83 FR 7092 - Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Rules Related to the Complex Order Book
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 83, Issue 33 (February 16, 2018)
Federal Register Volume 83, Issue 33 (February 16, 2018)
| Page Range | 7092-7096 | |
| FR Document | 2018-03197 |
[Federal Register Volume 83, Number 33 (Friday, February 16, 2018)] [Notices] [Pages 7092-7096] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-03197] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-82689; File No. SR-CBOE-2018-016] Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Rules Related to the Complex Order Book February 12, 2018. 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 February 2, 2018, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') 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 proposes to amend its rules related to the Complex Order Book (``COB''). (additions are italicized; deletions are [bracketed]) * * * * * Cboe Exchange, Inc. Rules * * * * * Rule 6.53C. Complex Orders on the Hybrid System (a)-(b) No change. (c) Complex Order Book: (i) Routing of Complex Orders: The Exchange will determine which classes and which complex order origin types (i.e., non-broker- dealer public customer, broker-dealers that are not Market-Makers or specialists on an options exchange, and/or Market-Makers or specialists on an options exchange) are eligible for entry into the COB and whether such complex orders can route directly to the COB and/or from PAR to the COB. In a class in which the Exchange determines complex orders of Market-Makers and specialists on an options exchange are not eligible for entry into the COB, the Exchange may determine that Market-Makers and specialists may enter complex orders into the COB if: (A) their complex orders are on the opposite side of (1) a priority customer complex order(s) resting in the COB with a price not outside the national spread market; or (2) order(s) on the same side of the market in the same strategy that initiated a COA(s) if there are ``x'' number of COAs within ``y'' milliseconds, counted on a rolling basis (the Exchange determines the number ``x'' (which must be at least 2) and time period ``y'' (which may be no more than 2,000)); and (B) they cancel their complex orders, if they remain unexecuted, no later than a specified time (which the Exchange determines and may be no more than five minutes) after the time the COB receives the Market-Maker order. Complex orders not eligible to route to COB (either directly or from PAR to COB) will route via the order handling system pursuant to Rule 6.12. (ii)-(iv) No change. (d) No change. . . . Interpretations and Policies: .01-.12 No change. * * * * * The text of the proposed rule change is also available on the Exchange's website (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 its rules related to the COB. Currently, Rule 6.53C(c)(i) states the Exchange may determine which classes and which complex order origin types (i.e., non-broker-dealer public customer, broker-dealers that are not market-makers or specialists on an options exchange, and/or Market-Makers or specialists on an options exchange) are eligible for entry into the COB and whether such complex orders can route directly to the COB and/or from PAR to the COB.\3\ To the extent an origin type is not eligible for entry into the COB, complex orders with that origin type may still be entered into the System as opening-only or immediate-or-cancel, as such orders would not rest in the COB when the Exchange is open for trading. --------------------------------------------------------------------------- \3\ Currently, Cboe Options has determined Market-Maker (origin code ``M'') and market-maker or specialist on an options exchange (``away market-makers'') (origin code ``N'') complex orders in options on the S&P 500 (``SPX'' and ``SPXW'') and the Cboe Volatility Index (``VIX'') are not eligible for entry into the COB. See Regulatory Circular RG15-195. The group of SPX options with standard third-Friday settlements trade under the SPX symbol on the Hybrid 3.0 trading system, and the group of SPX options with other settlements trade under the SPXW symbol on the Hybrid trading system. Pursuant to Rule 8.14, Interpretation and Policy .01(c), the Exchange may establish different trading parameters for each group to the extent the Exchange Rules otherwise provide for such parameters to be established on a class basis. --------------------------------------------------------------------------- The Exchange proposes to amend Rule 6.53C(c) to provide in a class in which the Exchange determines complex orders of Market-Makers and away market-makers are not eligible for entry into the COB, the Exchange may determine that Market-Makers and away market-makers may enter complex [[Page 7093]] orders into the COB if (1) their complex orders are on the opposite side of (A) a priority customer complex order(s) resting in the COB with a price not outside the national spread market (``NSM'') \4\ or (B) order(s) on the same side of the market in the same strategy that initiated a COA(s) if there are ``x'' number of COAs within ``y'' milliseconds, counted on a rolling basis (the Exchange will determine \5\ the number ``x'' (which must be at least 2) and time period ``y'' (which may be no more than 2,000)) and (2) they cancel their complex orders, if such orders remain unexecuted, no later than a specified time (which the Exchange determines and may be no more than five minutes) after the time the COB receives the order. The Exchange intends to set these parameters at levels it believes will permit Market-Makers to have sufficient time to submit orders into the COB to participate in COAs, which determination the Exchange will make based on Market-Maker feedback, business conditions, and data (including trading volume data and information regarding number of executions of Market-Maker orders against complex orders). --------------------------------------------------------------------------- \4\ See Rule 1.1(dddd) [sic]. \5\ Pursuant to Rule 6.53C, Interpretation and Policy .01, the Exchange will announce to Trading Permit Holders all determinations it makes pursuant to Rule 6.53C via Regulatory Circular. The Exchange will provide Trading Permit Holders with sufficient, advanced notice prior to changing any parameters its sets under the proposed rule change. --------------------------------------------------------------------------- Unlike the leg markets, in which market-makers provide liquidity through quotes, the COB has no market-maker quotes that indicate to customers the price at which liquidity providers are willing to trade against their orders.