Document ID: SEC-2014-1534-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2014-09-12T04:00Z

[Federal Register Volume 79, Number 177 (Friday, September 12, 2014)]
[Notices]
[Pages 54758-54771]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-21731]

[[Page 54758]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73017; File No. SR-CBOE-2014-062]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change To Adopt 
Extended Trading Hours

September 8, 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 August 26, 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.
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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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its rules to adopt extended trading 
hours. 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

    Currently, transactions in options on individual stocks may be made 
on the Exchange during the normal hours for business established by the 
exchanges currently trading the stocks underlying CBOE options,\3\ 
which is currently 8:30 a.m. through 3 p.m. Chicago time.\4\ 
Additionally, transactions in index options may be effected on the 
Exchange between 8:30 a.m. and 3 p.m. or 3:15 p.m.\5\ (8:30 a.m. 
through 3 p.m. or 3:15 p.m., as applicable, will be referred to as 
``Regular Trading Hours''). Regular Trading Hours are consistent with 
the regular trading hours of the other U.S. options exchanges, unlike 
many U.S. stock and futures exchanges, which allow for trading in some 
of their listed products for various periods of time outside of Regular 
Trading Hours.\6\ CBOE Futures Exchange LLC (``CFE''), a futures 
exchange owned by CBOE's parent company CBOE Holdings, Inc., currently 
makes CBOE Volatility Index[supreg] (``VIX'') futures available for 
trading nearly 24 hours a day, five days a week.\7\
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    \3\ Rule 6.1, Interpretation and Policy .01.
    \4\ All times are Chicago time unless otherwise noted.
    \5\ Rule 24.6.
    \6\ See, e.g., NASDAQ Stock Market LLC Rule 4617 (regular 
trading hours from 9:30 a.m. until 4 p.m. Eastern time and extended 
trading hours from 4 a.m. until 9:30 a.m. and 4 p.m. to 8 p.m. 
Eastern time); and New York Stock Exchange LLC Series 900 (providing 
for an off-hours trading facility to operate outside of the regular 
9:30 a.m. to 4 p.m. Eastern time trading session); see also, e.g., 
Chicago Board of Trade Extended Trading Hours for Grain, Oilseeds 
and Ethanol--Frequently Asked Questions (indicating that certain 
agricultural commodity products are available for electronic trading 
21 hours a day on the CME Globex trading platform); and 
IntercontinentalExchange, Inc. Regular Trading & Support Hours 
(indicating that many of its listed products are available for 
trading for periods of time outside of Regular Trading Hours, 
including overnight sessions). CBOE Stock Exchange, LLC (``CBSX''), 
a stock trading facility of CBOE, also has a rule providing for 
Extended Trading hours (from 7:30 to 8:30 a.m. and 3 to 3:45 p.m.). 
See Rule 51.2(a) (the Exchange notes that CBSX ceased trading 
operations on April 30, 2014).
    \7\ Specifically, the trading week for VIX futures begins on 
Sunday at 5 p.m. and ends on Friday at 3:15 p.m. CFE is closed for 
trading on Monday through Thursday for 15 minutes between 3:15 p.m. 
and 3:30 p.m., and trading for the new business day will begin at 
3:30 p.m. on Monday through Thursday. CFE closes at 3:15 p.m. on 
Friday and remains closed until 5 p.m. on Sunday.
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    Securities trading is a global industry, and investors located 
outside of the United States generally operate during hours outside of 
Regular Trading Hours. The Exchange believes there is global demand 
from investors for options on the S&P 500 Index (``SPX'') and VIX, two 
of CBOE's exclusively listed options,\8\ as alternatives for hedging 
and other investment purposes, particularly as a complementary 
investment tool to VIX futures. However, given that SPX and VIX options 
trade during Regular Trading Hours only, it is difficult for non-U.S. 
investors to take advantage of trading in these options. It is also 
difficult for U.S. investors that trade in non-U.S. markets to use 
these products as part of their global investment strategies. To meet 
this demand, and to keep pace with the continuing internationalization 
of securities markets, the Exchange proposes to offer trading in these 
two exclusively listed options during extended trading hours from 2 
a.m. to 8:15 a.m. Monday through Friday (``Extended Trading Hours''). 
These extended hours will allow market participants to engage in 
trading these options in conjunction with trading VIX futures on CFE 
during these hours.
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    \8\ An ``exclusively listed option'' is an option that trades 
exclusively on an exchange because the exchange has an exclusive 
license to list and trade the option or has the proprietary rights 
in the interest underlying the option. An exclusively listed option 
is different than a ``singly listed option,'' which is an option 
that is not an ``exclusively listed option'' but that is listed by 
one exchange and not by any other national securities exchange.
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    Extended Trading Hours will be a separate trading session from 
Regular Trading Hours, and there will be no carry over from one trading 
session to the other and no interaction between Extended Trading Hours 
and Regular Trading Hours. Additionally, the Extended Trading Hours 
will operate using separate Exchange servers and hardware from those 
used during Regular Trading Hours. To reflect this separation, the 
proposed rule change adds definitions of each trading session. Proposed 
Rule 1.1(qqq) defines ``Regular Trading Hours'' as the hours during 
which transactions in options may be made on the Exchange as set forth 
in Rule 6.1 (which hours are from 8:30 a.m. to either 3 p.m. or 3:15 
p.m. Chicago time, as set forth above).\9\ Proposed Rule 1.1(rrr) 
defines ``Extended Trading Hours'' as the hours outside of Regular 
Trading Hours during which the Exchange may be open for trading as set 
forth in Rule 6.1. These definitions also indicate that each may be 
referred to as a trading session throughout the Rules. While most of 
the Exchange rules apply to trading during both trading sessions, 
certain differences will apply to Extended Trading Hours as further 
described below. Having a separate definition for each trading session 
allows the

[[Page 54759]]

Exchange Rules to reflect these differences and the separation of the 
trading sessions.
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    \9\ Rule 6.1, Interpretation and Policy .01 currently states 
that the Board of Directors has resolved that, except under unusual 
conditions as may be determined by the Board or its designee, hours 
during which transactions in options on individual stocks may be 
made on the Exchange shall correspond to the normal hours for 
business established by the exchanges currently trading the stock 
underlying CBOE options. The proposed rule change makes this 
paragraph (a) and indicates such hours will be Regular Trading 
Hours.
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    Rule 6.1 states that the Exchange's Board of Directors will 
determine the days the Exchange will be open for business and the hours 
of such days during which transactions may be made on the Exchange. The 
proposed rule change deletes the definition of business days currently 
included in Rule 6.1 (which is being moved to proposed Rule 1.1(sss) as 
discussed below) and adds that the Board of Directors will determine 
both Regular Trading Hours and Extended Trading Hours. Proposed Rule 
6.1, Interpretation and Policy .01(b) provides that, similar to Regular 
Trading Hours, the Board of Directors has resolved that, except under 
unusual conditions as may be determined by the Board or its designee, 
Extended Trading Hours are from 2 a.m. to 8:15 a.m. Chicago time on 
Monday through Friday.\10\ The beginning of Extended Trading Hours 
coincides with the opening of European trading markets, which is 
consistent with one of the primary purposes of providing Extended 
Trading Hours, which is to provide additional investment opportunities 
for investors located outside of the United States. The Exchange may 
determine whether to operate during Extended Trading Hours; \11\ if it 
does, then transactions in options designated as eligible for trading 
during that trading session (as further described below) may be made on 
the Exchange.
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    \10\ The proposed rule change makes conforming changes to Rule 
24.6 (including Interpretation and Policy .01) regarding the days 
and hours of business with respect to index options.
    \11\ The Exchange believes it is appropriate to retain 
flexibility to determine whether to operate during Extended Trading 
Hours so that it can complete all system work and other preparations 
prior to implementing Extended Trading Hours and so that it can 
evaluate trading activity during Extended Trading Hours once 
implemented and determine whether to continue or modify the trading 
session (subject to applicable rule filings).
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    The proposed rule change also adds Rule 1.1(sss) to provide that a 
``business day'' or ``trading day'' is a day on which the Exchange is 
open for trading during Regular Trading Hours. A business day or 
trading day will include the Regular Trading Hours and Extended Trading 
Hours that occur on that day. If the Exchange is not open for Regular 
Trading Hours on a day (for example, because it is an Exchange 
holiday), then it will not be open for Extended Trading Hours on that 
day.
    Related to the separation of the trading sessions, the Book \12\ 
used during Regular Trading Hours is not connected to the Book used 
during Extended Trading Hours. Therefore, orders and quotes in the 
Regular Trading Hours Book will not be displayed in the Extended 
Trading Hours Book, and vice versa. Additionally, orders and quotes 
submitted during Regular Trading Hours will not trade with orders and 
quotes submitted during Extended Trading Hours.\13\
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    \12\ The proposed rule change adds Rule 1.1(ppp) to define the 
term ``Book'' as the electronic book of buy and sell orders and 
quotes maintained by the Hybrid Trading System. ``Hybrid Trading 
System'' refers to the Exchange's trading platform that allows 
Market-Makers to submit electronic quotes in their appointed 
classes. See Rule 1.1(aaa). The Book is also referred to as book, 
electronic book and EBook throughout the Rules, and the term 
``Book'' as used in the Rules will refer to the Book used during 
Regular Trading Hours or Extended Trading Hours, as applicable.
    \13\ As discussed further below, except as set forth in proposed 
Rule 6.1A and except for rules that by their terms are inapplicable 
during Extended Trading Hours or where the context otherwise 
requires, all Exchange rules apply to trading during Extended 
Trading Hours, including the business conduct rules in Chapter IV 
and rules related to doing business with the public in Chapter IX. 
Additionally, a broker-dealer's due diligence and best execution 
obligations apply during Extended Trading Hours.
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    The Exchange believes having separate trading sessions and using a 
separate book for each trading session is appropriate given that, while 
most rules apply in the same manner to both trading sessions, some 
rules differ in how they apply to each session and other rules do not 
apply to both trading sessions (as further discussed below). 
Additionally, as further discussed below, the Exchange expects there to 
be reduced liquidity, higher volatility and wider markets during 
Extended Trading Hours, and investors who submit orders or quotes 
during Regular Trading Hours may not want their orders or quotes to 
trade during Extended Trading Hours given those trading conditions.
    The proposed rule change adds Rule 6.1A, which sets forth the rules 
applicable to trading during Extended Trading Hours (and identifies 
when trading during Extended Trading Hours differs from trading during 
Regular Trading Hours). The Exchange believes it will benefit investors 
to have a primary description of how Extended Trading Hours differs 
from Regular Trading Hours contained in a single place within the 
rules.
    Specifically, proposed Rule 6.1A states the following:
     Applicability of Rules: Proposed paragraph (a) provides 
that all Exchange Rules will apply to trading during Extended Trading 
Hours except as set forth in proposed Rule 6.1A and except for the 
Rules that by their express terms are inapplicable during Extended 
Trading Hours or where the context otherwise requires. For example, the 
proposed rule change amends Rule 24.3 to provide that rule applies only 
during [sic] Regular Trading Hours.\14\ Additionally, because the 
proposed rule change provides that all trading during Extended Trading 
Hours will be electronic and on the Hybrid System, all rules related to 
open outcry trading and the Hybrid 3.0 System will be inapplicable 
during Extended Trading Hours.
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    \14\ The proposed rule change makes conforming changes to Rules 
6.1, Interpretations and Policies .03 and .05, 6.2, Interpretations 
and Policies .01-.03 and .05, 6.2A and 6.2B, Interpretations and 
Policies .01 and .08 to indicate provisions of those Rules that will 
not apply during Extended Trading Hours and will thus apply during 
Regular Trading Hours only.
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     Electronic Trading Only: Proposed paragraph (b) provides 
that all trading during Extended Trading Hours will be electronic on 
the Hybrid Trading System only (excluding the Hybrid 3.0 Platform) and 
that there will be no open outcry trading on the floor during Extended 
Trading Hours. Because various Rules accommodate open outcry and 
electronic trading by routing orders to PAR workstations,\15\ the order 
entry firm's booth or otherwise for manual handling under certain 
circumstances,\16\ the proposed rule change notes that if the Rules 
provide that an order should route to PAR, the System will return the 
order to the Trading Permit Holders during Extended Trading Hours.
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    \15\ PAR workstations are located in the trading crowds on the 
trading floor to allow manual handling of orders by Trading Permit 
Holders and Exchange PAR Officials. Because there will be no trading 
floor during Extended Trading Hours, PAR workstations will also not 
be available.
    \16\ For example, Rule 6.13(b)(v) states that if an order does 
not automatically execute because it does not satisfy the price 
check parameters set for the applicable class pursuant to that rule, 
then the order may route to PAR or, at the order entry firm's 
discretion, to the order entry firm's booth; if the order is not 
eligible to route to PAR, then it will be cancelled. Pursuant to 
proposed Rule 6.1A(b), during Extended Trading Hours, the system 
would return this order to the Trading Permit Holder.
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     Eligibility: Proposed paragraph (c) provides that the 
Exchange may designate as eligible for trading during Extended Trading 
Hours any exclusively listed option that the Exchange has designated 
for trading pursuant to Rules 24.2 and 24.9 (see discussion below for 
additional details).\17\ As indicated above, the Exchange has approved 
SPX \18\ and VIX

