Orders, and clarifying the manner in which these orders execute on the Exchange, promotes fair and orderly markets, as well as assists the Exchange in its ability to effectively attract order flow and liquidity to its market, and ultimately benefits all TPHs and all investors. Furthermore, any perceived burden on customers due to the fact that the single legged non-SPX combination portion of an SPX Combo Order must be executed in $0.05 or $0.10 increments pursuant to this rule (instead of $0.01 increments as is currently the Exchange's interpretation) is outweighed by the fact that the current practice of the trading crowd is to execute the single legged non-SPX combination in $0.05 or $0.10 increments and that the current practice enables the trading crowd to more quickly provide bids and offers that meet the minimum increment requirements. Furthermore, customers may in fact receive a better execution price on their SPX Combo Orders because TPHs competing for the order may improve their market by $0.05 or $0.10 instead of just $0.01. This rule change will only prevent the rare situation where a member is determined to execute a single legged non-SPX combination portion of an SPX Combo Order in $0.01 increments, which, again, is not a frequent occurrence. Furthermore, customers that want to hedge a single leg SPX option order with S&P 500 futures would be required to execute the SPX option in either $0.05 or $0.10 increments; therefore, customers reasonably should expect to be required to execute a single leg SPX option in either $0.05 or $0.10 increments when the single leg SPX option is tied to an SPX combination because the SPX combination is equivalent to an underlying futures level. Finally, the Commission has already determined that it's not unduly burdensome to competition to require orders in SPX with only one leg (i.e., orders that are not complex orders or SPX Combo Orders) to be executed in increments no smaller than $0.05 for option series below $3.00 and $.10 for all options series at or above $3.00.\22\ Thus, it follows that requiring a one legged non-SPX combination portion of an SPX Combo Order to be executed in $0.05 and $0.10 in the same manner is also not unduly burdensome on competition. --------------------------------------------------------------------------- \22\ See Rule 6.42(1)-(3). --------------------------------------------------------------------------- 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 Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission will: A. By order approve or disapprove such proposed rule change, or B. institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic CommentsUse the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or [[Page 66109]] Send an email to [email protected]. Please include File Number SR-CBOE-2016-064 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-2016-064. 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-2016-064 and should be submitted on or before October 17, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\23\ --------------------------------------------------------------------------- \23\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Robert W. Errett, Deputy Secretary. [FR Doc. 2016-23044 Filed 9-23-16; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 81, No. 186 / Monday, September 26, 2016 / Notices 66105
Commission may designate if it finds available publicly. All submissions places specified in Item IV below. The
such longer period to be appropriate should refer to File No. SR–NYSE– Exchange has prepared summaries, set
and publishes its reasons for so finding 2016–45, and should be submitted on or forth in sections A, B, and C below, of
or (ii) as to which the self-regulatory before October 17, 2016. the most significant aspects of such
organization consents, the Commission For the Commission, by the Division of statements.
will: Trading and Markets, pursuant to delegated
(A) By order approve or disapprove authority.48 A. Self-Regulatory Organization’s
the proposed rule change, or Robert W. Errett,
Statement of the Purpose of, and
(B) institute proceedings to determine Statutory Basis for, the Proposed Rule
Deputy Secretary.
whether the proposed rule change Change
[FR Doc. 2016–23046 Filed 9–23–16; 8:45 am]
should be disapproved.
BILLING CODE 8011–01–P 1. Purpose
IV. Solicitation of Comments
The Exchange proposes to amend
Interested persons are invited to
SECURITIES AND EXCHANGE Rules 24.20, SPX Combo Orders, and
submit written data, views and
COMMISSION 6.42, Minimum Increment for Bids and
arguments concerning Amendment No.
Offers, to specify the manner in which
1, including whether the proposed rule [Release No. 34–78885; File No. SR–CBOE–
the minimum increment provision of
change is consistent with the Act. 2016–064]
Comments may be submitted by any of Rule 6.42 applies to SPX Combo Orders.
the following methods: Self-Regulatory Organizations; Background
Chicago Board Options Exchange,
Electronic Comments Incorporated; Notice of Filing of a An SPX Combo Order consists of an
• Use the Commission’s Internet Proposed Rule Change Relating to order to purchase or sell one or more
comment form (http://www.sec.gov/ SPX Combo Orders SPX option series (hereinafter the ‘‘non-
rules/sro.shtml); or SPX combination’’) and the offsetting
September 20, 2016.
