Document ID: SEC-2014-0384-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2014-03-10T04:00Z

[Federal Register Volume 79, Number 46 (Monday, March 10, 2014)]
[Notices]
[Pages 13359-13364]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-05071]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71648; File No. SR-CBOE-2014-017]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change, as Modified 
by Amendment 1, To Amend Its Rules Related to Complex Orders

March 5, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\

[[Page 13360]]

notice is hereby given that on February 19, 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. On March 3, 2014, the Exchange 
filed Amendment No. 1 to the proposed rule change. 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 rules related to complex orders. 
The text of the proposed rule change is provided below.
    (additions are italicized; deletions are [bracketed])

* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *

Rule 6.53C. Complex Orders on the Hybrid System

    (a) Definition: No change.
    (b) Types of Complex Orders: No change.
    (c) Complex Order Book
    No change.
    (d) Process for Complex Order RFR Auction: Prior to routing to 
the COB or once on PAR, eligible complex orders may be subject to an 
automated request for responses (``RFR'') auction process.
    (i) For purposes of paragraph (d):
    (1) ``COA'' is the automated complex order RFR auction process.
    (2) A ``COA-eligible order'' means a complex order that, as 
determined by the Exchange on a class-by-class basis, is eligible 
for a COA considering the order's marketability (defined as a number 
of ticks away from the current market), size, complex order type (as 
defined in paragraphs (a) and (b) above) and complex order origin 
types (as defined in subparagraph (c)(i) above). Complex orders 
processed through a COA may be executed without consideration to 
prices of the same complex orders that might be available on other 
exchanges.
    (ii) Initiation of a COA: On receipt of (1) a COA-eligible order 
with two legs and request from the Trading Permit Holder 
representing the order or the PAR operator handling the order, as 
applicable, that it be COA'd or (2) a complex order with three or 
more legs, regardless of the order's routing parameters or handling 
instructions (except for orders routed for manual handling), the 
[Exchange]System will send an RFR message to all Trading Permit 
Holders who have elected to receive RFR messages. Notwithstanding 
clause (2) of this subparagraph (ii), the System will reject back to 
a Trading Permit Holder any complex order with three or more legs 
that includes a request pursuant to Interpretation and Policy .04 
that the order not COA. Any complex order with three or more legs on 
PAR will COA even if the PAR operator requests that the order not 
COA. The RFR message will identify the component series, the size 
and side of the market of the COA-eligible order and any 
contingencies, if applicable.
    (iii)-(ix) No change.
    . . . Interpretations and Policies:
    .01-.09 No change.
    .10 Execution of Complex Orders in Hybrid 3.0 Classes: For each 
class trading on the Hybrid 3.0 Platform, the Exchange may determine 
to not allow marketable complex orders entered into COB and/or COA 
to automatically execute against individual quotes residing in the 
EBook. The Exchange also may determine for each class trading on the 
Hybrid 3.0 Platform to not allow leg orders to be generated pursuant 
to paragraph (c)(iv) for complex orders resting in the COB. The 
allocation of such marketable complex orders against orders residing 
in the EBook and other complex orders shall be based on the best net 
price(s) and, at the same net price, multiple orders will be 
allocated as provided in paragraphs (c) and/or (d) in the Rule, as 
applicable, subject to the following:
    (a)-(d) No change.
    (e) On receipt of any COA-eligible order, the Exchange will send 
an RFR message to all Trading Permit Holders who have elected to 
receive RFR messages. The RFR message will identify the component 
series, the size and side of the market of the COA-eligible order 
and any contingencies, if applicable.
    .11-.12 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
    Under Rule 8.18, CBOE offers Market-Makers that are obligated to 
provide and maintain continuous electronic quotes in an option class 
the Quote Risk Monitor Mechanism (``QRM''), which is functionality to 
help Market-Makers manage their quotes and related risk. Market-Makers 
with appointments in classes that trade on the Exchange's Hybrid 
Trading System (the ``System'') \3\ must, among other things, provide 
and maintain continuous electronic quotes in a specified percentage of 
series in each class for a specified percentage of time.\4\ To comply 
with this requirement, each Market-Maker may use its own proprietary 
quotation and risk management system to determine the prices and sizes 
at which it quotes. In addition, each Market-Maker may use QRM.
---------------------------------------------------------------------------

