[Federal Register Volume 82, Number 172 (Thursday, September 7, 2017)]
[Notices]
[Pages 42375-42381]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-18939]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81516; File No. SR-CBOE-2017-058]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend Rule 6.25, Nullification and Adjustment 
of Options Transactions Including Obvious Errors

August 31, 2017.
    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 August 29, 2017, Chicago Board Options Exchange, Incorporated 
(the ``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 Exchange filed the proposal as a ``non-controversial'' 
proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 
\3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The purpose of this filing is to amend Rule 6.25, Nullification and 
Adjustment of Options Transactions including Obvious Errors. The text 
of the proposed rule change is attached as Exhibit 5 (sic).
    The text of the proposed rule change is also available on the 
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

[[Page 42376]]

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
Background
    The Exchange and other options exchanges recently adopted a new, 
harmonized rule related to the adjustment and nullification of 
erroneous options transactions, including a specific provision related 
to coordination in connection with large-scale events involving 
erroneous options transactions.\5\ The Exchange believes that the 
changes the options exchanges implemented with the new, harmonized rule 
have led to increased transparency and finality with respect to the 
adjustment and nullification of erroneous options transactions. 
However, as part of the initial initiative, the Exchange and other 
options exchanges deferred a few specific matters for further 
discussion. Specifically, as described in the Initial Filing, the 
Exchange and all other options exchanges have been working to further 
improve the review of potentially erroneous transactions as well as 
their subsequent adjustment by creating an objective and universal way 
to determine Theoretical Price in the event a reliable NBBO is not 
available. Because this initiative required additional exchange and 
industry discussion as well as additional time for development and 
implementation, the Exchange and the other options exchanges determined 
to proceed with the Initial Filing and to undergo a secondary 
initiative to complete any additional improvements to the applicable 
rule. In this filing, the Exchange proposes to adopt procedures that 
will lead to a more objective and uniform way to determine Theoretical 
Price in the event a reliable NBBO is not available. In addition, the 
Exchange proposes to amend the no valid quotes provision.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release Nos. 74556 (March 20, 
2015), 80 FR 16031 (March 26, 2015) (SR-BATS-2014-067); 81084 (July 
6, 2017), 82 FR 32216 (July 12, 2017) (SR-BatsBZX-2017-35); See also 
Securities Exchange Act Release No. 73884 (December 18, 2014), 79 FR 
77557 (December 24, 2014) (the ``Initial Filing'').
---------------------------------------------------------------------------