\6\ Allowing market-makers to enter orders on the COB when there are priority customer orders on the opposite side will provide those customers with this information, thus creating potential execution opportunities for customers whose orders are not satisfied by the leg markets or other complex orders. The Exchange believes the proposed rule change will add liquidity for resting priority customer complex orders in classes in which the Exchange has determined M and N complex orders are not eligible for entry into the COB, thus increasing execution opportunities at prices potentially better than the leg markets. --------------------------------------------------------------------------- \6\ Market-makers are unable (and not required to) submit quotes in the COB. --------------------------------------------------------------------------- Additionally, the Exchange believes it may be difficult for Market- Makers to respond to auctions, particularly when multiple auctions occur within a short amount of time, while managing risk related to the amount executed during those auctions. Market-makers have complicated risk modeling associated with their trading activity, which factors in the size, price, and frequency at which they trade with orders. In the leg markets, those risk models factor in market-makers' quotes. However, the Exchange understands Market-Makers have separate systems for quoting and for monitoring and responding to COAs, each of which has a different risk model and set of risk controls. For example, one server process submits quotes while another server process scans the market for opportunities, such as the presence of customer orders and auctions. It is common for Market-Makers to set risk controls with respect to the COA monitoring and response system to not respond to too many COAs within a short timeframe. If multiple COAs in a strategy occur within a short amount of time, it is common for a Market-Maker's system to determine this to be a potential system issue of the submitting Trading Permit Holder or Exchange. To ensure a Market-Maker does not trade with potentially erroneous orders and protect the Market-Maker from erroneous transactions to ensure it does not become overexposed to risk, the Market-Maker's system that monitors COAs may stop responding to COAs in this situation pursuant to the Market-Maker's risk controls for that system (e.g., the system may be programmed to only respond to a specific number of auctions within a time period). This ultimately reduces auction liquidity and potential price improvement for COA orders. Additionally, this may result in the Market-Maker missing opportunities to participate in legitimate auctions. However, it is common for market participants to enter multiple small orders into COAs that are not erroneous (e.g., in accordance with market participants' algorithmic trading that may break up larger orders when hedging large portfolios). To the extent a Market-Maker's system stops responding to COAs in the above situation, a person may review the COAs and determine in its discretion it is appropriate to trade with the COA orders even if the System does not permit it due to automatic controls. Under the proposed rule change, that person could then submit an order to the COB that would be available to trade against those multiple COA orders up to the amount the Market-Maker is willing to trade. Even if the COAs were the result of an error by the submitting market participants, the Market-Maker that submitted a complex order that ultimately executes against those erroneous COA errors still had an opportunity to review the sizes and prices of those orders and evaluate how much and at what prices it is willing to trade. This is no different than the possibility of a market-maker quote resting in the leg market executing against an erroneously entered order.\7\ It is easier, and faster, for a person to submit an order to the COB to cover the amount of contracts it is willing to trade than enter individual responses to COAs given the brief COA response period (currently 100 milleseconds). Allowing Market-Makers to enter orders on the COB when there are multiple auctions occurring in short periods of time permits Market-Makers to post their trading interest up to the total amount of contracts within a single strategy they desire to trade within their risk controls for orders (as an order on the COB may trade against various COA orders), which limits execution risk while permitting them to continue to provide liquidity to price improvement auctions.\8\ --------------------------------------------------------------------------- \7\ The Exchange may nullify a transaction or adjust the execution price of a transaction in accordance with Rule 6.25. \8\ Pursuant to Rule 6.53C(d), a Market-Maker or away market- maker order on the opposite side of the auctioned order resting on the COB may be available for execution against any contracts of the auctioned order that did not execute during the auction. --------------------------------------------------------------------------- The Exchange believes the proposed rule change also permits it to maintain the protections in those classes gained from not having M and N complex orders otherwise resting in the COB by only permitting M and N complex orders to rest in the COB under certain circumstances for limited time periods. In classes in which there is significant open outcry trading, there is generally a large number of complex orders that execute in open outcry, and such orders are generally for significant quantity. There is a risk of orders in the COB interfering with this trading. For example, if a broker represents a large buy complex order on the floor, if there is a small sell order in the COB for that strategy at a better price, the broker must trade with that resting order first. While this affords price improvement for a small portion of the buy order, this first execution lengthens the time of execution for the entire order, which may ultimately harm the customer with respect to the overall price given the speed at which the market changes. Additionally, if there is a small buy order for that strategy in the COB at a better bid price, the floor broker would not be able to clear that order and would not be able to trade until that order is no longer resting on the book at a better [[Page 7094]] price. This would ultimately disadvantage the floor broker's customer, who must now wait for execution. While non-market-maker orders are permitted in the COB in these classes, the Exchange believes these risks would be significantly heightened if market-maker orders were permitted to rest on the COB, as the Exchange expects market-makers would rest many smaller orders in reaction to hearing an order represented by a broker, which could block open outcry transactions more frequently. For the following examples, suppose the NBBO for the VIX October 14 call is 2.50 to 2.60, and the market for the VIX October 14 put is 1.50 to 1.60. Therefore, the NSM for a straddle \9\ is 4.00 to 4.20. Pursuant to the proposed rule change, the Exchange permits M and N orders to rest in VIX when there is an opposing side customer order resting in the COB with a price not outside $4.00 and $4.20 or if there are at least two COAs within a 1,000 millisecond interval, and