    \3\ The System is a trading platform that allows automatic 
executions to occur electronically and open outcry trades to occur 
on the floor of the Exchange. To operate in this ``hybrid'' 
environment, the Exchange has a dynamic order handling system that 
has the capability to route orders to the trade engine for automatic 
execution and book entry, to Trading Permit Holder and PAR Official 
workstations located in the trading crowds for manual handling, and/
or to other order management terminals generally located in booths 
on the trading floor for manual handling. Where an order is routed 
for processing by the Exchange order handling system depends on 
various parameters configured by the Exchange and the order entry 
firm itself.
    \4\ See Rules 8.7(d)(ii)(iv) (Market-Makers), 8.13(d) (Preferred 
Market-Makers), 8.15A(b)(i) (Lead Market-Makers) and 8.85(a)(i) 
(Designated Primary Market-Makers).
---------------------------------------------------------------------------

    A Market-Maker's risk in a class is not limited to the risk in a 
single series of that class. Rather, a Market-Maker is generally 
actively quoting in multiple classes, and each class may comprise 
hundreds or thousands of individual series. The System automatically 
executes orders against a Market-Maker's quotes in accordance with the 
Exchange's priority and allocation rules.\5\ As a result, a Market-
Maker has exposure and risk in all series in which it is quoting in 
each of its appointed classes. QRM is an optional functionality that 
helps Market-Makers, and TPH organizations with which a Market-Maker is 
associated, limit this overall exposure and risk.
---------------------------------------------------------------------------

    \5\ See Rules 6.45A, 6.45B and 6.53C.
---------------------------------------------------------------------------

    Specifically, if a Market-Maker elects to use QRM, the System will 
cancel a Market-Maker's quotes in all series in an appointed class if 
certain parameters the Market-Maker establishes are triggered. Market-
Makers may set the following QRM parameters (Market-Makers may set 
none, some or all of these parameters):
     a maximum number of contracts for that class (the 
``contract limit'') and a specified rolling time period in seconds 
within which such contract limit is to

[[Page 13361]]

