Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 22027 

85See C2 Rule 6.13, Interpretation and Policy 

.04(a)(5) and Notice, 77 FR at 10024. 

86See C2 Rule 6.13, Interpretation and Policy 

.04(d) and Notice, 77 FR at 10024. 

87See C2 Rule 6.13, Interpretation and Policy 

.02(b). 

88 15 U.S.C. 78s(b)(2). 

89 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 66394 

(February 14, 2012), 77 FR 10026 (‘‘Notice’’). 

4CBOE proposes to define a complex order as any 

order for the same account involving the execution 

of two or more different options series in the same 

underlying security occurring at or near the same 

time in a ratio that is equal to or greater than oneto-three (.333) and less than equal to three-to-one 

(3.00) (or such lower ratio as may be determined by 

the Exchange on a class-by-class basis) and for the 

purpose of executing a particular investment 

strategy. See CBOE Rule 6.53C(a)(1). 

5CBOE proposes to define a stock-option order as 

any order for the same account to buy or sell a 

stated number of units of an underlying stock or a 

security convertible into the underlying stock 

(‘‘convertible security’’) coupled with the purchase 

or sale of options contract(s) on the opposite side 

of the market representing either (i) the same 

number of units of the underlying stock or 

convertible security; or (ii) the number of units of 

the underlying stock necessary to create a delta 

neutral position, but in no case in a ratio greater 

than eight (8) options contracts per unit of trading 

of the underlying stock or convertible security 

established for that series by The Options Clearing 

Corporation (or such lower ratio as may be 

determined by the Exchange on a class-by-class 

basis). See CBOE Rule 6.53C(a)(2). 

6See Notice, 77 FR at 10032. 

7See id. 

8See ISE Rule 722(a)(1) and (2). 

9See CBOE Rule 6.53C(a)(1) and (2). 

10See, e.g., CBOE Rule 6.53C, Interpretation and 

Policy .06(c) and (d). 

C2 also proposes to extend the 

existing individual series leg width 

price check parameter in C2 Rule 6.13, 

Interpretation and Policy .04(a) to the 

individual series legs of market and 

marketable limit stock-option orders.85

This price check parameter prevents the 

automatic execution of a marketable 

complex order when the width between 

C2’s best bid and offer in any individual 

series leg is not within an acceptable 

price range. C2 further proposes to 

extend the existing buy-buy (sell-sell) 

strategy price check parameter in C2 

Rule 6.13, Interpretation and Policy 

.04(d) to stock-option orders.86 As 

described more fully above, this price 

check parameter prevents the automatic 

execution of complex order at a net 

limit price that is inconsistent with the 

order’s strategy (e.g., an order where all 

of the components of a strategy are to 

buy, but the order is priced at 0 or at 

a net credit). The Commission believes 

it is consistent with the Act for C2 to 

have the ability to apply these price 

check parameters to stock-option orders, 

in addition to complex orders. 

F. Extension of the re-COA Feature to 

Stock-Option Orders 

C2 proposes to amend C2 Rule 6.13, 

Interpretation and Policy .02(b) to apply 

its ‘‘re-COA’’ feature to stock-option 

orders resting at the top of the COB. For 

classes in which COA is activated, a 

non-marketable stock-option order 

resting at the top of the COB may be 

automatically subject to a COA if the 

order is within a number of ticks away 

from the current derived net market.87

The Commission believes applying the 

‘‘re-COA’’ feature to stock-option orders 

could facilitate the execution of stockoption orders by providing an 

opportunity for a stock-option order 

resting at the top of the COB to be 

executed automatically. Accordingly, 

the Commission finds that the provision 

is consistent with the Act. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,88 that the 

proposed rule change (SR–C2–2012– 

004) is approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.89

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2012–8784 Filed 4–11–12; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66759; File No. SR–CBOE– 

2012–005] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Order Approving a 

Proposed Rule Change Relating to 

Stock-Option Orders 

April 6, 2012. 

I. Introduction 

On February 7, 2012, the Chicago 

Board Options Exchange, Incorporated 

(‘‘CBOE’’ or ‘‘Exchange’’), filed with the 

Securities and Exchange Commission 

(‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule change to 

amend CBOE Rule 6.53C, ‘‘Complex 

Orders on the Hybrid System,’’ to, 

among other things, revise CBOE’s 

procedures for electronically executing 

stock-option orders. The proposed rule 

change was published for comment in 

the Federal Register on February 21, 

2012.3 The Commission received no 

comment letters regarding the proposed 

rule change. This order approves the 

proposed rule change. 

II. Description 

CBOE proposes to amend CBOE Rule 

6.53C to adopt new definitions of 

complex order and stock-option order, 

and to make several changes to its 

procedures for electronically executing 

stock-option orders. 

A. Definitions of Complex Order and 

Stock-Option Order 

CBOE Rule 6.53C(a) currently defines 

complex orders, including stock-option 

orders, in terms of enumerated 

strategies. The proposal replaces these 

enumerated strategies with general 

definitions of complex order 4 and 

stock-option order.5 According to CBOE, 

the investing industry creates new and 

legitimate investment strategies that do 

not necessarily fit within the current 

narrow definitions of complex order 

types, and, as a result, bona fide 

transactions to limit risk are not 

afforded the facility of execution 

provided to more common complex 

orders.6 CBOE believes that more 

general definitions will provide greater 

flexibility in the design and use of 

complex strategies.7 CBOE notes that its 

new definitions of complex order and 

stock-option order are consistent with 

those of another options exchange 8 and 

with CBOE Rule 6.80(4). 