provides Market-Makers with three minutes to cancel orders once those Market- Maker orders are received into the COB. --------------------------------------------------------------------------- \9\ A straddle order buys or sells the put and call of the same series. --------------------------------------------------------------------------- Example #1At 10:00 a.m., a customer submits to the COB an order to buy 20 of the VIX October 14 straddle at $4.10 (there are no other customer orders resting in the COB to buy this strategy at any price). At 10:01 a.m., the customer order is still resting, and the COB receives a Market-Maker order to sell 50 of the VIX October 14 straddle at $4.12. The Market-Maker must cancel the order by 10:04 a.m. At 10:04 a.m., the Market-Maker cancels the order. At 10:04:30 a.m., the same customer order continues to rest on the COB, and the Market-Maker enters another order to sell the straddle at $4.11. The Market-Maker must cancel that order by 10:07:30 a.m. At 10:07 a.m., the Market-Maker cancels the order. Example #2 At 10:31 a.m., a customer submits to the COB an order to buy 20 of the VIX October 14 straddle at $3.99 (there are no other customer orders resting in the COB to buy this strategy at any price). Market-Makers would not be permitted to enter opposing orders into the COB, because the customer order resting in the COB is priced outside of the NSM. At 10:35 a.m., the NSM changes from $4.00 to $4.20 to $3.90 to $4.10, and thus the resting customer order is now within the NSM. At 10:38 a.m., the COB receives a Market-Maker order to sell 50 of the straddle at $4.00. At 10:40 a.m., the customer cancels its resting order and submits a new order to buy 20 of the straddle at $4.00, which executes again the resting Market-Maker order.\10\ At 10:41 a.m., the Market- Maker cancels the remaining 30 of the straddle. --------------------------------------------------------------------------- \10\ Note the customer receives a better price than is currently offered in the leg markets--to get an execution in the leg markets, the customer would have had to buy the straddle at $4.10. --------------------------------------------------------------------------- Example #3 At 10:00:00:000 a.m., a customer submits an order to buy the VIX October 14 straddle, which initiates a COA (there was no other COA within the previous 1000 milliseconds), so Market-Makers may not submit an order into the COB. At 10:00:00:999 a.m., another customer submits an order to buy the VIX October 14 straddle, which initiates another COA. As this is the second COA within a one thousand millisecond interval, Market- Makers may submit orders to the COB. At 10:01:000 a.m., a Market-Maker submits to the COB an order to sell the VIX October 14 straddle at $4.12. The Market-Maker must cancel the order by 10:04:000 a.m. The time period within which a Market-Maker must cancel its complex order pursuant to the proposed rule change provides the Market-Maker with sufficient time for the opposing customer to potentially re-price its order for execution against the Market-Maker's order or for the Market-Maker order to execute against an order following a COA, while also giving the Market-Maker sufficient time to manually cancel its unexecuted orders while managing all of its trading activity. A time period that is too short may discourage market-makers from entering orders under these circumstances, but a time period that is too long may eliminate the benefits of not permitting market-maker orders to rest in the COB (as discussed above). Additionally, requiring customer orders to be not outside the NSM for Market-Makers to submit orders to the COB prevents situations in which market participants may take advantage of this functionality. For example, a customer may rest an order in the COB that is far outside the NSM (and thus unlikely to execute) for long periods of time, which would then permit Market- Makers to rest orders in the COB for such long periods of time, because if a Market-Maker order on the COB does not trade, the Market-Maker could cancel it pursuant to the proposed rule change and then re-submit the order to the COB. The Exchange's Regulatory Division will have surveillance in place to enforce the proposed rule change, which surveillance will monitor whether M and N orders have only been entered in the permitted circumstances described above, and whether any such unexecuted orders have been cancelled by the deadline imposed by the proposed rule change. 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.\11\ Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) \12\ 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) \13\ requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. --------------------------------------------------------------------------- \11\ 15 U.S.C. 78f(b). \12\ 15 U.S.C. 78f(b)(5). \13\ Id. --------------------------------------------------------------------------- In particular, the Exchange believes the proposed rule change will add liquidity and increase customer execution opportunities at prices potentially better than the leg markets for resting priority customer complex orders and auctioned orders in classes in which the Exchange has determined M and N orders are otherwise not eligible for entry into the COB, while maintaining the protections in those classes gained from not having M and N complex orders otherwise resting in the COB,\14\ which benefits investors. Unlike [[Page 7095]] the leg markets, in which market-makers provide liquidity through quotes, the COB has no market-maker quotes that indicate to customers the price at which liquidity providers are willing to trade against their orders. Allowing market-makers to enter orders on the COB when there are priority customer orders on the opposite side will provide those customers with this information, thus creating potential execution opportunities for customers whose orders are not satisfied by the leg markets or other complex orders. --------------------------------------------------------------------------- \14\ As discussed above, in classes in which there is significant open outcry trading, the Exchange is aware of risk that market-makers could rest orders in the COB at prices that would interfere with executions by in-crowd market participants. --------------------------------------------------------------------------- Additionally, the Exchange believes it may be difficult for Market- Makers to respond to auctions, particularly when multiple auctions occur within a short amount of time, while managing risk related to amount executed during those auctions. Market-makers have complicated risk modeling associated with their trading activity, which factors in the size, price, and frequency at which they trade with orders. In the leg markets, those risk models factor in market-makers' quotes. However, the Exchange understands Market-Makers have separate systems for quoting and for monitoring and responding to COAs, each of which has