Document ID: SEC-2017-0102-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2017-01-25T05:00Z

[Federal Register Volume 82, Number 15 (Wednesday, January 25, 2017)]
[Notices]
[Pages 8459-8462]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-01614]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79836; File No. SR-CBOE-2016-084]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Amendment No. 1, and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1, To Amend Exchange Rules Related to the Automated 
Improvement Mechanism

January 18, 2017.

I. Introduction

    On November 29, 2016, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to the provisions of Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change to make permanent make 
permanent those aspects of its Automated Improvement Mechanism (``AIM'' 
or ``Auction'') that are currently operating on a pilot basis. The 
proposed rule change was published for comment in the Federal Register 
on December 13, 2016.\3\ The Commission received no comments regarding 
the proposal. On January 6, 2017, the Exchange filed Amendment No. 1 to 
the proposed rule change.\4\ The Commission is publishing this notice 
to solicit comments on Amendment No. 1 from interested persons, and is 
approving the proposed rule change, as modified by Amendment No. 1, on 
an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79499 (December 7, 
2016), 81 FR 90012 (``Notice'').
    \4\ In Amendment No. 1, the Exchange described additional data 
relating to complex orders submitted through AIM and provided 
additional support for its proposal to approve the aspects of AIM 
currently operating on a pilot basis as applicable to complex 
orders. To promote transparency of its proposed amendment, when CBOE 
filed Amendment No. 1 with the Commission, it also submitted 
Amendment No. 1 as a comment letter to the file, which the 
Commission posted on its Web site and placed in the public comment 
file for SR-CBOE-2016-084 (available at https://www.sec.gov/comments/sr-cboe-2016-084/cboe2016084-1475098-130456.pdf). The 
Exchange also posted a copy of its Amendment No. 1 on its Web site 
(http://www.cboe.com/aboutcboe/legal/submittedsecfilings.aspx), when 
it filed it with the Commission.
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II. Description of the Proposal

    AIM exposes certain orders electronically to an auction process to 
provide these orders with the opportunity to receive an execution at an 
improved price.\5\ In addition, the AIM auction process for FLEX 
Options (``FLEX AIM'') exposes certain FLEX Options orders 
electronically to an auction process to provide these orders with the 
opportunity to receive an execution at an improved price.\6\ The AIM 
and FLEX AIM auctions are available only for orders that a Trading 
Permit Holder represents as agent (``Agency Order'') and for which a 
second order of the same size as the Agency Order (and on the opposite 
side of the market) is also submitted (effectively stopping the Agency 
Order at a given price).
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    \5\ See CBOE Rule 6.74A. See also Securities Exchange Release 
No. 53222 (February 3, 2006), 71 FR 7089 (February 10, 2006) (SR-
CBOE-2005-60) (``AIM Approval Order'').
    \6\ See Securities Exchange Release No. 66702 (March 30, 2012), 
77 FR 20675 (April 5, 2012) (SR-CBOE-2011-123) (``FLEX AIM Approval 
Order'').
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    Three components of AIM were approved by the Commission on a pilot 
basis (the ``Pilot''): (1) That there is no minimum size requirement 
for orders to be eligible for the AIM; (2) that the AIM will conclude 
prematurely anytime there is a quote lock on the Exchange pursuant to 
Rule 6.45A(d); \7\ and (3) that there is no minimum size requirement 
for orders to be eligible for the FLEX AIM.\8\ In connection with the 
Pilot, the Exchange has provided certain data to the Commission to 
provide supporting evidence that, among other things, there is 
meaningful competition for all size orders and that there is an active 
and liquid market functioning on the Exchange outside of the AIM.\9\ 
The Pilot is currently set to expire on January 18, 2017.\10\ The 
Exchange proposes to make the Pilot permanent.
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    \7\ A quote lock occurs when a CBOE Market-Maker's quote 
interacts with the quote of another CBOE Market-Maker (i.e., when 
internal quotes lock).
    \8\ The pilot for the FLEX AIM auction process was modeled after 
the pilot for non-FLEX Options. See FLEX AIM Approval Order, supra 
note 6.
    \9\ See Interpretation and Policy .03 to CBOE Rule 6.74A and 
Interpretation and Policy .03 to CBOE Rule 24B.5A.
    \10\ See Securities Exchange Act Release No. 78316 (July 13, 
2016) 81 FR 46975 (July 19, 2016) (SR-CBOE-2016-056).
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A. No Minimum Size Requirement Pilot

