82 FR 26724 - Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change Related to Unusual Market Conditions and the Duty To Systemize Non-Electronic Orders Prior to Representation

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 109 (June 8, 2017)

[Federal Register Volume 82, Number 109 (Thursday, June 8, 2017)]
[Notices]
[Pages 26724-26726]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-11870]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80854; File No. SR-CBOE-2017-010]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove a Proposed Rule Change Related to Unusual Market 
Conditions and the Duty To Systemize Non-Electronic Orders Prior to 
Representation

June 2, 2017.

I. Introduction

    On February 15, 2017, the Chicago Board Options Exchange, 
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and 
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change to amend its rules 
regarding the circumstances in which CBOE Floor Officials may declare a 
``fast'' market and the actions those Floor Officials may take when a 
fast market is declared, including the ability to suspend the duty to 
systemize a non-electronic order prior to representing it in open 
outcry trading. The proposed rule change was published for comment in 
the Federal Register on March 6, 2017.\3\ The Commission received no 
comments on the proposed rule change. On April 18, 2017, pursuant to 
Section 19(b)(2) of the Exchange Act,\4\ the Commission designated a 
longer period within which to approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to disapprove the proposed rule change.\5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 80123 (February 28, 
2017), 82 FR 12667 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 80481, 82 FR 18941 
(April 24, 2017). The Commission designated June 4, 2017, as the 
date by which the Commission shall either approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
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    The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and to institute 
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to 
determine whether to approve or disapprove the proposed rule change, as 
discussed in Section III below. The institution of proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved, nor does it mean that the Commission 
will ultimately disapprove the proposed rule change. Rather, as 
described in Section III below, the Commission seeks and encourages 
interested persons to provide additional comment on the proposed rule 
change in order to inform the Commission's analysis of whether to 
approve or disapprove the proposed rule change.
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    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of Proposal

    Currently, CBOE Rule 6.6(a) permits two Floor Officials to declare 
a market to be ``fast'' ``because of an influx of orders or other 
unusual conditions or circumstances'' when doing so would be in ``the 
interest of maintaining a fair and orderly market.'' \7\ Once a market 
is declared ``fast,'' Floor Officials have the authority to take a 
number of actions.\8\
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    \7\ See CBOE Rule 6.6(a).
    \8\ See CBOE Rule 6.6(b).
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    In its filing, CBOE proposes several changes to Rule 6.6. First, 
CBOE proposes to amend paragraph (a) of the rule to require that at 
least one of the two Floor Officials that declares a fast market must 
be an Exchange employee. Additionally, the Exchange proposes to provide 
a non-exhaustive list of ``unusual conditions or circumstances'' that 
Floor Officials may consider when determining whether to declare a 
market to be ``fast.'' Specifically, proposed new language in Rule 
6.6(a) would provide that: ``[i]t may be in the interest of fair and 
orderly markets to declare a fast market when one or more of the 
following conditions have been met: (i) The previous day's closing 
price of the S&P 500 Index is more than 2% away from the previous day's 
opening price; (ii) the front-month E-mini S&P 500 Future (symbol ES/1) 
is trading more than 20 points above or below the previous day's 
closing values by 8:00 a.m. CT; or (iii) the intraday price of the S&P 
500 Index moves more than 1% in any one hour interval during regular 
trading hours.'' In the Notice, CBOE acknowledges that some of these 
conditions occur with some degree of frequency,\9\ but nevertheless 
asserts that these measures could reflect volatile trading 
conditions.\10\ The Exchange asserts that including these guidelines in 
the rule text would give better notice to market participants as to 
when it might declare a fast market.\11\
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    \9\ See Notice, supra note 3, at 12669 (noting that, over a 
prior eight month period, the intraday price of the S&P 500 Index 
had moved more than 1% in any one hour interval during regular 
trading hours on at least 30 days, which the Exchange categorized as 
a ``not . . . infrequent occurrence'').
    \10\ See id. at 12668-69.
    \11\ See id.
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    Further, CBOE proposes to allow two Floor Officials to suspend 
during a fast market the requirement of CBOE Rule 6.24 that non-
electronic orders be systematized prior to representation on the 
trading floor.\12\ During such a suspension, Trading Permit Holders 
(``TPHs'') and TPH organizations would be required to follow the 
procedures described in Rule 6.24(b), which require paper tickets to be 
used for orders received during a malfunction or disruption of the 
Exchange's systems.\13\ The Exchange also would require that, as soon 
as it declares an end to a fast market, TPHs would be required 
immediately to resume systematizing orders prior to representing them 
and use best efforts to, as soon as possible and no later than the 
close of business, input electronically into the Exchange's systems all 
relevant order information received during the time period when the 
order systematization requirement was suspended.\14\
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    \12\ See proposed Rule 6.6(b).
    \13\ See proposed Rule 6.6.01.
    \14\ See id.
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    In justifying its proposal, CBOE highlights that the risk that 
customers and market participants may experience losses if they miss 
the market as a result of the time required for TPHs to systematize 
orders, a risk that CBOE

