[Federal Register Volume 76, Number 86 (Wednesday, May 4, 2011)]
[Notices]
[Pages 25392-25394]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-10771]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64354; File No. SR-CBOE-2011-041]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of Proposed Rule Change Establishing
Qualified Contingent Cross Orders
April 27, 2011.
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 April 18, 2011, the Chicago Board Options Exchange,
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and
Exchange Commission (the ``Commission'') the proposed rule change as
described in Items I and II 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 is proposing rules to create a new order type referred
to as a qualified contingent cross order (``QCC Order''). The text of
the rule proposal is available on the Exchange's Web site (http://www.cboe.org/legal), at the Exchange's Office of the Secretary and at
the Commissions 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 parts of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The International Securities Exchange, LLC (``ISE'') recently
received Commission approval of a proposed rule change which adopted a
qualified contingent cross order type (the ``ISE Proposal''). CBOE has
opposed the ISE Proposal, but believes we now need to adopt rules to
introduce a similar order type for competitive reasons, as indicated in
our qualified contingent order briefs and comment letters responding to
the ISE Proposal.\3\ Therefore, CBOE is proposing to adopt rules
related to a new QCC Order type.
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\3\ ISE first proposed to adopt a qualified contingent cross
order type through SR-ISE-2009-35. This proposal was approved by the
Commission's Division of Trading and Markets (the ``Division'')
pursuant to delegated authority on August 28, 2009, Securities
Exchange Act Release No. 60584 (August 28, 2009), 74 FR 45663
(September 3, 2009) (SR-ISE-2009-35), but this approval was stayed
by a CBOE petition seeking full Commission review. See Letters from
Joanne Moffic-Silver, General Counsel and Corporate Secretary, CBOE,
dated September 4 and 14, 2009. ISE thereafter submitted its
modified rule change, SR-ISE-2010-73, and a letter requesting that
the Commission vacate the Division's approval of SR-ISE-2009-35
simultaneous with the approval of SR-ISE-2010-73. CBOE submitted
numerous letters objecting to ISE's original and modified qualified
contingent cross proposals, however, the Commission approved SR-ISE-
2010-73 and set aside SR-ISE-2009-35 on February 24, 2011. See
Securities Exchange Act Release Nos. 62523 (July 16, 2010), 75 FR
43211 (July 23, 2010) (SR-ISE-2010-73) (ISE Proposal), 63955
(February 24, 2011) (SR-ISE-2010-73) (ISE Approval), and 69354
(February 24, 2011) (SR-ISE-2009-35); see also, e.g., CBOE comment
letters and materials dated July 16, 2009, September 4, 2009,
September 14, 2009, September 17, 2009, December 3, 2009, January
20, 2010, April 7, 2010, and April 9, 2010, which can be viewed at
the following links: http://www.sec.gov/comments/sr-ise-2009-35/ise200935.shtml#notice; http://www.sec.gov/rules/sro/ise/isearchive/isearchive2009.shtml#SR-ISE-2009-35; and http://www.sec.gov/comments/sr-ise-2010-73/ise201073.shtml. As a result, CBOE is
submitting the instant rule change proposal as a competitive
response to SR-ISE-2010-73.
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Background
The Exchange is currently a party to the Options Order Protection
and Locked/Crossed Market Plan (``Distributive Linkage Plan''),\4\ and
has implemented Exchange rules in conjunction with that plan (the
``Distributive Linkage Rules'').\5\ Similar to Regulation NMS under the
Act, the Distributive Linkage Plan requires,
[[Page 25393]]
among other things, that the Exchange establish, maintain and enforce
written policies and procedures that are reasonably designed to prevent
``Trade-Throughs.'' \6\ A Trade-Through is a transaction in an option
series at a price that is inferior to the best price available in the
market.\7\
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\4\ See Securities Exchange Act Release No. 60405 (July 30,
2009), 74 FR 39362 (August 6, 2009) (File No. 4-546).
\5\ See Securities Exchange Act Release No. 60551 (August 20,
2009), 74 FR 43196 (August 26, 2009) (SR-CBOE-2009-040).
\6\ Section 5(a) of the Distributive Linkage Plan.
\7\ Section 2(21) of the Distributive Linkage Plan.
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The Distributive Linkage Plan replaced the Plan for the Purpose of
Creating and Operating an Intermarket Option Linkage (``Old Linkage
Plan''), and the Distributive Linkage Rules replaced the then-existing
CBOE rules implementing the Old Linkage Plan (``Old Linkage Rules'').