[[Page 54760]]

for trading on the Exchange during Extended Trading Hours. Any series 
in these classes that are expected to be open for trading during 
Regular Trading Hours will be open for trading during Extended Trading 
Hours on that same trading day (subject to Rules 6.2B and 24.13, 
Interpretation and Policy .03, which set forth procedures for the 
opening of trading). Flexible Exchange Options (``FLEX Options''), 
which trade pursuant to Chapters XXIVA and XXIVB, will not be eligible 
for trading during Extended Trading Hours.\19\
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    \17\ The proposed rule change makes a conforming change to Rule 
24.6 (including Interpretation and Policy .01) (regarding days and 
hours of business for index options transactions) to indicate that 
the Exchange may authorize transactions in index options identified 
in Rule 6.1A during Extended Trading Hours.
    \18\ The Exchange notes that SPX currently trades on the Hybrid 
3.0 trading platform during Regular Trading Hours (weekly SPX series 
trade on the Hybrid trading platform during Regular Trading Hours). 
Pursuant to proposed Rule 6.1A(b), SPX will trade on the Hybrid 
trading platform (and not the Hybrid 3.0 trading platform) and thus 
pursuant to rules applicable to the Hybrid trading platform (rather 
than the Hybrid 3.0 trading platform) during Extended Trading Hours.
    \19\ Rules 24A.4(b) and (c) and 24B.4(b) and (c) provide the 
Exchange with the authority to approve and open for trading any FLEX 
Options series on any index or security that is eligible for non-
FLEX Options trading under Rules 24.2 or 5.3, respectively. 
Therefore, not listing FLEX Options during Extended Trading Hours is 
consistent with the Exchange's current authority.
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     Participants: Proposed paragraph (d) provides that Trading 
Permit Holders must obtain an Extended Trading Hours Trading Permit to 
trade during Extended Trading Hours pursuant to the process set forth 
in Rule 3.1.\20\ As is true during Regular Trading Hours, only 
authorized Trading Permit Holders (including their nominees) and their 
associated persons may access the Hybrid Trading System (this would 
apply to any non-U.S. based Trading Permit Holders).\21\ The Exchange 
notes that while there is a distinction between Trading Permits with 
respect to trading sessions, there is no distinction for Trading Permit 
Holder status with respect to trading sessions. In other words, a 
current Trading Permit Holder does not need to reapply to become an 
Extended Trading Hours Trading Permit Holder. Trading Permit Holders 
may trade during Regular Trading Hours and/or Extended Trading Hours as 
long as they hold a Trading Permit(s) for the applicable trading 
session.\22\ Because Regular Trading Hours and Extended Trading Hours 
are separate, the Exchange believes it is appropriate to have separate 
Trading Permits for the trading sessions.
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    \20\ The proposed rule change amends Rule 3.1(a)(iv) to provide 
that (a) the Exchange will also have the authority to issue 
different types of trading permits to trade during Regular Trading 
Hours or Extended Trading Hours and (b) Trading Permits for one 
trading session do not allow trading during another trading session. 
The Exchange intends to issue Regular Trading Hours Trading Permits 
and Extended Trading Hours Trading Permits. A Regular Trading Hours 
Trading Permit allows the holder to trade during Regular Trading 
Hours but not Extended Trading Hours, and an Extended Trading Hours 
Trading Permit allows the holder to trade during Extended Trading 
Hours but not Regular Trading Hours. The Exchange notes that Rule 
3.1(a)(vi) provides the Exchange with authority to limit or reduce 
the number of any type of Trading Permit it can issue. Thus, under 
that rule, the Exchange will be able to limit the number of Extended 
Trading Hours Trading Permits it issues, which may be different than 
the limit of Regular Trading Hours Trading Permits (a different 
Trading Permit type) it issues. The Exchange intends to set the 
initial limit of Extended Trading Hours Trading Permits at 300 
Market-Maker Trading Permits and 150 Electronic Access Trading 
Permits (compared to 900 Market-Maker Trading Permits, 150 Floor 
Broker Trading Permits and 150 Electronic Access Trading Permits for 
Regular Trading Hours), as set forth in Regulatory Circular RG14-092 
(dated June 13, 2014). The Exchange expects fewer Market-Makers (due 
to fewer products traded) during Extended Trading Hours, and Floor 
Broker Trading Permits are unnecessary during Extended Trading Hours 
(due to no open outcry trading).
    \21\ See Rule 6.23A(d). The Exchange's Web site provides the 
process pursuant to which Trading Permit Holders and their 
associated persons may receive authorization from the Exchange to 
access the Hybrid Trading System. Additionally, pursuant to Rule 
3.8(a), all Trading Permit Holder organizations must designate an 
individual nominee to represent the organization with respect to 
each of the organization's Trading Permits. Among other things, a 
nominee must be approved to be a Trading Permit Holder. Thus, a 
nominee under Rule 3.8 would be able to access the Exchange as a 
Trading Permit Holder and on behalf of the applicable Trading Permit 
Holder organization in accordance with the rules. This is consistent 
with Rule 6.1, Interpretation and Policy .05, which provides that 
the term ``Trading Permit Holder'' as defined in the Exchange's 
bylaws and used in the Exchange's rules includes a nominee of a 
Trading Permit Holder organization unless the context otherwise 
requires.
    \22\ The Commission recently approved changes to Rule 6.21 
related to give ups of Clearing Trading Permit Holders that have not 
yet been implemented. See Securities Exchange Act Release No. 34-
72668 (July 24, 2014), 79 FR 44229 (July 30, 2014) (SR-CBOE-2014-
048). Consistent with the changes described above regarding Trading 
Permits for each trading session, the proposed rule change amends 
the recently approved rule text in Rule 6.21 to provide that the 
Clearing Trading Permit Holder that is named as the give up for a 
transaction must hold a Trading Permit for the trading session in 
which the transaction occurred. A Clearing Trading Permit Holder 
must be operating in a trading session to be able to clear 
transactions during that trading session, and thus must hold a 
Trading Permit for that trading session.
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     Market-Makers: Proposed paragraph (e) provides that a 
Market-Maker's appointment during Regular Trading Hours does not apply 
during Extended Trading Hours.\23\ This is consistent with the 
separation of the two trading sessions. Additionally, because Extended 
Trading Hours will occur during overnight hours in Chicago (and trading 
levels are expected to be lower than those during Regular Trading 
Hours), the Exchange does not believe that Market-Maker Regular Trading 
Hours appointments should apply during Extended Trading Hours (and thus 
impose obligations on Market-Makers during that trading session who may 
not want to trade during that trading session).
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    \23\ The proposed rule change makes conforming changes to Rule 
8.3.
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    Market-Makers may request Extended Trading Hours appointments in 
accordance with Rule 8.3 (and proposed subparagraph (e)(i)). Similar to 
Regular Trading Hours, proposed Rule 6.1A(e)(i) provides that Market-
Makers can create a Virtual Trading Crowd appointment during Extended 
Trading Hours, which confers the right to quote electronically during 
Extended Trading Hours in the appropriate number of classes selected 
from the Extended Trading Hours tier and related appointment costs. For 
Extended Trading Hours, the appointment cost for each of VIX and SPX 
options will be 0.5. Each Extended Trading Hours Trading Permit will 
have an appointment credit of 1.0 (the same as a Regular Trading Hours 
Trading Permit), so at the launch of Extended Trading Hours, a Market-
Maker will only need to hold one Extended Trading Hours Trading Permit 
if it wants to quote in both SPX and VIX during Extended Trading 
Hours.\24\
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    \24\ The proposed rule change makes conforming changes to Rule 
8.3(c) to indicate that appointments pursuant to that provision 
(including the appointment costs) apply during Regular Trading Hours 
only and that the quarterly rebalancing of appointment costs 
excludes Extended Trading Hours tier classes.
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    Rule 8.7(d)(ii) requires Market-Makers that trade more than 20% of 
contract volume electronically in an appointed class to (a) comply with 
bid/ask differential requirements determined by the Exchange on a 
class-by-class basis, (b) maintain continuous electronic quotes in 60% 
of the non-adjusted option series of in each appointed class \25\ with 
a time to expiration of less than nine months for 90% of the time when 
the Market-Maker is quoting in a class, with initial quote size for the 
minimum number of contracts determined by the Exchange on a class-by-
class basis (which must be at least one contract) and (c) provide a 
two-sided market in response to a request for quote in the crowd 
complying with bid/ask differential requirements. Rule 1.1(ccc) 
provides that a Maker will be deemed to have provided continuous 
electronic quotes if it provides electronic two-sided quotes for 90% of 
the time that the Market-Maker is required to provide electronic quotes 
in an appointed class on a given trading day.
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    \25\ The Exchange recently amended this provision to, among 
other things, apply to all appointed classes collectively, which 
change is effective but not yet operative. Securities Exchange Act 
Release No. 34-72742 (August 1, 2014), 79 FR 46282 (August 7, 2014) 
(SR-CBOE-2014-059).