Calculation of Theoretical Price Using a Third Party Provider
    Under the harmonized rule, when reviewing a transaction as 
potentially erroneous, the Exchange needs to first determine the 
``Theoretical Price'' of the option, i.e., the Exchange's estimate of 
the correct market price for the option. Pursuant to Rule 6.25, if the 
applicable option series is traded on at least one other options 
exchange, then the Theoretical Price of an option series is the last 
national best bid (``NBB'') just prior to the trade in question with 
respect to an erroneous sell transaction or the last national best 
offer (``NBO'') just prior to the trade in question with respect to an 
erroneous buy transaction unless one of the exceptions described below 
exists. Thus, whenever the Exchange has a reliable NBB or NBO, as 
applicable, just prior to the transaction, then the Exchange uses this 
NBB or NBO as the Theoretical Price.
    The Rule also contains various provisions governing specific 
situations where the NBB or NBO is not available or may not be 
reliable. Specifically, the Rule specifies situations in which there 
are no quotes or no valid quotes for comparison purposes, when the 
national best bid or offer (``NBBO'') is determined to be too wide to 
be reliable, and at the open of trading on each trading day. In each of 
these circumstances, in turn, because the NBB or NBO is not available 
or is deemed to be unreliable, the Exchange determines Theoretical 
Price. Under the current Rule, when determining Theoretical Price, 
Exchange personnel generally consult and refer to data such as the 
prices of related series, especially the closest strikes in the option 
in question. Exchange personnel may also take into account the price of 
the underlying security and the volatility characteristics of the 
option as well as historical pricing of the option and/or similar 
options. Although the Rule is administered by experienced personnel and 
the Exchange believes the process is currently appropriate, the 
Exchange recognizes that it is also subjective and could lead to 
disparate results for a transaction that spans multiple options 
exchanges.
    The Exchange proposes to adopt Interpretation and Policy .08 to 
specify how the Exchange will determine Theoretical Price when required 
by sub-paragraphs (b)(1)-(3) of the Rule (i.e., at the open, when there 
are no valid quotes or when there is a wide quote). In particular, the 
Exchange has been working with other options exchanges to identify and 
select a reliable third party vendor (``TP Provider'') that would 
provide Theoretical Price to the Exchange whenever one or more 
transactions is under review pursuant to Rule 6.25 and the NBBO is 
unavailable or deemed unreliable pursuant to Rule 6.25(b). The Exchange 
and other options exchanges have selected CBOE Livevol, LLC 
(``Livevol'') as the TP Provider, as described below. As further 
described below, proposed Interpretation and Policy .08 would codify 
the use of the TP Provider as well as limited exceptions where the 
Exchange would be able to deviate from the Theoretical Price given by 
the TP Provider.
    Pursuant to proposed Interpretation and Policy .08, when the 
Exchange must determine Theoretical Price pursuant to the sub-
paragraphs (b)(1)-(3) of the Rule, the Exchange will request 
Theoretical Price from the third party vendor to which the Exchange and 
all other options exchanges have subscribed. Thus, as set forth in this 
proposed language, Theoretical Price would be provided to the Exchange 
by the TP Provider on request and not through a streaming data feed.\6\ 
This language also makes clear that the Exchange and all other options 
exchanges will use the same TP Provider. As noted above, the proposed 
TP Provider selected by the Exchange and other options exchanges is 
Livevol. The Exchange proposes to codify this selection in proposed 
paragraph (d) to Interpretation and Policy .08. As such, the Exchange 
would file a rule proposal and would provide notice to the options 
industry of any proposed change to the TP Provider.