be measured (the ``measurement interval'');
     a maximum cumulative percentage (which is the sum of the 
percentages of the original quoted size of each side of each series 
that trade) (the ``cumulative percentage limit'') that the Market-Maker 
is willing to trade within a specified measurement interval; or
     a maximum number of series for which either side of the 
quote is fully traded (the ``number of series fully traded'') within a 
specified measurement interval.
    If the Exchange determines the Market-Maker has traded more than 
the contract limit or cumulative percentage limit, or has traded at 
least the number of series fully traded, of a class during the 
specified measurement interval, the System will cancel all of the 
Market-Maker's electronic quotes in that class (and any other cases 
with the same underlying security) until the Market-Maker refreshes 
those quotes (a ``QRM Incident''). A Market-Maker, or TPH organization 
with which the Market-Maker is associated, may also specify a maximum 
number of QRM Incidents that may occur on an Exchange-wide basis during 
a specified measurement interval. If the Exchange determines that a 
Market-Maker or TPH Organization, as applicable, has reached its QRM 
Incident limit during the specified measurement interval, the System 
will cancel all of the Market-Maker's or TPH Organization's quotes, as 
applicable, and the Market-Maker's orders resting in the book in all 
classes and prevent the Market-Maker and TPH organization from sending 
additional quotes or orders to the Exchange until the earlier to occur 
of (1) the Market-Maker or TPH organization reactivates this ability or 
(2) the next trading day.
    The purpose of the QRM functionality is to allow Market-Makers to 
provide liquidity across most series in their appointed classes without 
being at risk of executing the full cumulative size of all their quotes 
before being given adequate opportunity to adjust their quotes. For 
example, if a Market-Maker can enter quotes with a size of 25 contracts 
in 100 series of class ABC, its potential exposure is 2,500 contracts 
in ABC. To mitigate the risk of having all 2,500 contracts in ABC 
execute without the opportunity to evaluate its positions, the Market-
Maker may elect to use QRM. If the Market-Maker elects to use the 
contract limit functionality and sets the contract limit at 100 and the 
measurement interval at five seconds for ABC, the System will 
automatically cancel the Market-Maker's quotes in all series of ABC if 
100 or more contracts in series of ABC execute during any five-second 
period.
    To assure that all quotations are firm for their full size, the 
System performs the parameter calculations after an execution against a 
Market-Maker's quote occurs. For example, using the same parameters in 
class ABC as above, if a Market-Maker has executed a total of 95 
contracts in ABC within the previous three seconds, a quote in a series 
of ABC with a size of 25 contracts continues to be firm for all 25 
contracts. An incoming order in that series could execute all 25 
contracts of that quote, and, following the execution, the total size 
parameter would add 25 contracts to the previous total of 95 for a 
total of 120 contracts executed in ABC. Because the total size executed 
within the previous five seconds now exceeds the 100 contract limit for 
ABC, the System would, following the execution, immediately cancel all 
of the Market-Maker's quotes in series of ABC. The Market-Maker would 
then enter new quotes for series in ABC. Thus, QRM limits the amount by 
which a Market-Maker's executions in a class may exceed its contract 
limit to the largest size of its quote in a single series of the class 
(or 25 in this example).
    The Exchange proposes to amend Rule 6.53C regarding complex orders 
to limit a potential source of unintended Market-Maker risk related to 
how the System calculates risk parameters under Rule 8.18 when complex 
orders leg into the market.\6\ As discussed above, by checking the risk 
parameters following each execution in a series, the risk parameters 
allow a Market-Maker to provide liquidity across multiple series of a 
class without being at risk of executing the full cumulative size of 
all its quotes. This is not the case, however, when a complex order 
legs into the regular market (i.e. the market for individual, or 
simple, orders). Because the execution of each leg of a complex order 
is contingent on the execution of the other legs, the execution of all 
the legs in the regular market is processed as a single transaction, 
not as a series of individual transactions.
---------------------------------------------------------------------------

    \6\ Rule 6.53C(c)(ii)(1) provides that complex orders in the 
complex order book (``COB'') may execute against individual orders 
or quotes in the book provided the complex order can be executed in 
full (or a permissible ratio) by the orders and quotes in the book. 
Rule 6.53C(d)(v)(1) provides that orders that are eligible for the 
complex order auction (``COA'') may trade with individual orders and 
quotes in the book provided the COA-eligible order can be executed 
in full (or a permissible ratio) by the orders and quotes in the 
book. COA is an automated request for responses (``RFR'') auction 
process. Upon initiation of a COA, the Exchange sends an RFR message 
to all Trading Permit Holders who have elected to receive RFR 
messages, which RFR message identifies the series, size and side of 
the market of the COA-eligible order and any contingencies. Eligible 
market participants may submit responses during a response time 
interval. At the conclusion of the response time interval, COA-
eligible orders are allocated in accordance with Rule 6.53C(d)(v), 
including against individual orders and quotes in the book.
---------------------------------------------------------------------------

    For example, if market participants enter into the System 
individual orders to buy 25 contracts for the Jan 30 call, Jan 35 call, 
Jan 40 call and Jan 45 call in class ABC, the System processes each 
order as it is received and calculates the Market-Makers parameters in 
class ABC following the execution of each 25-contract call. However, if 
a market participant enters into the System a complex order to buy all 
four of these strikes in class ABC 25 times, which complex order 
executes against bids and offers for the individual series (i.e. legs 
into the market), the System will calculate the Market-Maker's 
parameters in class ABC following the execution of all 100 contracts. 
If the Market-Maker had set the same parameters in class ABC as 
discussed above (100-contract limit with five-second measurement 
interval) and had executed 95 contracts in class ABC within the 
previous three seconds, the amount by which the next transaction might 
exceed 100 is limited to the largest size of its quote in a single 
series of the class. In that example, since the largest size of the 
Market-Maker's quotes in any series was 25 contracts, the Market-Maker 
could not have exceeded the 100-contract limit by more than 20 
contracts (95 + 25 = 120). However, with respect to the complex order 
with four legs 25 times, the next transaction against the Market-
Maker's quotes potentially could be as large as 100 contracts 
(depending upon whether there are other market participants at the same 
price), creating the potential in this example for the Market-Maker to 
exceed the 100-contract limit by 95 contracts (95 + 100 = 195) instead 
of 20 contracts.
    As this example demonstrates, legging of complex orders into the 
regular market presents higher risk to Market-Makers than executing 
their quotes against individual orders entered in multiple series of a 
class in the regular market, because it may result in Market-Makers 
exceeding their risk parameters by a greater number of contracts. This 
risk is directly proportional to the number of legs associated with a 
complex order. Market-Makers have expressed concerns to the Exchange 
regarding this risk.
    To address this Market-Maker risk, the Exchange proposes to require 
all complex orders with three or more legs