a different risk model and set of risk controls. It is common for Market-Makers to set risk controls with respect to the COA monitoring and response system to not respond to too many COAs within a short timeframe. If multiple COAs in a strategy occur within a short amount of time, it is common for a Market-Maker's system to determine this to be a potential system issue of the submitting Trading Permit Holder or Exchange. To ensure a Market-Maker does not trade with potentially erroneous orders and protect the Market-Maker from erroneous transactions, the Market-Maker's system that monitors COAs may stop responding to COAs in this situation pursuant to the Market-Maker's risk controls for that system. This ultimately reduces auction liquidity and potential price improvement for COA orders. Allowing Market-Makers to enter orders on the COB when there are multiple auctions occurring in short periods of time permits Market-Makers to post their trading interest up to the total amount of contracts within a single strategy they desire to trade within their risk controls for orders (as an order on the COB may trade against various COA orders), which limits execution risk while permitting them to continue to provide liquidity to price improvement auctions. Therefore, the proposed rule change will improve Market-Makers' ability to trade against orders auctioned in a short period of time while managing their risk and thus increase execution opportunities for these orders. M and N complex orders provide customers with additional information regarding prices at which there is interest in the strategies. Current rules permit the Exchange to allow M and N orders into the COB; the rule change merely provides the Exchange with flexibility to allow this if certain conditions exist. The time period within which a Market-Maker must cancel its complex order pursuant to the proposed rule change provides the Market-Maker with sufficient time for the opposing customer to potentially re-price its order for execution against the Market-Maker's order or for the Market-Maker order to execute against an order following a COA, while also giving the Market-Maker sufficient time to manually cancel its unexecuted orders while managing all of its trading activity. A time period that is too short may discourage market-makers from entering orders under these circumstances, as they may not have time to cancel the order in time while managing all their trading activity, but a time period that is too long may eliminate the benefits of not permitting market-maker orders to rest in the COB (as discussed above). Additionally, requiring customer orders to be not outside the NSM for Market-Makers to submit orders to the COB prevents situations in which market participants may take advantage of this functionality--for example, a customer may rest an order in the COB that is far outside the NSM (and thus unlikely to execute) for long periods of time, which would then permit Market- Makers to rest orders in the COB for such long periods of time, because if a Market-Maker order on the COB does not trade, the Market-Maker could cancel it pursuant to the proposed rule change and then re-submit the order to the COB. The Exchange's Regulatory Division will have surveillance in place to enforce the proposed rule change, which surveillance will monitor whether M and N orders have only been entered in the permitted circumstances described above, and whether any such unexecuted orders have been cancelled by the deadline imposed by the proposed rule change. B. Self-Regulatory Organization's Statement on Burden on Competition Cboe Options 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. Current Rule 6.53C(c) permits the Exchange to determine M and N complex orders are not eligible to rest in the COB; the rule change merely provides the Exchange with flexibility to allow this if certain conditions exist. The proposed rule change permits Market-Makers to submit complex orders for entry into the COB, and cancel such orders if they remain unexecuted, in the same circumstances in those classes. If permitted, Market-Makers may enter complex orders for entry into the COB in their discretion; such order entry will not be required. Market-Makers may continue to enter opening only or immediate-or-cancel complex orders in those classes, or submit no complex orders in those classes, as they do today. Market-Makers have differing levels of resources, and some may determine to not expend resources to update systems to automatically recognize that conditions exist to permit them to rest orders in the COB. However, through discussions with Market-Makers, the Exchange understands any such system updates to require minimal expenditure. Additionally, it is possible for Market-Makers to manually observe the existence of conditions that would permit them to rest orders in the COB, and manually cancel them within the required timeframe. The proposed rule change does not require Market-Makers to submit orders to the COB if the conditions in the proposed rule change exist; such order submission would be voluntary and in Market-Makers' discretion. The proposed rule change provides all Market-Makers with the ability to submit orders to the COB in these circumstances. The Exchange believes the proposed rule change will add liquidity and increase customer execution opportunities at prices potentially better than the leg markets for resting priority customer complex orders and auctioned orders in classes in which the Exchange has determined M and N orders are not otherwise eligible for entry into the COB. The proposed rule change will apply in the same manner to all Market-Makers in the classes in which the Exchange permits the proposed activity. The proposed rule change has no impact on intermarket competition, as it relates solely to orders that the Exchange permits to rest in its COB. 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. [[Page 7096]] 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-2018-016 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-2018-016. 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 website (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 website 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. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-CBOE-2018-016, and should be submitted on or before March 9, 2018. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\15\ --------------------------------------------------------------------------- \15\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018-03197 Filed 2-15-18; 8:45 am] BILLING CODE 8011-01-P
![7092 Federal Register / Vol. 83, No. 33 / Friday, February 16, 2018 / Notices
internet website (http://www.sec.gov/ proposed rule change as described in Home.aspx), at the Exchange’s Office of
rules/sro.shtml). Copies of the Items I, II, and III below, which Items the Secretary, and at the Commission’s
submission, all subsequent have been prepared by the Exchange. Public Reference Room.