    In support of its proposal, and in addition to data submitted to 
the Commission on a monthly and confidential basis since the Pilot's 
inception, the Exchange has provided the Commission with data for AIM 
executions from January through June 2015 (the ``Report'').\11\ The 
Exchange believes the data provides evidence that AIM offers meaningful 
competition for all size orders and that there is an active and liquid 
market functioning on the Exchange outside of AIM.\12\ The Exchange 
further notes that the data provided in the Report demonstrates the 
price improvement benefits of AIM.\13\ According to the Exchange, 
approving the no minimum size pilot on a permanent basis will allow AIM 
to continue to offer meaningful price improvement and will not have an 
adverse effect on the market functioning on the Exchange outside of 
AIM.\14\
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    \11\ See Exhibit 3 to SR-CBOE-2016-084.
    \12\ See Notice, supra note 3, at 90013-14.
    \13\ See id. The Commission notes that AIM currently requires 
price improvement for Agency Orders of fewer than 50 contracts. See 
CBOE Rule 6.74A(a)(3).
    \14\ See Notice, supra note 3, at 90014.
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    Specifically, the Report contains eight categories of non-customer 
and customer auction data, as well as three categories of summary 
auction data, during the period from January through

[[Page 8460]]

June 2015.\15\ Each of the eight categories is divided into 
subcategories based on the spread of the National Best Bid or Offer 
(``NBBO'') at the time an Auction was initiated. The data is further 
divided into the number of orders that were auctioned within each 
particular subcategory. Finally, for each subcategory, the Exchange 
identified the per contract price improvement that occurred at each 
NBBO spread, the average number of participants responding to the 
Auctions plus the initiator, the total volume the initiator received, 
the average percentage of orders the initiator received, and the 
percentage of contracts received by the Auction initiator.
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    \15\ See Exhibit 3 to SR-CBOE-2016-084. The various categories 
contained in the Report include: (1) Non-Customer Auction/Under 50 
Contracts/CBOE not at NBBO; (2) Non-Customer Auction/Under 50 
Contracts/CBOE at NBBO; (3) Non-Customer Auction/50 Contracts and 
over/CBOE not at NBBO; (4) Non-Customer Auction/50 Contracts and 
over/CBOE at NBBO; (5) Customer Auction/Under 50 Contracts/CBOE not 
at NBBO; (6) Customer Auction/Under 50 Contracts/CBOE at NBBO; (7) 
Customer Auction/50 Contracts and over/CBOE not at NBBO; (8) 
Customer Auction/50 Contracts and over/CBOE at NBBO; (9) Summary of 
all Non-Customer Auctions for the Period; (10) Summary of all 
Customer Auctions for the Period; and (11) Summary of all Auctions 
for the Period.
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    The summary of all Auctions demonstrates that AIM offers 
competition and price improvement because the vast majority of 
contracts traded via AIM received price improvement beyond the NBBO. 
Specifically, with regards to Customer AIM auctions, of the 54,243,091 
contracts traded via AIM during the Report period, 41,278,408 contracts 
received price improvement beyond the NBBO.\16\ In addition, of the 
54,504,717 total contracts traded via AIM during the Report period, 
41,514,731 contracts received price improvement beyond the NBBO.\17\
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    \16\ See Exhibit 3 to SR-CBOE-2016-084.
    \17\ See id.
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    For complex orders that are otherwise eligible for AIM,\18\ the AIM 
eligibility requirements of CBOE Rule 6.74A(a) apply in the same manner 
as they apply for simple orders. Thus, a complex order may be executed 
via AIM at a net debit or net credit price provided, for example, that 
an Agency Order that is a complex order of 50 contracts or more (as 
determined by the size of the smallest leg) is stopped at the better of 
the NBBO or the Agency Order's limit price (if the order is a limit 
order).\19\ Similarly, a complex order of fewer than 50 contracts (as 
determined by the size of the smallest leg) may be executed via AIM at 
a net debit or net credit price provided that the Agency Order is 
stopped at the better of (A) the NBBO price improved by one minimum 
price improvement increment, which increment shall be determined by the 
Exchange but may not be smaller than one cent; or (B) the Agency 
Order's limit price (if the order is a limit order).\20\
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    \18\ A ``complex order'' is any order involving the execution of 
two or more different options series in the same underlying security 
occurring at or near the same time in a ratio that is equal to or 
greater than one-to-three (.333) and less than or equal to three-to-
one (3.00) (or such lower ratio as may be determined by the Exchange 
on a class-by-class basis) and for the purpose of executing a 
particular investment strategy. For the purpose of applying the 
aforementioned ratios to complex orders comprised of both mini-
option contracts and standard option contracts, ten (10) mini-option 
contracts will represent one (1) standard option contract. Only 
those complex orders with no more than the applicable number of 
legs, as determined by the Exchange on a class-by-class basis, are 
eligible for processing. See CBOE Rule 6.53C(a)(1).
    \19\ See CBOE Rule 6.74A(a)(2).
    \20\ See CBOE Rule 6.74A(a)(3). The Commission notes that, as 
with simple orders, AIM currently requires price improvement for 
complex Agency Orders where the smallest leg is fewer than 50 
contracts.
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    In September 2016, there were 5,982 complex orders processed via 
AIM with an order size of 50 contracts or more (as determined by the 
size of the smallest leg), and there were 214,986 complex orders 
processed via AIM with an order size of fewer than 50 contracts (as 
determined by the size of the smallest leg).\21\ With regards to having 
no minimum size requirement for orders to be eligible for the Auction, 
the Exchange believes small complex orders benefit from the price 
improvement offered by AIM in the same manner that small simple orders 
benefit from the price improvement offered by AIM, and that it is 
therefore appropriate to approve the no minimum size pilot on a 
permanent basis.\22\ The Exchange believes that, in addition to the 
simple order market, the complex order market both within and outside 
of AIM is robust, and therefore it is appropriate to approve the no 
minimum size pilot on a permanent basis.
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    \21\ See Amendment No. 1.
    \22\ See id.
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B. Early Conclusion of the AIM

