[Federal Register Volume 76, Number 28 (Thursday, February 10, 2011)]
[Notices]
[Pages 7614-7616]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-2970]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63842; File No. SR-CBOE-2011-009]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change Related to Stock-Option Orders
February 4, 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 January 27, 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. CBOE has submitted the proposed rule change under Section
19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ which
renders the proposal effective upon filing with the Commission. 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.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing to amend its complex order request for
response (``RFR'') auction (``COA'') as it applies to stock-option
orders to incorporate certain order eligibility parameters. The text of
the proposed rule change is available on the Exchange's Web site
(http://www.cboe.org/Legal), at the Exchange's Office of the Secretary,
and at the Commission.
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 those 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
Prior to routing to the complex order book or once on PAR, eligible
complex orders may be subjected to an automated COA process where
orders are exposed for price improvement under Rule 6.53C(d), Process
for Complex Order RFR Auction. Generally, if a market order cannot be
filled in whole or in a permissible ratio at the conclusion of COA,
then the order (or any remaining balance) will route to PAR for manual
handling. However, the Exchange has the ability to vary this process
for market stock-option orders that contain one or more option leg(s)
under Rule 6.53C.06(d). Specifically, instead of routing to PAR for
manual handling, the Exchange may determine on a class-by-class basis
that any remaining balance of the option leg(s) of a market stock-
option order will automatically route to CBOE's Hybrid System for
processing as a simple market order(s) consistent with CBOE's order
execution rules and any remaining balance of the stock leg will
automatically route to the CBOE Stock Exchange (``CBSX''), CBOE's stock
facility, for processing as a simple
[[Page 7615]]
market order consistent with CBSX order execution rules.\5\ This
alternate legging functionality is intended to assist in the automatic
execution and processing of stock-option orders that are market orders.
The Exchange notes that when a stock-option order is legged in this
manner, it is possible for CBOE to route the option leg(s) to another
options exchange and/or for CBSX to route the stock leg to another
stock exchange, consistent with their respective rules.\6\
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\5\ Pursuant to Rule 6.53C.01, any determination by the Exchange
to route stock-option market orders in this manner will be announced
to Trading Permit Holders via Regulatory Circular.
\6\ See, e.g., CBOE's Rules 6.14A, Hybrid Agency Liaison 2
(HAL2), and 6.14B, Order Routing to Other Exchanges, and CBSX's Rule
52.6, Processing of Round-lot Orders.
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The Exchange is preparing to activate this legging functionality
for market stock-option orders. However, before activating the
functionality, the Exchange is proposing to codify certain order
eligibility parameters that would be applicable to such market stock-
option orders. Specifically, the Exchange is proposing to provide that
for each class in which the legging functionality is activated, an
``eligible market order'' means a stock-option order that is within
designated size and order type \7\ parameters, determined by the
Exchange on a class-by-class basis, and for which the national best bid
or offer (``NBBO'') is within designated size and price parameters, as
determined by the Exchange for the individual leg. The designated NBBO
price parameters will be determined based on a minimum bid price for
sell orders and a maximum offer price for buy orders. The Exchange may
also determine on a class-by-class basis to limit the trading times
within regular trading hours that the legging functionality will be
available.\8\
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\7\ The legging functionality is currently only available for
stock-option orders that are market orders. The market stock-option
``order types'' are those with only one option leg and those with
more than one option leg (e.g., a conversion or reversal).
\8\ Pursuant to Rule 6.53C.01, any determination by the Exchange
regarding these legging functionality parameters will be announced
to Trading Permit Holders via Regulatory Circular.
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The Exchange notes that the inclusion of an order eligibility
provision will provide the Exchange with more flexibility to administer
the legging functionality in a manner that is consistent with other
CBOE rules that contain order eligibility provisions based on order
size, order type and other factors, e.g., Rules 6.13, CBOE Hybrid
System Automatic Execution Feature, 6.14, Hybrid Agency Liaison (HAL),
6.14A, 6.53, Certain Types of Orders Defined, and 6.53C(d).\9\ The
Exchange also notes that the designated NBBO size and NBBO price
parameters and the eligible trading time parameter are specific to the
COA legging functionality (although the Exchange notes that there are
other price reasonability check parameters within various other CBOE
Rules, e.g., Rule 6.13 and Interpretation and Policy .08 to Rule 6.53C,
Complex Orders on the Hybrid System).
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\9\ Indeed, to be eligible for the COA process itself, an order
must be a COA-eligible order. A ``COA-eligible order'' is a complex
order (including a stock-option order) that, as determined by the
Exchange on a class-by-class basis, is eligible for COA considering
the order's marketability (defined as a number of ticks away from
the current market), size, complex order type and 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). See Rule 6.53C(d)(i)(2) and Interpretation and Policy
.06(d) to Rule 6.53C.