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[[Page 54761]]

    Proposed paragraph (e)(ii) provides that, notwithstanding the 20% 
contract volume requirement in Rule 8.7(d)(ii), Market-Makers with 
Extended Trading Hours appointments must comply with the quoting 
obligations set forth in Rule 8.7(d)(ii) (except during Extended 
Trading Hours the Exchange may determine to have no bid/ask 
differential requirements as set forth in subparagraph (A) and there 
will be no open outcry quoting obligation as set forth in subparagraph 
(C)) \26\ as well as other obligations set forth in Rule 8.7. The 
Exchange notes that Market-Makers with appointments for Extended 
Trading Hours must still otherwise comply with applicable Exchange 
Rules that apply during Extended Trading Hours. Because of the expected 
lower liquidity, wider spreads and higher volatility during Extended 
Trading Hours, the Exchange believes it is appropriate to have the 
ability to not impose bid/ask differential requirements on Market-
Makers during Extended Trading Hours in order to allow Market-Makers to 
quote under those conditions.\27\ The proposed rule change allows the 
Exchange to impose bid/ask differential requirements during Extended 
Trading Hours (which it would announce by Regulatory Circular) if it 
thinks such an obligation would be appropriate. Additionally, because 
there is no open outcry trading during Extended Trading Hours, the 
Exchange believes it is appropriate to not apply the open outcry 
quoting obligation to Market-Makers during Extended Trading Hours.
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    \26\ The proposed rule change makes a conforming change to Rule 
8.7(d) to indicate that Rule 8.7(d)(i) applies during Regular 
Trading Hours only. Additionally, the proposed rule change amends 
Rule 8.7(d) to state that the 20% threshold will be based on a 
Market-Maker's electronic trading volume during Regular Trading 
Hours only. Because only electronic trading is permitted during 
Extended Trading Hours, the Exchange believes it is appropriate to 
exclude that trading from the determination as to which set of 
obligations applies to a Market-Maker's appointment. For example, if 
a Market-Maker typically conducts most of its trading in its 
appointments in open outcry but elects to participate in Extended 
Trading Hours, it should not have to satisfy the electronic quoting 
obligations during Regular Trading Hours because its Extended 
Trading Hours trading puts the Market-Maker over the 20% threshold. 
It would, however, need to satisfy the continuous electronic quoting 
obligations during Extended Trading Hours.
    \27\ The Exchange notes that other exchanges with substantially 
similar continuous quoting obligations do not impose bid/ask 
differential requirements on Market-Makers during Regular Trading 
Hours (and also do not impose open outcry obligations). See, e.g., 
C2 Options Exchange, Incorporated (C2) Rule 8.5.
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    Additionally, Rule 8.7(d) indicates that the quoting obligations in 
subparagraph (ii) do not apply for the first 90 days after a class 
begins trading and that a Market-Maker must satisfy the quoting 
obligations in subparagraph (ii) for a class beginning the calendar 
quarter following a calendar quarter in which it transacted more than 
20% contract volume electronically in that class. Proposed paragraph 
(e)(ii) provides that, notwithstanding those two provisions, a Market-
Maker with an Extended Trading Hours appointment in a class must 
immediately comply with the quoting obligations in Rule 8.7(d)(ii) 
during Extended Trading Hours. Similar to the reasoning above, because 
all Extended Trading Hours trading will be electronic only, the 
Exchange does not believe the 90-day delay period or calendar quarter 
delay is necessary for Extended Trading Hours.
    Because appointments for each trading session are separate, the 
proposed rule change amends Rule 8.7(d)(iii) to provide that quoting 
obligations of Market-Makers apply per trading session. In other words, 
if a Market-Maker has an appointment in a class during Regular Trading 
Hours and Extended Trading Hours, the Exchange will determine 
compliance with the continuous electronic quoting requirement during 
Regular Trading Hours separately from compliance with the continuous 
electronic quoting requirement during Extended Trading Hours. Thus, a 
Market-Maker must quote in 60% of the non-adjusted series that have a 
time to expiration of less than nine months of an appointment for 90% 
of the time it is quoting during Regular Trading Hours (each trading 
day) and in 60% of the non-adjusted series that have a time to 
expiration of less than nine months of an appointment for 90% of the 
time it is quoting during Extended Trading Hours (each trading 
day).\28\
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    \28\ The proposed rule change makes a conforming change to Rule 
1.1(ccc), which is the definition of continuous electronic quotes, 
to state that the percentage of time a Market-Maker must provide 
continuous electronic quotes is determined in the applicable trading 
session. Pursuant to Rule 8.7, Interpretation and Policy .01, the 
continuous electronic quoting obligation does not apply to intra-day 
add-on series on the day during which such series are added for 
trading.
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    Pursuant to proposed paragraph (e)(iii)(A), the Exchange may 
approve one or more Market-Makers to act as Lead Market-Makers 
(``LMMs'') in each class during Extended Trading Hours in accordance 
with Rule 8.15A for terms of at least one month. However, to the extent 
the Exchange approves Market-Makers to act as LMMs during Extended 
Trading Hours, proposed paragraph (e)(iii)(B) provides that LMMs must 
comply with the continuous quoting obligation and other obligations of 
Market-Makers described above but not the obligations set forth in Rule 
8.15A \29\ during Extended Trading Hours for their allocated classes. 
It further provides that LMMs do not receive a participation 
entitlement as set forth in Rules 6.45B and 8.15B during Extended 
Trading Hours.
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    \29\ Rule 8.15A (and Rule 1.1(ccc)) requires LMMs to provide 
continuous electronic quotes in at least the lesser of 99% of the 
non-adjusted series or 100% of the non-adjusted series minus one 
call-put pair within their appointed classes, with the term call-put 
pair referring to one call and one put that cover the same 
underlying instrument and have the same expiration date and exercise 
price, for 90% of the time.
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    Pursuant to proposed paragraph (e)(iii)(C), if an LMM (1) provides 
continuous electronic quotes in at least the lesser of 99% of the non-
adjusted series or 100% of the non-adjusted series minus one call-put 
pair in an Extended Trading Hours allocated class (excluding intra-day 
add-on series on the day during which such series are added for 
trading) during Extended Trading Hours in a given month and (2) ensures 
an opening of the same percentage of series by 2:05 a.m. for at least 
90% of the trading days during Extended Trading Hours in a given month 
(which standards are substantially similar to LMM obligations during 
Regular Trading Hours except as discussed below), the LMM will receive 
a rebate for that month in an amount set forth in the Exchange Fees 
Schedule.\30\ Notwithstanding Rule 1.1(ccc), for purposes of this 
heightened continuous quoting standard, an LMM will be deemed to have 
provided continuous electronic quotes during Extended Trading Hours if 
the LMM provides electronic two-sided quotes for 90% of the time in 
Extended Trading Hours in a given month.\31\
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    \30\ The Exchange intends to submit a separate rule filing to 
adopt all fees applicable to Extended Trading Hours, including the 
amount of the rebate. As set forth in Regulatory Circular RG14-092, 
LMMs in each class that satisfy the heightened standard in a month 
are expected to receive a pro-rata share of a ``compensation pool'' 
equal to $25,000 times the number of LMMs in that class.
    \31\ If a technical failure or limitation of a system of the 
Exchange prevents the LMM from maintaining, or prevents the LMM from 
communicating to the Exchange, timely and accurate electronic quotes 
in a class, the duration of such failure will not be considered in 
determining whether the LMM has satisfied the 90% quoting standard 
with respect to that class. The Exchange may consider other 
exceptions to this continuous electronic quoting standard based on 
demonstrated legal or regulatory requirements or other mitigating 
circumstances.
---------------------------------------------------------------------------

    The Exchange believes it is more fitting to implement an incentive 
program with a rebate during Extended Trading Hours, rather than the 
obligation/benefit structure that exists during Regular Trading Hours. 
LMMs will not be obligated to satisfy

[[Page 54762]]

heightened continuous quoting and opening quoting standards during 
Extended Trading Hours. The proposed rule change does not provide for 
LMMs to receive a benefit in exchange for satisfying an obligation. 
Instead, the proposed rule change creates an incentive program in which 
LMMs must satisfy a heightened standard to receive a rebate in order to 
encourage LMMs to provide significant liquidity during Extended Trading 
Hours.
    The Exchange expects that Trading Permit Holders may need to 
undertake significant expenses to be able to quote at a significantly 
heightened standard during Extended Trading Hours, such as to perform 
system work and add personnel. The Exchange believes providing a rebate 
will encourage Trading Permit Holders to not only apply to be LMMs 
during Extended Trading Hours but incentive them to increase liquidity 
during Extended Trading Hours, as the rebate could offset the costs 
that accompany providing quotes at the heightened standard. The 
Exchange does not expect that the Regular Trading Hours obligation/
benefit structure would provide similar incentive during Extended 
Trading Hours. The Exchange expects lower trading liquidity and trading 
levels during Extended Trading Hours, and thus fewer opportunities for 
an LMM to receive a participation entitlement. Without the possibility 
of receiving a participation entitlement on a sufficient volume of 
trades, there would not be sufficient incentive for Trading Permit 
Holders to undertake an obligation to quote at heightened levels, which 
could result in even lower levels of liquidity. Therefore, a rebate is 
more appropriate than imposing an obligation to receive a participation 
entitlement.
    The participation entitlement received by LMMs during Regular 
Trading Hours is a form of financial benefit provided in return for 
satisfying a heightened quoting obligation. Offering a rebate during 
Extended Trading Hours is merely a different type of financial benefit 
that may be given to LMMs during Extended Trading Hours if it achieves 
a heightened quoting level. While the proposed standards are similar to 
the Regular Trading Hours quoting obligations (as the intent of the 
program is to incentive quoting to add liquidity to the trading 
session), the structure of the program is similar to other incentive 
programs (pursuant to which, for example, rebates are given in exchange 
for achieving volume thresholds). This program is just proposing a 
different type of threshold and a corresponding rebate that are more 
suited to the expected market conditions during Extended Trading Hours. 
The Exchange wants to provide LMMs with the flexibility to determine 
whether satisfying the heightened standard makes good business sense 
given the trading levels and costs during Extended Trading Hours.
    The Exchange believes it is appropriate and fair for LMMs to 
satisfy the heightened continuous quoting standard during Extended 
Trading Hours as part of the incentive program on a monthly basis 
rather than a daily basis. First, as discussed above, the Exchange 
expects LMMs to have fewer employees available during Extended Trading 
Hours than Regular Trading Hours to address any systems issues that may 
arise (and thus such issues may take longer to correct), which will 
make satisfaction of this heightened standard more difficult. The 
Exchange also expects Trading Permit Holders to have additional costs 
during Extended Trading Hours to be able to quote at these heightened 
levels during Extended Trading Hours. Thus, the Exchange believes a 
monthly quoting standard, slightly modified from the daily Regular 
Trading Hours quoting obligation, will offset such additional burdens 
and incentive more Trading Permit Holders to be LMMs during Extended 
Trading Hours, which will increase liquidity during the trading session 
and ultimately benefit investors. The heightened standard is still 
challenging to achieve to justify the provision of a rebate. The 
Exchange believes fewer or no Trading Permit Holders will elect to 
function as LMMs and quote at the heightened standard during Extended 
Trading Hours if the standard is not applied monthly, because the 
benefits received (the rebate) would not offset the burdens to quote at 
such levels during Extended Trading Hours, particularly if those quotes 
will result in fewer trades during the trading session. The Exchange 
believes liquidity during Extended Trading Hours will benefit more from 
having more LMMs quoting at a heightened monthly standard than fewer 
(or no) LMMs quoting at a heightened daily standard.
    Second, the Exchange does not believe a monthly standard would 
result in a material reduction in liquidity than a daily standard. An 
LMM that quotes 99% of the non-adjusted series (or 100% minus one call-
put pair) for less than 90% of the time during one Extended Trading 
Hours session will have to quote more during another Extended Trading 
Hours session (or sessions) in the same calendar month to achieve the 
heightened standard and receive a rebate. To the extent the 
applicability of a monthly standard allows an LMM to quote a lower 
percentage in a class during one session, it essentially requires the 
LMM to quote a higher percentage in that class during another session 
in that month if it wants to receive the rebate for that month. 
Ultimately, the quoting levels balance out over the month. The Exchange 
also notes that the LMM heightened quoting standard must be met in each 
class to receive a rebate for that class. The Regular Trading Hours 
continuous quoting obligation, while applied daily, will soon be 
applied collectively. Thus, the Extended Trading Hours standard will be 
more difficult to achieve than the Regular Trading Hours obligation in 
this respect once that change is implemented and offsets any reduction 
that may result from a monthly standard.\32\
---------------------------------------------------------------------------

    \32\ See supra note 25.
---------------------------------------------------------------------------

    Third, as discussed above, the LMM heightened quoting standard, 
unlike during Regular Trading Hours, is not an obligation for which an 
LMM receives an entitlement but rather an incentive program condition 
to be satisfied to receive a rebate. While the Regular Trading Hours 
quoting obligation is applied daily, a monthly standard is consistent 
with other incentive programs. The Exchange believes having a monthly 
quoting standard will encourage more Market-Makers to apply to act as 
LMMs during Extended Trading Hours, which will provide greater 
liquidity during the trading session, ultimately benefiting all market 
participants during Extended Trading Hours.
    Similarly, the opening quoting standard is not an obligation but 
rather an incentive condition to be satisfied to receive a rebate. The 
opening quoting standard that LMMs must satisfy to receive the rebate 
is substantially similar to the opening quoting requirement for Regular 
Trading Hours.\33\ For the same reasons described

