81 FR 91967 - Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Related to Rules Regarding the Responsibility for Ensuring Compliance With Open Outcry Priority and Allocation Requirements and Trade-Through Prohibitions

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 243 (December 19, 2016)

[Federal Register Volume 81, Number 243 (Monday, December 19, 2016)]
[Notices]
[Pages 91967-91970]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-30393]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79540; File No. SR-CBOE-2016-082]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Related to 
Rules Regarding the Responsibility for Ensuring Compliance With Open 
Outcry Priority and Allocation Requirements and Trade-Through 
Prohibitions

December 13, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on December 1, 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 regarding

[[Page 91968]]

responsibilities for ensuring compliance with open outcry priority and 
allocation requirements and Trade-Through prohibitions. The text of the 
proposed rule change is provided below.

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

Chicago Board Options Exchange, Incorporated Rules

* * * * *

Rule 6.45A.--Priority and Allocation of Equity Option Trades on the 
CBOE Hybrid System

* * * * *
    . . . Interpretations and Policies:
    .01-.04 No change.
    .05 For an open outcry transaction between a Floor Broker and 
Market-Maker it is the responsibility of the initiator of the 
transaction to ensure that the transaction is executed in accordance 
with the priority and allocation provisions set forth in Rule 6.45A(b) 
and does not cause a Trade-Through (unless otherwise excepted) under 
Rule 6.81. For an open outcry transaction between a Floor Broker and 
another Floor Broker or between a Market-Maker and another Market-
Maker, both parties to the transaction are responsible for ensuring the 
transaction is executed in accordance with the aforementioned Rules.

Rule 6.45B--Priority and Allocation of Trades in Index Options and 
Options on ETFs on the CBOE Hybrid System

* * * * *
    . . . Interpretations and Policies:
    .01-.05 No Change.
    .06 For an open outcry transaction between a Floor Broker and 
Market-Maker it is the responsibility of the initiator of the 
transaction to ensure that the transaction is executed in accordance 
with the priority and allocation provisions set forth in Rule 6.45B(b) 
and does not cause a Trade-Through (unless otherwise excepted) under 
Rule 6.81. For an open outcry transaction between a Floor Broker and 
another Floor Broker or between a Market-Maker and another Market-
Maker, both parties to the transaction are responsible for ensuring the 
transaction is executed in accordance with the aforementioned Rules.
* * * * *