• Send an email to rule-comments@ number of ‘‘SPX combinations’’ defined
sec.gov. Please include File No. SR– Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the by the delta.3 For purposes of an SPX
NYSE–2016–45 on the subject line. Combo Order, an SPX combination is a
‘‘Act’’),1 and Rule 19b–4 thereunder,2
Paper Comments notice is hereby given that on purchase (sale) of an SPX call and sale
(purchase) of an SPX put having the
• Send paper comments in triplicate September 8, 2016, Chicago Board
Options Exchange, Incorporated (the same expiration date and strike price.
to Brent J. Fields, Secretary, Securities
‘‘Exchange’’ or ‘‘CBOE’’) filed with the Additionally, the delta is the positive
and Exchange Commission, 100 F Street
Securities and Exchange Commission (negative) number of SPX combinations
NE., Washington, DC 20549–1090.
(the ‘‘Commission’’) the proposed rule that must be sold (bought) to establish
All submissions should refer to File No. a market neutral hedge with one or more
SR–NYSE–2016–45. This file number change as described in Items I, II, and
III below, which Items have been SPX option series (i.e., the non-SPX
should be included on the subject line combination).4
if email is used. To help the prepared by the Exchange. The
Commission process and review your Commission is publishing this notice to SPX traders commonly hedge their
comments more efficiently, please use solicit comments on the proposed rule options positions with SPX
only one method. The Commission will change from interested persons. combinations, also called ‘‘synthetic
post all comments on the Commission’s I. Self-Regulatory Organization’s futures,’’ which, as the above definition
Internet Web site (http://www.sec.gov/ Statement of the Terms of Substance of provides, are created by combining
rules/sro.shtml). Copies of the the Proposed Rule Change long(short) SPX calls with short(long)
submission, all subsequent SPX puts of the same series, in lieu of
The Exchange seeks to amend its rules hedging with the actual S&P 500 futures
amendments, all written statements
related to SPX Combo Orders. The text contract trading at CME. The individual
with respect to the proposed rule
of the proposed rule change is available legs of the SPX combination are priced
change that are filed with the
on the Exchange’s Web site (http:// such that a value for the SPX
Commission, and all written
www.cboe.com/AboutCBOE/ combination is established which is
communications relating to the
CBOELegalRegulatoryHome.aspx), at equivalent to the value of a future at a
proposed rule change between the
the Exchange’s Office of the Secretary, level at which the trader wishes to make
Commission and any person, other than
and at the Commission’s Public the underlying futures market ‘‘static.’’
those that may be withheld from the
Reference Room. Then, based on the static value
public in accordance with the
provisions of 5 U.S.C. 552, will be II. Self-Regulatory Organization’s established by the SPX combination that
available for Web site viewing and Statement of the Purpose of, and has been quoted, the trader will request
printing in the Commission’s Public Statutory Basis for, the Proposed Rule a market for the non-SPX combination
Reference Room, 100 F Street NE., Change that he wishes to trade, and will
Washington, DC 20549 on official In its filing with the Commission, the indicate the delta of the non-SPX
business days between the hours of Exchange included statements combination. An SPX trader will
10:00 a.m. and 3:00 p.m. Copies of such concerning the purpose of and basis for execute the SPX combination in
filing also will be available for conjunction with the non-SPX
mstockstill on DSK3G9T082PROD with NOTICES
the proposed rule change and discussed
inspection and copying at the principal any comments it received on the combination, taking into account the
office of the Exchange. All comments proposed rule change. The text of these delta of the particular options making
received will be posted without change; statements may be examined at the up the non-SPX combination, such that
the Commission does not edit personal the combined positions will create a
identifying information from 48 17 CFR 200.30–3(a)(12).
submissions. You should submit only 1 15 U.S.C. 78s(b)(1). 3 See Rule 24.20(a)(3).
information that you wish to make 2 17 CFR 240.19b–4. 4 See Rule 24.20(a)(1) and (2).
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![66106 Federal Register / Vol. 81, No. 186 / Monday, September 26, 2016 / Notices
‘‘delta neutral’’ hedge.5 For example, a Rule 24.20 does not explicitly specify or ratio order as defined in Rule 6.53,10 a
customer that wants to purchase 100 the minimum increment applicable to stock-option order as defined in Rule 1.1(ii),
SPX calls that have a delta of ‘‘30’’ (30% SPX Combo Orders,8 or reference how a security future-option order as defined in
Rule 1.1(zz), or any other complex order as
or .30) may hedge against a downward the minimum increment provision of
defined in Rule 6.53C.11
movement in the S&P 500 Index by Rule 6.42(4) applies to SPX Combo
selling 30 SPX combinations (.30 × 100). Orders, the Exchange believes the As the definitions of spread, straddle,
In other words, the SPX combination in original intent was for SPX Combo combination and ratio order do not
this example will be to sell 30 SPX calls Orders to be considered ‘‘complex specifically identify SPX Combo Orders,
and buy 30 SPX puts with the same orders’’ for the purposes of the the Exchange believes confusion has
strike price and expiration date. minimum increment. In support of this arisen with respect to whether an SPX
When the non-SPX combination is conclusion the Exchange notes that Rule Combo Order is a complex order for
paired with an SPX combination the 6.42(4)(b) states that ‘‘complex orders purposes of the minimum increment.