amendments, all written statements The Commission is publishing this
II. Self-Regulatory Organization’s
with respect to the proposed rule notice to solicit comments on the
Statement of the Purpose of, and
change, that are filed with the proposed rule change from interested Statutory Basis for, the Proposed Rule
Commission, and all written persons. Change
communications relating to the
proposed rule change between the I. Self-Regulatory Organization’s In its filing with the Commission, the
Commission and any person, other than Statement of the Terms of Substance of Exchange included statements
those that may be withheld from the the Proposed Rule Change concerning the purpose of and basis for
public in accordance with the The Exchange proposes to amend its the proposed rule change and discussed
provisions of 5 U.S.C. 552, will be rules related to the Complex Order Book any comments it received on the
available for website viewing and (‘‘COB’’). proposed rule change. The text of these
printing in the Commission’s Public (additions are italicized; deletions are statements may be examined at the
Reference Room, 100 F Street NE, [bracketed]) places specified in Item IV below. The
Washington, DC 20549, on official * * * * * Exchange has prepared summaries, set
business days between the hours of forth in sections A, B, and C below, of
10:00 a.m. and 3:00 p.m. Copies of such Cboe Exchange, Inc. Rules the most significant aspects of such
filings will also be available for * * * * * statements.
inspection and copying at the principal A. Self-Regulatory Organization’s
office of ICE Clear Europe and on ICE Rule 6.53C. Complex Orders on the
Hybrid System Statement of the Purpose of, and
Clear Europe’s website at https:// Statutory Basis for, the Proposed Rule
www.theice.com/clear-europe/ (a)–(b) No change. Change
regulation#rule-filings. (c) Complex Order Book:
All comments received will be posted 1. Purpose
(i) Routing of Complex Orders: The
without change. Persons submitting Exchange will determine which classes and The Exchange proposes to amend its
comments are cautioned that we do not which complex order origin types (i.e., non- rules related to the COB. Currently, Rule
redact or edit personal identifying broker-dealer public customer, broker-dealers 6.53C(c)(i) states the Exchange may
information from comment submissions. that are not Market-Makers or specialists on determine which classes and which
You should submit only information an options exchange, and/or Market-Makers complex order origin types (i.e., non-
that you wish to make available or specialists on an options exchange) are
broker-dealer public customer, broker-
publicly. All submissions should refer eligible for entry into the COB and whether
such complex orders can route directly to the
dealers that are not market-makers or
to File Number SR–ICEEU–2018–003 specialists on an options exchange, and/
COB and/or from PAR to the COB. In a class
and should be submitted on or before or Market-Makers or specialists on an
in which the Exchange determines complex
March 9, 2018. orders of Market-Makers and specialists on options exchange) are eligible for entry
For the Commission, by the Division of an options exchange are not eligible for entry into the COB and whether such complex
Trading and Markets, pursuant to delegated into the COB, the Exchange may determine orders can route directly to the COB
authority.11 that Market-Makers and specialists may enter and/or from PAR to the COB.3 To the
Eduardo Aleman, complex orders into the COB if: extent an origin type is not eligible for
Assistant Secretary. (A) their complex orders are on the entry into the COB, complex orders with
opposite side of (1) a priority customer
[FR Doc. 2018–03200 Filed 2–15–18; 8:45 am] that origin type may still be entered into
complex order(s) resting in the COB with a
BILLING CODE 8011–01–P price not outside the national spread market;
the System as opening-only or
or (2) order(s) on the same side of the market immediate-or-cancel, as such orders
in the same strategy that initiated a COA(s) would not rest in the COB when the
SECURITIES AND EXCHANGE if there are ‘‘x’’ number of COAs within ‘‘y’’ Exchange is open for trading.