Rule 6.73. Responsibilities of Floor Brokers

* * * * *
    . . . Interpretations and Policies:
    .01-.06 No change.
    .07 For an open outcry transaction between a Floor Broker and 
Market-Maker it is the responsibility of the initiator of the 
transaction to ensure that the transaction is executed in accordance 
with the priority and allocation provisions set forth in Rules 6.45A(b) 
and 6.45B(b) and does not cause a Trade-Through (unless otherwise 
excepted) under Rule 6.81. For an open outcry transaction between a 
Floor Broker and another Floor Broker or between a Market-Maker and 
another Market-Maker, both parties to the transaction are responsible 
for ensuring the transaction is executed in accordance with the 
aforementioned Rules.
* * * * *
    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
    The Exchange proposes to amend CBOE Rules 6.45A, 6.45B, and 6.73 to 
identify the party to a transaction that is responsible for ensuring 
that a transaction is executed in accordance with the priority and 
allocation requirements as set forth in Rules 6.45A(b) and 6.45B(b) \3\ 
and does not cause a ``Trade-Through'' (unless otherwise excepted) 
under Rule 6.81.\4\ The Exchange does not seek to absolve TPHs of the 
responsibility to ensure transactions are executed in accordance with 
the priority and allocation provisions or the Trade-Through prohibition 
provisions. Rather, the Exchange seeks to specify that the party or 
parties responsible for ensuring transactions are executed in 
accordance with the priority and allocation provisions and Trade-
Through prohibitions is the initiator of the transaction when a Floor 
Broker is trading with a Market-Maker, both parties when a Floor Broker 
trades with a Floor Broker, and both parties when the transaction is 
between Market-Makers.\5\
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    \3\ Rules 6.45A(b) and 6.45B(b) set forth the Exchange's rules 
related to the allocation of orders represented in open outcry. 
Specifically, Rules 6.45A(b) and 6.45B(b) provide, among other 
things, that where two or more bids (offers) for the same option 
contract represent the highest (lowest) price, public customer 
orders in the electronic book shall have first priority.
    \4\ A ``Trade-Through'' is a transaction in an options series, 
either as principal or agent, at a price that is lower than a 
Protected Bid or higher than a Protected Offer. CBOE Rule 6.81 
provides that unless an exception applies, Trading Permit Holders 
(``TPHs'') shall not effect Trade-Throughs.
    \5\ In the case of a Floor Broker initiating a transaction with 
multiple counterparties, any Floor Broker counterparty would be held 
responsible in the same manner as a Floor Broker trading with one 
other Floor Broker. Similarly, in the case of a Market-Maker 
initiation [sic] a transaction with multiple counterparties, any 
Market-Maker counterparty would be held responsible in the same 
manner as a Market-maker initiation [sic] a transaction with one 
other counterparty.
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    Currently, if a transaction executed on the trading floor is 
executed at a Trade-Through price or was executed in violation of book 
priority, the Trade-Through or book priority violations are enforced 
against both parties to the transaction. With respect to transactions 
between Floor Brokers and transactions between Market-Makers, both 
parties will continue to be held responsible for the above violations. 
With respect to transactions between a Floor Broker and a Market-Maker, 
the Exchange believes the party that should be held responsible is the 
party that initiated the transaction on the trading floor. Generally 
speaking, Floor Brokers are the parties that initiate transactions on 
the trading floor by representing orders and executing the orders 
against bids and offers of other in-crowd market participants, 
including Market-Makers. For example, a typical open outcry transaction 
consists of a Floor Broker representing an order and requesting a quote 
from Market-Makers in the trading crowd. Market-Makers respond to the 
representation by indicating they are willing to buy (bid) the 
particular options series at X price and sell (offer) at Y price, which 
are based on the Market-Makers' theoretical values for the particular 
options. If the quoted market meets the requirements of the order as 
specified by the Floor Broker's client the Floor Broker executes the 
order against the best quoted bid or offer price(s). The Floor Broker, 
as initiator, controls the order and the execution price of the order; 
thus, it follows that

[[Page 91969]]