---------------------------------------------------------------------------

    \6\ Though the Exchange and other options exchanges considered a 
streaming feed, it was determined that it would be more feasible to 
develop and implement an on demand service and that such a service 
would satisfy the goals of the initiative.
---------------------------------------------------------------------------

    The Exchange and other options exchanges have selected Livevol as 
the proposed TP Provider after diligence into various alternatives. 
Livevol has, since 2009, been the options industry leader in providing 
equity and index options market data and analytics services.\7\ The 
Exchange believes that Livevol has established itself within the 
options industry as a trusted provider of such services and notes that 
it and all

[[Page 42377]]

other options exchanges already subscribe to various Livevol services. 
In connection with this proposal, Livevol will develop a new tool based 
on its existing technology and services that will supply Theoretical 
Price to the Exchange and other options exchanges upon request. The 
Theoretical Price tool will leverage current market data and 
surrounding strikes to assist in a relative value pricing approach to 
generating a Theoretical Price. When relative value methods are 
incapable of generating a valid Theoretical Price, the Theoretical 
Price tool will utilize historical trade and quote data to calculate 
Theoretical Price.
---------------------------------------------------------------------------

    \7\ The Exchange notes that in 2015, Livevol was acquired by 
CBOE Holdings, Inc., the ultimate parent company of the Exchange and 
C2 Options Exchange (``C2'').
---------------------------------------------------------------------------

    Because the purpose of the proposal is to move away from a 
subjective determination by Exchange personnel when the NBBO is 
unavailable or unreliable, the Exchange intends to use the Theoretical 
Price provided by the TP Provider in all such circumstances. However, 
the Exchange believes it is necessary to retain the ability to contact 
the TP Provider if it believes that the Theoretical Price provided is 
fundamentally incorrect and to determine the Theoretical Price in the 
limited circumstance of a systems issue experienced by the TP Provider, 
as described below.
    As proposed, to the extent an Official \8\ of the Exchange believes 
that the Theoretical Price provided by the TP Provider is fundamentally 
incorrect and cannot be used consistent with the maintenance of a fair 
and orderly market, the Official shall contact the TP Provider to 
notify the TP Provider of the reason the Official believes such 
Theoretical Price is inaccurate and to request a review and correction 
of the calculated Theoretical Price. For example, if an Official 
received from the TP Provider a Theoretical Price of $80 in a series 
that the Official might expect to be instead in the range of $8 to $10 
because of a recent corporate action in the underlying, the Official 
would request that the TP Provider review and confirm its calculation 
and determine whether it had appropriately accounted for the corporate 
action. In order to ensure that other options exchanges that may 
potentially be relying on the same Theoretical Price that, in turn, the 
Official believes to be fundamentally incorrect, the Exchange also 
proposes to promptly provide notice to other options exchanges that the 
TP Provider has been contacted to review and correct the calculated 
Theoretical Price at issue and to include a brief explanation of the 
reason for the request.\9\ Although not directly addressed by the 
proposed Rule, the Exchange expects that all other options exchanges 
once in receipt of this notification would await the determination of 
the TP Provider and would use the corrected price as soon as it is 
available. The Exchange further notes that it expects the TP Provider 
to cooperate with, but to be independent of, the Exchange and other 
options exchanges.\10\
---------------------------------------------------------------------------