The Old Linkage Plan and the Old Linkage Rules provided a limited
Trade-Through exemption for ``Block Trades,'' defined to be trades of
500 or more contracts with a premium value of at least $150,000.\8\
However, as with Regulation NMS, the Distributive Linkage Plan does not
provide a Block Trade exemption.
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\8\ Old Linkage Plan Sections 2(3) and 8(c)(i)(C); and former
CBOE Rule 6.80(2).
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The ISE Proposal stated that the loss of the Block Trade exemption,
among other things, adversely affects the ability of its members to
effect large trades that are tied to stock,\9\ and therefore proposed a
QCC as a limited substitute for the Block Trade exemption. While we
continue to disagree with the premise that QCC serves as a limited
substitute for the Block Trade exemption (e.g., the Block Trade
exemption is designed to provide Trade-Through relief, as discussed
above; whereas QCC does not provide Trade-Through relief, as discussed
below) and our views with respect to the potential impact that the ISE
Proposal may have on market structure remain unchanged,\10\ we
nonetheless are proposing to adopt rules related to QCC Orders in order
to permit the Exchange to remain competitive with ISE, and the other
options exchanges that may also adopt rules for QCCs, by making QCC
Orders available to CBOE Trading Permit Holders (``TPHs'') and their
customers through the Exchange.
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\9\ See ISE Proposal at 43212.
\10\ See note 3, supra.
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Proposal
The Exchange is proposing to amend CBOE Rule 6.53, Certain Types of
Orders Defined, to include a new QCC Order type. When a CBOE TPH
effects a qualified contingent trade (``QCT'') \11\ in a Regulation NMS
stock,\12\ the TPH will be permitted to cross the options leg(s) of the
trade on CBOE immediately without exposure if the order is for at least
1000 contracts, is part of a QCT,\13\ is executed at a price at least
equal to the national best bid or offer (``NBBO''), and there are no
public customer orders resting in the Exchange's electronic book at the
same price.
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\11\ The Commission, by order, has provided Trade-Through relief
for QCTs from Rule 611(a) of Regulation NMS, 17 CFR 242.611(a). See
Securities Exchange Act Release No. 57620 (April 4, 2008) (the ``QCT
Release,'' which supersedes a release initially granting the QCT
exemption, Securities Exchange Act Release No. 54389 (August 31,
2006)). The QCT Release provides an exemption from Trade-Through
liability in the equity market for multi-component, fully-hedged
trades where one order is contingent on the execution of one or more
additional orders.
\12\ An ``NMS stock'' is defined in Rule 600 of Regulation NMS
under the Exchange Act, 17 CFR 242.600.
\13\ The Exchange is proposing to define a qualified contingent
cross trade substantively identical to the Commission's definition
in the QCT Release. A qualified contingent cross trade must meet the
following conditions: (i) At least one component must be an NMS
stock, as defined in Rule 600 of Regulation NMS, 17 CFR 242.600;
(ii) all components must be effected with a product or price
contingency that either has been agreed to by all the respective
counterparties or arranged for by a broker-dealer as principal or
agent; (iii) the execution of one component must be contingent upon
the execution of all other components at or near the same time; (iv)
the specific relationship between the component orders (e.g., the
spread between the prices of the component orders) is determined by
the time the contingent order is placed; (v) the component orders
must bear a derivative relationship to one another, represent
different classes of shares of the same issuer, or involve the
securities of participants in mergers or with intentions to merge
that have been announced or cancelled; and (vi) the transaction must
be fully hedged (without regard to any prior existing position) as a
result of other components of the contingent trade. Consistent with
the QCT Release and the ISE Proposal, TPHs must demonstrate that the
transaction is fully hedged using reasonable risk-valuation
methodologies. See QCT Release, supra note 11, at footnote 9.
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The QCC Order type would permit TPHs to provide their customers a
net price for the entire trade, and then allow the TPH to execute the
options leg(s) of the trade on CBOE at a price at least equal to the
NBBO while using the QCT exemption to effect the trade in the equities
leg at a price necessary to achieve the net price.\14\ Under the
proposal, CBOE will not permit the options component(s) of a QCC Order
to trade through the NBBO.\15\
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\14\ CBOE will adopt policies and procedures to ensure that TPHs
use the QCC Order properly. First, we will require TPHs to properly
mark all QCC Orders as such. In addition, CBOE will implement an
examination and surveillance program to assess TPH compliance with
the requirements applicable to QCC Orders, including the requirement
that the stock leg of the transaction be executed at or near the
same time as the options leg. We believe that ISE and other
exchanges adopting a QCC-type order are also required to adopt
similar policies and procedures.
