Document ID: SEC-2014-0593-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2014-04-10T04:00Z

[Federal Register Volume 79, Number 69 (Thursday, April 10, 2014)]
[Notices]
[Pages 19940-19942]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-07991]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71872; File No. SR-CBOE-2014-026]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change To Amend Its 
Rule 24.19

April 4, 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 March 21, 2014, 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.
---------------------------------------------------------------------------

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

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

    The Exchange proposes to amend its rule related to Multi-Class 
Broad-Based Index Option Spread Orders. The text of the proposed rule 
change is 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 make changes regarding Multi-Class Broad-
Based Index Option Spread Orders (``Multi-Class Spread Orders'') and 
its Rule 24.19. Exchange Rule 24.19 provides a definition of the term 
``Broad-Based Index Option'' for the purposes of Rule 24.19. However, 
some of the products that qualify as ``Broad-Based Index Options'' 
under Rule 24.19 are not, in and of themselves, index options. As such, 
the Exchange proposes to rename this term ``Broad Based Option'' and 
replace the term ``Broad-Based Index Option'' with ``Broad-Based 
Option'' throughout Rule 24.19.
    Similarly, Rule 24.19 provides a definition of the term ``Multi-
Class Broad-Based Index Option Spread Order.'' Because of the change 
proposed above, the Exchange proposes to remove the word ``Index'' from 
this term. The Exchange also proposes to replace the word ``Spread'' 
with ``Complex'' in order to achieve continuity within Exchange rules 
(spread orders are complex orders). As such, the term would now be 
``Multi-Class Broad-Based Option Complex Order'' and the Exchange 
proposes to replace ``Multi-Class Broad-Based Index Option Spread 
Order'' with ``Multi-Class Broad-Based Option Complex Order'' 
throughout Rule 24.19 (and to replace the shortened term, ``Multi-Class 
Spread Order'' with ``Multi-Class Complex Order'' throughout Rule 
24.19).
    The Exchange also proposes to update the definition of Multi-Class 
Complex Order to more clearly and accurately reflect what such an order 
is. Currently, the term Multi-Class Complex Order is defined as ``an 
order or quote to buy a stated number of contracts of a Broad-Based 
Option and to sell an equal number, or an equivalent number, of 
contracts of a different Broad-Based Option.'' \3\ The common 
conception of a Multi-Class Complex Order really involves the 
transaction (either a buy or a sell) of a stated number of contracts of 
a Broad-Based Option and the transaction (either a buy or a sell) of an 
equal number, or equivalent number, of contracts of a different Broad-
Based Option to achieve a position in which one leg of the order 
generally offsets the market exposure of the other leg. Given the 
inherent nature of options contracts, a buy-sell structure is not 
necessary to achieve offsetting market exposure.
---------------------------------------------------------------------------

    \3\ See CBOE Rule 24.19(a)(2).
---------------------------------------------------------------------------

    For example, because OEX is approximately half the value of SPX, a 
Multi-Class Complex Order including the two products would achieve a 
position in which one leg of the order offsets the market exposure of 
the other leg by trading two times as many OEX contracts as SPX 
contracts. But it would not necessarily require buying and selling 
contracts. To continue with the example, a market participant could buy 
100 SPX calls and buy 200 OEX puts, thereby offsetting the market 
exposure of the first leg with the second leg (since the first leg 
creates a long position and the second leg creates a short position 
(and also since this would involve trading two times as many OEX 
contracts as SPX contracts)). Therefore, the Exchange proposes to amend 
this statement to replace the terms ``buy'' and ``sell'' with 
``transact'', and to add the language regarding one leg of the order 
offsetting the market exposure of the other leg. Also, the description 
of a Multi-Class Complex Order being ``an order or quote'' is somewhat 
misleading, as a quote cannot be submitted for a Multi-Class Complex 
Order and may only be made in open outcry in response to a Multi-Class 
Complex Order. As such, the Exchange proposes to clarify that it is an 
``order (or quote in response to an order) . . .'' Therefore, either an 
order or a quote that is in response to an order can qualify for the 
provisions of paragraphs (b)(iii) and (b)(iv) of Rule 24.19. In sum, 
the Exchange proposes to amend the beginning of Rule 24.19(a)(2) to 
read: ``The term ``Multi-Class Broad-Based