[[Page 54763]]

above regarding the monthly quoting standard, the Exchange believes it 
is appropriate for satisfaction of the opening standard to be based on 
a percentage of Extended Trading Hours trading sessions during a month 
rather than every trading session.
---------------------------------------------------------------------------

    \33\ The proposed rule change provides a specific timing 
requirement, which it believes gives clearer guidance to LMMs 
regarding the opening quote standard. Currently, nearly all series 
open for Regular Trading Hours within that time frame, and thus the 
Exchange believes this timeframe is appropriate and will not be 
unduly burdensome on LMMs. Additionally, while the Extended Trading 
Hours opening standard is slightly less than the Regular Trading 
Hours opening standard, the Exchange believes it is appropriate to 
provide LMMs with slight flexibility, particularly because the 
proposed opening quoting standard is consistent with the series and 
timing percentage for the continuous quoting standard. The Exchange 
believes that having the same percentage standard at opening and 
during the Extended Trading Hours allows LMMs to more efficiently 
quote and incentivize satisfaction of the standards by LMMs. 
Additionally, the Exchange believes the slight flexibility at the 
open may encourage quoting by LMMs. The Exchange does not believe 
this slight reduction in the opening standard will materially impact 
liquidity, which is already expected to be lower during Extended 
Trading Hours. In fact, the Exchange believes this flexibility may 
increase liquidity during Extended Trading Hours. In the event a 
series does not open because no LMM provides opening quotes in that 
series, the Exchange notes that Rule 8.7(d)(iv) requires Market-
Makers to submit a quote or maintain continuous quotes in a series 
in their appointed classes if called upon by a designated Exchange 
official if the official deems it necessary in the interest of 
maintaining a fair and orderly market.
---------------------------------------------------------------------------

    The Exchange notes that if a Market-Maker is unable to regularly 
comply with the quoting obligation due to systems issues or for other 
reasons during Extended Trading Hours, the Exchange has the authority 
under the rules to suspend or terminate a Market-Maker's registration 
or appointments.\34\ The Exchange also notes that while it intends 
initially to approve LMMs during Extended Trading Hours for one-year 
terms,\35\ it may consider an LMM's regularity of systems issues and 
monthly quoting levels when deciding whether to renew a Market-Maker's 
application to act as an Extended Trading Hours LMM.
---------------------------------------------------------------------------

    \34\ See, e.g., Rules 8.2(b) and 8.3(a)(i) (subject to the 
Market-Makers right to a review of any such determination).
    \35\ Proposed Rule 6.1A(e)(iii) provides that the Exchange may 
appoint LMMs to a class during Extended Trading Hours for terms of 
at least one month (which is consistent with the provision for terms 
of LMMs appointed to Hybrid classes during Regular Trading Hours as 
set forth in Rule 8.15A(i)).
---------------------------------------------------------------------------

    The proposed rule change adds Rule 6.1A(e)(iv) to provide that an 
order submitted during Extended Trading Hours by a Trading Permit 
Holder that is a Market-Maker in the class for Regular Trading Hours 
but not Extended Trading Hours may be eligible for Market-Maker 
treatment. Market-Makers may receive the benefit of different margin 
treatment for Market-Maker orders,\36\ and the proposed rule provides 
that this treatment may extend to an order in a class (subject to other 
restrictions) submitted by a Trading Permit Holder during Extended 
Trading Hours, even if the Trading Permit Holder acts as a Market-Maker 
for that class during Regular Trading Hours but not Extended Trading 
Hours. However, if the rules impose any percentage limit on ``off-floor 
orders'' of Market-Makers in a class, then such an order will be 
considered an off-floor order that counts toward that percentage limit. 
For example, Rule 8.7, Interpretation and Policy .03 provides that if a 
Market-Maker receives Market-Maker treatment for off-floor orders in a 
calendar quarter, then the Market-Maker must execute in person (and not 
through orders) at least 80% of its transactions in Hybrid 3.0 
classes.\37\ SPX is a Hybrid 3.0 class during Regular Trading Hours but 
will be a Hybrid class during Extended Trading Hours. Because all 
Extended Trading Hours transactions are electronic (and thus ``off-
floor''), the Exchange believes SPX orders that are executed during 
Extended Trading Hours count towards the 20% limit on a Market-Maker's 
transactions that may be off-floor in SPX.
---------------------------------------------------------------------------

    \36\ See Rule 12.3(f).
    \37\ Currently, there is no similar percentage limit for VIX; 
however, if the Exchange rules imposed a limitation on the allowed 
percentage of off-floor orders for VIX Market-Makers, then Extended 
Trading Hours VIX Market-Maker orders would similarly count toward 
any applicable off-floor order percentage limit.
---------------------------------------------------------------------------

     Orders: Proposed paragraph (f) provides that all order 
types that are available for electronic processing during Regular 
Trading Hours \38\ and as otherwise determined by the Exchange \39\ 
will be available during Extended Trading Hours except market orders, 
market-on-close orders, stop orders and good-til-cancelled orders. The 
Exchange expects reduced liquidity, higher volatility and wider spreads 
during Extended Trading Hours. Therefore, the Exchange believes it is 
appropriate to not allow market orders (and stop orders, market-on-
close orders and market-if-touched orders, which can become market 
orders) in order to protect customers should wide price fluctuations 
occur due to the potential illiquid and volatile nature of the market 
or other factors that could impact market activity.\40\ The Exchange 
believes that good-til-cancelled orders would likely not be used often 
during Extended Trading Hours given the expected reduced liquidity 
during those hours and potential market changes during Regular Trading 
Hours. As discussed above and in the following paragraph, each trading 
session has a separate book. The Exchange believes that it further 
protects investors to start each Extended Trading Hours session with an 
empty book, as the orders from the previous Extended Trading Hours 
session will have been cancelled at the end of that previous session.
---------------------------------------------------------------------------

    \38\ Certain order types, such as market-if-touched orders, are 
available during Regular Trading Hours but not accepted by the 
System for electronic processing and instead are routed to PAR.
    \39\ The rules provide the Exchange with flexibility to 
determine which order types are available in general and for 
specific functionality. See, e.g, Rules 6.2B(a)(i) (permitting the 
Exchange to determine order types that may be entered pre-opening 
and participate in the opening rotation); 6.13(b)(i) (permitting the 
Exchange to determine eligible order types for automatic execution); 
6.53 (permitting the Exchange to make order types available on a 
class-by-class basis and providing that certain order types may not 
be made available for all Exchange systems); and 6.53C(c)(i) 
(permitting the Exchange to determine order origin types eligible 
for entry into the COB) and (d)(i)(2) (permitting the Exchange to 
determine order types eligible for the complex order auction 
(``COA'')). The proposed rule change is consistent with current 
Exchange authority under these rules.
    \40\ See ``Report of the Working Group on Investor Protection 
and Education,'' Extended Hours Working Group at 2, 4 (which report 
recommends that limit orders be used by investors in extended 
trading hours until trading during that time becomes more liquid, as 
limit orders are the most practical method of controlling risk).
---------------------------------------------------------------------------

     Book: Proposed paragraph (g) provides that the Book used 
during Extended Trading Hours will not be connected to the Book used 
during Regular Trading Hours. As discussed above, orders and quotes in 
the Regular Trading Hours Book will not be displayed in the Extended 
Trading Hours Book, and vice versa. Additionally, orders and quotes 
submitted during Regular Trading Hours will not trade with orders and 
quotes submitted during Extended Trading Hours, and vice versa. 
Additionally, a separate complex order book (``COB'') will also be used 
during Extended Trading Hours, which COB will operate during Extended 
Trading Hours in accordance with Rule 6.53C(c) in the same manner as 
the COB operates during Regular Trading Hours and not be connected to 
the COB used during Regular Trading Hours. Complex orders in the COB 
during Extended Trading Hours will execute in accordance with Rule 
6.53C(c)(ii). As discussed above, the System will cancel all orders and 
quotes remaining on the Book and COB at the end of an Extended Trading 
Hours session.
     Compliance with Rules: Proposed paragraph (h) provides 
that the business conduct rules set forth in Chapter IV of the 
Exchange's Rules apply during Extended Trading Hours. These Rules, 
among other things, prohibit Trading Permit Holders from engaging in 
acts or practices inconsistent with just and equitable principles of 
trade, making any willful or material misrepresentation or omission in 
any application, report or other communication to the Exchange or the 
Options Clearing Corporation, and from effecting or inducing the 
purchase, sale or exercise of any security for the purpose of 
manipulating the price or activity of the security.\41\ These Rules

[[Page 54764]]

apply to Trading Permit Holders even without this provision; however, 
given the importance of these Rules, the Exchange believes that it is 
worthwhile to also include their applicability in proposed Rule 6.1A so 
that the proposed Extended Trading Hours rules are more informative and 
complete.
---------------------------------------------------------------------------

    \41\ Rules 4.11 and 24.4 impose position limits and Rules 4.12 
and 24.5 impose exercise limits on Trading Permit Holders 
transactions. However, the Exchange notes that Rules 24.4 and 24.5 
provide that there are no position or exercise limits on SPX or VIX.
---------------------------------------------------------------------------

     Exchange Determinations: Proposed paragraph (i) provides 
that to the extent the Rules allow the Exchange to make a 
determination, such as on a class-by-class or series-by-series basis, 
the Exchange may make a determination for Extended Trading Hours that 
differs from that made for Regular Trading Hours. The Exchange will 
announce all determinations made under Rule 6.1A by Regulatory 
Circular. The Exchange maintains flexibility with respect to certain 
rules so that it may apply different settings and parameters to each 
class to address the specific characteristics of that class and its 
market. For example: Rules 6.45A(a) and 6.45B(a) allow the Exchange to 
determine electronic allocation algorithms on a class-by-class basis 
\42\; Rule 8.7(b)(iv), (d)(i)(A) and (d)(ii)(A) allows the Exchange to 
determine bid/ask differential requirements on a class-by-class basis; 
Rules 6.2B(e)(ii) and 6.13(b)(v) allow the Exchange to set price 
reasonability checks on a class-by-class basis; and Rules 6.13A(a), 
6.14A(a), 6.53C(d)(i)(2), 6.74A(a)(1) and 6.74B(a)(1) allow the 
Exchange to activate various auctions on a class-by-class basis.\43\ 
Because trading during Extended Trading Hours will be electronic only, 
and because trading during Extended Trading Hours may be different than 
Regular Trading Hours (such as lower trading levels, reduced liquidity 
and fewer participants), the Exchange believes it is appropriate to 
extend this flexibility to each trading session.
---------------------------------------------------------------------------

    \42\ Thus, the allocation algorithm and priority overlays that 
apply to a class during Regular Trading Hours may differ from the 
allocation algorithm and priority overlays that apply to that class 
during Extended Trading Hours. For example, the ultimate matching 
algorithm with customer priority and participation entitlement may 
apply to Class XYZ during Regular Trading Hours but price-time with 
no customer priority or participation entitlement may apply to Class 
XYZ during Extended Trading Hours. The Exchange intends to initially 
apply the price-time allocation algorithm to SPX and the pro-rata 
allocation algorithm to VIX, with no priority overlays, pursuant to 
Rule 6.45B(a) during Extended Trading Hours. The Exchange announced 
this intention in Regulatory Circular RG14-092 (dated June 13, 2014) 
and will announce any changes to the algorithms applied to classes 
during Extended Trading Hours in additional Regulatory Circulars. As 
discussed above, Chapter IV business conduct rules apply to Trading 
Permit Holders during Extended Trading Hours. This includes Rule 
4.2, which among other things prohibits Trading Permit Holders from 
violating the Act and the rules and regulations thereunder.
    \43\ In order to provide orders with opportunities for price 
improvement during Extended Trading Hours, the Exchange intends to 
activate COA and the automated improvement mechanism (``AIM'') 
auction during Extended Trading Hours, which will operate in 
accordance with Rules 6.53C and 6.74A, respectively, in the same 
manner as they do during Regular Trading Hours (including providing 
customer priority for executions following the conclusion of those 
auctions as set forth in those rules), except with respect to AIM, 
the requirement that three Market-Makers must be quoting to initiate 
an AIM auction will not apply during Extended Trading Hours. The 
Exchange believes it is appropriate to exclude this requirement 
during Extended Trading Hours because of excepted reduced number of 
Market-Makers during Extended Trading Hours. AIM is a valuable price 
improvement mechanism, and eliminating this requirement will make 
more price improvement opportunities available during Extended 
Trading Hours, despite potentially lower participation levels.
---------------------------------------------------------------------------