\15\ While the QCC Order type does not provide exposure for
price improvement for the options leg(s) of a stock-option order,
the options leg(s) must be executed at the NBBO or better. The
Commission has previously approved crossing transactions with no
opportunity for price improvement. See, e.g., ISE Rules 715 and 721,
and Interpretation and Policy .08 of CBOE Rule 6.74A.
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Under this proposal, CBOE would permit QCC Orders to be submitted
electronically from on or off the floor through the CBOE Hybrid Trading
System. In this regard, we note that, in order to effect proprietary
orders (including QCC Orders) electronically from on the floor of the
Exchange, TPHs must ensure that they qualify for an exemption from
Section 11(a)(1) of the Act,\16\ which concerns proprietary trading on
an exchange by an exchange member. Generally, Section 11(a)(1) of the
Act restricts any member of a national securities exchange from
effecting any transaction on such exchange for (i) the member's own
account, (ii) the account of a person associated with the member, or
(iii) an account over which the member or a person associated with the
member exercises discretion, unless a specific exemption is available.
Examples of common exemptions include the exemption for transactions by
broker dealers acting in the capacity of a market maker under Section
11(a)(1)(A),\17\ the ``G'' exemption for yielding priority to non-
members under Section 11(a)(1)(G) of the Act and Rule 11a1-1(T)
thereunder,\18\ and ``Effect vs. Execute'' exemption under Rule 11a2-
2(T) under the Act.\19\ In this regard, we note that, consistent with
existing Exchange Rules for effecting proprietary orders from on the
floor of the Exchange, TPHs effecting QCC Orders and relying on the G
exemption would be required to yield priority to any interest in the
electronic book at the same price (not just public customer orders) to
ensure that non-member interest is protected.\20\
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\16\ 15 U.S.C. 78k(a)(1).
\17\ 15 U.S.C. 78k(a)(1)(A).
\18\ 15 U.S.C. 78k(a)(1)(G) and 17 CFR 240.11a1-1(T).
\19\ 17 CFR 240.11a2-2(T).
\20\ See, e.g., Securities Exchange Act Release No. 59546 (March
10, 2009), 74 FR 11144 (March 16, 2009)(SR-CBOE-2009-016) and
related CBOE Regulatory Circular RG09-35 (regulatory circular
provides TPHs guidance on the application of Section 11(a)(1) to
trading on CBOE's Hybrid Trading System; the circular describes
Section 11(a)(1) and certain of the exemptions to Section 11(a)(1)
as well as the application of the (G) Order exemption and the Effect
vs. Execute exemption (Rule 11a2-2(T)) to trading on the Hybrid
Trading System).
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The Exchange's proposal addresses the mechanics of executing the
stock and options components of a net-price transaction. The Exchange
believes that it is necessary that it provide TPHs and their customers
with the same trading capabilities available on other exchanges with
respect to QCCs,
[[Page 25394]]
including the change proposed herein, which would permit TPHs to
execution the options leg(s) of large complex orders on the Exchange.
This rule change is being proposed as a competitive response, and is
substantially similar in all material respects, to the ISE Proposal
that was recently approved by the Commission.\21\
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\21\ See note 3, supra.
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2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the
Act,\22\ in general, and furthers the objectives of Section 6(b)(5) of
the Act,\23\ in particular, in that an exchange should have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, 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. In particular, the proposed QCC Order type will
prevent executions from occurring when there is a public customer order
resting in the electronic book at the same price and will assure that
only large-size orders (i.e., orders of at least 1000 contracts) are
eligible. The proposed rule will facilitate the ability of CBOE TPHs to
execute large options orders that are tied to stock in an efficient
manner, while also protecting the national market system against Trade-
Throughs.
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\22\ 15 U.S.C. 78f(b).
\23\ 15 U.S.C. 78f(b)(5).
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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.
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
proposal.
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 (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization 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 e-mail to [email protected]. Please include
File Number SR-CBOE-2011-041 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2011-041. This file
number should be included on the subject line if e-mail 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
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File No. SR-CBOE-2011-041 and should be
submitted on or before May 25, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-10771 Filed 5-3-11; 8:45 am]
BILLING CODE 8011-01-P