CBOE Rule 6.53C(c)(iii) currently 

permits only complex orders with no 

more than four legs to be placed in the 

Complex Order Book (‘‘COB’’). CBOE 

proposes to remove this limitation and 

to provide that only complex orders and 

stock-option orders with no more than 

the applicable number of legs, as 

determined by CBOE on a class-by-class 

basis, will be eligible for electronic 

processing.9

B. Execution of Stock-Option Orders 

1. Legging of Stock-Option Orders 

Currently, complex orders, including 

stock-option orders, may trade with 

other complex orders or by ‘‘legging’’ 

with the individual orders and quotes in 

CBOE’s and CBSX’s electronic books 

(‘‘EBooks’’) for the individual 

component legs, provided that the 

complex order can be executed in full, 

or in a permissible ratio, by the orders 

and quotes in the EBooks for the 

individual component legs.10 In the case 

of a stock-option order that is legged, 

the stock component of the order would 

trade with CBSX’s EBook and the option 

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22028 Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 

11See Notice, 77 FR at footnote 10. 

12CBOE will retain legging functionality in one 

limited circumstance, as described below. See 

CBOE Rule 6.53C, Interpretation and Policy .06(d). 

13See Notice, 77 FR at 10028. 

14See CBOE Rule 6.53C, Interpretation and Policy 

.06(d). For purposes of the legging functionality, an 

eligible market order is a stock-option order that is 

within the designated size and order type 

parameters, as determined by CBOE on a class-byclass basis, and for which the NBBO is within 

designated size and price parameters, as determined 

by CBOE for the individual leg. See CBOE Rule 

6.53C, Interpretation and Policy .06(d). 

15See CBOE Rule 6.53C, Interpretation and Policy 

.06. 

16See Notice, 77 FR at 10028. 

17See CBOE Rule 6.53C, Interpretation and Policy 

.06(d). 

18See CBOE Rule 6.53C, Interpretation and Policy 

.06(d). 

19See Notice, 77 FR at footnote 16. 

20See CBOE Rule 6.53C, Interpretation and Policy 

.06(a). As described above, CBOE may continue to 

route to CBSX the stock leg of an eligible market 

stock-option order that cannot be executed in full 

or in a permissible ratio at the conclusion of a COA. 

See CBOE Rule 6.53C, Interpretation and Policy 

.06(d). 

21See Notice, 77 FR at 10027. 

22See CBOE Rule 6.53C, Interpretation and Policy 

.06(a). 

23CBOE notes that stock-option orders may be 

represented in open outcry by floor brokers or by 

CBOE PAR officials. See Notice, 77 FR at footnote 

9. See also CBOE Rules 6.45A(b) and 6.45B(b). 

24See Notice, 77 FR at 10026. 

25See Notice, 77 FR at 10026–10027. 

26See Notice, 77 FR at 10027. 

27 17 CFR 242.611(a). See Securities Exchange Act 

Release No. 57620 (April 4, 2008), 73 FR 19271 

(April 9, 2008) (order modifying the QCT 

Exemption). See also Securities Exchange Act 

Release No. 54389 (August 31, 2006), 71 FR 52829 

(September 7, 2006) (order establishing the QCT 

Exemption). 

28See CBOE Rule 6.53C, Interpretation and Policy 

.06(a). 

29See Notice, 77 FR at 10027. 

30See Notice, 77 FR at 10026–10027. 

31See CBOE Rule 6.53C, Interpretation and Policy 

.06(b), (c), and (f). 

32See CBOE Rule 6.53C, Interpretation and Policy 

.06(c). 

33See id. CBOE notes that the allocation 

algorithms for the individual series legs include 

series leg(s) would trade with CBOE’s 

EBook.11

The proposal revises CBOE Rule 

6.53C, Interpretation and Policy .06 to 

provide that stock-option orders will 

execute against other stock-option 

orders through COB and the Complex 

Order RFR Auction (‘‘COA’’), rather 

than by legging against individual 

orders and quotes.12 CBOE believes that 

this change will provide for more 

efficient execution and processing of 

stock-option orders and will help to 

mitigate the potential risks associated 

with legging stock-option orders, 

including the risk of an unhedged 

position if one leg of the order cannot 

be executed.13

The proposal retains the legging 

functionality for an eligible market 

stock-option order that cannot be 

executed in full or in a permissible ratio 

at the conclusion of a COA.14 At the 

conclusion of a COA, any remaining 

balance of the option leg(s) of an eligible 

market stock-option order will continue 

to route to the Hybrid System for 

processing as a simple market order(s), 

and CBOE will electronically transmit 

any remaining balance of the stock leg 

to a designated broker-dealer (as 

described below) for processing as a 

market order.15 The designated brokerdealer will represent the stock leg on 

behalf of the party that submitted the 

stock-option order. 