[[Page 13362]]

to COA prior to entering the COB.\7\ Under Rule 6.53C(d)(i)(2), the 
Exchange may determine on a class-by-class which complex orders are 
eligible for COA, including by complex order type and origin type.\8\ 
Rule 6.53C(d)(ii) provides that the Exchange will initiate a COA on 
receipt of a COA-eligible order and request from the Trading Permit 
Holder representing the order that it be COA'd. The Exchange proposes 
to amend Rule 6.53C(d)(ii) to provide that the System\9\ will initiate 
a COA on receipt of (1) a COA-eligible order with two legs and request 
from the Trading Permit Holder representing the order that it be COA'd 
or (2) a complex order with three or more legs, regardless of the 
order's routing parameters (e.g., request to route directly to COB, 
all-or-none order, immediate-or-cancel) or handling instructions 
(except for orders routed for manual handling).\10\ Thus, all complex 
orders in Hybrid classes with three or more legs will automatically COA 
(other than those routed for manual handling) prior to entering the COB 
where they can leg into the market.\11\ Additionally, the Exchange 
proposes to amend Rule 6.53C(d)(ii) to provide that notwithstanding 
proposed clause (2) described above, the System will reject back to a 
Trading Permit Holder any complex order with three or more legs that 
includes a request pursuant to Interpretation and Policy .04 that the 
order not COA.\12\ This will prevent a Trading Permit Holder from using 
a routing parameter request to not COA a complex order with three or 
more legs to bypass the protection provided by the automatic COA 
functionality proposed in this filing while providing the Trading 
Permit Holder with an opportunity to reconsider how to handle the 
complex order.
---------------------------------------------------------------------------

    \7\ This proposed change applies to Hybrid classes only, and not 
Hybrid 3.0 classes. The Exchange does not believe the risk discussed 
in this rule filing is present in Hybrid 3.0 classes. The proposed 
rule change amends Rule 6.53C, Interpretation and Policy .10 to 
indicate that complex orders in Hybrid 3.0 classes, regardless of 
the number of legs, will COA in the same manner they currently do.
    \8\ Currently, in all Hybrid classes, customer, firm and broker-
dealer complex orders are eligible for COA, and all complex order 
types except for immediate-or-cancel (``IOC'') orders are eligible 
for COA in all Hybrid classes. Additionally, only marketable orders 
and ``tweeners'' (limit orders bettering the same side of the 
derived net market) are eligible for COA. For Hybrid 3.0 classes 
(i.e. SPX), all complex order types (including IOC orders) are 
eligible for COA, but only customer complex orders are eligible for 
COA. See Regulatory Circulars RG06-73, RG08-38 and RG08-97.
    \9\ The proposed rule change amends the language to say that the 
System will send the RFR message rather than the Exchange. Because 
the System will automatically send the RFR message when the 
conditions set forth in Rule 6.53C(d)(ii) are met, the Exchange 
believes using the term ``System'' in the rule text is appropriate.
    \10\ The Exchange notes that if a complex order with three or 
more legs contains an instruction to route for manual handling, such 
as to PAR, and through such manual handling routes to the COB, the 
proposed rule change provides that order will COA prior to entry on 
the COB, even if the PAR operator requests that the order not COA.
    \11\ The Exchange notes that this automatic COA applies only to 
complex orders and not stock-option orders.
    \12\ Rule 6.53C, Interpretation and Policy .04 provides that 
Trading Permit Holders routing complex orders directly to the COB 
may request that the complex orders be COA'd on a class-by-class 
basis and Trading Permit Holders with resting complex orders on PAR 
may request that complex orders be COA'd on an order-by-order basis. 
As discussed above, the Exchange intends to propose in a separate 
rule filing to amend Interpretation and Policy .04 to allow Trading 
Permit Holders to request that complex orders not COA on an order-
by-order basis, in addition to a class-by-class basis.
---------------------------------------------------------------------------