COMMISSION milliseconds, counted on a rolling basis (the The Exchange proposes to amend
Exchange determines the number ‘‘x’’ (which Rule 6.53C(c) to provide in a class in
[Release No. 34–82689; File No. SR–CBOE– must be at least 2) and time period ‘‘y’’ which the Exchange determines
2018–016] (which may be no more than 2,000)); and complex orders of Market-Makers and
(B) they cancel their complex orders, if away market-makers are not eligible for
Self-Regulatory Organizations; Cboe they remain unexecuted, no later than a
Exchange, Inc.; Notice of Filing of a entry into the COB, the Exchange may
specified time (which the Exchange
Proposed Rule Change To Amend determine that Market-Makers and away
determines and may be no more than five
Rules Related to the Complex Order minutes) after the time the COB receives the market-makers may enter complex
Book Market-Maker order.
3 Currently, Cboe Options has determined Market-
February 12, 2018. Complex orders not eligible to route Maker (origin code ‘‘M’’) and market-maker or
Pursuant to Section 19(b)(1) of the to COB (either directly or from PAR to specialist on an options exchange (‘‘away market-
COB) will route via the order handling makers’’) (origin code ‘‘N’’) complex orders in
Securities Exchange Act of 1934 (the options on the S&P 500 (‘‘SPX’’ and ‘‘SPXW’’) and
‘‘Act’’),1 and Rule 19b–4 thereunder,2 system pursuant to Rule 6.12. the Cboe Volatility Index (‘‘VIX’’) are not eligible for
notice is hereby given that, on February (ii)–(iv) No change. entry into the COB. See Regulatory Circular RG15–
2, 2018, Cboe Exchange, Inc. (the (d) No change. 195. The group of SPX options with standard third-
daltland on DSKBBV9HB2PROD with NOTICES
. . . Interpretations and Policies: Friday settlements trade under the SPX symbol on
‘‘Exchange’’ or ‘‘Cboe Options’’) filed the Hybrid 3.0 trading system, and the group of SPX
with the Securities and Exchange .01–.12 No change. options with other settlements trade under the
Commission (the ‘‘Commission’’) the * * * * * SPXW symbol on the Hybrid trading system.
The text of the proposed rule change Pursuant to Rule 8.14, Interpretation and Policy
.01(c), the Exchange may establish different trading
11 17 CFR 200.30–3(a)(12). is also available on the Exchange’s parameters for each group to the extent the
1 15 U.S.C. 78s(b)(1). website (http://www.cboe.com/ Exchange Rules otherwise provide for such
2 17 CFR 240.19b–4. AboutCBOE/CBOELegalRegulatory parameters to be established on a class basis.
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![Federal Register / Vol. 83, No. 33 / Friday, February 16, 2018 / Notices 7093
orders into the COB if (1) their complex related to the amount executed during erroneous COA errors still had an
orders are on the opposite side of (A) a those auctions. Market-makers have opportunity to review the sizes and
priority customer complex order(s) complicated risk modeling associated prices of those orders and evaluate how
resting in the COB with a price not with their trading activity, which factors much and at what prices it is willing to
outside the national spread market in the size, price, and frequency at trade. This is no different than the
(‘‘NSM’’) 4 or (B) order(s) on the same which they trade with orders. In the leg possibility of a market-maker quote
side of the market in the same strategy markets, those risk models factor in resting in the leg market executing
that initiated a COA(s) if there are ‘‘x’’ market-makers’ quotes. However, the against an erroneously entered order.7 It
number of COAs within ‘‘y’’ Exchange understands Market-Makers is easier, and faster, for a person to
milliseconds, counted on a rolling basis have separate systems for quoting and submit an order to the COB to cover the
(the Exchange will determine 5 the for monitoring and responding to COAs, amount of contracts it is willing to trade
number ‘‘x’’ (which must be at least 2) each of which has a different risk model than enter individual responses to COAs
and time period ‘‘y’’ (which may be no and set of risk controls. For example, given the brief COA response period
more than 2,000)) and (2) they cancel one server process submits quotes while (currently 100 milleseconds). Allowing
their complex orders, if such orders another server process scans the market Market-Makers to enter orders on the
remain unexecuted, no later than a for opportunities, such as the presence COB when there are multiple auctions
specified time (which the Exchange of customer orders and auctions. occurring in short periods of time
determines and may be no more than It is common for Market-Makers to set permits Market-Makers to post their
five minutes) after the time the COB risk controls with respect to the COA trading interest up to the total amount
receives the order. The Exchange monitoring and response system to not of contracts within a single strategy they
intends to set these parameters at levels respond to too many COAs within a desire to trade within their risk controls
it believes will permit Market-Makers to short timeframe. If multiple COAs in a for orders (as an order on the COB may
have sufficient time to submit orders strategy occur within a short amount of trade against various COA orders),
into the COB to participate in COAs, time, it is common for a Market-Maker’s which limits execution risk while
which determination the Exchange will system to determine this to be a permitting them to continue to provide
make based on Market-Maker feedback, potential system issue of the submitting liquidity to price improvement
business conditions, and data (including Trading Permit Holder or Exchange. To auctions.8
trading volume data and information ensure a Market-Maker does not trade The Exchange believes the proposed
regarding number of executions of with potentially erroneous orders and rule change also permits it to maintain
Market-Maker orders against complex protect the Market-Maker from the protections in those classes gained
orders). erroneous transactions to ensure it does from not having M and N complex
Unlike the leg markets, in which not become overexposed to risk, the orders otherwise resting in the COB by
market-makers provide liquidity Market-Maker’s system that monitors only permitting M and N complex
through quotes, the COB has no market- COAs may stop responding to COAs in orders to rest in the COB under certain
maker quotes that indicate to customers this situation pursuant to the Market- circumstances for limited time periods.