    With respect to Rules that require determinations by the Exchange, 
Floor Officials or other Exchange personnel (such as trading halts, 
opening series, and obvious errors), the Exchange represents that it 
will have appropriate personnel available during Extended Trading Hours 
to make these determinations to the extent necessary during the trading 
session.
     Disclosure: Proposed paragraph (j) requires Trading Permit 
Holders to make certain disclosures to customers regarding material 
trading risks that exist during Extended Trading Hours. The Exchange 
expects overall lower levels of trading during Extended Trading Hours 
compared to Regular Trading Hours. While trading processes during 
Extended Trading Hours will be substantially similar to trading 
processes during Regular Trading Hours, the Exchange believes it is 
important for investors, particularly public customers, to be aware of 
any differences and risks that may result from lower trading levels and 
thus requires these disclosures. Proposed paragraph (j) provides that 
no Trading Permit Holder organization may accept an order from a 
customer for execution during Extended Trading Hours without disclosing 
to that customer that trading during Extended Trading Hours involves 
material trading risks, including the possibility of lower liquidity 
(including fewer Market-Makers quoting), higher volatility, changing 
prices, an exaggerated effect from news announcements, wider spreads, 
the absence of an updated underlying index or portfolio value or 
intraday indicative value and lack of regular trading in the securities 
underlying the index or portfolio and any other relevant risk. The 
proposed rule provides an example of these disclosures. The Exchange 
believes that requiring Trading Permit Holders to disclose these risks 
to non-TPH customers will facilitate informed participation in Extended 
Trading Hours.
    The Exchange also intends to distribute to its Trading Permit 
Holders and make available on its Web site a Regulatory Circular 
regarding Extended Trading Hours that discloses, among other things: 
(1) That the current underlying index value may not be updated during 
Extended Trading Hours, (2) that lower liquidity during Extended 
Trading Hours may impact pricing, (3) that higher volatility during 
Extended Trading Hours may occur, (4) that wider spreads may occur 
during Extended Trading Hours, (5) the circumstances that may trigger 
trading halts during Extended Trading Hours, (6) required customer 
disclosures (as described above), and (7) suitability requirements. The 
Exchange believes that, with this disclosure, Extended Trading Hours 
are appropriate and beneficial notwithstanding the absence of a 
disseminated updated index value during those hours.
     Index Values: Proposed paragraph (k) provides that the 
Exchange will not report a value of an index underlying an index option 
trading during Extended Trading Hours because the value of the 
underlying index will not be recalculated during or at the close of 
Extended Trading Hours. The closing value of the index from the 
previous trading day will be available for Trading Permit Holders that 
trade during Extended Trading Hours. However, the Exchange does not 
believe it would be useful or efficient to disseminate to Trading 
Permit Holders the same value repeatedly at frequent intervals, as it 
does during Regular Trading Hours (when the index value is being 
updated).\44\
---------------------------------------------------------------------------

    \44\ Rule 24.2(b)(10), (d)(8), (e)(7) and (f)(11) currently 
provides that underlying index values will be disseminated at least 
once every 15 seconds. This provision is superseded with respect to 
Extended Trading Hours by proposed Rule 6.1A(k), and thus no such 
dissemination will occur during Extended Trading Hours. The proposed 
rule change also amends Rule 24.3 to provide that dissemination of 
the current index value will occur after the close of Regular 
Trading Hours (thus, no such dissemination will occur after the 
close of Extended Trading Hours, as no new index value will have 
been calculated during Extended Trading Hours) and from time-to-time 
on days on which transactions are made on the Exchange (pursuant to 
proposed Rule 6.1A(k), the Exchange will not disseminate index 
values during Extended Trading Hours).
---------------------------------------------------------------------------

    The differences described above are consistent with the Exchange's 
goal to permit trading during Extended Trading Hours for those Trading 
Permit Holders

[[Page 54765]]

that choose to do so without imposing additional burdens on those that 
do not. The Exchange also notes the following in connection with this 
goal:
     The Exchange will not require any Trading Permit Holder to 
participate during Extended Trading Hours. Trading during Extended 
Trading Hours will be optional.
     The Exchange will minimize Trading Permit Holders' 
preparation efforts to the greatest extent possible by allowing Trading 
Permit Holders to trade during Extended Trading Hours with the same 
connection lines,\45\ message formats and data feeds that they use 
during Regular Trading Hours. The Exchange notes that Trading Permit 
Holders must use separate log-ins and acronyms for each trading 
session.
---------------------------------------------------------------------------

    \45\ The Exchange notes that the same telecommunications lines 
used by Trading Permit Holders during Regular Trading Hours may be 
used during Extended Trading Hours. However, those lines will need 
to be connected to a separate application server at the Exchange to 
trade during Extended Trading Hours.
---------------------------------------------------------------------------

     The Exchange will have a pre-opening period before the 
opening of trading during Extended Trading Hours and an opening 
rotation in the same manner it does for Regular Trading Hours. The 
proposed rule change amends Rule 6.2B(a) to extend the applicability of 
the Hybrid Opening System to Extended Trading Hours. The proposed rule 
change states that the pre-opening period for Extended Trading Hours 
will be a period of time prior to 2 a.m., during which time the Hybrid 
Trading System will accept orders and quotes.\46\ The proposed rule 
change also amends Rule 6.2B(b) to provide that the Hybrid Trading 
System will initiate the opening rotation procedure and send a notice 
to market participants after 2 a.m. with respect to Extended Trading 
Hours.\47\ The Exchange notes that Rule 6.2B(f) provides that two Floor 
Officials may deviate from the standard manner of the opening procedure 
when necessary in the interests of maintaining a fair and orderly 
market. Because there may be reduced participation and liquidity during 
Extended Trading Hours, the Exchange believes it may be appropriate in 
certain circumstances for Floor Officials to determine to open a series 
during Extended Trading if, for example, there are no opening quotes if 
it believes there is sufficient order interest in the series.
---------------------------------------------------------------------------

    \46\ The proposed rule change amends Rule 6.2 and 6.2A to state 
that the opening rotations described in those Rules will apply only 
during Regular Trading Hours. The Exchange will only use the Hybrid 
Opening System described in Rule 6.2B for Extended Trading Hours. 
The proposed rule change amends Rule 6.2B(b)(ii) to clarify that 
provision applies during Regular Trading Hours only. This provision 
primarily relates to floor trading, which will not be available 
during Extended Trading Hours. The proposed rule change also amends 
Rule 6.2B, Interpretations and Policies .01 and .08 to indicate that 
the modified opening procedure for Hybrid 3.0 classes and for 
classes on volatility settlement days apply during Regular Trading 
Hours only. The Hybrid 3.0 trading platform will not be available 
during Extended Trading Hours, and the Exchange will use the 
modified opening procedure for volatility settlement days during 
Regular Trading Hours only.
    \47\ The proposed rule change makes a corresponding change to 
Rule 24.13, which describes the opening rotation for index options, 
to include the applicable opening time for Extended Trading Hours.
---------------------------------------------------------------------------

     Order processing will operate in the same manner during 
Extended Trading Hours as it does for Regular Trading Hours. There will 
be no changes to the ranking, display, or allocation algorithms rules 
(as indicated above, the Exchange may apply a different allocation 
algorithm to a class during Extended Trading Hours than it applies to 
the class during Regular Trading Hours).
     There will be no changes to the processes for clearing, 
settlement, exercise and expiration.\48\
---------------------------------------------------------------------------

    \48\ The Exchange has held discussions with the Options Clearing 
Corporation, which is responsible for clearance and settlement of 
all listed options transactions and has informed the Exchange that 
it will be able to clear and settle all transactions that occur on 
the Exchange and handle exercises of options during Extended Trading 
Hours.
---------------------------------------------------------------------------

     The Exchange will report the Exchange best bid and offer 
and executed trades to the Options Price Reporting Authority (``OPRA'') 
during Extended Trading Hours in the same manner they are reported 
during Regular Trading Hours. Exchange proprietary data feeds will also 
be disseminated during Extended Trading Hours using the same formats 
and delivery mechanisms with which the Exchange disseminates them 
during Regular Trading Hours. Use of these proprietary data feeds will 
be optional.\49\
---------------------------------------------------------------------------

    \49\ Any fees related to receipt of the OPRA data feed during 
Extended Trading Hours will be included on the OPRA fee schedule. 
Any fees related to receipt of the Exchange's proprietary data feeds 
during Extended Trading Hours will be included on the Exchange Fees 
Schedule (and will be included in a separate rule filing) or the 
Exchange's market data Web site, as applicable.
---------------------------------------------------------------------------

     The Exchange will require certain Trading Permit Holders 
to maintain connectivity to a backup trading facility during Extended 
Trading Hours, as it does during Regular Trading Hours.\50\ The 
Exchange will announce which Trading Permit Holders must maintain this 
connectivity by Regulatory Circular.
---------------------------------------------------------------------------

    \50\ Currently, all Market-Makers in exclusively listed option 
classes on CBOE who are streaming quotes in such classes, all DPMs 
in multiply listed option classes, and all Trading Permit Holders 
connected to the CBOE primary data center and transacting non-
Trading Permit Holder customer business unless a Trading Permit 
Holder can demonstrate ready access to the back-up data center 
through another Trading Permit Holder connected to the back-up data 
center, must connect to the backup trading facility during Regular 
Trading Hours. See Regulatory Circular RG13-110.
---------------------------------------------------------------------------

     The Exchange will perform all necessary surveillance 
coverage during Extended Trading Hours.
     The Exchange will process all clearly erroneous trade 
breaks during Extended Trading Hours in the same manner it does during 
Regular Trading Hours and will have senior Help Desk personnel 
available to do so (the same personnel that do so during Regular 
Trading Hours), with one minor difference.
    The proposed rule change amends Rule 6.25, Interpretation and 
Policy .02 to provide that, during Extended Trading Hours, the term 
``Trading Officials'' as used in Rule 6.25 means at least two Exchange 
officials that are members of the Exchange's staff designated to 
perform Trading Official functions. During Regular Trading Hours, 
Trading Officials must include one Trading Permit Holder. However, 
because Trading Permit Holders may not be available during Extended 
Trading Hours, the Exchange believes it is appropriate to have the 
Exchange officials that are available make determinations under Rule 
6.25 do so during Extended Trading Hours so that determinations that 
need to be made under the rule are done so in a timely and efficient 
manner in accordance with the rule.
    The proposed rule change also amends Rule 6.25(a)(1)(iii) and (iv) 
to add a corresponding time for Extended Trading Hours by which parties 
may request reviews of transactions under that rule.
     The Exchange may halt trading during Extended Trading 
Hours in the interests of a fair and orderly market in the same manner 
it could during Regular Trading Hours pursuant to Rule 24.7. The 
proposed rule change amends Rule 24.7, Interpretation and Policy .01 to 
provide that one of the factors that the Exchange may consider when 
determining to halt trading in an option is if trading in related 
futures has been halted. Rule 24.7, Interpretation and Policy .01 
currently provides that the Exchange may consider whether activation of 
price limits on futures exchanges when determining whether to halt 
trading in an index option; this proposed factor is merely an extension 
of the currently existing factor, which allows consideration of any 
halt in trading of the related futures product, not just a halt due to 
price limit activation. This factor is also consistent

