Document ID: SEC-2015-0872-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2015-05-20T04:00Z

[Federal Register Volume 80, Number 97 (Wednesday, May 20, 2015)]
[Notices]
[Pages 29142-29143]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-12141]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74960; File No. SR-CBOE-2015-029]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of a Proposed Rule Change 
Relating to Stock-Option Order Handling

May 14, 2015.

I. Introduction

    On March 16, 2015, Chicago Board Options Exchange, Incorporated 
(``CBOE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and 
Rule 19b-4 thereunder,\2\ a proposed rule change to amend its rules 
regarding the handling and processing of stock-option orders on the 
Exchange. The proposed rule change was published for comment in the 
Federal Register on April 1, 2015.\3\ The Commission received no 
comments on the proposal. This order grants approval of the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 74590 (March 26, 
2015), 80 FR 17528 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to amend its rules regarding the handling and 
processing of stock-option orders represented in open outcry on the 
floor of the Exchange. As described in more detail below, the Exchange 
proposes to amend CBOE Rule 6.48 to allow Trading Permit Holders 
(``TPHs'') or PAR Officials \4\ to electronically route the stock 
component of a stock-option order represented in open outcry on the 
floor of the CBOE directly from a Public Automated Routing (``PAR'') 
workstation \5\ to an Exchange-designated broker-dealer for electronic 
execution on a stock venue. In addition, the Exchange proposes to amend 
Interpretation .06 to Rule 6.53C to require that the Clearing Trading 
Permit Holder (``CTPH'') \6\ identified as the Designated Give Up by 
the executing TPH in accordance with CBOE Rule 6.21 on a stock-option 
order enter into a brokerage agreement with the non-affiliated 
Exchange-designated broker-dealers before the TPH electronically routes 
the stock component of the stock-option order to that Exchange-
designated broker-dealer for execution on a stock venue.
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    \4\ See Notice, supra note 3 at 17529, defining ``PAR 
Officials.''
    \5\ Id., defining ``PAR workstations.''
    \6\ Id. at footnote 5, discussing the obligations of TPHs and 
CTPHs.
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    Routing Stock Component of a Stock-Option Order via PAR. Currently, 
the stock component of stock-option orders handled and processed on the 
Exchange in open outcry are manually transmitted (e.g., via telephone) 
by the PAR user (i.e., a floor broker or PAR Official) on the floor to 
a broker on a stock trading venue for execution. The Exchange proposes 
to adopt subparagraph (d) to Exchange Rule 6.48 (Contract Made on 
Acceptance of Bid or Offer) to allow TPHs or PAR Officials to 
electronically route the stock component of such stock-option orders to 
an Exchange-designated broker-dealer not affiliated with the Exchange 
for electronic execution at a stock trading venue directly from PAR.\7\ 
Proposed Rule 6.48(d) also provides that the stock component of a 
stock-option order represented in open outcry may be routed to an 
Exchange-designated broker-dealer not affiliated with the Exchange for 
electronic execution at a stock trading venue as single orders or as 
paired orders (including with orders transmitted from separate PAR 
workstations), and that the stock-option order must comply with the 
Qualified Contingent Trade (``QCT'') Exemption of Rule 611(a) of 
Regulation NMS.\8\ Finally, Rule 6.48(d) would require TPHs who route 
the stock component of a stock-option order represented in open outcry 
through PAR to comply with Rule 6.53C.06, which governs the trading of 
complex orders, including stock-option orders, on the CBOE Hybrid 
System.\9\
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    \7\ See Notice, supra note 3 at 17530.
    \8\ Id.
    \9\ See Proposed Rule 6.48(d).
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    The Exchange represents that for any order whose stock component is 
routed via PAR to an Exchange-designated broker-dealer for execution at 
a stock trading venue, the Exchange-designated broker-dealer would be 
responsible for the proper execution, trade reporting, and submission 
to clearing of the stock trade that is part of the stock-option 
order.\10\ The Exchange also represents that once the stock component 
of a stock-option order is transmitted to the Exchange-designated 
broker-dealer, the Exchange-designated broker-dealers is responsible 
for determining whether the orders may be executed in accordance with 
all of the rules applicable to the execution of equity orders, 
including compliance with applicable short sale, trade-through, and 
reporting rules.\11\
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    \10\ See Notice, supra note 3 at 17530.
    \11\ Id.
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    The Exchange believes that the proposed rule change will support 
more efficient stock-option order execution, streamline the steps 
required for open-outcry stock-option order trading, and enhance the 
Exchange's audit trail by creating a more robust record of the stock 
component of stock-option order executions on the floor of the 
Exchange.\12\ The Exchange also believes that the proposed rule change 
will promote liquidity on the national market system by allowing TPHs 
to more easily use stock-option orders and more quickly send the stock 
component of a stock-option order to a stock trading venue.\13\
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    \12\ Id.
    \13\ See Notice, supra note 3 at 17532.
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    Brokerage Agreement between the Clearing Trading Permit Holder and 
the Exchange-designated Broker-Dealer. Under current Interpretation and 
Policy .06(a) to CBOE Rule 6.53C, the stock component of a stock-option 
order cannot be processed automatically unless the executing TPH has 
entered into a brokerage agreement with one or more Exchange-designated 
broker-dealer(s) not affiliated with the Exchange that can 
electronically execute the equity order on a stock trading venue.\14\ 
Under the proposed rule change, Interpretation and Policy .06 to CBOE 
Rule 6.53C would instead require the CTPH that was previously 
identified by the TPH as the ``Designated Give Up'' pursuant to CBOE 
Rule 6.21 to enter into a brokerage agreement with the non-affiliated 
Exchange-designated broker-dealer(s) before the TPH electronically 
routes the stock component a of stock-option order to the Exchange-
designated broker-dealer for execution at a stock-trading venue.\15\ 
The Exchange notes that it is the CTPH, not the order entry TPH that 
guarantees