non-SPX combination can be described are subject to special priority In addition, the current interpretation
as being ‘‘tied’’ to the value of a future requirements as described in Rules 6.45, that an SPX Combo Order is technically
because the non-SPX combination is 6.45A, 6.45B, 6.53C, 24.19 and 24.20.’’ 9 a complex order for purposes of the
tied to an SPX combination that is The Exchange believes referencing Rule minimum increment (meaning all legs
equivalent to the value of a future. The 24.20 in this manner demonstrates the can be executed in $0.01 increments)
concept of an option being ‘‘tied’’ to an intent to include SPX Combo Orders as does not fit how SPX Combo Orders are
complex orders for purposes of the generally executed. In general, the only
underlying value extends to stock-
minimum increment provision. time legs of an SPX Combo Order are
option orders.6 For example, floor
Although the Exchange believes the executed in $0.01 increments is in
brokers may represent an order to buy
intent was to include SPX Combo relation to a non-SPX combination with
an AAPL call tied to the sale of AAPL
Orders as complex orders for purposes multiple legs. When the non-SPX
stock at a specified price. The price at
of the minimum increment, the combination is a single leg, the trading
which the crowd is willing to sell the
Exchange also believes there is crowd generally executes the non-SPX
call is dependent on the specified price
confusion amongst members of the combination in $0.05 or $0.10
of the AAPL stock. For purposes of this
trading crowd regarding the applicable increments, even though the current
example, assume the specified price is
minimum increment. The Exchange interpretation allows the legs to be
$99. The crowd may be willing to sell executed in $0.01 increments. The
the call for $5.00 tied to AAPL stock at believes the confusion has arisen
because Interpretation and Policy .01 to Exchange notes that it is not a violation
$99. If the specified price of AAPL stock to execute a single leg non-SPX
was instead $100, the crowd’s market Rule 6.42 does not specifically identify
SPX Combo Orders as complex orders; combination in $0.01, $0.05 or $.10
for the call would change. If the broker
is unable to execute the stock portion of rather, Rule 6.42.01 states:
10 A spread order is defined as ‘‘an order to buy
the order at the specified price of $99, For purposes of this rule [6.42], ‘‘complex a stated number of option contracts and to sell the
the option portion of the order also order’’ means a spread, straddle, combination same number of option contracts, or contracts
cannot be executed. Similarly, a broker representing the same number of shares at option,
defined in Interpretation and Policy .01 [to Rule of the same class of options.’’ See Rule 6.53(d). A
representing an SPX Combo Order may combination order is defined as ‘‘an order involving
6.42], may be expressed in any net price increment
be unable to execute the SPX (that may not be less than $0.01) that may be a number of call option contracts and the same
combination portion of the order at the determined by the Exchange on a class-by-class number of put option contracts in the same
desired futures level because the basis and announced to the Trading Permit Holders underlying security. In the case of adjusted option
via Regulatory Circular, regardless of the minimum contracts, a combination order need not consist of
individual leg prices of the SPX increments otherwise appropriate to the individual the same number of put and call contracts if such
combination that would create the legs of the order. Notwithstanding the foregoing contracts both represent the same number of shares
equivalent futures value are outside the sentence, bids and offers on complex orders in at option.’’ See Rule 6.53(e). A straddle order is
options on the S&P 500 Index (SPX), p.m.-settled defined as ‘‘an order to buy a number of call option
market for the leg prices. contracts and the same number of put option
S&P 500 Index (SPXPM) or on the S&P 100 Index
Minimum Increment Applicable to SPX (OEX and XEO), except for box/roll spreads, shall contracts on the same underlying security which
be expressed in decimal increments no smaller than contracts have the same exercise price and
Combo Orders $0.05 or in any increment, as determined by the expiration date; or an order to sell a number of call
Currently, SPX Combo Orders are Exchange on a class-by-class basis and announced option contracts and the same number of put option
to the Trading Permit Holders via Regulatory contracts on the same underlying security which
treated as complex orders for the Circular. In addition: (a) The legs of a complex contracts have the same exercise price and
purposes of the minimum increment order may be executed in $0.01 increments; and (b) expiration date. (E.g., an order to buy two XYZ July
provision of Rule 6.42(4).7 Although complex orders are subject to special priority 50 calls and to buy two July 50 XYZ puts is a