    \8\ For purposes of the Rule, an Official is an Officer of the 
Exchange or such other employee designee of the Exchange that is 
trained in the application of Rule 6.25.
    \9\ See proposed paragraph (b) to Interpretation and Policy .08.
    \10\ The Exchange expects any TP Provider selected by the 
Exchange and other options exchanges to act independently in its 
determination and calculation of Theoretical Price. With respect to 
Livevol specifically, the Exchange again notes that Livevol is a 
subsidiary of CBOE Holdings, Inc., which is also the ultimate parent 
company of the Exchange and multiple other options exchanges. The 
Exchange expects Livevol to calculate Theoretical Price independent 
of its affiliated exchanges in the same way it will calculate 
Theoretical Price independent of non-affiliated exchanges.
---------------------------------------------------------------------------

    The Exchange believes that the proposed provision to allow an 
Official to contact the TP Provider if he or she believes the provided 
Theoretical Price is fundamentally incorrect is necessary, particularly 
because the Exchange and other options exchanges will be using the new 
process for the first time. Although the exchanges have conducted 
thorough diligence with respect to Livevol as the selected TP Provider 
and would do so with any potential replacement TP Provider, the 
Exchange is concerned that certain scenarios could arise where the 
Theoretical Price generated by the TP Provider does not take into 
account relevant factors and would result in an unfair result for 
market participants involved in a transaction. The Exchange notes that 
if such situations do indeed arise, to the extent practicable the 
Exchange will also work with the TP Provider and other options 
exchanges to improve the TP Provider's calculation of Theoretical Price 
in future situations. For instance, if the Exchange determines that a 
particular type of corporate action is not being appropriately captured 
by the TP Provider when such provider is generating Theoretical Price, 
while the Exchange believes that it needs the ability to request a 
review and correction of the Theoretical Price in connection with a 
specific review in order to provide a timely decision to market 
participants, the Exchange would share information regarding the 
specific situation with the TP Provider and other options exchanges in 
an effort to improve the Theoretical Price service for future use. The 
Exchange notes that it does not anticipate needing to rely on this 
provision frequently, if at all, but believes the provision is 
necessary nonetheless to best prepare for all potential circumstances. 
Further, the Theoretical Price used by the Exchange in connection with 
its rulings will always be that received from the TP Provider and the 
Exchange has not proposed the ability to deviate from such price.\11\
---------------------------------------------------------------------------

    \11\ To the extent the TP Provider has been contacted by an 
Official of the Exchange, reviews the Theoretical Price provided but 
disagrees that there has been any error, then the Exchange would be 
bound to use the Theoretical Price provided by the TP Provider.
---------------------------------------------------------------------------

    Pursuant to proposed paragraph (c) to Interpretation and Policy 
.08, an Official of the Exchange may determine the Theoretical Price if 
the TP Provider has experienced a systems issue that has rendered its 
services unavailable to accurately calculate Theoretical Price and such 
issue cannot be corrected in a timely manner. The Exchange notes that 
it does not anticipate needing to rely on this provision frequently, if 
at all, but believes the provision is necessary nonetheless to best 
prepare for all potential circumstances. Further, consistent with 
existing text in Rule 6.25(e)(4), the Exchange has not proposed a 
specific time by which the service must be available in order to be 
considered timely.\12\ The Exchange expects that it would await the TP 
Provider's services becoming available again so long as the Exchange 
was able to obtain information regarding the issue and the TP Provider 
had a reasonable expectation of being able to resume normal operations 
within the next several hours based on communications with the TP 
Provider. More specifically with respect to Livevol, Livevol has 
business continuity and disaster recovery procedures that will help to 
ensure that the Theoretical Price tool remains available or, in the 
event of an outage, that service is restored in a timely manner.
---------------------------------------------------------------------------

