Document ID: SEC-2015-2000-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2015-11-27T05:00Z

[Federal Register Volume 80, Number 228 (Friday, November 27, 2015)]
[Notices]
[Pages 74149-74151]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-30075]

[[Page 74149]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76489; File No. SR-CBOE-2015-103]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to the Technical Disconnect Mechanism

November 20, 2015.
    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 November 9, 2015, 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, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 6.23C related to the Exchange's 
Technical Disconnect Mechanism. The text of the proposed rule change is 
provided below. (additions are italicized; deletions are [bracketed])
* * * * *

Chicago Board Options Exchange, Incorporated

Rules
* * * * *
Rule 6.23C Technical Disconnect
    (a) When a CBOE Application Server (``CAS'') loses communication 
with a Client Application such that a CAS does not receive an 
appropriate response to a Heartbeat Request within ``x'' period of 
time, the Technical Disconnect Mechanism will automatically logoff the 
Trading Permit Holder's affected Client Application and[, if 
applicable, will] automatically cancel all the Trading Permit Holder's 
Market-Maker quotes, if applicable, and open orders with a time-in-
force of ``day'' (``day orders''), if the Trading Permit Holder enables 
that optional service, posted through the affected Client Application. 
The following describes how the Technical Disconnect Mechanism works 
for each of the Exchange's application programming interfaces 
(``APIs''):
    [(i) CBOE Market Interface (``CMi'') API. A CAS shall generate a 
Heartbeat Request to a Client Application every ``n'' period of time. 
The value of ``n'' shall be set by the Exchange at two (2) seconds. The 
value of ``x'' shall be set either by the Exchange or a Trading Permit 
Holder, depending upon the version of CMi being used. If the value of 
``x'' is determined by the Exchange, ``x'' shall be set at twenty (20) 
seconds. If the value of ``x'' is determined by a Trading Permit 
Holder, ``x'' shall in no event be less than three (3) seconds or 
exceed twenty (20) seconds.]
    (i[i]) CBOE Market Interface 2.0 (``CMi 2'') API. A CAS shall 
generate a Heartbeat Request to a Client Application (i) after the CAS 
does not receive any messages from a particular Client Application for 
``n'' period of time or (ii) after every ``n'' period of time. A 
Trading Permit Holder shall determine the value of ``n.'' In no event 
shall ``n'' be less than three (3) seconds or exceed twenty (20) 
seconds. If a CAS generates a Heartbeat Request only after it does not 
receive any messages from a particular Client Application for ``n'' 
period of time, the value of ``x'' shall be set at a half (.5) second. 
If a CAS generates a Heartbeat Request every ``n'' period of time, the 
value of ``x'' shall be equal to the value of ``n.''
    (ii[i]) Financial Information eXchange (``FIX'') Protocol API. A 
CAS shall generate a Heartbeat Message to a Client Application after 
the CAS does not receive any messages from a particular Client 
Application for ``n'' period of time. If the CAS does not receive a 
response to the Heartbeat Message from the Client Application for ``n'' 
period of time, the CAS shall generate a Heartbeat Request to the 
Client Application. A Trading Permit Holder shall determine the value 
of ``n'' at logon. In no event shall ``n'' be less than five (5) 
seconds. The value of ``x'' shall be equal to the value of ``n.''
    (b) The Technical Disconnect Mechanism is enabled for all Trading 
Permit Holders and may not be disabled by Trading Permit Holders, 
except the automatic cancellation of a Trading Permit Holder's day 
orders is an optional service that the Trading Permit Holder may enable 
or disable through the API.
    (c) The trigger of the Technical Disconnect Mechanism is event- and 
Client Application-specific. The automatic cancellation of a Market-
Maker's quotes (if applicable) or a Trading Permit Holder's day orders 
(if enabled by the Trading Permit Holder) entered into a CAS via a 
particular Client Application will neither impact nor determine the 
treatment of the quotes of the same or other Market-Makers or orders of 
the same Trading Permit Holder entered into the CAS via a separate and 
distinct Client Application. Except for day orders the Technical 
Disconnect Mechanism automatically cancels if a Trading Permit Holder 
enables that optional service, [T]the Technical Disconnect Mechanism 
will not impact or determine the treatment of orders a Trading Permit 
Holder previously entered into the CAS.
    . . . Interpretations and Policies:
    .01 No change.
* * * * *
    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.