    The Exchange notes that approximately 90% of complex orders 
submitted to the Exchange have only two legs. Additionally, as 
discussed above, orders in Hybrid classes of all order types except IOC 
orders and all order origin codes except Market-Maker and away market-
maker orders are currently COA-eligible.\13\ Currently, all Trading 
Permit Holders have requested that all of their COA-eligible orders in 
Hybrid classes process through COA upon entry into the System. Thus, 
the proposed rule change will only impact a small percentage of complex 
orders that enter into the System, as a large percentage of complex 
orders entered into the System are only two legs or already COA prior 
to execution. The Exchange also notes that complex orders with three or 
more legs will still have opportunities for execution through COA or on 
the COB if they do not execute at the end of the COA (including 
execution with the leg markets). The Exchange notes that the rules 
contain provisions that prevent the execution of complex orders that 
might otherwise be executable.\14\ Thus, the Exchange believes that 
requiring complex orders with three or more legs to COA prior to 
entering COB and legging into the regular market does not create any 
unusual circumstances for the System. The Exchange believes that the 
potential risk to Market-Makers in the regular market of allowing 
orders with three or more legs to directly enter COB and leg into the 
market far outweighs the potential benefit of continuing to allow COA 
to be voluntary for a limited number of orders.
---------------------------------------------------------------------------

    \13\ See supra note 8.
    \14\ See, e.g., Rules 6.45A(a) and 6.45B(a) (priority overlays, 
such as public customer) and Rule 6.53C, Interpretation and Policy 
.08 (price check parameters).
---------------------------------------------------------------------------

    The Exchange believes that requiring complex orders in Hybrid 
classes with three or more legs to COA prior to entering COB and 
legging into the market will discourage market participants from 
continuing to enter the ``complex orders'' that expose Market-Makers to 
the risk described above. Those ``complex orders'' that primarily 
create this risk are generally IOC complex orders (which are the only 
order type that currently does not COA in Hybrid classes) with a large 
number of legs that generally execute immediately against prices in the 
leg markets, which do not appear to have investment strategies similar 
to traditional complex orders but instead are specifically designed to 
circumvent QRM settings. The proposed rule change eliminates the 
possibility of immediate executions of these ``complex orders.'' Market 
participants may still enter these ``complex orders.'' However, if they 
do, the ``complex orders'' will COA, which COA will allow Market-Makers 
to become aware of these ``complex orders'' and have adequate 
opportunity to react accordingly, including to adjust their quotes to 
avoid circumvention of their QRM settings. If a Market-Maker receives 
an RFR for a COA for one of these ``complex orders'' in one of its 
appointed Hybrid classes, and the Market-Maker believes the order may 
execute against its quotes and cause executions that significantly 
exceed its contract limit in that class, the Market-Maker may adjust 
its quotes as it deems necessary to reduce its risk exposure prior to 
the ``complex order'' legging into the market and being presented to 
the Market-Maker for execution. The Exchange believes the proposed rule 
change will allow Market-Makers to better manage their risk in their 
appointments, as it will reduce the risk of these ``complex orders'' 
causing executions that significantly exceed Market-Makers' risk 
parameters. The Exchange believes this reduced risk will encourage 
Market-Makers to quote larger size, which will increase liquidity and 
enhance competition in those classes.
    The Exchange notes that the proposed rule change does not impact 
the allocation of complex orders or relieve Market-Makers of their 
obligations to provide continuous electronic quotes under the Exchange 
Rules or to provide ``firm'' quotes pursuant to CBOE Rule 8.51 or Rule 
602 of Regulation NMS.
    The proposed rule change also amends Rule 6.53C(d)(ii) to provide 
that PAR operators handling an order may request that a COA-eligible 
order be