[[Page 54766]]

with the Exchange's authority to consider whether trading in a related 
index option has been halted when determining whether to halt trading 
in an option on a security other than a stock option.\51\
---------------------------------------------------------------------------

    \51\ See Rule 6.3(a)(iv). As discussed above, VIX futures 
currently trade on CFE, which overlap with the proposed Extended 
Trading Hours on CBOE. The Exchange believes it is appropriate to 
consider halting trading in SPX and VIX options if CFE has halted 
trading in VIX futures.
---------------------------------------------------------------------------

    In addition, Rule 24.7(d) provides that when the hours of trading 
of the underlying primary securities market for an index option do not 
overlap or coincide with those of the Exchange, the provisions in 
paragraphs (a) through (c) of that Rule (except for (a)(v)) do not 
apply. As Extended Trading Hours do not coincide with the hours of 
trading of the underlying primary securities market, the proposed rule 
change extends the applicability of paragraph (d) to Extended Trading 
Hours. Generally, the Exchange considers halting trading only in 
response to unusual conditions or circumstances, as it wants to 
interrupt trading as infrequently as possible and only if necessary to 
maintain a fair and orderly market. During Regular Trading Hours, it 
would be unusual, for example, for stocks or options underlying the 
index to not be trading or the current calculation of the index to not 
be available. However, as discussed above, there will be no calculation 
of underlying indexes during Extended Trading Hours, and Extended 
Trading Hours do not coincide with the regular trading hours of the 
underlying stock or options (there may be some overlap with trading of 
certain underlying stocks towards the end of Extended Trading Hours as 
mentioned above \52\). Thus, these factors described in Rule 24.7(a) 
(other than (a)(v)) are not unusual for Extended Trading Hours, and 
thus the Exchange does not believe it is necessary to consider these as 
reasons for halting trading during Extended Trading Hours.\53\ 
Exclusion of Extended Trading Hours from those provisions will allow 
trading during that trading session to occur despite the existence of 
those conditions (if the Exchange considered the existence of those 
conditions during Extended Trading Hours as reasons to halt, trading 
during Extended Trading Hours would be halted every trading day). It is 
appropriate for the Exchange to consider any unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market during Extended Trading Hours, which may, for example, include 
whether the underlying primary securities market was halted at the 
close of the previous trading day (in which case the Exchange will 
evaluate whether the condition that led to the halt has been resolved 
or would not impact trading during Extended Trading Hours) or 
significant events that occur during Extended Trading Hours.
---------------------------------------------------------------------------

    \52\ See supra note 6.
    \53\ Rule 24.7(a) provides that the Exchange may consider the 
following factors when determining whether to halt trading in an 
index option: (a) The extent to which trading is not occurring in 
the stocks or options underlying the index; (b) the current 
calculation of the index derived from the current market prices of 
the stocks is not available; (c) the ``current index level'' for a 
volatility index is not available or the cash (spot) value for a 
volatility index is not available; (d) the extent to which the 
rotation has been completed or other factors regarding the status of 
the rotation; or (e) other unusual conditions or circumstances 
detrimental to the maintenance of a fair and orderly market are 
present.
---------------------------------------------------------------------------

    Rule 24.7(c) references Rule 6.3B regarding the initiation of a 
marketwide trading halt (or a circuit breaker). Under Rule 6.3B, the 
Exchange will halt trading in all classes whenever a circuit breaker is 
initiated in response to extraordinary market conditions. Rule 
6.3B(b)(i) [sic] states that the Exchange will halt trading for 15 
minutes if a Level 1 or Level 2 Market Decline occurs after 8:30 a.m. 
and up to and including 2:25 p.m. (or 11:25 a.m. for an early scheduled 
close). Additionally, the Exchange will not halt trading if a Level 1 
or Level 2 Market Decline occurs after 2:25 p.m. (or 11:25 a.m., if 
applicable). Rule 6.3B(b)(ii) [sic] states that the Exchange will halt 
trading until the next trading day if a Level 3 Market Decline occurs. 
Exclusion of consideration of Rule 6.3B is consistent with the terms of 
Rule 6.3B, as the beginning of Extended Trading Hours occurs well past 
the 15-minute halt window for a Level 1 or Level 2 Market Decline, and 
is the next trading day in accordance with a Level 3 Market Decline. 
Additionally, if stock trading has not resumed within the 15-minute 
window, Rule 6.3B(c)(ii) [sic] allows the Exchange to open trading in 
all options not overlying any stocks for which trading has not resumed.
    The Exchange believes that, even if stock trading was halted at the 
close of the previous trading day, the length of time between that time 
and the beginning of Extended Trading Hours is significant (over 10 
hours), and the condition that led to the halt is likely to have been 
resolved. The proposed rule change allows the Exchange to consider 
unusual conditions or circumstances when determining whether to halt 
trading during Extended Trading Hours. To the extent a circuit breaker 
caused a stock market to be closed at the end of the prior trading day, 
the Exchange could consider, for example, whether it received notice 
from stock exchanges that trading was expected to resume (or not) the 
next trading day in determining whether to halt trading during Extended 
Trading Hours. Because the stock markets would not begin trading until 
after Extended Trading Hours opens, the Exchange believes it should be 
able to open Extended Trading Hours rather than waiting several hours 
to see whether stock markets open to allow investors to participate in 
Extended Trading Hours if the Exchange believe such trading can occur 
in a fair and orderly manner based on then-existing circumstances, not 
circumstances that existed many hours earlier.
    Rule 24.7(c) currently provides that the factors in Rule 24.7(a) 
(other than (a)(v)) and circuit breakers initiated pursuant to Rule 
6.3B do not apply to the Exchange when the hours of the underlying 
primary securities market for an index option do not overlap or 
coincide with those of the Exchange. As this is true for Extended 
Trading Hours, the proposed rule change merely extends this authority 
to such trading session.
    The proposed rule change also amends certain rules to indicate that 
they apply separately to each trading session. Rule 6.23B provides that 
Trading Permit Holders may purchase bandwidth packets in accordance 
with the Exchange's Fees Schedule. The proposed rule change amends this 
rule to indicate that bandwidth packets can be purchased for each 
trading session.\54\ Bandwidth packets for Regular Trading Hours are 
separate and distinct from bandwidth packets for Extended Trading Hours 
and may be used only during the applicable trading session. Rule 8.3A 
provides that the Exchange may impose a limit on the number of market 
participants that may quote electronically in a product.\55\ The 
proposed rule change amends this rule to indicate that the quoting 
limit will apply during each trading session. The class quoting limit 
is intended to limit the number of quoters in a product at

[[Page 54767]]

the same time, so the Exchange believes it is appropriate for the limit 
to apply to each trading session, particularly because the quoters 
during Regular Trading Hours may be different than those during 
Extended Trading Hours. Rule 8.18 makes available to Market-Makers a 
quote risk monitor mechanism (``QRM'') pursuant to which Market-Makers 
may establish parameters to manage their risk. The proposed rule change 
amends this rule to indicate that parameters established by Market-
Makers apply to each trading session.\56\ Thus, a Market-Maker that 
elects to use QRM for Regular Trading Hours and Extended Trading Hours 
will have to separately establish parameters for each trading session 
(although a Market-Maker may elect to use the same parameters for both 
trading sessions or use QRM for one trading session and not the other). 
These proposed rule changes are consistent with the separation of the 
trading sessions and provides for the application of different 
parameters to address the differing market conditions that may be 
present during each trading session.
---------------------------------------------------------------------------

    \54\ Rule 6.23B currently provides that bandwidth limits are not 
in effect during pre-opening prior to 8:25 a.m. The proposed rule 
change amends this provision to indicate that the bandwidth limits 
will not be in effect five minutes before the beginning of a trading 
session to extend the applicability of this provision to the pre-
opening period of Extended Trading Hours, as it will apply in the 
same manner to accommodate potentially increased activity prior to 
the opening.
    \55\ Pursuant to Rule 8.3A, Interpretation and Policy .01, the 
default class quoting limit for a Hybrid class is 50. Pursuant to 
that rule, the Exchange will submit a rule filing to increase this 
limit for a product (including for a product during Extended Trading 
Hours) and announce any changes to the limit in an Information 
Circular.
    \56\ The proposed rule change also makes the nonsubstantive 
change to add a period after ``Rule 8.18'' in the rule heading to 
conform to the other rule headings throughout the rules.
---------------------------------------------------------------------------

    Certain rules currently include general phrases related to a day, 
trading, such as normal trading and the close of trading. The proposed 
rule change makes technical changes to Rules 6.2B, Interpretation and 
Policy .03, 6.13(b)(vi), 8.7, Interpretation and Policy .01, and 
11.1(c) and Interpretation and Policy .03 to incorporate the 
terminology included in this proposed rule change to specify the 
appropriate trading session(s) being referenced in those rules. The 
Exchange will disseminate last sale and quotation information during 
Extended Trading Hours through OPRA pursuant to the Plan for Reporting 
of Consolidated Options Last Sale Reports and Quotation Information 
(the ``OPRA Plan''), as it does during Regular Trading Hours.\57\ It 
will also disseminate an opening quote and trade price through OPRA for 
Extended Trading Hours.\58\ Therefore, all Trading Permit Holders that 
trade during Extended Trading Hours will have access to all quote and 
sale information during those hours.
---------------------------------------------------------------------------

    \57\ The OPRA Plan provides for the collection and dissemination 
of last sale and quotation information on options that are traded on 
the participant exchanges. The OPRA Plan is a national market system 
plan approved by the Commission pursuant to Section 11A of the Act 
and Rule 608 thereunder. See Securities Exchange Act Release No. 
17638 (March 18, 1981). The full text of the OPRA Plan is available 
at http://www.opradata.com. All operating U.S. options exchanges 
participate in the OPRA Plan. The operator of OPRA informed CBOE 
that it intends to add a modifier to the disseminated information 
during Extended Trading Hours.
    \58\ The proposed rule change makes a corresponding change to 
Rule 6.2B(d).
---------------------------------------------------------------------------

    The Exchange understands that systems and other issues may arise 
and is committed to resolving those issues as quickly as possible, 
including during Extended Trading Hours. Thus, the Exchange will have 
appropriate staff on-site and otherwise available as necessary during 
Extended Trading Hours to handle any technical and support issues that 
may arise during those hours. Additionally, the Exchange will have 
Exchange Floor Officials available to address any trading issues that 
may arise during Extended Trading Hours.\59\ The Exchange is also 
committed to fulfilling its obligations as a self-regulatory 
organization at all times, including during Extended Trading Hours, and 
will have appropriate trained, qualified regulatory staff in place 
during Extended Trading Hours to the extent it deems necessary to 
satisfy those obligations. The Exchange's surveillance procedures will 
also be revised to incorporate transactions that occur and orders and 
quotations that are submitted during Extended Trading Hours. The 
Exchange believes that its surveillance procedures are adequate to 
properly monitor trading of SPX and VIX options during Extended Trading 
Hours.
---------------------------------------------------------------------------

    \59\ The Exchange notes that, to conduct trading during Extended 
Trading Hours, persons that are not Trading Permit Holders, such as 
employees of affiliates of Trading Permit Holders located outside of 
the United States, may be transmitting orders and quotes during 
Extended Trading Hours (such non-Trading Permit Holders would not 
have direct access to the Exchange, and thus those orders and quotes 
would be submitted to the Exchange through Trading Permit Holders' 
systems subject to applicable laws, rules and regulations). Trading 
Permit Holders may authorize (in a form and manner determined by the 
Exchange) individuals at these non-Trading Permit Holder entities to 
contact the Help Desk during Extended Trading Hours to address any 
issues.
---------------------------------------------------------------------------

