Document ID: SEC-2013-2259-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Topaz Exchange, LLC
Posted Date: 2013-12-31T05:00Z

[Federal Register Volume 78, Number 251 (Tuesday, December 31, 2013)]
[Notices]
[Pages 79718-79720]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-31227]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71181; File No. SR-Topaz-2013-19]

Self-Regulatory Organizations; Topaz Exchange, LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change to More 
Specifically Address the Number and Size of Contra-parties to a 
Qualified Contingent Cross Order

December 24, 2014.
    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 December 18, 2013, Topaz Exchange, LLC (d/b/a ISE Gemini) (the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to

[[Page 79719]]

solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The Exchange is proposing to amend Rule 715 (Types of Orders) to 
more specifically address the number and size of contra-parties to a 
Qualified Contingent Cross Order (``QCC Order''). The text of the 
proposed rule change is available on the Exchange's Internet Web site 
at http://www.ise.com, at the principal office of the Exchange, and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
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 self-regulatory organization 
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
    The purpose of this proposal is to expand the availability of QCC 
Orders by permitting multiple contra-parties on a QCC Order. Under the 
proposal, multiple contra-parties would be allowed, so long as each 
contra-party order consists of an order for at least 1,000 contracts; 
provided however, that the originating QCC Order must also be for at 
least 1,000 contracts (in addition to meeting the other requirements of 
a QCC Order). This is intended to accommodate multiple contra-parties, 
as explained further below.
    A QCC Order must be comprised of an order to buy or sell at least 
1,000 contracts \3\ that is identified as being part of a qualified 
contingent trade,\4\ coupled with a contra-side order to buy or sell an 
equal number or contracts. QCC Orders are automatically executed upon 
entry provided that the execution (i) is not at the same price as a 
Priority Customer Order on the Exchange's limit order book and (ii) is 
at or between the NBBO. QCC Orders will be automatically canceled if 
they cannot be executed. QCC Orders may only be entered in the regular 
trading increments applicable to the options class under Rule 710 
(Minimum Trading Increments).
---------------------------------------------------------------------------

    \3\ In the case of Mini Options, the minimum size is 10,000 
contracts.
    \4\ A ``qualified contingent trade'' is a transaction consisting 
of two or more component orders, executed as agent or principal, 
where: (a) At least one component is an NMS Stock, as defined in 
Rule 600 of Regulation NMS under the Exchange Act; (b) all 
components are effected with a product or price contingency that 
either has been agreed to by all the respective counterparties or 
arranged for by a broker-dealer as principal or agent; (c) the 
execution of one component is contingent upon the execution of all 
other components at or near the same time; (d) the specific 
relationship between the component orders (e.g., the spread between 
the prices of the component orders) is determined by the time the 
contingent order is placed; (e) the component orders bear a 
derivative relationship to one another, represent different classes 
of shares of the same issuer, or involve the securities of 
participants in mergers or with intentions to merge that have been 
announced or cancelled; and (f) the transaction is fully hedged 
(without regard to any prior existing position) as a result of other 
components of the contingent trade.
---------------------------------------------------------------------------

    The QCC Order type was approved for the Exchange in its current 
form on February 24, 2011 [sic].\5\ It was always the Exchange's intent 
and understanding when drafting the rule text that a QCC Order could 
involve multiple contra-parties of the QCC trade when the originating 
QCC Order consisted of at least 1,000 contracts. However, the rule 
language addressing the contra-side of a QCC Order is drafted from the 
perspective of how the QCC Order gets entered into the Exchange system. 
Specifically, the contra-side order to a QCC Order will always be 
entered as a single order, even if that order consists of multiple 
contra-parties who are allocated their portion of the trade in a post-
trade allocation. Notwithstanding the foregoing, the literal wording of 
the current QCC Order rule could result in a more limited 
interpretation of the rule. Therefore, the Exchange now proposes to 
make it clear that a QCC Order must involve a single order for at least 
1,000 contracts on the originating side, but that it may consist of 
multiple orders on the opposite, contra-side, so long as each of the 
contra-side orders is for at least 1,000 contracts.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 70050 (July 26, 
2013), 78 FR 46622 (August 1, 2013) (File No. 10-209).
---------------------------------------------------------------------------