[[Page 19941]]

Option Complex Order (referred to herein as ``Multi-Class Complex 
Order'')'' is an order or quote in response to an order to transact a 
stated number of contracts of a Broad-Based Option and to transact an 
equal number, or an equivalent number, of contracts of a different 
Broad-Based Option to achieve a position in which one leg of the order 
offsets the market exposure of the other leg.'' \4\
---------------------------------------------------------------------------

    \4\ Currently, the Exchange permits Multi-Class Complex Orders 
in the following combinations (pursuant to CBOE Rule 24.19(a)(2) and 
CBOE Regulatory Circular RG14-033): (i) Any combination of options 
on MNX, NDX, or QQQ (as all these options are based on the NASDAQ 
100 Index); (ii) any combination of options on OEF, OEX, XEO (all 
based on the S&P 100 Index) or SPX, SPXPM, XSP or XSPAM (all of 
which are based on the S&P 500 Index, which has a close relationship 
in price movement to the S&P 100 Index); (iii) any combination of 
options on SPX, SPXPM, XSP, XSPAM or SPY (all of which are based on 
the S&P 500 Index); (iv) any combination of options on IWM and RUT 
(both of which are based on the Russell 2000 Index); and (v) any 
combination of VIX, VXX, VXZ or VXST (all of which are based on the 
CBOE Volatility Index).
---------------------------------------------------------------------------

    Currently, not all Multi-Class Complex Orders may be entered 
electronically due to systems constraints. The Exchange is in the 
process of modifying its electronic order-entry systems to provide for 
the electronic entry and validation of all Multi-Class Complex Orders 
to the floor of the Exchange. This will provide for an enhanced audit 
trail that will better allow regulatory oversight for the provisions of 
Rule 24.19. For the Exchange's systems to be able to determine that two 
separate legs are part of the same Multi-Class Complex Order in order 
to receive treatment as a Multi-Class Complex Order, however, both legs 
must be entered together on a single order ticket. As such, the 
Exchange proposes to amend Rule 24.19 to state that ``Multi-Class 
Complex Orders must be entered on a single order ticket at time of 
systemization to be eligible for the procedures and relief set out in 
this Rule.'' The Multi-Class Complex Order type will enforce the 
permitted combinations of options covered by Rule 24.19. Multi-Class 
Complex Orders with invalid combinations will be rejected by the 
Exchange. While the proposed rule change allows for all Multi-Class 
Complex Orders to be entered electronically, all Multi-Class Complex 
Orders will still be executed in open outcry on the Exchange's trading 
floor.
    Because the current method for representing and executing Multi-
Class Complex Orders is manual and must occur only in open outcry, the 
current language states that a Multi-Class Complex Order may be 
represented at the trading station of either Broad-Based Option 
involved, and also requires that the Trading Permit Holder (``TPH'') 
initiating the order in the trading crowd to contact an Order Book 
Official (``OBO''), Designated Primary Market-Maker (``DPM''), or 
appropriate Exchange staff, as applicable, at the other trading station 
to have a notice of such order disseminated to the other trading crowd. 
The proposed rule change will require a Multi-Class Complex Order must 
be represented at the primary trading station, and state that the TPH 
representing the order must contact the DPM or Exchange staff \5\ (as 
applicable) at the other trading station in order to provide notice of 
such order for dissemination to the other trading crowd. The current 
rules states that ``Such notice shall be disseminated by the Recipient 
who shall verbalize the terms of the order to the other trading 
crowd.'' However, the Exchange proposes to replace the word 
``verbalize'' with the word ``announce'', as the Exchange is currently 
contemplating changes that will allow such notice to be posted on 
screens electronically to the other trading crowd (which could be a 
more efficient method of posting such order information). Each Broad-
Based Option has a trading station. The primary trading station is the 
first trading station at which the Multi-Class Complex Order is 
represented. The floor broker representing the Multi-Class Complex 
Order may determine which trading station should be the primary trading 
station. This ensures that all market participants at both physical 
trading locations are aware of the terms of the order being processed.
---------------------------------------------------------------------------