[[Page 13363]]

COA'd. Currently, Rule 6.53C(d)(ii) states that a Trading Permit Holder 
representing an order may request that the order be COA'd. However, 
other parts of the rules provide that orders resting on PAR may also 
COA.\15\ The introductory language to Rule 6.53C(d) also states that 
complex orders may be subject to COA once on PAR. Currently, the part 
of the rule regarding initiation of a COA states that Trading Permit 
Holders may initiate a COA. In order to have more consistency within 
the rules, the Exchange believes that it is appropriate to include in 
the part of the rule that describes the initiation of a COA that orders 
on PAR may be submitted to COA by the PAR operator, in addition to 
orders submitted directly to the System by Trading Permit Holders.
---------------------------------------------------------------------------

    \15\ See, e.g., Rule 6.53C, Interpretation and Policy .04(a) 
(which states that Trading Permit Holders with resting complex 
orders on PAR may request that complex orders be COA'd).
---------------------------------------------------------------------------

    The Exchange will announce the implementation date of the proposed 
rule change in a Regulatory Circular to be published no later than 90 
days following the effective date. The implementation date will be no 
later than 180 days following the effective date.
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.\16\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \17\ 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) \18\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes it is reasonable to require 
complex orders in Hybrid classes with three or more legs to COA. In 
this respect, the Exchange notes that the vast majority of complex 
orders in Hybrid classes consist of only two legs, and the majority of 
complex orders already COA upon entry into the System--those orders 
will be unaffected by this proposed rule change. The proposed rule 
change will essentially only impact the complex orders in Hybrid 
classes with three or more legs that are currently not eligible for COA 
(many of which the Exchange believes do not have investment strategies 
of traditional complex orders). The Exchange believes this impact is 
minimal, as these orders will still have opportunities for execution 
through a COA, in the COB, or in the leg markets following the end of 
the COA. Further, the Exchange believes that the potential risk of not 
requiring these orders to COA prior to entering the COB and legging 
into the market limits the amount of liquidity that Market-Makers are 
willing to provide in the regular market. In particular, Market-Makers 
may reduce the size of their quotations in the regular market because 
of the presence of these ``complex orders'' that are designed to 
circumvent QRM and risk the execution of the cumulative size of Market-
Makers' quotations across multiple series without Market-Makers' being 
aware of these ``complex orders'' or having an opportunity to adjust 
their quotes. Accordingly, the Exchange believes that reducing Market-
Maker risk in the regular market by requiring complex orders in Hybrid 
classes with three or more legs to COA will benefit investors by 
encouraging additional liquidity in the regular market. This potential 
benefit to investors far exceeds any perceived detriment to requiring 
certain ``complex'' orders to COA prior to potential interaction with 
the leg markets. The Exchange also believe it is appropriate to reject 
any complex orders with three or more legs for which a Trading Permit 
Holder does not include a COA request, and to automatically COA any 
complex order with three or more legs on PAR even if the PAR operator 
requests that the order not COA, because a Trading Permit Holder or PAR 
operator, as applicable, would otherwise be able to bypass this Market-
Maker protection.
    The Exchange also believes the proposed rule change to require all 
complex orders with three or more legs to COA is consistent with the 
requirement that Market-Makers' quotes be firm under Rule 602 of 
Regulation NMS.\19\ The proposed rule change does not relieve Market-
Makers of their obligation to provide ``firm'' quotes. If a complex 
order in a Hybrid class with three or more legs goes through COA and 
then legs into the market for execution upon completion of the COA, at 
which point the complex order would execute against a Market-Maker's 
quotes based on priority rules, the Market-Maker must execute its 
quotes against the order at its then-published bid or offer up to its 
published quote size, even if such execution would cause the Market-
Maker to significantly exceed its risk parameters. However, as 
discussed above, prior to the end of COA (and thus prior to a complex 
order legging into the market), a Market-Maker may adjust its published 
quotes to manage its risk in a class as it deems necessary, including 
to prevent executions that would exceed its risk parameters. In this 
case, the firm quote rule does not obligate the Market-Maker to execute 
its quotes against the complex order at the quote price and size that 
was published when the order entered the System and initiated the COA. 
Rather, the Market-Maker's firm quote obligation applies only to its 
disseminated quote at the time an order is presented to the Market-
Maker for execution, which presentation does not occur until the System 
processes the order against the leg markets after completion of the 
COA.\20\ Thus, the