CBOE believes that the order 

eligibility parameters for eligible market 

stock-option orders help to mitigate the 

potential risks associated with legging 

stock-option orders, including the risk 

of an order drilling through multiple 

price points on another exchange 

(thereby resulting in executions at 

prices that are far from the NBBO and 

potentially erroneous), and the risk that 

one leg of the stock-option order will go 

unexecuted (resulting in an incomplete 

execution and a partial position that is 

unhedged).16

2. Eligible Market Orders 

For purposes of the legging 

functionality, an eligible market order is 

a stock-option order that is within 

certain parameters determined by 

CBOE, and for which the NBBO is 

within designated size and price 

parameters, as determined by CBOE for 

the individual leg.17 Currently, CBOE 

may determine the NBBO price 

parameters based on a minimum bid 

price for sell orders and a maximum sell 

price for buy orders.18 The proposal 

eliminates the provision permitting 

CBOE to specify a designated NBBO 

price parameter based on a maximum 

offer price for buy orders because CBOE 

does not intend to utilize this 

parameter.19

3. Communication of Stock Leg to a 

Designated Broker-Dealer(s) 

Under the proposal, CBOE will 

electronically communicate the stock 

leg of a stock-option order to a 

designated broker-dealer(s) for 

execution on behalf of a Trading Permit 

Holder, rather than routing the stock leg 

to CBSX.20 CBOE believes that this 

procedure will provide a more efficient 

means for processing stock-option 

orders.21 To participate in stock-option 

order automated processing, a Trading 

Permit Holder must enter into a 

brokerage agreement with one or more 

designated broker-dealers that are not 

affiliated with CBOE.22 However, CBOE 

notes that this process is not exclusive, 

and that Trading Permit Holders will be 

able to continue using open outcry 

procedures to execute stock-option 

orders if they choose to do so.23

CBOE will transmit the stock 

component of a stock-option order to a 

designated broker-dealer as two paired 

orders with a designated limit price 

(except in the limited circumstance 

described above for eligible market 

stock-option orders) after the Exchange’s 

trading system has determined that a 

stock-option order trade is possible and 

at what net prices.24 The designated 

broker-dealer will act as agent for the 

stock leg of a stock-option order and 

will be responsible for the proper 

execution, trade reporting, and 

submission to clearing of the stock 

trade.25 After CBOE communicates the 

stock orders to the designated brokerdealer for execution, the broker-dealer 

will be responsible for determining 

whether the orders may be executed in 

accordance will all of the rules 

applicable to the execution of equity 

orders, including compliance with the 

applicable short sale, trade-through, and 

reporting rules.26

A Trading Permit Holder may submit 

a stock-option order only if the order 

complies with the qualified contingent 

trade exemption (‘‘QCT Exemption’’) 

from Rule 611(a) of Regulation NMS,27

and a Trading Permit Holder submitting 

a stock-option order represents that the 

order complies with the QCT 

Exemption.28 In addition, as described 

more fully in the Notice, CBOE’s Hybrid 

System will validate compliance with 

the QCT Exemption with respect to each 

matched order communicated to the 

designated broker-dealer.29

CBOE intends to file a separate 

proposal to establish fees related to the 

routing of the stock portion of a stockoption order.30

C. Allocation Algorithms and Priority 

1. COB and COA Allocation Algorithms 

Currently, stock-option orders in COB 

may execute against other stock-option 

orders or against individual orders and 

quotes in the EBook.31 Because CBOE 

will no longer permit the legging of 

stock-option orders in COB against 

individual orders and quotes in the 

component legs, the proposal amends 

the COB algorithm to provide that stockoption orders that are marketable 

against each other will execute 

automatically.32 Multiple stock-option 

orders at the same price will be 

allocated pursuant to the rules of 

trading priority otherwise applicable to 

incoming electronic orders in the 

individual component legs,33 or 

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Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 22029 

price-time, pro-rata, and the ultimate matching 

algorithm (‘‘UMA’’) base priorities, and a 

combination of various optional priority overlays 

pertaining to public customer priority, Market 

Maker participation entitlement, small order 

preference, and market turner. See Notice, 77 FR at 

footnote 17. See also CBOE Rules 6.45A and 6.45B. 

34CBOE Rule 6.53C, Interpretation and Policy .09 

allows CBOE to determine, on a class-by-class basis, 

which electronic matching algorithm from CBOE 

Rule 6.45A or 6.45B, as applicable, will apply to 

executions in COB in lieu of the algorithm specified 

in CBOE Rule 6.53C(c)(ii)(2) and (3). 

35See CBOE Rule 6.53C, Interpretation and Policy 

.06(b), (d), and (f). 

36See CBOE Rule 6.53C, Interpretation and Policy 

.06(d). Under Interpretation and Policy .06(d), as 

amended, a stock-option order that was subject to 

a COA would execute against other stock-option 

orders first, at the best net price(s) and, at the same 

price, in the following sequence: (i) Against public 

customer stock-option orders resting in COB before, 

or received during, the COA Response Time 

Interval, and public customer RFR Responses, with 

multiple public customer orders ranked by time 

priority; (ii) against non-public customer orders 

resting in COB before the COA Response Time 

Interval, with multiple orders subject to the UMA 

allocation in CBOE Rule 6.45A or 6.45B, as 

applicable; and (iii) against non-public customer 

orders resting in COB that are received during the 

COA Response Time Interval, and non-public 

customer RFR Responses, with multiple orders 

subject to the CUMA allocation in CBOE Rule 6.45A 

or 6.45B, as applicable. 

37See Notice, 77 FR at 10028. 