    \12\ In the context of a Significant Market Event, the Exchange 
may determine, ``in consultation with other options exchanges . . . 
that timely adjustment is not feasible due to the extraordinary 
nature of the situation.'' See Rule 6.25(e)(4).
---------------------------------------------------------------------------

    The Exchange also notes that if a wide-scale event occurred, even 
if such event did not qualify as a ``Significant Market Event'' 
pursuant to Rule 6.25(e), and the TP Provider was unavailable or 
otherwise experiencing difficulty, the Exchange believes that it and 
other options exchanges would seek to coordinate to the extent 
possible. In particular, the Exchange and other options exchanges now 
have a process, administered by the Options Clearing Corporation, to 
invoke a discussion

[[Page 42378]]

amongst all options exchanges in the event of any widespread or 
significant market events. The Exchange believes that this process 
could be used in the event necessary if there were an issue with the TP 
Provider.
    The Exchange also proposes to adopt language in paragraph (d) of 
Interpretation and Policy .08 to Rule 6.25 to disclaim the liability of 
the Exchange and the TP Provider in connection with the proposed Rule, 
the TP Provider's calculation of Theoretical Price, and the Exchange's 
use of such Theoretical Price. Specifically, the proposed rule would 
state that neither the Exchange, the TP Provider, nor any affiliate of 
the TP Provider (the TP Provider and its affiliates are referred to 
collectively as the ``TP Provider''), makes any warranty, express or 
implied, as to the results to be obtained by any person or entity from 
the use of the TP Provider pursuant to Interpretation and Policy .08. 
The proposed rule would further state that the TP Provider does not 
guarantee the accuracy or completeness of the calculated Theoretical 
Price and that the TP Provider disclaims all warranties of 
merchantability or fitness for a particular purpose or use with respect 
to such Theoretical Price. Finally, the proposed Rule would state that 
neither the Exchange nor the TP Provider shall have any liability for 
any damages, claims, losses (including any indirect or consequential 
losses), expenses, or delays, whether direct or indirect, foreseen or 
unforeseen, suffered by any person arising out of any circumstance or 
occurrence relating to the use of such Theoretical Price or arising out 
of any errors or delays in calculating such Theoretical Price. This 
proposed language is modeled after existing language in Exchange Rules 
regarding ``reporting authorities'' that calculate indices.\13\
---------------------------------------------------------------------------

    \13\ See, e.g., Rule 24.14, which relates to index options 
potentially listed and traded on the Exchange and disclaims 
liability for a reporting authority and their affiliates; see also, 
e.g., Rule 29.10, which relates to certain types of Credit Options 
potentially listed and traded on the Exchange and disclaim liability 
for the Exchange, a reporting authority and any agent of the 
Exchange.
---------------------------------------------------------------------------

