81 FR 90012 - Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change To Amend Exchange Rules Related to the Automated Improvement Mechanism

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 239 (December 13, 2016)

[Federal Register Volume 81, Number 239 (Tuesday, December 13, 2016)]
[Notices]
[Pages 90012-90015]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-29804]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79499; File No. SR-CBOE-2016-084]


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

December 7, 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 November 29, 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.
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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 seeks to amend Exchange Rules related to the Automated 
Improvement Mechanism. The text of the proposed rule change is provided 
below.

(additions are italicized; deletions are [bracketed])
* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *

[[Page 90013]]

Rule 6.74A. Automated Improvement Mechanism (``AIM'')

    Notwithstanding the provisions of Rule 6.74, a Trading Permit 
Holder that represents agency orders may electronically execute an 
order it represents as agent (``Agency Order'') against principal 
interest or against a solicited order provided it submits the Agency 
Order for electronic execution into the AIM auction (``Auction'') 
pursuant to this Rule.
    (a)-(b) No change.

. . . Interpretations and Policies:

    .01-.02 No change.
    .03 [Initially, and for at least a Pilot Period expiring on January 
18, 2017, there will be] There is no minimum size requirement for 
orders to be eligible for the Auction. [During this Pilot Period, the 
Exchange will submit certain data, periodically as required by the 
Commission, to provide supporting evidence that, among other things, 
there is meaningful competition for all size orders and that there is 
an active and liquid market functioning on the Exchange outside of the 
Auction mechanism. Any raw data which is submitted to the Commission 
will be provided on a confidential basis.]
    .04-.05 No change.
    .06 [Subparagraph (b)(2)(E) of this rule will be effective for a 
Pilot Period until January 18, 2017. During the Pilot Period, the 
Exchange will submit certain data, periodically as required by the 
Commission, relating to the frequency with which early termination of 
the Auction occurs pursuant to this provision as well as any other 
provision, and also the frequency with which early termination pursuant 
to this provision results in favorable pricing for the Agency Order. 
Any raw data which is submitted to the Commission will be provided on a 
confidential basis.] Reserved.
    .07-.09 No change.
* * * * *

Rule 24B.5A. FLEX Automated Improvement Mechanism

    Notwithstanding the provisions of Rule 24B.5, a FLEX Trader that 
represents agency orders may electronically execute an order it 
represents as agent (``Agency Order'') against principal interest and/
or against solicited orders provided it submits the Agency Order for 
execution into the automated improvement mechanism auction (``AIM 
Auction'') pursuant to this Rule.
    (a) AIM Auction Eligibility Requirements. A FLEX Trader (the 
``Initiating Trading Permit Holder'') may initiate an AIM Auction 
provided all of the following are met:
    (1) the Agency Order is in a FLEX class designated as eligible for 
AIM Auctions as determined by the Exchange and within the designated 
AIM Auction order eligibility size parameters as such size parameters 
are determined by the Exchange; and
    (2) the Initiating Trading Permit Holder must stop the entire 
Agency Order as principal and/or with a solicited order(s) at the 
better of the BBO price improved by one minimum price improvement 
increment or the Agency Order's limit price.
    (b) No change.

    . . . Interpretations and Policies:

    .01-.02 No change.
    .03 [Initially, and for at least a Pilot Period expiring on January 
18, 2017, there will be] There is no minimum size requirement for 
orders to be eligible for the AIM Auction. [During this Pilot Period, 
the Exchange will submit certain data, periodically as required by the 
Commission, to provide supporting evidence that, among other things, 
there is meaningful competition for all size orders and that there is 
an active and liquid market functioning on the Exchange outside of the 
AIM Auction. Any raw data which is submitted to the Commission will be 
provided on a confidential basis.]
    .04-.07 No change.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In February 2006, CBOE obtained approval from the Securities and 
Exchange Commission (the ``Commission'') to adopt the AIM auction 
process.\3\ AIM exposes certain orders electronically to an auction 
process to provide these orders with the opportunity to receive an 
execution at an improved price. The AIM auction is available only for 
orders that a Trading Permit Holder represents as agent (``Agency 
Order'') and for which a second order of the same size as the Agency 
Order (and on the opposite side of the market) is also submitted 
(effectively stopping the Agency Order at a given price).
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    \3\ See Securities Exchange Release No. 53222 (February 3, 
2006), 71 FR 7089 (February 10, 2006) (SR-CBOE-2005-60).
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    The Commission approved two components of AIM on a pilot basis: (1) 
That there is no minimum size requirement for orders to be eligible for 
the auction; and (2) that the auction will conclude prematurely anytime 
there is a quote lock on the Exchange pursuant to Rule 6.45A(d).\4\
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    \4\ A quote lock occurs when a CBOE Market-Maker's quote 
interacts with the quote of another CBOE Market-Maker (i.e. when 
internal quotes lock).
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    Eleven extensions to the pilot programs have previously become 
effective.\5\ The pilot program is set to expire on January 18, 2017. 
The Exchange is seeking permanent approval of the pilot programs.
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    \5\ See Securities Exchange Act Release Nos. 54147 (July 14, 
2006), 71 FR 41487 (July 21, 2006) (SR-CBOE-2006-64); 56094 (July 
18, 2007), 72 FR 40910 (July 25, 2007) (SR-CBOE-2007-80); 58196 
(July 18, 2008), 73 FR 43803 (July 28, 2008) (SR-CBOE-2008-76); 
60338 (July 17, 2009), 74 FR 36803 (July 24, 2009) (SR-CBOE-2009-
051); 62522 (July 16, 2010), 75 FR 43596 (July 26, 2010) (SR-CBOE-
2010-067); 64930 (July 20, 2011), 76 FR 44636 (July 26, 2011) (SR-
CBOE-2011-066); 67302 (June 28, 2012), 77 FR 39779 (July 5, 2012) 
(SR-CBOE-2012-061); 69867 (June 27, 2013), 78 FR 40230 (July 3, 
2013) (SR-CBOE-2013-066); 72570 (July 9, 2014), 79 FR 41337 (July 
15, 2014) (SR-CBOE-2014-054); 75476 (July 16, 2015), 80 FR 43548 
(July 22, 2015) (SR-CBOE-2015-068); and 78316 (July 13, 2016) 81 FR 
138 (July 19, 2016).
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    As evidenced by data submitted to the Commission on a monthly and 
confidential basis since the pilot programs inception, AIM offers 
meaningful competition for all size orders. Additionally, there is an 
active and liquid market functioning on the Exchange outside of AIM. In 
addition to monthly data provided to the Commission on a confidential 
basis, the Exchange provided the Commission