38See CBOE Rule 6.53C, Interpretation and Policy 

.06(a) and (d). See also Notice, 77 FR at 10028 and 

10029. 39See CBOE Rule 6.53C, Interpretation and Policy 

.06(b)(1). The Commission notes that CBOE intends 

to file a separate proposed rule change to revise 

CBOE Rule 6.53C, Interpretation and Policy .06 and 

.08 to further describe booth routing parameters and 

related order management terminal operations. See 

email message from Jennifer Lamie, Assistant 

General Counsel, Legal Division, CBOE, to Yvonne 

Fraticelli, Special Counsel, and Brian Baltz, 

Attorney, Division of Trading and Markets, 

Commission, dated March 27, 2012. 

40See id. 41See CBOE Rule 6.53C, Interpretation and Policy 

.06(a)(2). The order would not execute 

automatically against the derived net market 

because stock-option orders will no longer execute 

against the individual legs of the order, except in 

the limited circumstance described above. 42See id. 43See Notice, 77 FR at 10029. 44See id. 45See CBOE Rule 6.53C, Interpretation and Policy 

.08(f). 

46See CBOE Rule 6.53, Interpretation and Policy 

.08(f)(1). 

47See CBOE Rule 6.53C, Interpretation and Policy 

.08(f)(2). See also note 39, supra. 

48See id. 

49See CBOE Rule 6.53C, Interpretation and Policy 

.08(f)(1). 

50See id. 

51See Notice, 77 FR at footnote 21. 

52See id. 

53See note 27, supra. 

54See Notice, 77 FR at footnote 21. 

pursuant to another allocation algorithm 

designated by CBOE under CBOE Rule 

6.53C, Interpretation and Policy .09.34

Stock-option orders in COA, like 

stock-option orders in COB, currently 

may execute against other stock-option 

orders or against individual orders and 

quotes in the EBook.35 Because CBOE 

will no longer permit the legging of 

stock-option orders in COA against 

individual orders and quotes in the 

component legs, except in the limited 

circumstance noted above, the proposal 

amends the COA algorithm to provide 

that stock-option orders executed 

against other stock-option orders 

through COA will trade first at the best 

net price(s) and, at the same price, in 

the sequence set forth in CBOE Rule 

6.53C(d)(2)–(4).36

2. Priority 

For a stock-option order to execute 

against another stock-option order in 

COB or COA, the execution must occur 

at a price where the option leg(s) of the 

stock-option order have priority over the 

individual orders and quotes in CBOE’s 

EBook.37 To satisfy this condition, the 

individual options legs of the stockoption order: (1) Must not trade at a 

price that is inferior to CBOE’s best bid 

(offer) in the individual component 

series; and (2) must not trade at CBOE’s 

best bid (offer) in the individual 

component series if one or more public 

customer orders are resting at the best 

bid (offer) in each of the component 

series and the stock-option order could 

otherwise be executed in full or in a 

permissible ratio.38

D. Provisions Applicable to Marketable 

Stock-Option Orders 

Several provisions in the proposal 

address the handling of stock-option 

orders that become marketable. First, to 

the extent that a marketable stockoption order cannot be executed in full, 

or in a permissible ratio, after it is 

routed to COB or following a COA, any 

part of the order that can execute will 

execute and the remaining balance will 

be routed on a class-by-class basis to 

PAR or, at the order entry firm’s 

discretion, to the order entry firm’s 

booth.39 If the order is not eligible to 

route to PAR, the remaining balance 

will be cancelled.40

Second, to the extent that a stockoption order resting in COB becomes 

marketable against the derived net 

market, the full order will be subject to 

a COA.41 The derived net market will be 

calculated using CBOE’s best bid or 

offer for the individual option series 

leg(s) and the NBBO for the stock leg.42

CBOE believes that automatically 

initiating a COA after a resting stockoption order becomes marketable 

against the derived net market will 

provide an opportunity for market 

participants to match or improve the net 

price and provide an opportunity for 

automatic execution of the order.43

CBOE notes that this system feature will 

not be applicable to a resting stockoption order that becomes marketable 

against another stock-option order(s).44

E. Price Check Parameters 

CBOE proposes to adopt a new price 

check parameter applicable to the 

electronic processing of stock-option 

orders.45 This price check parameter 

would allow CBOE to determine, on a 

class-by-class basis, and announce to 

Trading Permit Holders via Regulatory 

Circular, not to automatically execute a 

marketable stock-option order if, 

following a COA, the execution would 

not be within the acceptable derived net 

market for the strategy that existed at 

the start of the COA.46 Such an order 

would route on a class-by-class basis to 

PAR or, at the order entry firm’s 

discretion, to the order entry firm’s 

booth.47 If the order is not eligible to 

route to PAR, the remaining balance 

would be cancelled.48

The ‘‘acceptable derived net market’’ 

for a strategy will be calculated using 

CBOE’s best bid or offer in the 

individual option series leg(s) and the 

NBBO in the stock leg plus/minus an 

acceptable tick distance.49 CBOE will 

determine the ‘‘acceptable tick 

distance’’ on a class-by-class and 

premium basis.50 CBOE believes that it 

is reasonable and appropriate to use the 

Exchange’s best bid and offer for the 

individual series to calculate the 

acceptable derived net market for the 

option series leg(s) because the option 

component leg(s) of a stock-option order 

are not permitted to trade at a price that 

is inferior to CBOE’s best bid and 

offer.51 CBOE believes that it is 

reasonable and appropriate to use the 

NBBO plus/minus an acceptable tick 

distance to calculate the acceptable 

derived net market for the stock 

component because CBOE believes that 

the NBBO should serve as a reasonable 

proxy for what may be considered a 

reasonable price for the automatic 

execution of the stock component leg.52

CBOE believes, further, that it also may 

be appropriate to consider some range 

outside the NBBO in determining the 

acceptable tick distance because the 

stock leg of a stock-option order that 

qualifies for the QCT Exemption 53 may 

be executed outside the NBBO for the 

stock.54 Accordingly, in establishing the 

acceptable tick distance for the stock leg 

of the order, CBOE would have the 

flexibility to use the NBBO (which 

would equate to an acceptable tick 

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22030 Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 

55See id. 