    In connection with the proposed change described above, the 
Exchange proposes to modify Rule 6.25 to state that the Exchange will 
rely on paragraph (b), and Interpretation and Policy .08 when 
determining Theoretical Price.
No Valid Quotes--Market Participant Quoting on Multiple Exchanges
    As described above, one of the times where the NBB or NBO is deemed 
to be unreliable for purposes of Theoretical Price is when there are no 
quotes or no valid quotes for the affected series. In addition to when 
there are no quotes, the Exchange does not consider the following to be 
valid quotes: (i) All quotes in the applicable option series published 
at a time where the last NBB is higher than the last NBO in such series 
(a ``crossed market''); (ii) quotes published by the Exchange that were 
submitted by either party to the transaction in question; and (iii) 
quotes published by another options exchange against which the Exchange 
has declared self-help. In recognition of today's market structure 
where certain participants actively provide liquidity on multiple 
exchanges simultaneously, the Exchange proposes to add an additional 
category of invalid quotes. Specifically, in order to avoid a situation 
where a market participant has established the market at an erroneous 
price on multiple exchanges, the Exchange proposes to consider as 
invalid the quotes in a series published by another options exchange if 
either party to the transaction in question submitted the quotes in the 
series representing such options exchange's best bid or offer. Thus, 
similar to being able to ignore for purposes of the Rule the quotes 
published by the Exchange if submitted by either party to the 
transaction in question, the Exchange would be able to ignore for 
purposes of the rule quotations on other options exchanges by that same 
market participant.
    In order to continue to apply the Rule in a timely and organized 
fashion, however, the Exchange proposes to initially limit the scope of 
this proposed provision in two ways. First, because the process will 
take considerable coordination with other options exchanges to confirm 
that the quotations in question on an away options exchange were indeed 
submitted by a party to a transaction on the Exchange, the Exchange 
proposes to limit this provision to apply to up to twenty-five (25) 
total options series (i.e., whether such series all relate to the same 
underlying security or multiple underlying securities). Second, the 
Exchange proposes to require the party that believes it established the 
best bid or offer on one or more other options exchanges to identify to 
the Exchange the quotes which were submitted by such party and 
published by other options exchanges. In other words, as proposed, the 
burden will be on the party seeking that the Exchange disregard their 
quotations on other options exchanges to identify such quotations. In 
turn, the Exchange will verify with such other options exchanges that 
such quotations were indeed submitted by such party.
    Below are examples of both the current rule and the rule as 
proposed to be amended.

Example 1--Current Rule, Trading Permit Holder (``TPH'') Erroneously 
Quotes on One Exchange

Assumptions
    For purposes of this example, assume the following:
    <bullet> A TPH acting as a Market Maker on the Exchange (``Market 
Maker A'') is quoting in twenty series of options underlying security 
ABCD on the Exchange (and only the Exchange).
    <bullet> Market Maker A makes an error in calculating the market 
for options on ABCD, and publishes quotes in all twenty series to buy 
options at $1.00 and to sell options at $1.05.
    <bullet> In fact, options on ABCD in these series are nearly 
worthless and no other market participant is quoting in such series.
    <bullet> Therefore, the NBBO in the twenty series at issue is $1.00 
x $1.05 (with the Exchange representing the NBBO based on Market Maker 
A's quotes).
    <bullet> Assume TPH A immediately enters sell orders and executes 
against Market Maker A's quotes at $1.00.
    <bullet> Assume Market Maker A submits to the Exchange a timely 
request for review of the trades with TPH A as potentially erroneous 
transactions to buy.
Result
    <bullet> Based on the Exchange's current rules, the Exchange would 
identify Market Maker A as a participant to the trades at issue and 
would consider Market Maker A's quotations invalid pursuant to Rule 
6.25(b)(2).
    <bullet> As there were no other valid quotes to use as a reference 
price, the Exchange would then determine Theoretical Price.
    <bullet> Assume the Exchange determines a Theoretical Price of 
$0.05.
    [cir] The execution price of $1.00 exceeds the $0.25 minimum amount 
set forth in the Exchange's table to determine whether an obvious error 
has occurred (i.e., $0.05 + $0.25 = $0.30) so any execution at or above 
this price is an obvious error.
    [cir] Accordingly, the executions in all series would be adjusted 
by the Exchange to executions at $0.20 per contract (Theoretical Price 
of $0.05 plus $0.15) to the extent the incoming orders submitted by TPH 
A were non-Customer orders.
    [cir] The executions in all series would be nullified to the extent 
the incoming orders submitted by TPH A were Customer orders.

[[Page 42379]]