[[Page 13364]]

proposed rule change is consistent with the firm quote rule.
---------------------------------------------------------------------------

    \19\ Rule 602(b)(2) obligates a Market-Maker to execute any 
order to buy or sell a subject security presented to it by another 
broker or dealer or any other person belonging to a category of 
persons with whom the Market-Maker customarily deals, at a price at 
least as favorable to the buyer or sell as the Market-Maker's 
published bid or offer in any amount up to its published quotation 
size. Rule 602(b)(3) provides that no Market-Maker is obligated to 
execute a transaction for any subject security to purchase or sell 
that subject security in an amount greater than its revised 
quotation size if, prior to the presentation of an order for the 
purchase or sale of a subject security, the Market-Maker 
communicated to the Exchange a revised quotation size. Similarly, no 
Market-Maker is obligated to execute a transaction for any subject 
security if, before the order sought to be executed is presented, 
the Market-Maker has communicated to the Exchange a revised bid or 
offer. CBOE Rule 8.51 imposes a similar obligation (Market-Maker 
must sell (buy) at least the established number of contracts at the 
offer (bid) which is displayed when the Market-Maker receives a buy 
(sell) order at the trading station where the reported security is 
located for trading; however, no Market-Maker is obligated to 
execute a transaction for a listed option when, prior to the 
presentation of an order to sell (buy) to the Market-Maker, the 
Market-Maker has communicated to the Exchange a revised quote).
    \20\ See Staff Legal Bulletin No. 16, Transaction in Listed 
Options Under Exchange Act Rule 11Ac1-1, U.S. Securities and 
Exchange Commission, Division of Market Regulation, January 20, 2004 
(``Scenario 3: When an Order is ``Presented'' . . . If an individual 
market maker generates its own quotations . . . and exchange systems 
route incoming orders to the responsible broker-dealer with 
priority, when is an order presented to a responsible broker-dealer? 
Response: . . . . When each market maker is the responsible broker-
dealer with respect to its own quote, an order is presented to it 
when received by the market maker from the exchange system.''). When 
a complex order is processing through COA, the order is still in the 
System and has not yet been presented to a broker or dealer 
(including a Market-Maker) for execution. Only after completion of 
the COA, when the System allocates the complex order for execution 
in accordance with priority rules, will that order be ``presented'' 
to the Market-Maker for firm quote purposes.
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change to provide that 
PAR operators handling an order may request a COA for a COA-eligible 
order is consistent with the Act because the Exchange rules already 
allow orders on PAR to be submitted to COA, as described above. This 
proposed rule change merely includes this ability in the rule provision 
that describes how a COA may be initiated to more completely and 
accurately describe the circumstances in which an order may COA.

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 proposed rule change to 
require all complex orders with three or more legs to COA addresses 
concerns that Market-Makers raised to the Exchange and is intended to 
reduce risk to Market-Makers that are quoting in the regular market. 
CBOE believes that the proposed rule change will promote competition by 
encouraging Market-Makers to increase the size of and to more 
aggressively price their quotes, which will increase liquidity on the 
Exchange. The proposed rule change applies in the same manner to all 
complex orders in Hybrid classes of three or more legs and is intended 
to reduce risk for all Market-Makers that electronically quote in 
Hybrid classes.
    The proposed rule change to provide that PAR operators handling an 
order may request a COA for a COA-eligible order is consistent with 
current Exchange rules and thus has no competitive impact.

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-2014-017 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2014-017. 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-2014-017, and should be submitted on or before March 31, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
---------------------------------------------------------------------------

    \21\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-05071 Filed 3-7-14; 8:45 am]
BILLING CODE 8011-01-P