    For instance, a 5,000 contract originating QCC Order to buy could, 
under this proposal, be coupled with two contra-side orders to sell 
2,500 contracts each. Similarly, a 5,000 contract originating QCC Order 
to buy could, under this proposal, be coupled with a [sic] two contra-
side orders to sell, one for 4,000 contracts and one for 1,000 
contracts. In the above examples, each sell (contra-side) order needs 
to be for a minimum of 1,000 contracts, provided that the total of all 
sell (contra-side) orders equals the size of the originating order and 
that originating order is at least 1,000 contracts.
    Accordingly, the Exchange is proposing to amend the definition of 
QCC Order to clarify that an originating order to buy or sell at least 
1,000 contracts coupled with a contra-side order or orders totaling an 
equal number of contracts is permitted, so long as each contra-side 
order is for at least 1,000 contracts.
2. Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \6\ that an exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism for a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest by amending the rule text to more clearly defining the 
QCC Order. Specifically, because the proposal clarifies that a QCC 
Order permits multiple contra-parties, it should therefore provide 
members and participants with certainty as to what is allowed and, 
therefore, provide more opportunity to participate in QCC trades, 
consistent with the key principles behind the QCC Order.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In approving QCC Orders, the Commission has stated that ``. . . 
qualified contingent trades are of benefit to the market as a whole and 
a contribution to the efficient functioning of the securities markets 
and the price discovery process.'' \7\ The Commission ``also has 
recognized that contingent trades can be useful trading tools for 
investors and other market participants, particularly those who trade 
the securities of issuers involved in mergers, different classes of 
shares of the same issuer, convertible securities, and equity 
derivatives such as options [emphasis added].'' \8\ In light of these 
benefits, the Exchange believes that the proposal should improve the 
usefulness of the QCC Order without raising novel regulatory issues, 
because the proposal does not impact the fundamental aspects of this 
order type--it merely

[[Page 79720]]

permits multiple contra-parties, while preserving the 1,000 contract 
minimum.
---------------------------------------------------------------------------

    \7\ QCC Approval Order at text accompanying footnote 115.
    \8\ QCC Approval Order at Section III.A. citing Securities 
Exchange Act Release No. 54389 (August 31, 2006), 71 FR 52829 
(September 7, 2006) (Original QCT Exemption).
---------------------------------------------------------------------------

    Consistent with Section 6(b)(8) of the Act, the Exchange seeks to 
compete with other options exchanges for QCC Orders involving multiple 
parties, including where there are multiple contra-parties. The 
Exchange believes that this will be beneficial to participants because 
allowing multiple contra-parties of at least 1,000 contracts should 
foster competition for filling one side of a QCC Order and thereby 
result in potentially better prices, as opposed to only allowing one 
contra-party and, thereby requiring that contra-party to do a larger 
size order which could result in a worse price for the trade.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. In fact, the proposal is 
intended to relieve a burden on competition, which results from 
different exchanges interpreting their rules differently. Among the 
options exchanges, the Exchange believes that the proposal to allow 
multiple contra-parties of at least 1,000 contracts should foster 
competition for filling the contra-side of a QCC order and thereby 
result in potentially better prices for such orders.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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

    Because the foregoing proposed rule change does not significantly 
affect the protection of investors or the public interest, does not 
impose any significant burden on competition, and, by its terms, does 
not 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) \9\ of the Act and Rule 19b-
4(f)(6) \10\ thereunder. The Exchange provided the Commission with 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at least 
five business days prior to the date of filing the proposed rule 
change.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR. 240.19b-4(f)(6).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form http://www.sec.gov/rules/sro.shtml ); or
     Send an Email to rule-comments@sec.gov. Please include 
File No. SR-Topaz-2013-19 on the subject line.

Paper Comments

     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-Topaz-2013-19. 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 Commissions 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-Topaz-2013-19 and should be 
submitted by January 21, 2014.
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-31227 Filed 12-30-13; 8:45 am]
BILLING CODE 8011-01-P