the price at which liquidity providers Maker’s risk controls for that system In classes in which there is significant
are willing to trade against their orders.6 (e.g., the system may be programmed to open outcry trading, there is generally a
Allowing market-makers to enter orders only respond to a specific number of large number of complex orders that
on the COB when there are priority auctions within a time period). This execute in open outcry, and such orders
customer orders on the opposite side ultimately reduces auction liquidity and are generally for significant quantity.
will provide those customers with this potential price improvement for COA There is a risk of orders in the COB
information, thus creating potential orders. interfering with this trading. For
Additionally, this may result in the example, if a broker represents a large
execution opportunities for customers
Market-Maker missing opportunities to buy complex order on the floor, if there
whose orders are not satisfied by the leg
participate in legitimate auctions. is a small sell order in the COB for that
markets or other complex orders. The
However, it is common for market strategy at a better price, the broker
Exchange believes the proposed rule
participants to enter multiple small must trade with that resting order first.
change will add liquidity for resting
orders into COAs that are not erroneous While this affords price improvement
priority customer complex orders in
(e.g., in accordance with market for a small portion of the buy order, this
classes in which the Exchange has participants’ algorithmic trading that
determined M and N complex orders are first execution lengthens the time of
may break up larger orders when execution for the entire order, which
not eligible for entry into the COB, thus hedging large portfolios). To the extent
increasing execution opportunities at may ultimately harm the customer with
a Market-Maker’s system stops respect to the overall price given the
prices potentially better than the leg responding to COAs in the above
markets. speed at which the market changes.
situation, a person may review the Additionally, if there is a small buy
Additionally, the Exchange believes it
COAs and determine in its discretion it order for that strategy in the COB at a
may be difficult for Market-Makers to is appropriate to trade with the COA
respond to auctions, particularly when better bid price, the floor broker would
orders even if the System does not
multiple auctions occur within a short not be able to clear that order and would
permit it due to automatic controls.
amount of time, while managing risk not be able to trade until that order is
Under the proposed rule change, that
no longer resting on the book at a better
4 See
person could then submit an order to
Rule 1.1(dddd) [sic].
the COB that would be available to trade
daltland on DSKBBV9HB2PROD with NOTICES
5 Pursuant to Rule 6.53C, Interpretation and 7 The Exchange may nullify a transaction or
Policy .01, the Exchange will announce to Trading against those multiple COA orders up to adjust the execution price of a transaction in
Permit Holders all determinations it makes the amount the Market-Maker is willing accordance with Rule 6.25.
pursuant to Rule 6.53C via Regulatory Circular. The to trade. Even if the COAs were the 8 Pursuant to Rule 6.53C(d), a Market-Maker or
Exchange will provide Trading Permit Holders with result of an error by the submitting away market-maker order on the opposite side of
sufficient, advanced notice prior to changing any the auctioned order resting on the COB may be
parameters its sets under the proposed rule change. market participants, the Market-Maker available for execution against any contracts of the
6 Market-makers are unable (and not required to) that submitted a complex order that auctioned order that did not execute during the
submit quotes in the COB. ultimately executes against those auction.
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![7096 Federal Register / Vol. 83, No. 33 / Friday, February 16, 2018 / Notices
III. Date of Effectiveness of the inspection and copying at the principal changes to the ICE Clear Europe
Proposed Rule Change and Timing for office of the Exchange. All comments Clearing Rules or Procedures.3
Commission Action received will be posted without change. II. Clearing Agency’s Statement of the
Within 45 days of the date of Persons submitting comments are Purpose of, and Statutory Basis for, the
publication of this notice in the Federal cautioned that we do not redact or edit Proposed Rule Change
Register or within such longer period personal identifying information from
comment submissions. You should In its filing with the Commission, ICE
up to 90 days (i) as the Commission may
submit only information that you wish Clear Europe included statements
designate if it finds such longer period
to make available publicly. All concerning the purpose of and basis for
to be appropriate and publishes its
submissions should refer to File the proposed rule change and discussed
reasons for so finding or (ii) as to which
Number SR–CBOE–2018–016, and any comments it received on the
the Exchange consents, the Commission
proposed rule change. The text of these
will: should be submitted on or before March
statements may be examined at the
A. By order approve or disapprove 9, 2018.
places specified in Item IV below. ICE
such proposed rule change, or For the Commission, by the Division of Clear Europe has prepared summaries,
B. institute proceedings to determine Trading and Markets, pursuant to delegated set forth in sections (A), (B), and (C)
whether the proposed rule change authority.15 below, of the most significant aspects of
should be disapproved.