[[Page 26725]]

believes is exacerbated during fast markets when there can be an 
unusually large number of orders submitted to brokers and market prices 
can change quickly.\15\ The Exchange argues that market participants 
may be better served when the systemization requirement is suspended, 
which the Exchange believes could help TPHs more quickly execute orders 
in open outcry.\16\
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    \15\ See Notice, supra note 3, at 12669.
    \16\ See id.
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    The Exchange asserts that its proposed amendments to CBOE Rule 6.6 
would not affect its ability to maintain an accurate audit trail.\17\ 
CBOE argues that suspending the systematization requirement during a 
fast market would merely delay its receipt of the audit trail 
information, because that information would still be recorded in a 
written form according to the procedures set forth under CBOE Rule 
6.24, which currently applies only when orders are received during a 
malfunction or disruption of the Exchange's systems.\18\
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    \17\ See id.
    \18\ See id. Rule 6.24 does not explicitly require order details 
to be captured prior to representation of the order in open outcry.
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    Additionally, the Exchange asserts that the proposed rule change 
would not affect its ability to promptly report trade and quotation 
information to the Options Price Reporting Authority (``OPRA'').\19\ 
The Exchange states that market participants would still be required to 
report the execution of orders within 90 seconds even where the 
systematization requirement had been suspended under proposed Rule 
6.6.\20\ Further, the Exchange states that its collection and reporting 
of quotation information to OPRA would not be affected by the proposed 
rule change; CBOE would continue to collect and transmit bids and 
offers at stated prices or limits with respect to individual securities 
in which it provides a market.\21\
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    \19\ See id. at 12670.
    \20\ See id.
    \21\ See id.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2017-010 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act \22\ to determine whether the proposed 
rule change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as stated below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change to inform the Commission's analysis of 
whether to approve or disapprove the proposed rule change.
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    \22\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\23\ the 
Commission is providing notice of the grounds for disapproval under 
consideration, as discussed below. The Commission believes that 
instituting proceedings will allow for additional analysis of, and 
input from commenters with respect to, the proposed rule change's 
consistency with: (1) Section 6(b)(1) of the Exchange Act,\24\ which 
requires that a national securities exchange is so organized and has 
the capacity to be able to carry out the purposes of the Exchange Act 
and to comply, and to enforce compliance by its members and persons 
associated with its members, with the provisions of the Exchange Act, 
the rules and regulations thereunder, and the rules of the exchange; 
and (2) Section 6(b)(5) of the Exchange Act,\25\ which requires that 
the rules of a national securities exchange be designed, among other 
things, to prevent fraudulent and manipulative acts and practices, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, and, in general, to protect 
investors and the public interest.
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    \23\ See id.
    \24\ 15 U.S.C. 78f(b)(1).
    \25\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Commission is concerned whether the proposed rule 
change could adversely impact the ability of the Exchange to enforce 
compliance by its members on the CBOE trading floor with applicable 
rules and regulations, including CBOE rules designed to, among other 
things, ensure the integrity of its audit trail to help CBOE prevent 
fraudulent and manipulative acts and practices. In particular, the 
Commission wishes to consider further whether CBOE has sufficiently 
demonstrated how suspending the systemization requirement and relying 
upon paper tickets, where the order details are not captured prior to 
representation of the order in open outcry trading, in an environment 
of ``extraordinary market volatility,'' when TPHs may receive ``an 
unusually large number of orders'' and ``market prices can change 
erratically, extremely quickly, and in enormous swings'' will foster 
compliance with its audit trail rules, support the integrity of the 
audit trail and the Exchange's surveillance that relies thereon, and 
not otherwise diminish the Exchange's ability to ensure compliance with 
these critically important rules and thereby continue to maintain an 
accurate and reliable audit trail to support its regulatory operations 
and obligations.\26\
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    \26\ Notice, supra note 3, at 12668-69.
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    In its Notice for the current proposal, the Exchange asserts that 
its proposed amendments to CBOE Rule 6.6 would not affect its ability 
to maintain an accurate audit trail, but the Exchange does not discuss 
how or why its position on that issue has changed since first 
instituting the requirement in 2005.\27\ The Commission is concerned 
whether CBOE's proposal to suspend the systemization requirement in a 
fast moving market is appropriately designed to support the integrity 
and reliability of its audit trail during active trading and, in turn, 
whether it is designed to support its surveillance program and thereby 
help prevent fraudulent and manipulative acts and protect investors and 
the public interest. Further, the Commission is concerned about the 
appropriateness of the Exchange's proposal to expand the application of 
Rule 6.24(b), which currently only allows order details to be recorded 
in paper form when CBOE's systems are down, to now allow paper tickets 
to be used during a ``fast'' market when CBOE's systems are working 
properly.
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    \27\ See Notice, supra note 3, at 12669.
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Sections 6(b)(1), 6(b)(5), 6(b)(8), or any other 
provision of the Exchange Act, or the rules and regulations thereunder. 
Although there do not appear to be any issues relevant to approval or 
disapproval that would be facilitated by an oral presentation of views, 
data, and arguments, the Commission will consider, pursuant to Rule 
19b-4, any request for an opportunity to make an oral presentation.\28\
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    \28\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Act Amendments of 
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 
75, 94th Cong., 1st Sess. 30 (1975).

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[[Page 26726]]

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by June 29, 2017. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by July 13, 
2017. The Commission asks that commenters address the sufficiency of 
the Exchange's statements in support of the proposal, in addition to 
any other comments they may wish to submit about the proposed rule 
change.
    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-2017-010 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 Numbers SR-CBOE-2017-010. 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 these filings 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-2017-010 and should be 
submitted on or before June 29, 2017. Rebuttal comments should be 
submitted by July 13, 2017.
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    \29\ 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-11870 Filed 6-7-17; 8:45 am]
BILLING CODE 8011-01-P