56See CBOE Rule 6.53C, Interpretation and Policy 

.08(f)(2). AIM, SAM and CTC are mechanisms that 

may be used to cross two paired orders. See Notice, 

77 FR at footnote 22. 

57See CBOE Rule 6.53C, Interpretation and Policy 

.08(f)(2) and Notice, 77 FR at 10030. 

58See CBOE Rule 6.53C, Interpretation and Policy 

.08(f)(2). 

59See CBOE Rule 6.53C, Interpretation and Policy 

.08(a) and Notice, 77 FR at 10030–10031. 

60See id. 

61See Notice, 77 FR at 10031. 

62See CBOE Rule 6.53C, Interpretation and Policy 

.04(b). 

63See Notice, 77 FR at 10031. 

64See id. 

65See Notice, 77 FR at 10031–10032. 

66 In approving this proposal, the Commission has 

considered the proposed rule’s impact on 

efficiency, competition, and capital formation. See 

15 U.S.C. 78c(f). 

67 15 U.S.C. 78f(b)(5). 

68See ISE Rule 722(a)(1) and (2). 

69CBOE Rule 6.80(4) defines a Complex Trade for 

purposes of CBOE Chapter VI, Section E, ‘‘Order 

Protection; Locked and Crossed Markets.’’ CBOE 

Rule 6.81(b)(7) provides an exception from the 

prohibition on Trade-Throughs for any transaction 

that was effected as a portion of a Complex Trade. 

70See Phlx Rule 1080, Commentary .08(a)(i) 

(stating that stock-option orders may only be 

executed against other stock-option orders and 

cannot be executed by the System against orders for 

the individual components). 

distance of 0) or a range outside the 

NBBO.55

In classes where this price check 

parameter is available, it will also be 

available for COA responses under 

CBOE Rule 6.53C(d), AIM and 

Solicitation Auction Mechanism stockoption orders and responses under 

CBOE Rules 6.74A and 6.74B, and 

customer-to-customer immediate cross 

stock-option orders under CBOE Rule 

6.74A, Interpretation and Policy .08 

(‘‘CTC’’).56 Under these provisions, 

paired stock-option orders and 

responses will not be accepted except 

that, to the extent that only a paired 

contra-side order subject to an auction 

under CBOE Rule 6.74A or 6.74B 

exceeds the price check parameter, the 

contra-side order will not be accepted 

and the paired original Agency Order 

will not be accepted or, at the order 

entry firm’s discretion, the Agency 

Order would continue processing as an 

unpaired stock option order (e.g., the 

Agency Order would route to COB or 

COA for processing).57 To the extent 

that a contra-side order or response is 

marketable, its price will be capped at 

the price inside the acceptable derived 

net market.58

CBOE also proposes to apply the 

existing individual series leg width 

price check parameter in CBOE Rule 

6.53C, Interpretation and Policy .08(a)(i) 

to market and marketable limit stockoption orders.59 Under this price check 

parameter, a market or marketable limit 

stock-option order in a class where the 

price check parameter was available 

would not be executed automatically if 

the width between CBOE’s best bid and 

best offer in any individual series leg 

was not within an acceptable price 

range.60

CBOE believes that the price 

protection parameters will help to 

mitigate the potential risks associated 

with stock-option orders drilling 

through multiple price points, thereby 

resulting in executions that are extreme 

and potentially erroneous.61

F. Extension of the re-COA Feature to 

Stock-Option Orders 

CBOE Rule 6.53C, Interpretation and 

Policy .04(b) provides that, for classes in 

which COA is activated, a nonmarketable order resting at the top of the 

COB may be automatically subject to 

COA if the order is within a number of 

ticks away from current derived net 

market. The proposal extends this ‘‘reCOA’’ feature to include stock-option 

orders resting at the top of the COB, and 

to provide that the derived net market 

for a stock-option order will be 

calculated using CBOE’s best bid or 

offer in the individual option series 

leg(s) and the NBBO in the stock leg.62

CBOE notes that this feature would 

apply only to a resting non-marketable 

stock-option order that moves close to 

the derived net market, but would not 

apply to a resting stock-option order 

that becomes marketable against another 

stock-option order(s).63 CBOE believes 

that this feature will facilitate the 

execution of stock-option orders by 

providing an automated opportunity for 

the execution of, and price 

improvement to, a resting stock-option 

order that is priced near the current 

market, similar to what a Trading Permit 

Holder might do if the Trading Permit 

Holder were representing the stockoption order in open outcry or entering 

the order into COB.64

G. Rule Text Reorganizations 

As described more fully in the Notice, 

CBOE also proposes various changes to 

reorganize and simplify the rules 

governing stock-option orders by, 

among other things, consolidating 

certain provisions in CBOE Rule 6.53C, 

Interpretation and Policy .06.65

III. Discussion and Commission’s 

Findings 

After careful review, the Commission 

finds that the proposed rule change is 

consistent with the requirements of the 

Act and the rules and regulations 

thereunder applicable to a national 

securities exchange.66 In particular, the 

Commission finds that the proposed 

rule change is consistent with Section 

6(b)(5) of the Act,67 which requires, 

among other things, that the rules of a 

national securities exchange be 

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. 