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
    The Exchange proposes to amend Rule 6.23C related to the Exchange's 
Technical Disconnect Mechanism. Rule 6.23C(a) provides that when a CBOE 
Application Server (``CAS'') \3\ loses communication with a Client 
Application \4\ such that a CAS does not receive an appropriate 
response to a Heartbeat Request \5\ within ``x'' period of

[[Page 74150]]

time, the Technical Disconnect Mechanism will automatically logoff the 
Trading Permit Holder's (``TPH'') affected Client Application. If that 
occurs, the current rule provides that the Technical Disconnect 
Mechanism, if applicable, will automatically cancel all the TPH's 
Market-Maker quotes posted through the affected Client Application.\6\ 
The Technical Disconnect Mechanism is intended to help mitigate the 
potential risks associated with a loss of communication with a Client 
Application, such as erroneous or unintended executions for stale 
quotes that are resting in the CBOE book. This mechanism serves to 
assist a TPH when a technical or system issue occurs, as well as assist 
the Exchange in maintaining a fair and orderly market.
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    \3\ CBOE currently has numerous CASs serving TPHs.
    \4\ For relevant purposes, a ``Client Application'' is the 
system component, such as a CBOE-supported workstation or a TPH's 
custom trading application, through which a TPH communicates its 
quotes and/or orders to a CAS. Messages are passed between a Client 
Application and a CAS. A Market-Maker may send quotes to the 
Exchange from one or more Client Applications, and a TPH may send 
orders to the Exchange from one or more Client Applications.
    \5\ A ``Heartbeat Request'' refers to a message from a CAS to a 
Client Application to check connectivity and which requires a 
response from the Client Application in order to avoid logoff. The 
Heartbeat Request acts as a virtual pulse between a CAS and a Client 
Application and allows a CAS to continually monitor its connection 
with a Client Application. Failure to receive a response to a 
Heartbeat Request within the Heartbeat Response Time is indicative 
of a technical or system issue.
    \6\ See Rule 6.23C and Securities Exchange Act Release No. 34-
70039 (July 25, 2013), 78 FR 46395 (July 31, 2013) (SR-CBOE-2013-
071) for further information regarding the Technical Disconnect 
Mechanism.
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    The proposed rule change provides TPHs with an optional service 
that, if enabled by a TPH, will cause the Technical Disconnect 
Mechanism to also automatically cancel all the TPH's open orders with a 
time-in-force of ``day'' (``day orders'') posted through the affected 
Client Application if the CAS loses communication with the Client 
Application. The proposed rule change amends Rule 6.23C(b) to provide 
that the TPH may enable or disable this optional service through its 
application programming interface (``API'') (all other aspects of the 
Technical Disconnect Mechanism continue to otherwise be enabled for all 
TPHs and may not be disabled by TPHs).\7\ The proposed rule change 
makes corresponding changes to Rule 6.23C(c) that indicate the 
Technical Disconnect Mechanism will automatically cancel a TPH's day 
orders (in addition to a Market-Maker's quotes), if the TPH enables the 
proposed optional service.\8\ As is the case in the event the Technical 
Disconnect Mechanism automatically logs a TPH off and cancels its 
Market-Maker quotes (if applicable), if a TPH enables this proposed 
optional service, and the Technical Disconnect Mechanism automatically 
logs a TPH off and cancels the TPH's day orders due to lost 
communication with TPH's Client Application, the TPH may send messages 
to the CAS to enter new orders once it reestablishes connectivity to 
the Client Application. In addition, any nonconnectivity will continue 
to be event- and Client Application-specific. In other words, any 
cancellation of day orders entered into a CAS via a particular Client 
Application will neither impact nor determine the treatment of the 
quotes of the same TPH entered into a CAS via a separate and distinct 
Client Application. The Technical Disconnect Mechanism will not impact 
or determine the treatment of orders previously entered into a CAS if 
the TPH does not enable this optional service, nor will it impact or 
determine the treatment of non-day orders previously entered into a CAS 
by the TPH. The Exchange notes use of this service will be voluntary 
and within the sole discretion of each TPH.
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    \7\ CBOE currently makes available two APIs: CBOE Market 
Interface 2.0 (``CMi 2'') and Financial Information eXchange 
Protocol (``FIX''). The proposed rule change deletes Rule 
6.23A(a)(i) [sic] regarding the CBOE Market Interface (``CMi'') API, 
as that has been phased out and is no longer available to TPHs. The 
proposed rule change also renumbers subparagraphs (ii) and (iii) to 
become subparagraphs (i) and (ii), respectively.
    \8\ In addition, the proposed rule change makes nonsubstantive 
changes to Rule 6.23C(a), including moving the phrase ``if 
applicable'' to ensure that phrase clearly applies to the 
cancellation of a Market-Maker's quotes (as that functionality only 
applies to TPHs that are Market-Makers).
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    The proposed optional service is an additional preventative risk 
control measure that CBOE is making available to TPHs. It is intended 
to help further mitigate the potential risks associated with a loss of 
communication with a Client Application. While orders may be static in 
nature and rest in the book, TPHs often enter day orders more 
frequently in response to then-current market conditions. Therefore, if 
a TPH's Client Application is disconnected for any period of time, it 
is possible that market conditions upon which it based its day orders 
may change during that time and make those orders stale. Consequently, 
any resulting executions of those orders may be erroneous or 
unintended. The Exchange believes it is appropriate to limit this 
optional service to day orders and exclude good-til-cancelled 
orders,\9\ as those orders are intended to rest in the book for a 
period of time and thus have lower risk of erroneous or unintended 
executions during and after the Technical Disconnect Mechanism logs off 
a TPH.
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    \9\ Currently, the Exchange offers two time-in-force order 
types: Day and good-til-cancelled. The proposed optional service 
will apply to orders that include the ``day'' marking.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\10\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \11\ requirements that the rules 
of an exchange 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 regulating, 
clearing, settling, processing information with respect to, and 
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. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \12\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ Id.
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    In particular, the proposed rule change helps maintain a fair and 
orderly market and protects investors and the public interest. The 
Technical Disconnect Mechanism is a valuable tool that is designed to 
help maintain a fair and orderly market. The Exchange believes that 
providing TPHs with the option to have the Technical Disconnect 
Mechanism cancel its day orders, in addition to Market-Maker quotes (if 
applicable), further mitigates the potential risks associated with a 
loss in communication with a Client Application. The Exchange believes 
it is reasonable to offer to cancel only day orders. Unlike non-day 
orders, day orders are more likely to be reflective of then-current 
market conditions and are intended to rest in the book for a limited 
period of time. As a result, in the event that a CAS loses connectivity 
with a Client Application, execution of day orders during that time are 
more likely to result in erroneous or unintended executions, while risk 
of such executions is lower for non-day orders. The proposed optional 
service protects TPHs from these potential erroneous or unintended 
executions, as well as protects investors and the efficiency and 
fairness of the markets in general. The Exchange believes this 
functionality enhances the overall market quality for options traded on 
CBOE. The Exchange notes that other exchanges offer their members 
similar services that cancels a member's orders if it disconnects from 
the exchange.\13\
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    \13\ See, e.g., BZX Exchange US Equities FIX Specification, 
Version 1.33.5 (October 8, 2014), available at http://www.batstrading.com/resources/membership/BATS_FIX_Specification.pdf 
(see Section 5.1 for description of automatic cancel on 
disconnection or malfunction); MIAX Options Market Protections 
Handout (March 2015), available at https://www.miaxoptions.com/sites/default/files/MIAX_Market_Protections_March_2015.pdf (see page 
5 for description of auto cancel on disconnect order protection); 
and NYSE UTPDirect (CGC Binary) API Specification, V1.4 (February 
26, 2015), available at https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSEUTPDirect_Specification.pdf (see Section 3.8 for 
description of cancel on disconnect service).