the Floor Broker in this example should be responsible for ensuring 
priority and allocation consistent with the applicable rules and that 
Trade-Through requirements are satisfied.
    Floor Brokers are also in a good position to prevent Trade-Throughs 
and book priority violations because Floor Brokers may utilize the 
Public Automatic Routing System (``PAR'') to execute orders, which is 
not available to Market-Makers. PAR provides all of the necessary 
market data to avoid Trade-Throughs and book priority violations (e.g., 
PAR includes data related to electronic public customer books, CBOE 
best bid and offer (``BBO''), and national best bid and offer 
(``NBBO''), etc.). In addition, PAR calculates and displays a net price 
for complex orders held by a Floor Broker. Most importantly, however, 
PAR offers alerts that warn Floor Brokers that a proposed execution 
price for a given order may violate priority or result in a potential 
Trade-Through. These alerts occur via pop-up windows within PAR.
    When Floor Brokers trade with Market-Makers the Market-Makers are 
not in as good of a position to prevent Trade-Throughs and book 
priority violations. Although Market-Makers have access to market data 
via screens on the trading floor and/or their own electronic devices, 
they do not have access to the specific terms and conditions of a Floor 
Broker's order on an electronic basis and must evaluate the CBOE BBO 
and the NBBO without the aid of PAR. Instead, a request for quote for a 
given order is verbally communicated by a Floor Broker to the trading 
crowd and the verbal information is taken into consideration by Market-
Makers (and other in-crowd market participants) when providing a 
responsive quote. Furthermore, Market-Makers evaluate a Floor Broker's 
request for a quote against the Market-Maker's theoretical values for 
the given options series. This process becomes even more complicated 
when there are multiple options series that must be evaluated for a 
complex order. Ultimately, the Exchange believes it is reasonable for a 
Market-Maker to rely on a Floor Broker to ensure that an open outcry 
transaction is executed in accordance with the priority and allocation 
provisions and Trade-Through prohibition provisions when the Floor 
Broker is initiating the transaction. If a Market-Maker initiates a 
transaction with a Floor Broker the Market-Maker will be responsible 
for ensuring that the transaction is executed in accordance with the 
priority and allocation provisions and Trade-Through prohibition 
provisions.
    The Exchange proposes to add Interpretation and Policy .05 to Rule 
6.45A, .06 to Rule 6.45B, and .07 to Rule 6.73. As previously noted, 
the proposal does not amend who is responsible when an open outcry 
transaction is between Floor Brokers or between Market-Makers. As is 
the case today, for open outcry transactions between Floor Brokers or 
open outcry transactions between Market-Makers, both parties are 
responsible for ensuring that a transaction is executed in accordance 
with the priority and allocation rules and the Trade-Through prevention 
rules. For these scenarios the proposal simply sets forth the existing 
standard, which, again, calls for both parties being responsible for 
ensuring that a transaction is executed in accordance with the priority 
and allocation rules and the Trade-Through prohibition rules.
    The Exchange notes that this rule change, consistent with the 
Options Intermarket Linkage Plan, is reasonably designed to prevent 
Trade-Throughs \6\ as well as book priority violations because the 
proposal places the responsibility for ensuring transactions are 
executed in accordance with the rules on the specific party or parties 
in a good position to ensure compliance. The Exchange also notes that 
this rule may help limit the number of priority and Trade-Through 
violations because the proposal identifies a particular party or 
parties to each transaction (as opposed to all parties) as being 
responsible for ensuring compliance with the rules. Furthermore, in all 
cases the responsibility will fall on all parties to the transaction 
(i.e., when Floor Broker trades with another Floor Broker or when a 
Market-Maker trades with another Market-Maker) or the initiator of the 
transaction.
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    \6\ See generally Securities Exchange Act Release No. 43086 
(July 28, 2000), 65 FR 48023 (August 4, 2000) (Order approving 
Options Intermarket Linkage Plan).
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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.\7\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \8\ 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) \9\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ Id.
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    In particular, the Exchange believes that the proposed rule change 
is appropriate because the vast majority of the time Floor Brokers are 
the initiators of open outcry transactions on the trading floor, and 
they are able to use PAR to assist them with ensuring that transactions 
are executed in accordance with priority and allocation rules and 
Trade-Through prohibition rules, which makes this proposal reasonably 
designed to ensure compliance with Exchange Rules. As a result, the 
Exchange believes this change will remove potential impediments to a 
free and open market and a national market system. The Exchange also 
believes this rule change may help limit the number of priority and 
Trade-Through violations, which generally helps to protect investors 
and the public interest, because the proposal more appropriately 
identifies the specific party or parties responsible for ensuring 
compliance with these rules (i.e., the initiator in the case of Floor 
Brokers trading with Market-Makers and both parties when Market-Makers 
trade with Market-Makers and both parties when Floor Brokers trade with 
Floor Brokers). Furthermore, in all cases the responsibility will fall 
on all parties to the transaction (i.e., when Floor Broker trades with 
another Floor Broker or when a Market-Maker trades with another Market-
Maker) or the initiator of the transaction.

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. CBOE does not believe that the 
proposed rule change will impose any burden on intramarket competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act because the proposed change will apply equally to all market 
participants that initiate

[[Page 91970]]

transactions on the floor of the Exchange. Furthermore, any perceived 
burden on Floor Brokers or Market-Makers is misplaced because Floor 
Brokers and Market-makers are no worse off from this proposal as both 
parties are currently held responsible for book priority and trade-
through violations. The Exchange does not believe that the proposed 
change will impose any burden on intermarket competition because it 
only applies to trading on CBOE.

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-2016-082 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-2016-082. 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-2016-082 and should be 
submitted on or before January 9, 2017.
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    \10\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-30393 Filed 12-16-16; 8:45 am]
 BILLING CODE 8011-01-P