[[Page 29143]]

authorization of a trade and accepts financial responsibility for all 
Exchange transactions made by the execution TPH. Accordingly, the 
Exchange believes that, consistent with CBOE Rule 6.21 (relating to 
give-ups), the CTPH should be responsible for order handling and 
processing requirements for trades that it guarantees.\16\ In 
connection with the Exchange's proposal to amend Interpretation and 
Policy .06 to Rule 6.53C, the Exchange also clarified that the stock 
component of a stock-option order represented in open outcry shall be 
routed from PAR to the Exchange-designated broker-dealer for automated 
processing in accordance with the order's terms.\17\
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    \14\ Id. at 17531.
    \15\ Id.
    \16\ Id. at 17532.
    \17\ See Proposed Interpretation and Policy .06(a) to Rule 
6.53C.
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    Conforming and Clarifying Changes. Finally, the Exchange also 
proposes conforming changes to Exchange Rules 6.45A (Priority and 
Allocation of Equity Option Trades on the CBOE Hybrid System) and 6.45B 
(Priority and Allocation of Trades in Index Options and Options on ETFs 
on the CBOE Hybrid System) to reference the revised functionality set 
forth in this proposal.\18\ The Exchange also proposes to specify that 
stock-option orders may be executed against other electronic stock-
option orders in general, rather than state that such orders may be 
executed against other stock-option orders specifically through either 
the COB or COA.\19\
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    \18\ See Notice, supra note 3 at 17531.
    \19\ Id. According to the Exchange, this latter change reflects 
the fact that such orders may be subjected to the Automated 
Improvement Mechanism (``AIM'') as well as executed through the COB 
or COA.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\20\ In particular, the Commission finds that the proposed 
rule change is consistent with the requirements of Section 6(b)(5) of 
the Act,\21\ which requires, among other things, that the Exchange's 
rules be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitation 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; 
and are not designed to permit unfair discrimination between customers, 
issuers, brokers or dealers. The Commission believes that the proposed 
change to extend electronic stock component routing functionality to 
PAR users will create another method for processing stock-option orders 
entered into on the Exchange that is designed to facilitate 
transactions in stock-option orders on the Exchange. The Commission 
also believes that it is reasonable for the CTPH that guarantees a 
stock-option order transaction to enter into a brokerage agreement with 
the Exchange-designated broker-dealer that will execute the stock 
component of the stock-option order on a stock trading venue.
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    \20\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-CBOE-2015-029) be, and it 
hereby is, approved.
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    \22\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-12141 Filed 5-19-15; 8:45 am]
BILLING CODE 8011-01-P