[[Page 90014]]

with a summary report (the ``Report''), included herein as Exhibit 3, 
which demonstrates the price improvement benefits of AIM. Approving the 
pilot programs on a permanent basis will allow AIM to continue to offer 
meaningful price improvement and will not have an adverse effect on the 
market functioning on the Exchange outside of AIM.
    Specifically, the Report contains eight categories of non-customer 
and customer auction data, as well as three categories of summary 
auction data, during the period January 2015 through June 2015. Each of 
the eight categories is divided into subcategories based on the spread 
of the National Best Bid or Offer (``NBBO'') at the time an auction was 
initiated. The data is further divided into the number of orders that 
were auctioned within each particular subcategory. Finally, for each 
subcategory, Exchange identified the per contract price improvement 
that occurred at each NBBO spread; the average number of participants 
responding to the auctions plus the initiator; the total volume the 
initiator received; the average percentage of orders the initiator 
received; and the percentage of contracts received by the auction 
initiator.
    The various categories contained in the Report include:
(1) Non-Customer Auction/Under 50 Contracts/CBOE not at NBBO
(2) Non-Customer Auction/Under 50 Contracts/CBOE at NBBO
(3) Non-Customer Auction/50 Contracts and over/CBOE not at NBBO
(4) Non-Customer Auction/50 Contracts and over/CBOE at NBBO
(5) Customer Auction/Under 50 Contracts/CBOE not at NBBO
(6) Customer Auction/Under 50 Contracts/CBOE at NBBO
(7) Customer Auction/50 Contracts and over/CBOE not at NBBO
(8) Customer Auction/50 Contracts and over/CBOE at NBBO
(9) Summary of all Non-Customer Auctions for the Period
(10) Summary of all Customer Auctions for the Period
(11) Summary of all Auctions for the Period