    As discussed above, one of the primary goals of adding Extended 
Trading Hours is to attract investors located outside of the United 
States. In connection with extended trading hours on CFE, the Exchange 
implemented a communications hub near London, England in February 2013. 
The hub consists of telephone switch equipment and communication lines 
to provide direct access to the matching engine located in the United 
States. Currently, the hub is available to CFE trading privilege 
holders. However, upon launch of Extended Trading Hours, CBOE expects 
to allow Trading Permit Holders to connect to the hub to reach CBOE's 
matching engine located in the United States instead of setting up 
their own communication lines.\60\ The Exchange believes the hub will 
provide Trading Permit Holders with a more efficient and cost-effective 
way to connect and submit orders to the Hybrid Trading System and thus 
encourage trading by these non-U.S. investors during Extended Trading 
Hours.\61\
---------------------------------------------------------------------------

    \60\ Market participants may also connect to the hub to receive 
market data.
    \61\ See supra note 21 regarding who may directly access the 
Exchange on behalf of a Trading Permit Holder.
---------------------------------------------------------------------------

    In connection with the implementation of the hub for Trading Permit 
Holders, the proposed rule change amends the definition of Hybrid 
Trading System in Rule 1.1(aaa) to provide that the System will include 
any connectivity to the Exchange's trading platform that is 
administered by or on behalf of the Exchange, such as a communications 
hub. Additionally, to accommodate the potential interest of non-U.S. 
persons or organizations to become Trading Permit Holders, the proposed 
rule change amends Rule 3.4 regarding foreign Trading Permit Holders. 
Currently, Rule 3.4 provides that a Trading Permit Holder that does not 
maintain an office in the United States responsible for preparing and 
maintaining financial and other reports required to be filed with the 
Commission and the Exchange must (i) prepare all such reports, and 
maintain a general ledger chart of account and any description thereof, 
in English and U.S. dollars, (ii) reimburse the Exchange for any 
expense incurred in connection with examination of the Trading Permit 
Holder to the extent that such expenses exceed the cost of examining a 
Trading Permit Holder located within the United States, and (iii) 
ensure the availability of an individual fluent in English 
knowledgeable in securities and financial matters to assist the 
representatives of the Exchange during examinations.\62\ The proposed 
rule change provides that if a Trading Permit Holder applicant is not 
domiciled in (with respect to individuals) or organized under the laws 
of (with respect to organizations) the United States, then, in order 
for the Exchange

[[Page 54768]]

to approve the applicant to be a Trading Permit Holder, the individual 
or organization must, in addition to the other conditions set forth in 
Rules 3.2 and 3.3: \63\ (i) Be domiciled in or organized under the laws 
of a foreign jurisdiction expressly approved by the Exchange,\64\ which 
approval may be limited to one or more specified categories of Trading 
Permit Holders or Trading Permit Holder activities or be contingent 
upon the satisfaction of specified conditions by such individual or 
organization, (ii) be subject to the jurisdiction of the federal courts 
of the United States and the courts of the state of Illinois, and (iii) 
prior to acting as agent for a customer from a foreign jurisdiction, 
obtain written consent from the customer that permits the individual or 
organization to provide information regarding the customer and the 
customer's trading activities to the Exchange in response to a 
regulatory request for information pursuant to the rules of the 
Exchange. The Exchange believes these additional requirements for 
foreign Trading Permit Holders are reasonable so that the Exchange is 
able to ensure it is in compliance with any regulatory requirements 
that apply to it in foreign jurisdictions in which Trading Permit 
Holders are located, to obtain all books, records, reports and other 
information regarding the Trading Permit Holders and their customers 
that is necessary to conduct its surveillances, and to provide it with 
jurisdiction over the Trading Permit Holders to enforce its rules.
---------------------------------------------------------------------------

    \62\ The proposed rule change amends Rule 3.4(a)(iii) to provide 
that the individual referenced in that provision must be familiar 
with the Trading Permit Holder's securities business and financial 
matters, not just securities and financial matters in general. This 
more clearly states the intent of the rule to ensure that the 
individual is familiar with the appropriate matters and thus able to 
provide sufficient information to the Exchange as necessary. This 
proposed rule change is also consistent with CFE Rule 305B, upon 
which the proposed rule change is based.
    \63\ The proposed rule change also specifically imposes the 
requirements of Rule 3.4(a) on any Trading Permit Holder not 
domiciled in or organized under the laws of the United States.
    \64\ The proposed rule change allows the Exchange to withdraw 
approval of a foreign jurisdiction at any time and provides any 
Trading Permit Holder domiciled in, or organized under the laws of, 
that foreign jurisdiction with three months following the withdrawal 
to come into compliance with Rule 3.4. If that does not occur, the 
Exchange may terminate the Trading Permit Holder's status as a 
Trading Permit Holder.
---------------------------------------------------------------------------

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.\65\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \66\ 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 
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. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \67\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \65\ 15 U.S.C. 78f(b).
    \66\ 15 U.S.C. 78f(b)(5).
    \67\ Id.
---------------------------------------------------------------------------

    In particular, the proposed rule change is a competitive initiative 
designed to improve the Exchange's marketplace for the benefit of 
investors. The proposed rule change provides a new investment 
opportunity within the options trading industry that is consistent with 
the continued globalization of the securities markets and closer aligns 
the Exchange's trading hours with extended trading hours of stock 
exchanges and near round-the-clock trading of futures exchanges. The 
Exchange believes the proposed rule change will enhance competition by 
providing a service to investors that other options exchanges currently 
are not providing. The Exchange believes that competition among 
exchanges ultimately benefits the entire marketplace. Given the robust 
competition among the options exchanges, innovative trading mechanisms 
are consistent with the above-mentioned goals of the Exchange Act.
    The proposed rule change also provides a mechanism for the Exchange 
to more effectively compete with exchanges located outside of the 
United States. Global markets have become increasingly interdependent 
and linked, both psychologically and through improved communications 
technology. This has been accompanied by an increased desire among 
investors to have access to U.S.-listed exchange products outside of 
Regular Trading Hours, and the Exchange believes this desire extends to 
its exclusively listed products. The Exchange believes that the 
proposed rule change is reasonably designed to provide an appropriate 
mechanism for trading outside of Regular Trading Hours while providing 
for appropriate Exchange oversight pursuant to the Act, trade 
reporting, and surveillance.
    While no other options exchanges are currently open for trading 
outside of Regular Trading Hours, as discussed above, the Commission 
has authorized stock exchanges to be open for trading outside of those 
hours pursuant to the Act. Additionally, futures exchanges are also 
outside of those hours. Thus, the proposed rule change to adopt 
Extended Trading Hours is not novel. The Exchange currently has 
authority to list for trading the two products that will initially be 
available during Extended Trading Hours. As the proposed rule change is 
a new Exchange initiative, the Exchange believes it is reasonable to 
trade a limited number of classes upon implementation for which demand 
is believed to be the highest during Extended Trading Hours.
    The vast majority of the Exchange's trading rules will apply during 
Extended Trading Hours in the same manner as during Regular Trading 
Hours, which rules have all been approved by the Commission as being 
consistent with the goals of the Act. Rules that will apply equally 
during Extended Trading Hours include rules that protect public 
customers, impose best execution requirements on Trading Permit 
Holders, and prohibit acts and practices that are inconsistent with 
just and equitable principles of trade as well as fraudulent and 
manipulative practices. The proposed rule change also provides 
opportunities for price improvement during Extended Trading Hours and 
applies the same allocation and priority rules that are available to 
the Exchange during Regular Trading Hours. The Exchange believes that 
the rules that will apply during Extended Trading Hours will continue 
to promote just and equitable principles of trade and prevent 
fraudulent and manipulative acts.
    Additionally, the Exchange believes that the proposed rule change 
will foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, as the Exchange will 
ensure that adequate staffing is available during Extended Trading 
Hours to provide appropriate trading support during those hours, as 
well as Exchange Officials to make any necessary determinations under 
the Rules during Extended Trading Hours (such as trading halts and 
trade nullification for obvious errors). The Exchange is also committed 
to fulfilling its obligations as a self-regulatory organization at all 
times, including during Extended Trading Hours. The Exchange's 
surveillance procedures will also be revised to incorporate 
transactions that occur and orders and quotations that are submitted 
during Extended Trading Hours. The Exchange believes that its 
surveillance procedures are adequate to

[[Page 54769]]

properly monitor trading of SPX and VIX options during Extended Trading 
Hours. Clearing and settlement processes will be the same for Extended 
Trading Hours transactions as they for Regular Trading Hours 
transactions.
    The proposed rule change also allows all Trading Permit Holders and 
their associated persons with access to the Hybrid Trading System to 
obtain Trading Permits to trade during Extended Trading Hours, but does 
not require any Trading Permit Holder to participate during Extended 
Trading Hours, and thus does not unfairly discriminate among market 
participants. The Exchange also notes that Trading Permit Holders will 
be able to trade during Extended Trading Hours using the same 
connection lines, message formats and data feeds that they do during 
Regular Trading Hours, minimizing any preparation efforts necessary to 
participate during Extended Trading Hours.
    Market-Makers that elect to have appointments during Extended 
Trading Hours will be subject to the same quoting obligations with 
respect to their appointments as they are during Regular Trading Hours, 
which will be separately determined for each trading session, except 
that no open outcry quoting obligation will apply during Extended 
Trading Hours, as there will be no open outcry trading. Additionally, 
the proposed rule change provides that the Exchange may not impose bid/
ask differential requirements during Extended Trading Hours. Because of 
the expected lower liquidity, wider spreads and higher volatility 
during Extended Trading Hours, the Exchange believes this flexibility 
is appropriate in order to address these conditions. The Exchange notes 
that other options exchanges that are fully electronic (and thus have 
no open outcry trading) impose no bid/ask differential requirements on 
Market-Makers during Regular Trading Hours but have substantially 
similar continuous electronic quoting obligations as the Exchange will 
have during Extended Trading Hours. Therefore, the Exchange believes 
the proposed rule change provides the appropriate balance between the 
benefits and obligations of Market-Makers during Extended Trading Hours 
and thus consistent with the Act.
    While LMMs will only be required to meet the same obligations as 
Market-Makers during Extended Trading Hours, the Exchange believes it 
may be unduly burdensome to impose heightened quoting obligations 
during Extended Trading Hours as it does during Regular Trading Hours 
given the expected lower participation and trading volume and 
liquidity. The Exchange believes LMMs should have the flexibility to 
determine whether satisfying the heightened standards is appropriate 
for its business given the then-current market conditions during 
Extended Trading Hours. Because there are no additional obligations 
imposed on LMMs during Extended Trading Hours, they receive no 
additional benefits (i.e., no participation entitlement) during 
Extended Trading Hours. The incentive program is not unfairly 
discriminatory, as all Trading Permit Holders have the opportunity to 
apply to act as LMMs during Trading Permit Holders and participate in 
the incentive program, and the Exchange will appoint LMMs based on the 
factors set forth in the rules and otherwise disclosed to Trading 
Permit Holders.\68\
---------------------------------------------------------------------------

    \68\ See Regulatory Circular RG14-123 (dated August 12, 2014).
---------------------------------------------------------------------------

