Document ID: SEC-2011-1390-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Stock Exchange, Inc.
Posted Date: 2011-09-15T04:00Z

[Federal Register Volume 76, Number 179 (Thursday, September 15, 2011)]
[Notices]
[Pages 57089-57090]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-23607]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65308; File No. SR-CHX-2011-21]

Self-Regulatory Organizations; Chicago Stock Exchange, 
Incorporated; Order Approving a Proposed Rule Change to Amend Article 
20, Rule 9 (Cancellation of Transactions) and Interpretation and Policy 
.01 Thereunder Regarding the Cancellation of the Stock Leg of Stock-
Option Transactions Done on the Exchange

September 9, 2011.

I. Introduction

    On July 26, 2011, Chicago Stock Exchange, Incorporated 
(``Exchange'' or ``CHX'') 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 Article 20, Rule 9 
(Cancellation of Transactions) and Interpretation and Policy .01 
thereunder regarding the cancellation of the stock leg of stock-option 
transactions done on the Exchange. The proposed rule change was 
published for comment in the Federal Register on August 3, 2011.\3\ The 
Commission received four comment letters on the proposed rule 
change.\4\ This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 64985 (July 28, 
2011), 76 FR 46866 (``Notice'').
    \4\ See letters from Darren Story, CFA, Student Options, LLC, 
dated July 27, 2011 (``Story Letter''); Mike Bristow, Managing 
Director, Institutional Stock & Options, dated July 28, 2011 
(``Bristow''); Nick DiCicco, D and D Securities, dated August 23, 
2011; and Stephen Floirendo, Broker, Husky Trading, dated August 23, 
2011 (``Floirendo Letter'').
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II. Description of the Proposed Rule Change

    Under its former Interpretations and Policies .01(a) to CHX Article 
20, Rule 9,\5\ a trade representing the execution of the stock leg of a 
stock-option order could be cancelled only if market conditions in the 
options exchange prevented the execution of the options leg at the 
price agreed upon by the parties to the options transaction. By this 
proposed rule change, the Exchange expands the circumstances in which 
the stock leg of a stock-option order executed on the CHX's facilities 
may be cancelled to include situations in which the options leg is 
executed, but subsequently is cancelled by an options exchange pursuant 
to its rules. A transaction may not be cancelled pursuant to the 
provisions of Rule 9(b) unless the original trade was identified by a 
special trade indicator.\6\
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    \5\ By this proposal, CHX reorganizes its Rule 9, moving the 
text of Interpretation and Policy .01 into new paragraph (b), 
because the Exchange believes that the requirements of that 
Interpretation and Policy constitute an independent basis for the 
cancellation of transactions, rather than act as an interpretation 
of the general provisions of Rule 9. See Notice, supra note 3, 76 FR 
at 46866.
    \6\ See CHX Article 20, Rule 9(b)(6). See also Notice, supra 
note 3, 76 FR at 46866 (``A special trade indicator will be reported 
by the Exchange to the Consolidated Tape in order that the parties 
and other market participants are aware that the transaction may be 
cancelled by the parties if the requirements of the rule are 
satisfied.'').
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    Without the ability to cancel the stock leg of the stock-option 
trade at the request of the Participants when the transaction 
representing the options leg has been cancelled, the Exchange states 
that the parties to the transaction would be left with an unwanted 
stock position, which originally was taken as a component of (e.g., to 
hedge) the cancelled options transaction.\7\ The Exchange asserts that 
the circumstance where a trade that represents the stock leg of a 
stock-option order is cancelled at the request of the parties involved 
when the transaction representing the options leg has been cancelled is 
substantially similar to the situation where a trade that represents 
the stock leg of a stock-option order is cancelled when the options leg 
of a stock-option order is not executed at all, and that allowing 
cancellation of a trade that represents the unwanted stock leg of a 
stock-option order when the corresponding options leg trade was 
cancelled would eliminate the need to liquidate the unwanted stock 
leg.\8\
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    \7\ See Notice, supra note 3, 76 FR at 46866.
    \8\ See id.
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    The Exchange also proposes to require that any request to cancel a 
transaction involving a stock-option order be made by or on behalf of 
all Participants that are parties to the transaction, rather than by 
any party. The Exchange believes that requiring all Participant parties 
to consent to the cancellation will help prevent the possible abuse by 
a single party acting unilaterally. The Exchange represents that the 
ultimate parties to the cash equities transaction are the same parties 
to the equity options transaction, so any cancellation of the Exchange 
transaction will not have an impact on other market participants.\9\
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    \9\ In some instances, the parties to the options transactions 
may not be Exchange Participants. The orders of such firms would be 
executed on the Exchange in the name of its clearing firm, which 
must be an Exchange Participant. The clearing firm would then 
allocate the transaction to the options firm.
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    Finally, the Exchange proposes corresponding recordkeeping 
requirements in connection with stock-option order cancellations. CHX 
Rule 9(b)(3) requires the Participant acting as the broker in trades 
cancelled pursuant to proposed Rule 9(b)(1)(ii) to maintain records 
sufficient to establish that the options leg in fact was cancelled by 
the options exchange on which it was executed. A new requirement of CHX 
Rule 9(b)(4) is that the Participant acting as broker on the trade 
identify the reason that the trade was cancelled. The Exchange states 
that it will use the records to verify that the requirements imposed by 
the proposed rule changes have been met, and would treat the failure to 
properly document such cancellations as a rule violation subject to 
disciplinary treatment under Article 12 of the Exchange's rules.\10\
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    \10\ See Notice, supra note 3, 76 FR at 46866. The Exchange 
represents that it will implement surveillance procedures reasonably 
designed to detect possible violations of these provisions 
simultaneous with the approval of the proposed rule changes. See id. 
at note 6.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \11\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\12\ In