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[[Page 74151]]

    The Exchange also believes that the proposed rule change is 
designed to not permit unfair discrimination among market participants. 
Use of the optional service will be voluntary and within the sole 
discretion of each TPH. The proposed optional service is available to 
all TPHs and will apply to the same order types of all TPHs.
    The proposed rule change to delete language related to CMi benefits 
investors, as that API is no longer available to TPHs and thus deletion 
of that language helps eliminate confusion. CMi2 and FIX continue to be 
available to TPHs.

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

    CBOE does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. Specifically, the Exchange does 
not believe the proposed rule change will cause any burden on 
intramarket competition because the optional service will be available 
to all TPHs. Use of this optional service will be within the sole 
discretion of each TPH. The proposed rule change will have no impact on 
TPHs that do not enable the proposed optional service. For TPHs that 
elect to enable the proposed optional service, the only impact on those 
TPHs will be cancellation of day orders (in addition to Market-Maker 
quotes) upon loss of connectivity. The Technical Disconnect Mechanism 
will otherwise continue to function in the same manner as it does 
today. Further, the Exchange does not believe that such change will 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The proposed 
rule change modifies a mechanism available on CBOE's system and applies 
only to orders entered on CBOE. The Exchange notes that, should the 
proposed change make CBOE a more attractive place for trading, market 
participants trading on other exchanges are welcome to become TPHs and 
trade at CBOE if they determine that this proposed change has made CBOE 
more attractive or favorable. Additionally, as discussed above, other 
options exchanges offer their members similar functionality.\14\
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    \14\ Id.
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    The proposed rule change to delete language regarding CMi has no 
impact on competition, as it merely deletes a provision regarding an 
API that is no longer used by, and is no longer available to, TPHs. CMi 
2 ultimately replaced CMi, and FIX continues to be available to TPHs as 
well.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \15\ and paragraph (f) of Rule 19b-4 \16\ 
thereunder. 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. If the Commission 
takes such action, the Commission will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f).
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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 Number SR-CBOE-2015-103 on the subject line.

Paper comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2015-103. 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 the 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-2015-103 and should be 
submitted on or before December 18, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-30075 Filed 11-25-15; 8:45 am]
 BILLING CODE 8011-01-P