A. Definitions of Complex Order and 

Stock-Option Order 

The Commission finds that the 

proposed definitions of complex order 

and stock-option order are consistent 

with the Act. The Commission believes 

that the new definitions could permit 

the electronic trading on CBOE of 

complex orders representing investment 

strategies that do not fall within the 

enumerated strategies in CBOE’s current 

rule, including transactions designed to 

limit risk. The Commission notes that 

the proposed definitions of complex 

order and stock-option order are 

consistent with definitions included in 

the rules of another options exchange 68

and in CBOE Rule 6.80(4).69 In addition, 

the Commission believes that the rule 

changes removing the limit on the 

number of legs that may be included in 

a complex order could provide greater 

flexibility and permit the electronic 

trading on CBOE of additional complex 

orders. 

B. Execution of Stock-Option Orders 

1. Legging of Stock-Option Orders 

The Commission believes that the 

proposal to revise CBOE Rule 6.53C, 

Interpretation and Policy .06 to provide 

for the execution of stock-option against 

other stock-option orders through COB 

and COA, rather than by legging against 

individual orders and quotes in the 

CBOE and CBSX EBooks, is consistent 

with the Act because it could facilitate 

the execution of stock-option orders. 

The Commission notes that another 

options exchange similarly permits 

stock-option orders traded on its 

electronic trading platform to execute 

only against other stock-option orders.70

The Commission also believes that it 

is consistent with the Act for CBOE to 

retain the legging feature for eligible 

market stock-option orders that cannot 

be executed, in full or in a permissible 

ratio, at the conclusion of a COA 

because the legging functionality could 

provide an additional opportunity for 

these orders to be executed. The 

Commission notes that CBOE believes 

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Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 22031 

71See Notice, 77 FR at 10028. Under CBOE Rule 

6.53C, Interpretation and Policy .06(d), as amended, 

an ‘‘eligible market order’’ is a stock-option order 

that is within the designated size and order type 

parameters determined by CBOE on a class-by-class 

basis, and for which the NBBO is within designated 

size and price parameters, as determined by CBOE 

for the individual leg. The designated NBBO price 

parameters will be determined based on a minimum 

bid price for sell orders. CBOE may determine on 

a class-by-class basis to limit the trading times 

within regular trading hours that the legging 

functionality will be available. 

72See Notice, 77 FR at footnote 16. 

73See CBOE Rule 6.53C, Interpretation and Policy 

.06(a). 

74See CBOE Rule 6.53C, Interpretation and Policy 

.06(a). 

75See Notice, 77 FR at 10026–10027. 

76See Notice, 77 FR at 10027. 

77See CBOE Rule 6.53C, Interpretation and Policy 

.06(a). 

78See Notice, 77 FR at 10027. 

79Stock-option orders may be represented in 

open outcry by floor brokers or by CBOE PAR 

officials. See Notice, 77 FR at footnote 9 and 

accompanying text. See also CBOE Rules 6.45A(b) 

and 6.45B(b). 

80See ISE Rule 722, Supplementary Material .02. 

See also Phlx Rule 1080, Commentary .08. 

81See CBOE Rule 6.53C, Interpretation and Policy 

.06(c). CBOE also could allocate stock-option orders 

pursuant to another allocation algorithm designated 

by CBOE under CBOE Rule 6.53C, Interpretation 

and Policy .09. 

82CBOE Rule 6.53C(c) states that the allocation of 

complex orders in COB that are marketable against 

each other will be pursuant to the rules to trading 

priority otherwise applicable to incoming electronic 

orders in the individual component legs. 

83See CBOE Rule 6.53C, Interpretation and Policy 

.06(d). 

84See Notice, 77 FR at 10028. 

85See, e.g., CBOE Rules 6.45(e); 6.45A(b)(ii); and 

6.45B(b)(ii). 

that the eligibility parameters for 

eligible market stock-option orders 

could help to mitigate the risks that may 

be associated with legging stock-option 

orders.71

2. Eligible Market Orders 

The Commission believes that it is 

consistent with the Act for CBOE to 

modify the eligible market order 

parameter in CBOE Rule 6.53C, 

Interpretation and Policy .06(d) by 

eliminating the provision that allows 

CBOE to establish an NBBO price 

parameter for such orders based on a 

maximum offer price for buy orders. 

CBOE states that it does not intend to 

use this parameter.72 Accordingly, the 

Commission believes that eliminating 

this parameter will help to assure that 

the rule accurately reflects the 

parameters that CBOE may use to 

identify eligible market stock-option 

orders. 