[[Page 57090]]

particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\13\ which requires, among 
other things, that the Exchange's rules be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.
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    \11\ 15 U.S.C. 78f.
    \12\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Commission received four comment letters on the proposed rule 
change,\14\ all of which supported the proposal. All of the commenters 
noted that permitting cancellation of the stock leg of a stock-option 
transaction when the options leg is cancelled, upon mutual consent, 
would keep erroneous stock trades off the tape. Additionally, three 
commenters offered that this proposal would bolster investors' 
confidence in the marketplace.\15\
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    \14\ See supra note 4.
    \15\ See Bristow Letter, Floirendo Letter, and Story Letter, 
supra note 4.
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    The Commission believes that the proposed rule change should 
promote market efficiency by permitting CHX Participants, upon mutual 
consent, to cancel a trade that represents the stock leg of a stock-
option order when the options leg trade is cancelled, thereby saving 
Participants the expense of liquidating the unwanted stock leg. The 
Commission notes that the Exchange will not cancel any transaction 
pursuant to the provisions of Rule 9(b) unless the original trade was 
identified by a special trade indicator.\16\ The Commission believes 
that the presence of the special trade indicator will improve 
transparency by notifying market participants of the possibility of a 
potential cancellation and will foster cooperation and coordination 
with persons engaged in facilitating such transactions. In addition, 
the Commission notes that the Exchange represents that the ultimate 
parties to the cash equities transaction are the same parties to the 
equities options transactions so that cancellation of an Exchange trade 
that represents the stock leg of a stock option order will not have an 
impact on other market participants.\17\ The Commission also notes that 
CHX is adopting new recordkeeping obligations in connection with its 
expansion of stock-option order cancellations to verify that the 
requirements have been met. CHX has represented that it will treat the 
failure to properly document such cancellations as a rule violation 
subject to disciplinary treatment under Article 12 of the Exchange's 
rules. The Commission believes these procedures should protect 
investors and market participants by helping to ensure that the 
requirements have been met for stock-option cancellations.
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    \16\ See supra note 6.
    \17\ See supra note 9 and accompanying text.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-CHX-2011-21) be, and hereby 
is, approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-23607 Filed 9-14-11; 8:45 am]
BILLING CODE 8011-01-P