requirements as described in Rules 6.45, 6.45A, straddle order.) In the case of adjusted option
5 The entire SPX Combo Order consisting of the
6.45B, 6.53C, 24.19 and 24.20. contracts, a straddle order need not consist of the
8 Rule 24.20(b)(2) uses the term ‘‘minimum same number of put and call contracts if such
SPX combination portion and the non-SPX contracts both represent the same number of shares
increment’’ but only in reference to the priority
combination portion must be executed as a package. at option.’’ See Rule 6.53(f). A ratio order is defined
requirements for SPX Combo Orders, stating that:
6 A stock-option order is an order to buy or sell
‘‘[w]hen a Trading Permit Holder holding an SPX as ‘‘a spread, straddle, or combination order in
a stated number of units of an underlying or a Combo Order with the required combo indicator which the stated number of option contracts to buy
related security coupled with either (a) the and bidding or offering in a multiple of the (sell) is not equal to the stated number of option
purchase or sale of option contract(s) on the minimum increment on the basis of a total debit or contracts to sell (buy), provided that the number of
opposite side of the market representing either the credit for the order has determined that the order contracts differ by a permissible ratio. For purposes
same number of units of the underlying or related may not be executed by a combination of of this section, a permissible ratio is any ratio that
security or the number of units of the underlying transaction with the bids and offers displayed in the is equal to or greater than one-to-three (.333) and
security necessary to create a delta neutral position SPX limit order book or by the displayed quotes of less than or equal to three-to-one (3.00). For
mstockstill on DSK3G9T082PROD with NOTICES
or (b) the purchase or sale of an equal number of the crowd, then the order may be executed at the example, a one-to-two (.5) ratio, a two-to-three
put and call option contracts, each having the same best net debit or credit so long as (A) no leg of the (.667) ratio, or a two-to-one (2.00) ratio is
exercise price, expiration date and each order would trade at a price outside the currently permissible, whereas a one-to-four (.25) ratio or a
representing the same number of units of stock as, displayed bids or offers in the trading crowd or bids four-to-one (4.0) ratio is not.’’ See Rule 6.53(n).
and on the opposite side of the market from, the or offers in the SPX limit order book and (B) at least 11 Rule 6.53C is inapplicable to SPX Combo
underlying or related security portion of the order. on leg of the order would trade at a price that is Orders because SPX Combo Orders may be
Rule 1.1(ii). better than the corresponding bid or offer in the executed in open outcry only whereas Rule 6.53C
7 Rule 6.42(4) states that except as provided in SPX limit order book.’’ governs complex orders submitted to the Hybrid
Rule 6.53C, bids and offers on complex orders, as 9 See Rule 6.42(4)(b). System for electronic handling.
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![Federal Register / Vol. 81, No. 186 / Monday, September 26, 2016 / Notices 66109
• Send an email to rule-comments@ SECURITIES AND EXCHANGE investment company that is registered
sec.gov. Please include File Number SR– COMMISSION with the Commission;
CBOE–2016–064 on the subject line. • Creation Units will be continuously
[Release No. 34–78882; File No. TP 16–13] redeemable at the net asset value
Paper Comments (‘‘NAV’’) next determined after receipt
Order Granting Limited Exemptions
of a request for redemption by the Fund,
• Send paper comments in triplicate From Exchange Act Rule 10b–17 and
Rules 101 and 102 of Regulation M to and the secondary market price of the
to Secretary, Securities and Exchange
Amplify YieldShares Prime 5 Dividend Shares should not vary substantially
Commission, 100 F Street NE.,
ETF Pursuant to Exchange Act Rule from the NAV of such Shares;
Washington, DC 20549–1090. • Shares of the Fund will be listed
10b–17(b)(2) and Rules 101(d) and
All submissions should refer to File and traded on BATS Exchange Inc. or
102(e) of Regulation M
Number SR–CBOE–2016–064. This file another exchange in accordance with
number should be included on the September 20, 2016. exchange listing standards that are, or
subject line if email is used. To help the By letter dated September 20, 2016 will become, effective pursuant to
Commission process and review your (the ‘‘Letter’’), as supplemented by Section 19(b) of the Exchange Act (the
comments more efficiently, please use conversations with the staff of the ‘‘Listing Exchange’’); 2
Division of Trading and Markets, • The Fund seeks to track the
only one method. The Commission will
counsel for Amplify ETF Trust (the performance of the Underlying Index,
post all comments on the Commission’s
‘‘Trust’’) on behalf of the Trust, Amplify all the components of which have
Internet Web site (http://www.sec.gov/ publicly available last sale trade
rules/sro.shtml). Copies of the YieldShares Prime 5 Dividend ETF (the