The summary of all auctions overwhelming demonstrates that AIM offers 
competition and price improvement because the vast majority of 
contracts traded via AIM received price improvement beyond the NBBO. 
Specifically, with regards to Customer AIM auctions, of the 54,243,091 
contracts traded via AIM during the Report period 41,278,408 contracts 
received price improvement beyond the NBBO.\6\ In addition, of the 
54,504,717 total contracts traded via AIM during the Report period 
41,514,731 contracts received price improvement beyond the NBBO.\7\
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    \6\ See Exhibit 3, pages 46-47.
    \7\ See Exhibit 3, page 47.
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    Furthermore, the Exchange provided the Commission with data on a 
monthly and confidential basis on the number of times an AIM auction 
was terminated early because of a quote lock on the Exchange pursuant 
to CBOE Rule 6.45A(d). From January 2015 through June 2015, for 
example, there were less than two auctions ended early per month 
because of a quote lock. Thus, due to the infrequency with which a 
quote lock terminates an AIM auction, permanent approval of the pilot 
program to end AIM auctions early when there is a quote lock on the 
Exchange will have a de minimis impact on the marketplace. Also, 
modifying the ``Quote Lock'' \8\ timer, which allows quotes from two or 
more CBOE Market-Makers to remain locked for a given time interval 
prior to trading with one another, will not impact AIM. The quote lock 
is what triggers both the Quote Lock timer and the termination of an 
AIM auction; thus, the length of the Quote Lock timer will not affect 
AIM.
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    \8\ See Rule 6.45A(d)(i)(B) and RG16-158.
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    Additionally, in March 2012, CBOE obtained approval from the 
Commission to adopt the AIM auction process for FLEX Options.\9\ AIM 
for FLEX Options exposes certain FLEX Options orders electronically to 
an auction process to provide these orders with the opportunity to 
receive an execution at an improved price. The FLEX AIM auction is 
available only for Agency Orders and for which a second order of the 
same size as the Agency Order (and on the opposite side of the market) 
is also submitted (effectively stopping the Agency Order at a given 
price).
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    \9\ See Securities Exchange Release No. 66702 (March 30, 2012), 
77 FR 20675 (April 5, 2012) (SR-CBOE-2011-123).
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    The Commission approved on a pilot basis the component of AIM for 
FLEX Options that there is no minimum size requirement for orders to be 
eligible for the auction.\10\ Although Exhibit 3 does not include data 
regarding AIM for FLEX Options, the Exchange has submitted to the 
Commission reports providing detailed FLEX AIM auction and order 
execution data since the Pilot's inception. Five extensions to the 
pilot program have previously become effective.\11\ The pilot program 
is set to expire on January 18, 2017. The Exchange is seeking permanent 
approval of the pilot program.
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    \10\ The pilot for the FLEX AIM auction process was modeled 
after the pilot for non-FLEX Options described above, and included 
an initial expiration date of July 18, 2012 so that the FLEX pilot 
would coincide with the existing non-FLEX pilot.
    \11\ See Securities Exchange Act Release No. 67302 (June 28, 
2012), 77 FR 39779 (July 5, 2012) (SR-CBOE-2012-061); 69938 (July 5, 
2013), 78 FR 41481 (July 10, 2013) (SR-CBOE-2013-069); 72570 (July 
9, 2014), 79 FR 41337 (July 15, 2014) (SR-CBOE-2014-054); 75476 
(July 16, 2015), 80 FR 43548 (July 22, 2015) (SR-CBOE-2015-068); and 
78316 (July 13, 2016) 81 FR 138 (July 19, 2016).
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    Currently, in order to initiate a FLEX AIM auction the initiating 
Trading Permit Holder must stop the entire Agency Order as principal 
and/or with a solicited order(s) at the better of the BBO or the Agency 
Order's limit price. For purposes of Chapter XXIVB the term ``BBO'' 
means the best bid or offer, or both, as applicable, entered in 
response to a Request for Quotes (``RFQ'') \12\ or resting in the 
electronic book.\13\ Generally speaking there is no existing BBO prior 
to a FLEX AIM because there either has not been an RFQ or a FLEX Order 
with the same terms as the order to be auctioned in FLEX AIM.\14\ Thus, 
the monthly data submitted to the Commission does not show observable 
price improvement beyond the BBO because generally speaking no BBO 
exists prior to a FLEX AIM. Although the Exchange has agreed to modify 
its FLEX AIM rules to require the Agency Order to be stopped at the 
better of the BBO price improved by one minimum price increment or the 
Agency Order's limit price, the Exchange does not believe there will be 
any difference in the way FLEX AIM functions. It's likely that there 
will continue to be no BBO prior to a FLEX AIM; however, FLEX AIM will 
continue to offer the possibility for price improvement beyond the 
initiator's stop price.
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    \12\ RFQ is defined as the initial request supplied by a 
Submitting Trading Permit Holder to initiate FLEX bidding and 
offering. See Rule 24B.1(r).
    \13\ See Rule 24B.1(a).
    \14\ FLEX Order is defined as (i) FLEX bids and offers entered 
by FLEX Market-Makers and (ii) orders to purchase and orders to sell 
FLEX Options entered by FLEX Traders, in each case into the 
electronic book. See Rule 24B.1(j).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\15\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \16\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and

[[Page 90015]]

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) \17\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
    \17\ Id.
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    In particular, the proposed rule change protects investors and the 
public interest because the AIM and FLEX AIM pilot programs have 
allowed (1) smaller non-FLEX option and FLEX Option orders to receive 
the opportunity for price improvement pursuant to the AIM auction, and 
(2) with respect to non-FLEX options, Agency Orders in AIM auctions 
that are concluded early because of quote lock on the Exchange to 
receive the benefit of the lock price. Additionally, as noted above, 
the AIM pilot program offers meaningful price improvement and making it 
permanent will not have an adverse effect on the market functioning on 
the Exchange outside of AIM. Furthermore, although it's likely that 
there will continue to be no BBO prior to a FLEX AIM, the FLEX AIM 
mechanism will continue to offer the possibility for price improvement 
beyond the initiator's stop price and making the pilot permanent will 
not have an adverse effect on the market functioning on the Exchange 
outside of AIM.

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

    CBOE does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange does not believe 
the proposed rule changes impose any burden on intramarket competition 
because it applies to all Trading Permit Holders. In addition, the 
Exchange does not believe the proposed rule changes will impose any 
burden on intermarket competition, as they are merely making pilot 
programs already in existence permanent and which are available to all 
market participants through Trading Permit Holders. Additionally, CBOE 
believes that the AIM and FLEX AIM pilot programs have improved 
competition because the auction process provides non-customer and 
customer orders with the opportunity to receive an execution at an 
improved price.

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 Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2016-084 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-2016-084. 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 such 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-2016-084, and should be 
submitted on or before January 3, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-29804 Filed 12-12-16; 8:45 am]
 BILLING CODE 8011-01-P