3. Communication of Stock Leg to a 

Designated Broker-Dealer(s) 

As described more fully above, CBOE 

proposes to revise its rules to allow the 

Exchange to electronically communicate 

the stock leg of a stock-option order to 

a designated broker-dealer for execution 

on behalf of a Trading Permit Holder.73

To participate in stock-option order 

automated processing, a Trading Permit 

Holder must enter into a brokerage 

agreement with one or more designated 

broker-dealers that are not affiliated 

with CBOE.74

The designated broker-dealer will act 

as agent for the stock leg of a stockoption order and will be responsible for 

the proper execution, trade reporting, 

and submission to clearing of the stock 

trade.75 In addition, after CBOE 

communicates the paired stock orders to 

the designated broker-dealer for 

execution, the broker-dealer will be 

responsible for determining whether the 

orders may be executed in accordance 

with all of the rules applicable to the 

execution of equity orders, including 

compliance with the applicable short 

sale, trade-through, and reporting 

rules.76 In addition, a Trading Permit 

Holder may submit a stock-option order 

only if the order complies with the QCT 

Exemption from Rule 611(a) of 

Regulation NMS, and a Trading Permit 

Holder submitting a stock-option order 

represents that the order complies with 

the QCT Exemption.77 As described 

more fully in the Notice, CBOE’s Hybrid 

System will validate compliance with 

the QCT Exemption with respect to each 

matched order communicated to the 

designated broker-dealer.78

CBOE states that this automated 

process for executing stock-option 

orders is not exclusive, and that Trading 

Permit Holders will continue to be able 

to use open outcry procedures to 

execute stock-option orders if they 

choose to do so.79

The Commission notes that CBOE’s 

proposal to electronically communicate 

the stock leg of a stock-option order to 

a designated broker-dealer for execution 

is similar to rules adopted by other 

options exchanges.80 In addition, the 

Commission notes that Trading Permit 

Holders will continue to have the ability 

to use open outcry procedures to 

execute stock-option orders if they 

choose to do so. Accordingly, the 

Commission finds that the proposal to 

allow CBOE to electronically 

communicate the stock leg of a stockoption order to a designated brokerdealer that is not affiliated with CBOE 

for execution on behalf of a Trading 

Permit Holder is consistent with the 

Act. 

C. Allocation Algorithms and Priority 

1. COB and COA Allocation Algorithms 

Because stock-option orders generally 

will not execute against individual leg 

market interest in the CBOE and CBSX 

EBooks, CBOE is eliminating references 

in CBOE Rule 6.53C, Interpretation and 

Policy .06 to executions of stock-option 

orders against individual orders and 

quotes. Instead, stock-option orders in 

COB that are marketable against each 

other will execute automatically, and 

multiple stock-option orders at the same 

price will be allocated pursuant to the 

rules of trading priority otherwise 

applicable to incoming electronic orders 

in the individual component legs.81 The 

Commission notes that this allocation 

provision for stock-option orders in 

COB is consistent with the existing 

complex order allocation provision in 

CBOE Rule 6.53C(c)(ii)(2).82

Accordingly, the Commission believes 

that the allocation provision for 

marketable stock-option orders in COB 

is consistent with the Act. 

Because CBOE will no longer permit 

the legging of stock-option orders in 

COA against individual orders and 

quotes in the component legs (except 

with respect to an eligible market stockoption order that cannot be executed 

following a COA), CBOE is amending 

the COA algorithm to eliminate the 

reference to executions against 

individual orders and quotes in the 

EBook, but retaining the remainder of 

the current stock-option order allocation 

algorithm in CBOE Rule 6.53C, 

Commentary .06(d). Accordingly, stockoption orders executed through COA 

will trade first at the best net price(s) 

and, at the same price, in the sequence 

set forth in CBOE Rule 6.53C(d)(v)(2)– 

(4).83 The Commission believes that it is 

consistent with the Act for CBOE to 

continue to apply this allocation 

algorithm to stock-option orders. 

2. Priority 

For a stock-option order to execute 

against another stock-option order in 

COB or COA, the execution must occur 

at a price where the option leg(s) of the 

stock-option order have priority over the 

individual orders and quotes in CBOE’s 

EBook.84 To satisfy this condition, the 

individual options legs of the stockoption order: (1) Must not trade at a 

price that is inferior to CBOE’s best bid 

(offer) in the individual component 

series; and (2) must not trade at CBOE’s 

best bid (offer) in the individual 

component series if one or more public 

customer orders are resting at the best 

bid (offer) in each of the component 

series and the stock-option order could 

otherwise be executed in full or in a 

permissible ratio. These provisions are 

consistent with CBOE’s existing priority 

rules,85 and with the rules of other 

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22032 Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 

86See, e.g., ISE Rule 722(b)(2); and NYSE Amex 

Rule 980NY, Commentary .03(d). 

87See CBOE Rule 6.53C, Interpretation and Policy 

.06(a)(1). As noted above, CBOE plans to file a 

separate proposal that will further describe booth 

routing parameters and order management terminal 

operations. See note 39, supra. 

88See id. 

89See CBOE Rule 6.53C, Interpretation and Policy 

.06(a)(2). This system feature will not be applicable 

to a resting stock-option order that becomes 

marketable against another stock-option order(s). 

90See CBOE Rule 6.53C, Interpretation and Policy 

.06(a). 

91See CBOE Rule 6.53C, Interpretation and Policy 

.08(a)(5) and Notice, 77 FR at 10030—10031. 

92See CBOE Rule 6.53C, Interpretation and Policy 

.04(b). CBOE will calculate the derived net market 

for a stock-option order using CBOE’s best bid or 

offer in the individual option series leg(s) and the 

NBBO in the stock leg. 

93 15 U.S.C. 78s(b)(2). 