‘‘Fund’’), any national securities information;
submission, all subsequent • The Listing Exchange will
exchange on or through which shares of
amendments, all written statements disseminate continuously every 15
the Fund (‘‘Shares’’) are listed and may
with respect to the proposed rule seconds throughout the trading day,
subsequently trade, and persons or
change that are filed with the entities engaging in transactions in through the facilities of the
Commission, and all written Shares (collectively, the ‘‘Requestors’’), Consolidated Tape Association, the
communications relating to the requested exemptions, or interpretive or market value of a Share;
proposed rule change between the no-action relief, from Rule 10b–17 of the • The Listing Exchange, market data
Commission and any person, other than Securities Exchange Act of 1934, as vendors or other information providers
those that may be withheld from the amended (‘‘Exchange Act’’), and Rules will disseminate, every 15 seconds
public in accordance with the 101 and 102 of Regulation M, in throughout the trading day, a
provisions of 5 U.S.C. 552, will be connection with secondary market calculation of the intraday indicative
available for Web site viewing and transactions in Shares and the creation value of a Share;
printing in the Commission’s Public or redemption of aggregations of Shares • On each business day before the
Reference Room, 100 F Street NE., of 50,000 shares (‘‘Creation Units’’). opening of business on the Listing
The Trust is registered with the Exchange, the Fund will cause to be
Washington, DC 20549 on official
Securities and Exchange Commission published through the National
business days between the hours of
(‘‘Commission’’) under the Investment Securities Clearing Corporation the list
10:00 a.m. and 3:00 p.m. Copies of the
Company Act of 1940, as amended of the names and the quantities of
filing also will be available for securities of the Fund’s portfolio that
inspection and copying at the principal (‘‘1940 Act’’), as an open-end
management investment company. The will be applicable that day to creation
office of the Exchange. All comments and redemption requests;
Fund seeks to track the performance of
received will be posted without change;
an underlying index, the Prime 5 US • The arbitrage mechanism will be
the Commission does not edit personal facilitated by the transparency of the
identifying information from Dividend ETF Index (‘‘Underlying
Index’’). The Underlying Index seeks to Fund’s portfolio and the availability of
submissions. You should submit only the intraday indicative value, the
provide exposure to the five highest-
information that you wish to make liquidity of securities held by the Fund,
ranked dividend ETFs based on the
available publicly. All submissions index provider’s scoring and selection the ability to acquire such securities, as
should refer to File Number SR–CBOE– criteria. well as arbitrageurs’ ability to create
2016–064 and should be submitted on The Fund will seek to track the workable hedges;
or before October 17, 2016. performance of its Underlying Index by • The Fund will invest solely in
normally investing at least 80% of its liquid securities;
For the Commission, by the Division of • The Fund will invest in securities
Trading and Markets, pursuant to delegated total assets in the underlying exchange-
that will facilitate an effective and
authority.23 traded funds that comprise the
efficient arbitrage mechanism and the
Robert W. Errett, Underlying Index.1 In light of the
ability to create workable hedges;
Deputy Secretary.
composition of the Underlying Index, • All ETFs in which the Fund invests
the Fund intends to operate as an ‘‘ETF will either meet all conditions set forth
[FR Doc. 2016–23044 Filed 9–23–16; 8:45 am]
of ETFs.’’ Except for the fact that the in one or more class relief letters, will
BILLING CODE 8011–01–P Fund will operate as an ETF of ETFs, have received individual relief from the
the Fund will operate in a manner Commission, will be able to rely on
identical to the underlying ETFs. individual relief even though they are
mstockstill on DSK3G9T082PROD with NOTICES
The Requestors represent, among
not named parties, or will be able to rely
other things, the following:
• Shares of the Fund will be issued 2 Further, the Letter states that should the Shares
by the Trust, an open-end management also trade on a market pursuant to unlisted trading
privileges, such trading will be conducted pursuant
1 The remaining 20% may be invested in to self-regulatory organization rules that are or will
securities with maturities of less than one year or become effective pursuant to Section 19(b) of the
23 17 CFR 200.30–3(a)(12). cash equivalents, or the Fund may hold cash. Exchange Act.
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Document Created: 2018-02-09 13:22:57
Document Modified: 2018-02-09 13:22:57
| 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 66105 |
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