    \5\ The Exchange proposes to remove the reference to contacting 
an OBO, as the Exchange no longer has OBOs.
---------------------------------------------------------------------------

    The proposed rule change will enhance and improve the process of 
sending Multi-Class Complex Orders to the floor of the Exchange, as 
well as enhance the Exchange's audit trail with respect to such orders. 
It will also update the definition of Multi-Class Complex Order to more 
clearly and accurately reflect the common conception of a Multi-Class 
Complex Order. No later than 90 days following the effective date of 
the proposed rule change, the Exchange will announce to TPHs via 
Regulatory Circular the implementation date by which TPHs must be in 
compliance with the changes described herein. The implementation date 
will be no later than 180 days following the effective date of the 
proposed rule change, and will be at least 30 days following the 
release of the abovementioned Regulatory Circular (in order to give 
TPHs ample time to come into compliance with the changes described 
herein).
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules. 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.\6\ Specifically, the Exchange believes the 
proposed rule change is consistent with the Section 6(b)(5) \7\ 
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) \8\ requirement that the rules of an exchange not be designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
    \8\ Id.
---------------------------------------------------------------------------

    The Exchange believes that updating the definition of Multi-Class 
Complex Order to more clearly and accurately reflect the common 
conception of a Multi-Class Complex Order will remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system by allowing investors to receive Multi-Class Complex 
Order treatment for trades that are commonly viewed as Multi-Class 
Complex Orders. Additionally, the Exchange believes that the proposed 
rule change is designed to not permit unfair discrimination among 
market participants as all market participants may participate in 
Multi-Class Complex Orders.
    Automating the Multi-Class Complex Order creation process for all 
Multi-Class Complex Orders serves to remove impediments to and to 
perfect the mechanism for a free and open market and a national market 
system by providing market participants the ability to route Multi-
Class Complex Orders to the Exchange electronically. The Exchange 
believes the proposed changes will increase opportunities for

[[Page 19942]]

execution of Multi-Class Complex Orders, which will benefit investors. 
Further, enhancing the audit trail with respect to Multi-Class Complex 
Orders promotes transparency and aids in surveillance, thereby 
protecting investors.
    The Exchange also believes the proposed rule change is consistent 
with Section 6(b)(1) of the Act,\9\ which provides that the Exchange be 
organized and have the capacity to be able to carry out the purposes of 
the Act and to enforce compliance by the Exchange's Trading Permit 
Holders and persons associated with its Trading Permit Holders with the 
Act, the rules and regulations thereunder, and the rules of the 
Exchange. Enhancing the audit trail with respect to Multi-Class Complex 
Orders will allow the Exchange to better enforce compliance by the 
Exchange's TPHs and persons associated with its TPHs with the Act, the 
rules and regulations thereunder, and the rules of the Exchange.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

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.
    The Exchange believes that automating the Multi-Class Complex Order 
creation process for all Multi-Class Complex Orders promotes fair and 
orderly markets, as well as assists the Exchange in its ability to 
effectively attract order flow and liquidity to its market, and 
ultimately benefits all CBOE TPHs and all investors.
    The Exchange does not believe that the proposed rule change will 
impose any burden on intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act because Multi-
Class Complex Orders are available to all market participants through 
CBOE TPHs. The Exchange does not believe that the proposed rule change 
will impose any burden on intermarket competition that is not necessary 
or appropriate in furtherance of the purposes of the Act because, 
again, Multi-Class Complex Orders are available to all market 
participants through CBOE TPHs, which makes CBOE a more effective 
marketplace. Further, the proposed changes only affect trading on CBOE. 
To the extent that the proposed changes make CBOE more attractive to 
market participants at other exchanges, such market participants may 
elect to become CBOE market participants.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be 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

     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-2014-026 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-CBOE-2014-026. 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 20549-1090 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 offices 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-2014-026, and should be submitted on or before May 1, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-07991 Filed 4-9-14; 8:45 am]
BILLING CODE 8011-01-P