    The LMM incentive program during Extended Trading Hours is 
reasonable, as it is designed to encourage increased quoting to add 
liquidity during those hours and, while the heightened standard is 
substantially similar to the Regular Trading Hours quoting obligation, 
is similar to other incentive programs. While it may have a different 
type of threshold than those programs, the threshold is designed to 
achieve the purpose the Exchange is seeking through this program (added 
liquidity during Extended Trading Hours). LMMs that satisfy the 
heightened continuous quoting standard and the opening quoting standard 
in a class receive a rebate pursuant to the Fees Schedule. The Exchange 
believes it is appropriate to offer this LMM incentive program during 
Extended Trading Hours (as opposed to imposing heightened obligations 
and providing a participation entitlement) given the potential added 
costs that an LMM may undertake in order to satisfy the heightened 
quoting standards and expected lower trading volume (and thus fewer 
opportunities to receive a participation entitlement) during that 
trading session. Additionally, if an LMM does not satisfy these 
standards, then it will not receive the rebate set forth in the Fees 
Schedule. The Exchange believes it will benefit all market participants 
in Extended Trading Hours to encourage LMMs to satisfy the heightened 
quoting standards, which may increase liquidity during those hours.
    With respect to determining satisfaction by LMMs of these standards 
to receive the monthly rebate on a monthly basis, the Exchange expects 
Market-Makers to have fewer employees available during Extended Trading 
Hours than Regular Trading Hours to address any systems issues that may 
arise (and thus such issues may take longer to correct), which will 
make achievement of the heightened standards during Extended Trading 
Hours more difficult and potentially unduly burdensome. Because the 
Exchange expects reduced liquidity and trading activity during Extended 
Trading Hours, the Exchange believes applying the heightened quoting 
standard monthly will incentive more Trading Permit Holders to apply to 
be LMMs during Extended Trading Hours and thus increase liquidity 
during the trading session. Unlike during Regular Trading Hours (during 
which obligations must be satisfied daily), as discussed above, these 
standards are not obligations that an LMM must satisfy to receive a 
participation entitlement but rather an incentive to receive a rebate. 
A monthly standard is consistent with other incentive programs.\69\ The 
Exchange believes having monthly quoting standards will encourage more 
Market-Makers to apply to act as LMMs during Extended Trading Hours, 
which may ultimately provide greater liquidity during the trading 
session (even if these standards represent slight reductions from the 
corresponding Regular Trading Hours LMM obligations), ultimately 
benefiting all market participants during Extended Trading Hours. This 
greater liquidity benefits all market participants by potentially 
providing more trading opportunities and tighter spreads. The Exchange 
will further discuss the LMM incentive program in a separate fee 
filing.
---------------------------------------------------------------------------

    \69\ See, e.g., Securities Exchange Act Release No. 34-66054 
(December 23, 2011), 76 FR 82332 (December 30, 2011) (SR-CBOE-2011-
120) (adoption of volume incentive program that provides a rebate 
based on monthly trading activity) and the CBOE Fees Schedule.
---------------------------------------------------------------------------

    The proposed rule change clearly identifies the ways in which 
trading processes during Extended Trading Hours will differ from 
trading processes during Regular Trading Hours. Similarly, the proposed 
rule change indicates throughout the rules to which trading session 
they apply. These changes ensure that investors and the public are 
aware of any differences among the trading sessions and thus promote 
compliance by Trading Permit Holders with applicable rules during each 
trading session. The Exchange believes these differences are consistent 
with the separation of the trading sessions, the Exchange's goal to 
permit trading during Extended Trading Hours for those Trading Permit 
Holders that choose to do so without imposing

[[Page 54770]]

additional burdens on those that do not, and the expected differences 
in liquidity, participation and trading activity between Regular 
Trading Hours and Extended Trading Hours. The flexibility provided to 
the Exchange to make determinations for each trading session will allow 
the Exchange to apply settings and parameters to address the different 
market conditions that may be present during each trading session. 
Additionally, to further protect investors from any additional risks 
related to trading during Extended Trading Hours, the proposed rule 
change requires that disclosures be made to customers describing these 
potential risks. The separation of Regular Trading Hours and Extended 
Trading Hours (including the use of separate Books) also protects 
investors by preventing any investors who do not wish to trade during 
Extended Trading Hours from having any orders or quotes trade during 
those hours. Consistent with the goal of investor protection, the 
Exchange will not allow market orders during Extended Trading Hours due 
to the expected increased volatility and decreased liquidity during 
those hours.
    The proposed rule change is also consistent with Section 11A of the 
Act and Regulation NMS thereunder, because it provides for the 
dissemination of transaction and quotation information during Extended 
Trading Hours through OPRA pursuant to the OPRA Plan, which Commission 
approved and indicated to be consistent with the Act. While Section 11A 
and Regulation NMS contemplate an integrated system for trading 
securities, they also envision competition between markets, and 
innovation that provides marketplace benefits to attract order flow to 
an exchange does not result in unfair competition if the other markets 
are free to compete in the same manner.\70\
---------------------------------------------------------------------------

    \70\ See Exchange Act Release No. 29237 (May 24, 1991) (SR-NYSE-
1990-052 and SR-NYSE-1990-053) (approval of proposed rule change for 
NYSE to extend its trading hours outside of Regular Trading Hours). 
The Exchange also notes that currently no other U.S. options 
exchange provides for trading during hours outside of Regular 
Trading Hours as is provided for in the proposed rule change, and 
only exclusively listed products will be available for trading 
during Extended Trading Hours, so there is currently no need for 
intermarket linkage during Extended Trading Hours.
---------------------------------------------------------------------------

    Additionally, the proposed rule change is also consistent with Rule 
15c3-5 under the Act, in that it includes in the definition of System 
any connectivity to the Exchange's trading platform administered by or 
on behalf of the Exchange, such as the London hub. Thus, only Trading 
Permit Holders may connect to the hub.\71\ The Exchange believes the 
proposed rule change promotes compliance by Trading Permit Holders with 
the market access requirements under that rule.\72\ Further, the 
proposed rule change related to foreign Trading Permit Holders, 
including the requirement that the Exchange approve foreign 
jurisdictions from which Trading Permit Holders may connect, will 
promote compliance by the Exchange with regulatory requirements of 
governments and regulatory authorities outside of the United States. 
The proposed rule change that requires foreign Trading Permit Holders 
acting as agents for customers for foreign jurisdictions to obtain 
consent from customers that permits the Trading Permit Holders to 
provide information regarding their customers and their customers' 
trading activity to the Exchange enhances the Exchange's ability to 
satisfy its self-regulatory obligations by ensuring it is able to 
receive sufficient information to conduct its surveillances and 
investigations.
---------------------------------------------------------------------------

    \71\ See supra note 21.
    \72\ Please note that in the adopting release for Rule 15c3-5 
(risk management controls for brokers or dealers with market 
access), the Commission indicated that a broker-dealer relying on 
risk management technology developed by third parties should perform 
appropriate due diligence to help assure the controls are reasonably 
designed, effective, and otherwise consistent with Rule 15c3-5. Mere 
reliance on representations of the third-party technology 
developer--even if an exchange or other regulated entity--is 
insufficient to meet this due diligence standard.
---------------------------------------------------------------------------

    When Congress charged the Commission with supervising the 
development of a ``national market system'' for securities, Congress 
stated its intent that the ``national market system evolve through the 
interplay of competitive forces as unnecessary regulatory restrictions 
are removed.\73\ Consistent with this purpose, Congress and the 
Commission have repeatedly stated their preference for competition, 
rather than regulatory intervention to determine products and services 
in the securities markets.\74\ This consistent and considered judgment 
of Congress and the Commission is correct, particularly in light of 
evidence of robust competition in the options trading industry. The 
fact that an exchange proposed something new is a reason to be 
receptive, not skeptical--innovation is the life-blood of a vibrant 
competitive market--and that is particularly so given the continued 
internalization of the securities markets, as exchanges continue to 
implement new products and services to compete not only in the United 
States but throughout the world. Options exchanges continuously adopt 
new and different products and trading services in response to industry 
demands in order to attract order flow and liquidity to increase their 
trading volume. This competition has led to a growth in investment 
choices, which ultimately benefits the marketplace and the public. The 
Exchange believes that the proposed rule change will help further 
competition by providing market participants with yet another 
investment option.
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    \73\ See H.R. Rep. No. 94-229, at 92 (1975) (Conf. Rep.).
    \74\ See S. Rep. No. 94-75, 94th Cong., 1st Sess. 8 (1975) 
(``The objective [in enacting the 1975 amendments to the Exchange 
Act] would be to enhance competition and to allow economic forces, 
interacting within a fair regulatory field, to arrive at appropriate 
variations in practices and services.''); Order Approving Proposed 
Rule Change Relating to NYSE Arca Data, Securities Exchange Act 
Release No. 59039 (December 2, 2008), 73 FR 74770 (December 9, 2008) 
(``The Exchange Act and its legislative history strongly support the 
Commission's reliance on competition, whenever possible, in meeting 
its regulatory responsibilities for overseeing the [self-regulatory 
organizations] and the national market system. Indeed, competition 
among multiple markets and market participants trading the same 
products is the hallmark of the national market system.''); and 
Regulation NMS, 70 FR at 37499 (observing that NMS regulation ``has 
been remarkably successful in promoting market competition in [the] 
forms that are most important to investors and listed companies'').
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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. All Trading Permit Holders will 
be able to obtain a separate Trading Permit to trade during Extended 
Trading Hours. However, the proposed rule change does not impose 
additional burdens on those Trading Permit Holders that do not elect to 
trade during Extended Trading Hours. Additionally, while Market-Makers 
may choose to obtain an appointment for Extended Trading Hours, they 
are not required to do so, and if they do, they will be subject to the 
same quoting obligations that otherwise apply during Regular Trading 
Hours, with the exception of open outcry quoting obligations and 
potentially bid/ask differential requirements (although the Exchange 
will determine compliance with those obligations separately for each 
trading session). Similarly, while LMMs are not required to satisfy a 
heightened quoting standard and opening quoting standard, they do not 
receive the additional benefit of a participation entitlement. The 
Exchange believes the obligations imposed on

[[Page 54771]]

Market-Makers (including LMMs) during Extended Trading Hours is an 
appropriate balance of obligations and benefits, and the Exchange notes 
that the quoting obligations applicable during Extended Trading Hours 
are nearly identical to those of another options all-electronic options 
exchange (that has no bid/ask differential requirements during Regular 
Trading Hours). Additionally, elimination of bid/ask differential 
requirements during Extended Trading Hours is offset by the added costs 
Market-Makers may need to undertake to quote and fewer trades in which 
they may participate during Extended Trading Hours. Please see 
``Purpose'' and ``Statutory Basis'' above for additional discussion 
regarding the balance of these benefits and obligations during Extended 
Trading Hours.
    The Exchange believes the LMM incentive program during Extended 
Trading Hours will encourage LMMs to provide more liquidity during 
Extended Trading Hours, which may create more trading opportunities and 
tighter spreads and ultimately benefit all market participants. Please 
see ``Purpose'' and ``Statutory Basis'' above for additional discussion 
regarding the competitive impact of the proposed LMM incentive program, 
including the potential for increased liquidity during Extended Trading 
Hours. The Exchange also notes that Trading Permit Holders will be able 
to trade during Extended Trading Hours using the same connection lines, 
message formats, and data feeds that they do during Regular Trading 
Hours, reducing the potential added costs that Trading Permit Holders 
that elect to participate in Extended Trading Hours may need to 
undertake.
    The Exchange believes the proposed rule change is a new competitive 
initiative that will benefit the marketplace and investors. The 
Exchange also believes the proposed rule change will enhance 
competition by providing a service to investors that other options 
exchanges currently are not providing. Additionally, all options 
exchanges are free to compete in the same manner. The Exchange further 
believes that the same level of competition among options exchanges 
will continue during Regular Trading Hours. Because CBOE proposes to 
make only exclusively listed products available for trading during 
Extended Trading Hours, and because quotes and orders submitted during 
Extended Trading Hours will not trade with quotes and orders submitted 
during Regular Trading Hours, the proposed rule change will have no 
effect on the national best prices or trading during Regular Trading 
Hours. The Exchange also believes the proposed rule change could 
increase its competitive position outside of the United States by 
providing investors with an additional investment vehicle with respect 
to their global trading strategies during times that correspond with 
regular trading hours outside of the United States.
    Please see ``Statutory Basis'' above for additional discussion 
regarding the procompetitive impact of the proposed rule change.

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-2014-062 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-2014-062. 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 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2014-062 and should be 
submitted on or before October 3, 2014.
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    \75\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\75\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-21731 Filed 9-11-14; 8:45 am]
BILLING CODE 8011-01-P