94 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 66421 

(February 17, 2012), 77 FR 11181 (‘‘Notice’’). 

options exchanges.86 Accordingly, the 

Commission finds that the priority 

requirements for stock-option orders in 

CBOE Rule 6.53C, Commentary .06(b) 

are consistent with the Act. 

D. Provisions Applicable to Marketable 

Stock-Option Orders 

To the extent that a marketable stockoption order cannot be executed in full 

in, or in a permissible ratio, after it is 

routed to COB or following a COA, any 

part of the order that can execute will 

execute and the remaining balance will 

be routed on a class-by-class basis to 

PAR or, at the order entry firm’s 

discretion, to the order entry firm’s 

booth.87 If the order is not eligible to 

route to PAR, the remaining balance 

will be cancelled.88 The Commission 

believes that these provisions are 

consistent with the Act because they 

establish procedures for handling the 

remaining balance of a marketable 

stock-option order that cannot be 

executed in full or in a permissible 

ratio. 

In addition, to the extent that a stockoption order resting in COB becomes 

marketable against the derived net 

market, the full order will be subject to 

a COA.89 The Commission believes that 

this provision is consistent with the Act 

because it could facilitate the execution 

of a stock-option order that is 

marketable against the derived net 

market, but that would not execute 

against the derived net market because 

stock-option orders generally will not 

execute against leg market interest. 

E. Price Check Parameters 

The stock-option derived net market 

price check parameter in CBOE Rule 

6.53C, Interpretation and Policy .08(f) 

will prevent the automatic execution of 

a stock-option order following a COA if 

the execution would not be within the 

acceptable derived net market that 

existed at the start of the COA. The 

Commission believes that this price 

check parameter is consistent with the 

Act because it could help to prevent the 

automatic execution of stock-option 

orders at extreme or potentially 

erroneous prices. The Commission 

believes that it is reasonable to use 

CBOE’s best bid and offer for the 

individual series legs to calculate the 

acceptable derived net market for the 

option leg(s) of a stock-option order 

because the option leg(s) would not be 

permitted to trade at a price that is 

inferior to CBOE’s best bid or offer. The 

Commission believes that using the 

NBBO for the stock, plus or minus an 

acceptable tick distance, to determine 

the acceptable derived net market for 

the stock leg of a stock-option order will 

provide CBOE with flexibility in setting 

this parameter. The Commission notes 

that a stock-option order submitted to 

the Hybrid System must comply with 

the QCT Exemption.90 The stock leg of 

a stock-option order that complies with 

the QCT Exemption would be permitted 

to trade at a price that is outside the 

NBBO for the stock. 

CBOE also proposes to extend the 

existing individual series leg width 

price check parameter in CBOE Rule 

6.53C, Interpretation and Policy 

.08(a)(i), which currently applies to 

complex orders, to the individual series 

legs of market and marketable limit 

stock-option orders.91 This price check 

parameter prevents the automatic 

execution of a marketable complex 

order when the width between CBOE’s 

best bid and offer in any individual 

series leg is not within an acceptable 

price range. The Commission believes 

that it is consistent with the Act for 

CBOE to have the ability to apply this 

price check parameter to stock-option 

orders, in addition to complex orders. 

F. Extension of the Re-COA Feature to 

Stock-Option Orders 

CBOE proposes to amend CBOE Rule 

6.53C, Interpretation and Policy .04(b) 

to apply its ‘‘re-COA’’ feature to stockoption orders resting at the top of the 

COB. For classes in which COA is 

activated, a non-marketable stock-option 

order resting at the top of the COB may 

be automatically subject to COA if the 

order is within a number of ticks away 

from current derived net market.92 The 

Commission believes that applying the 

‘‘re-COA’’ feature to stock-option orders 

could facilitate the execution of stockoption orders by providing an 

opportunity for a stock-option resting at 

the top of the COB to be executed 

automatically. Accordingly, the 

Commission finds that the provision is 

consistent with the Act. 

G. Rule Text Reorganizations 

The Commission believes that the 

proposed changes to reorganize, 

consolidate, and simplify CBOE Rule 

6.53C, Interpretation and Policy .06 are 

consistent with the Act. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,93 that the 

proposed rule change (SR–CBOE–2012– 

005) is approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.94

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2012–8783 Filed 4–11–12; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66758; File No. SR–NYSE– 

2012–05] 

Self-Regulatory Organizations; New 

York Stock Exchange LLC; Order 

Granting Approval of a Proposed Rule 

Change Amending NYSE Rule 476A To 

Update its ‘‘List of Exchange Rule 

Violations and Fines Applicable 

Thereto Pursuant to Rule 476A’’ 

April 6, 2012. 

I. Introduction 

On February 7, 2012, New York Stock 

Exchange LLC (‘‘Exchange’’ or ‘‘NYSE’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’), pursuant 

to Section 19(b)(1) of the Securities 

Exchange Act of 1934 (‘‘Act’’) 1 and Rule 

19b–4 thereunder,2 a proposed rule 

change to amend NYSE Rule 476A to 

update its ‘‘List of Exchange Rule 

Violations and Fines Applicable Thereto 

Pursuant to Rule 476A.’’ The proposed 

rule change was published for comment 

in the Federal Register on February 24, 

2012.3 The Commission received no 

comment letters on the proposed rule 

change. This order approves the 

proposed rule change. 

II. Description 

By way of background, NYSE Rule 

476 governs disciplinary proceedings 

involving charges against members, 

member organizations, principal 

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