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Under these new order eligibility parameters, for example, the
Exchange might determine that for a given option class the COA legging
functionality would only be available for stock-option orders involving
one option leg where the maximum eligible order size is 1,000 shares
for the stock leg and 10 contracts for the option leg. Under the NBBO
size parameter, the Exchange might also determine that the legging
functionality would only be available in instances where the minimum
NBBO size is at least 1,000 shares for the stock leg and the minimum
NBBO size for the options leg(s) is a size that is at least sufficient
to satisfy the entire option leg(s). Under the NBBO price parameter,
the Exchange might also determine that the legging functionality would
only be available in instances where the NBBO bid for a component leg
is at least $0.25 or higher for a sell option leg. As for the eligible
trading times, the Exchange might determine to designate a time within
regular trading hours when the legging functionality would be
available, such as, for example, saying the legging functionality would
not be available within 3 minutes of the 3 p.m. (Central Time) close of
trading.\10\
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\10\ In the example above, the Exchange would issue a Regulatory
Circular to Trading Permit Holders before the legging functionality
parameters go into effect for the given option class that announces
the particular parameters that the Exchange determined to establish.
See note 8, supra.
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As indicated above, the legging functionality is intended to assist
in the automatic execution and processing of stock-option orders that
are market orders. The Exchange believes the addition of the above
described order eligibility parameters will provide the Exchange more
flexibility in administering the legging functionality in a manner that
is consistent with other Exchange rules that contain order eligibility
provisions. The Exchange also believes that these eligibility
parameters will enhance the functionality and assist with the
maintenance of orderly markets by helping to mitigate the potential
risks associated with legging stock option orders, e.g., the risk of an
order drilling through multiple price points on another exchange
(thereby resulting in execution at prices that are away from the NBBO
and potentially erroneous), and/or the risk of one leg of the stock-
option order going unexecuted (thereby not achieving a complete stock-
option order execution and having a partial position that is unhedged).
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the Act
\11\ in general and furthers the objectives of Section 6(b)(5) of the
Act \12\ in particular in that it should promote just and equitable
principles of trade, serve to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and
protect investors and the public interest. The Exchange believes the
proposed rule change will assist in the automatic execution and
processing of stock-option orders that are market orders. The Exchange
also believes the addition of the order eligibility parameters will
provide the Exchange with more flexibility in administering the legging
functionality in a manner that is consistent with other Exchange rules
that contain order eligibility provisions. In addition, the Exchange
believes that these eligibility requirements will enhance the
functionality and assist with the maintenance of orderly markets by
helping to mitigate the potential risks associated with legging stock
option orders, e.g., the risk of an order drilling through multiple
price points on another exchange (thereby resulting in execution at
prices that are away from the NBBO and potentially erroneous), and/or
the risk of one leg of the stock-option order going unexecuted (thereby
not achieving a complete stock-option order execution and having a
partial position that is unhedged).
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\11\ 15 U.S.C. 78f(b).
\12\ 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.
[[Page 7616]]
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
CBOE has designated the proposed rule change as one that does not:
(i) Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate if consistent with
the protection of investors and the public interest. Therefore, the
proposed rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(6) thereunder.\14\
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\13\ 15 U.S.C. 78s(b)(3)(A).
\14\ 17 CFR 240.19b-4(f)(6). Rule 19b-4(f)(6)(iii) also requires
an exchange to provide the Commission with written notice of its
intent to file the proposed rule change, along with a brief
description and text of the proposed rule change, at least five
business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission. The
Exchange satisfied this requirement.
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The Exchange has asked the Commission to waive the 30-day operative
delay. CBOE believes that the proposed order eligibility parameters for
the legging functionality will provide the Exchange with flexibility in
administering the legging functionality and assist in the maintenance
of fair and orderly markets by helping to mitigate potential risks
associated with the legging of stock-option orders, including the risk
of executions at multiple price points that are away from the NBBO and
potentially erroneous, and the risk that one leg of the order will go
unexecuted, resulting in an incomplete execution of the stock-option
order and a partial position that is unhedged.
The Commission grants the CBOE's request.\15\ The Commission
believes that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest because the order
eligibility parameters could help to mitigate some of the risks
associated with the legging of stock-option orders, including the risk
of an incomplete execution of one leg of the order that results in a
position that is not fully hedged, and the risk that a component of the
order could be executed at multiple prices that are away from the NBBO
and potentially erroneous. The Commission notes, in addition, that CBOE
will notify Trading Permit Holders through a Regulatory Circular of the
legging functionality parameters for an option class before the
parameters go into effect.\16\
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\15\ For purposes only of waiving the 30-day operative delay of
this proposal, the Commission has considered the proposed rule's
impact on efficiency, competition, and capital formation. See 15
U.S.C. 78c(f).
\16\ See notes 8 and 10, supra. See also CBOE Rule 6.53C,
Interpretation and Policy .01.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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-2011-009 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-2011-009. 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 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
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 Number SR-CBOE-2011-009 and should be
submitted on or before March 3, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-2970 Filed 2-9-11; 8:45 am]
BILLING CODE 8011-01-P