Example 2--Current Rule, TPH Erroneously Quotes on Multiple Exchanges

Assumptions
    For purposes of this example, assume the following:
    <bullet> A TPH acting as a Market Maker on the Exchange (``Market 
Maker A'') is quoting in twenty series of options underlying security 
ABCD on the Exchange and on a second exchange (``Away Exchange'').
    <bullet> Market Maker A makes an error in calculating the market 
for options on ABCD, and publishes quotes on both the Exchange and the 
Away Exchange in all twenty series to buy options at $1.00 and to sell 
options at $1.05.
    <bullet> In fact, options on ABCD in these series are nearly 
worthless and no other market participant is quoting in such series.
    <bullet> Therefore, the NBBO in the twenty series at issue is $1.00 
x $1.05 (with the Exchange and the Away Exchange representing the NBBO 
based on Market Maker A's quotes).
    <bullet> Assume TPH A immediately enters sell orders and executes 
against Market Maker A's quotes at $1.00.
    <bullet> Assume Market Maker A submits to the Exchange and to the 
Away Exchange timely requests for review of the trades with TPH A as 
potentially erroneous transactions to buy.
Result
    <bullet> Based on the Exchange's current rules, the Exchange would 
identify Market Maker A as a participant to the trades at issue and 
would consider Market Maker A's quotations on the Exchange invalid 
pursuant to Rule 6.25(b)(2). The Exchange, however, would view the Away 
Exchange's quotations as valid, and would thus determine Theoretical 
Price to be $1.05 (i.e., the NBO in the case of a potentially erroneous 
buy transaction).
    <bullet> The execution price of $1.00 does not exceed the $0.25 
minimum amount set forth in the Exchange's table to determine whether 
an obvious error has occurred (i.e., $1.05 + $0.25 = $1.30) so any 
execution at or above this price is an obvious error.
    <bullet> The transactions on the Exchange would not be nullified or 
adjusted.
    <bullet> As the Exchange and all other options exchanges have 
identical rules with respect to the process described above, the 
transactions on the Away Exchange would not be nullified or adjusted.

Example 3--Proposed Rule, TPH Erroneously Quotes on Multiple Exchanges 
\14\
---------------------------------------------------------------------------

    \14\ The Exchange notes that its proposed rule will not impact 
the proposed handling of a request for review where a market 
participant is quoting only on the Exchange, thus, the Exchange has 
not included a separate example for such a fact-pattern.
---------------------------------------------------------------------------

Assumptions
    For purposes of this example, assume the following:
    <bullet> A TPH acting as a Market Maker on the Exchange (``Market 
Maker A'') is quoting in twenty series of options underlying security 
ABCD on the Exchange and on a second exchange (``Away Exchange'').\15\
---------------------------------------------------------------------------

    \15\ The Exchange notes that the proposed rule would operate the 
same if Market Maker A was quoting on more than two exchanges. The 
Exchange has limited the example to two exchanges for simplicity.
---------------------------------------------------------------------------

    <bullet> Market Maker A makes an error in calculating the market 
for options on ABCD, and publishes quotes on both the Exchange and the 
Away Exchange in all twenty series to buy options at $1.00 and to sell 
options at $1.05.
    <bullet> In fact, options on ABCD in these series are nearly 
worthless and no other market participant is quoting in such series.
    <bullet> Therefore, the NBBO in the twenty series at issue is $1.00 
x $1.05 (with the Exchange and the Away Exchange representing the NBBO 
based on Market Maker A's quotes).
    <bullet> Assume TPH A immediately enters sell orders and executes 
against Market Maker A's quotes at $1.00.
    <bullet> Assume Market Maker A submits to the Exchange and to the 
Away Exchange timely requests for review of the trades with TPH A as 
potentially erroneous transactions to buy. At the time of submitting 
the requests for review to the Exchange and the Away Exchange, Market 
Maker A identifies to the Exchange the quotes on the Away Exchange as 
quotes also represented by Market Maker A (and to the Away Exchange, 
the quotes on the Exchange as quotes also represented by Market Maker 
A).
Result
    <bullet> Based on the proposed rules, the Exchange would identify 
Market Maker A as a participant to the trades at issue and would 
consider Market Maker A's quotations on the Exchange invalid pursuant 
to Rule 6.25(b)(2).
    <bullet> The Exchange and the Away Exchange would also coordinate 
to confirm that the quotations identified by Market Maker A on the 
other exchange were indeed Market Maker A's quotations. Once confirmed, 
each of the Exchange and the Away Exchange would also consider invalid 
the quotations published on the other exchange.
    <bullet> As there were no other valid quotes to use as a reference 
price, the Exchange would then determine Theoretical Price.
    <bullet> Assume the Exchange determines a Theoretical Price of 
$0.05.
    [cir] The execution price of $1.00 exceeds the $0.25 minimum amount 
set forth in the Exchange's table to determine whether an obvious error 
has occurred (i.e., $0.05 + $0.25 = $0.30) so any execution at or above 
this price is an obvious error.
    [cir] Accordingly, the executions in all series would be adjusted 
by the Exchange to executions at $0.20 per contract (Theoretical Price 
of $0.05 plus $0.15) to the extent the incoming orders submitted by TPH 
A were non-Customer orders.
    [cir] The executions in all series would be nullified to the extent 
the incoming orders submitted by TPH A were Customer orders.
    <bullet> As the Exchange and all other options exchanges would have 
identical rules with respect to the process described above, as other 
options exchanges intend to adopt the same rule if the proposed rule is 
approved, the transactions on the Away Exchange would also be nullified 
or adjusted as set forth above.
    <bullet> If this example was instead modified such that Market 
Maker A was quoting in 200 series rather than 20, the Exchange notes 
that Market Maker A could only request that the Exchange consider as 
invalid their quotations in 25 of those series on other exchanges. As 
noted above, the Exchange has proposed to limit the proposed rule to 25 
series in order to continue to process requests for review in a timely 
and organized fashion in order to provide certainty to market 
participants. This is due to the amount of coordination that will be 
necessary in such a scenario to confirm that the quotations in question 
on an away options exchange were indeed submitted by a party to a 
transaction on the Exchange.
Implementation Date
    The Exchange proposes to delay the operative date of this proposal 
to a date within ninety (90) days after the Commission approved the 
Bats BZX proposal on July 6, 2017. The Exchange will announce the 
operative date in a Regulatory Circular made available to its Members.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with the 
requirements of the Act and the rules