Eduardo A. Aleman, such statements.
IV. Solicitation of Comments Assistant Secretary. (A) Clearing Agency’s Statement of the
Interested persons are invited to [FR Doc. 2018–03197 Filed 2–15–18; 8:45 am] Purpose of, and Statutory Basis for, the
submit written data, views, and BILLING CODE 8011–01–P Proposed Rule Change
arguments concerning the foregoing,
including whether the proposed rule (a) Purpose
change is consistent with the Act. SECURITIES AND EXCHANGE ICE Clear Europe proposes revising its
Comments may be submitted by any of COMMISSION Stress Testing Policy, among other
the following methods: matters, to recategorize certain CDS
[Release No. 34–82692; File No. SR–ICEEU– stress testing scenarios, address specific
Electronic Comments
2018–001] wrong way risk, introduce new forward
• Use the Commission’s internet looking credit event scenarios and make
comment form (http://www.sec.gov/ Self-Regulatory Organizations; ICE certain other enhancements and
rules/sro.shtml); or Clear Europe Limited; Notice of Filing clarifications. These revisions do not
• Send an email to rule-comments@ of Proposed Rule Change, Security- involve any changes to the ICE Clear
sec.gov. Please include File Number SR– Based Swap Submission or Advance Europe Clearing Rules or Procedures.4
CBOE–2018–016 on the subject line. Notice Relating to Amendments to the ICE Clear Europe currently maintains
Paper Comments ICE Clear Europe CDS Clearing Stress a broad array of stress testing scenarios
Testing Policy (the ‘‘Stress Testing that are applied to portfolios of
• Send paper comments in triplicate positions as part of its risk management
Policy’’)
to Secretary, Securities and Exchange practices for the CDS product category.
Commission, 100 F Street NE, February 12, 2018. As part of the existing policy, the
Washington, DC 20549–1090. Clearing House management regularly
Pursuant to Section 19(b)(1) of the
All submissions should refer to File Securities Exchange Act of 1934 evaluates whether to retire certain
Number SR–CBOE–2018–016. This file scenarios or portfolios as outdated or
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
number should be included on the otherwise inapplicable, and whether to
notice is hereby given that on February
subject line if email is used. To help the add new scenarios or portfolios for
6, 2018, ICE Clear Europe Limited (‘‘ICE
Commission process and review your testing purposes. ICE Clear Europe is
Clear Europe’’) filed with the Securities
comments more efficiently, please use not proposing to change the frequency
and Exchange Commission
only one method. The Commission will of stress testing or of its regular reviews
(‘‘Commission’’) the proposed rule of stress testing scenarios, models and
post all comments on the Commission’s
internet website (http://www.sec.gov/ changes described in Items I, II, and III underlying parameters and
rules/sro.shtml). Copies of the below, which Items have been prepared assumptions.
submission, all subsequent by ICE Clear Europe. The Commission is The amendments generally reorganize
amendments, all written statements publishing this notice to solicit the existing stress testing scenarios into
with respect to the proposed rule comments on the proposed rule change two broad categories: Extreme but
change that are filed with the from interested persons. plausible market scenarios and extreme
Commission, and all written I. Clearing Agency’s Statement of the market scenarios. Extreme but plausible
communications relating to the Terms of Substance of the Proposed scenarios include both historical
proposed rule change between the Rule Change scenarios (such as those involving the
Commission and any person, other than 2008/2009 credit crisis, the Lehman
those that may be withheld from the ICE Clear Europe proposes revising its Brothers default and discordant
public in accordance with the Stress Testing Policy, among other scenarios, where there are discordant
provisions of 5 U.S.C. 552, will be matters, to recategorize certain CDS moves among major indices) and
daltland on DSKBBV9HB2PROD with NOTICES
available for website viewing and stress testing scenarios and make certain hypothetical scenarios (such as
printing in the Commission’s Public other enhancements and clarifications.
Reference Room, 100 F Street NE, These revisions do not involve any 3 Capitalized terms used but not defined herein
Washington, DC 20549 on official have the meanings specified in the ICE Clear
Europe Clearing Rules (the ‘‘Rules’’).
business days between the hours of 15 17 CFR 200.30–3(a)(12). 4 Capitalized terms used but not defined herein
10:00 a.m. and 3:00 p.m. Copies of such 1 15 U.S.C. 78s(b)(1). have the meanings specified in the ICE Clear
filing also will be available for 2 17 CFR 240.19b–4. Europe Clearing Rules (the ‘‘Rules’’).
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Document Created: 2018-02-16 00:55:46
Document Modified: 2018-02-16 00:55:46
| 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 | 83 FR 7092 |
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