[[Page 42380]]

and regulations thereunder that are applicable to a national securities 
exchange, and, in particular, with the requirements of Section 6(b) of 
the Act. Specifically, the proposal is consistent with Section 6(b)(5) 
of the Act because it would promote just and equitable principles of 
trade, remove impediments to, and perfect the mechanism of, a free and 
open market and a national market system, and, in general, protect 
investors and the public interest.
    As described above, the Exchange and other options exchanges are 
seeking to further modify their harmonized rules related to the 
adjustment and nullification of erroneous options transactions. The 
Exchange believes that the proposal to utilize a TP Provider in the 
event the NBBO is unavailable or unreliable will provide greater 
transparency and clarity with respect to the adjustment and 
nullification of erroneous options transactions. Particularly, the 
proposed changes seek to achieve consistent results for participants 
across U.S. options exchanges while maintaining a fair and orderly 
market, protecting investors and protecting the public interest. Thus, 
the Exchange believes that the proposal is consistent with Section 
6(b)(5) of the Act in that the proposed Rule will foster cooperation 
and coordination with persons engaged in regulating and facilitating 
transactions.
    The Exchange again reiterates that it has retained the standard of 
the current rule for most reviews of options transactions pursuant to 
Rule 6.25, which is to rely on the NBBO to determine Theoretical Price 
if such NBBO can reasonably be relied upon. The proposal to use a TP 
Provider when the NBBO is unavailable or unreliable is consistent with 
Section 6(b)(5) of the Act in that the proposed Rule will foster 
cooperation and coordination with persons engaged in regulating and 
facilitating transactions by further reducing the possibility of 
disparate results between options exchanges and increasing the 
objectivity of the application of Rule 6.25. Further, the Exchange 
believes that the proposed Rule is transparent with respect to the 
limited circumstances under which the Exchange will request a review 
and correction of Theoretical Price from the TP Provider, and has 
sought to limit such circumstances as much as possible. The Exchange 
notes that under the current Rule, Exchange personnel are required to 
determine Theoretical Price in certain circumstances and yet rarely do 
so because such circumstances have already been significantly limited 
under the harmonized rule (for example, because the wide quote 
provision of the harmonized rule only applies if the quote was narrower 
and then gapped but does not apply if the quote had been persistently 
wide). Thus, the Exchange believes it will need to request Theoretical 
Price from the TP Provider only in very rare circumstances and in turn, 
the Exchange anticipates that the need to contact the TP Provider for 
additional review of the Theoretical Price provided by the TP Provider 
will be even rarer. Similarly, the Exchange believes it is unlikely 
that an Exchange Official will ever be required to determine 
Theoretical Price, as such circumstance would only be in the event of a 
systems issue that has rendered the TP Provider's services unavailable 
and such issue cannot be corrected in a timely manner.
    The Exchange also believes its proposal to adopt language in 
paragraph (d) of Interpretation and Policy .08 to Rule 6.25 to disclaim 
the liability of the Exchange and the TP Provider in connection with 
the proposed Rule, the TP Provider's calculation of Theoretical Price, 
and the Exchange's use of such Theoretical Price is consistent with the 
Act. As noted above, this proposed language is modeled after existing 
language in Exchange Rules regarding ``reporting authorities'' that 
calculate indices, and is consistent with Section 6(b)(5) of the Act in 
that the proposed Rule will foster cooperation and coordination with 
persons engaged in regulating and facilitating transactions.
    As described above, the Exchange proposes a modification to the 
valid quotes provision to also exclude quotes in a series published by 
another options exchange if either party to the transaction in question 
submitted the orders or quotes in the series representing such options 
exchange's best bid or offer. The Exchange believes this proposal is 
consistent with Section 6(b)(5) of the Act because the application of 
the rule will foster cooperation and coordination with persons engaged 
in regulating and facilitating transactions by allowing the Exchange to 
coordinate with other options exchanges to determine whether a market 
participant that is party to a potentially erroneous transaction on the 
Exchange established the market in an option on other options 
exchanges; to the extent this can be established, the Exchange believes 
such participant's quotes should be excluded in the same way such 
quotes are excluded on the Exchange. The Exchange also believes it is 
reasonable to limit the scope of this provision to twenty-five (25) 
series and to require the party that believes it established the best 
bid or offer on one or more other options exchanges to identify to the 
Exchange the quotes which were submitted by that party and published by 
other options exchanges. The Exchange believes these limitations are 
consistent with Section 6(b)(5) of the Act because they will ensure 
that the Exchange is able to continue to apply the Rule in a timely and 
organized fashion, thus fostering cooperation and coordination with 
persons engaged in regulating and facilitating transactions and also 
removing impediments to and perfecting the mechanism of a free and open 
market and a national market system.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the proposal is consistent with Section 
6(b)(8) of the Act \16\ in that it does not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act as explained below.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    Importantly, the Exchange does not believe that the proposal will 
impose a burden on intermarket competition but rather that it will 
alleviate any burden on competition because it is the result of a 
collaborative effort by all options exchanges to further harmonize and 
improve the process related to the adjustment and nullification of 
erroneous options transactions. The Exchange does not believe that the 
rules applicable to such process is an area where options exchanges 
should compete, but rather, that all options exchanges should have 
consistent rules to the extent possible. Particularly where a market 
participant trades on several different exchanges and an erroneous 
trade may occur on multiple markets nearly simultaneously, the Exchange 
believes that a participant should have a consistent experience with 
respect to the nullification or adjustment of transactions. To that 
end, the selection and implementation of a TP Provider utilized by all 
options exchanges will further reduce the possibility that participants 
with potentially erroneous transactions that span multiple options 
exchanges are handled differently on such exchanges. Similarly, the 
proposed ability to consider quotations invalid on another options 
exchange if ultimately originating from a party to a potentially 
erroneous transaction on the Exchange represents a proposal intended to 
further foster cooperation by the options exchanges with respect to 
market events. The Exchange understands that all other options 
exchanges intend to

[[Page 42381]]

file proposals that are substantially similar to this proposal.
    The Exchange does not believe that the proposed rule change imposes 
a burden on intramarket competition because the proposed provisions 
apply to all market participants equally.

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.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change 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, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \17\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\18\
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \18\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
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 has satisfied this requirement.
---------------------------------------------------------------------------

    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or 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

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#255750494008464a4848404b5156655640460b424a53"><span class="__cf_email__" data-cfemail="f684839a93db95999b9b93988285b6859395d8919980">[email protected]</span></a>. Please include 
File Number SR-CBOE-2017-058 on the subject line.

Paper Comments

    <bullet> 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-2017-058. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of 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-2017-058, and should be 
submitted on or before September 28, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-18939 Filed 9-6-17; 8:45 am]
 BILLING CODE 8011-01-P


</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>