    CBOE Rule 6.74A(b)(2)(E) provides that the AIM will conclude 
prematurely anytime there is a quote lock on the Exchange pursuant to 
CBOE Rule 6.45A(d). This condition is operating as part of the current 
Pilot.\23\
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    \23\ See Interpretation and Policy .06 to CBOE Rule 6.74A.
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    As with the no minimum size requirement, the Exchange has gathered 
data on the number of times an AIM auction was terminated early because 
of a quote lock on the Exchange pursuant to CBOE Rule 6.45A(d). From 
January through June 2015, for example, there were less than two 
Auctions ended early per month because of a quote lock. Thus, for both 
simple and complex orders, due to the infrequency with which a quote 
lock terminates an AIM auction, the Exchange believes permanent 
approval of the pilot program to end AIM auctions early when there is a 
quote lock on the Exchange will have a de minimis impact on the 
marketplace.\24\
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    \24\ See Notice, supra note 3, at 90014. See also Amendment No. 
1. The Exchange further notes that modifying the ``Quote Lock'' 
timer, which allows quotes from two or more CBOE Market-Makers to 
remain locked for a given time interval prior to trading with one 
another, will not impact AIM. See CBOE Rule 6.45A(d)(i)(B) and RG16-
158.
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C. FLEX AIM Pilot

    Currently, in order to initiate a FLEX AIM auction, the initiating 
Trading Permit Holder must stop the entire Agency Order as principal or 
with a solicited order at the better of the BBO or the Agency Order's 
limit price. For purposes of CBOE Chapter XXIVB, the term ``BBO'' means 
the best bid or offer, or both, as applicable, entered in response to a 
Request for Quotes (``RFQ'') or resting in the electronic book.\25\ 
According to the Exchange, generally speaking, there is no existing BBO 
prior to a FLEX AIM because there either has not been an RFQ or a FLEX 
Order with the same terms as the order to be auctioned in FLEX AIM.\26\ 
Therefore, the Exchange notes, the data does not show observable price 
improvement beyond the BBO because, generally speaking, no BBO exists 
prior to a FLEX AIM.\27\ The Exchange has proposed to modify its FLEX 
AIM rules to require the Agency Order to be stopped at the better of 
the BBO price improved by one minimum price increment or the Agency 
Order's limit price, although the Exchange does not believe there will 
be any difference in the way FLEX AIM functions. The Exchange notes 
that there likely will continue to be no BBO prior to a FLEX AIM; 
however, the Exchange believes FLEX AIM will continue to offer the 
possibility for price improvement beyond the initiator's stop 
price.\28\
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    \25\ See CBOE Rule 24B.1(a). RFQ is defined as the initial 
request supplied by a Submitting Trading Permit Holder to initiate 
FLEX bidding and offering. See CBOE Rule 24B.1(r).
    \26\ FLEX Order is defined as (i) FLEX bids and offers entered 
by FLEX Market-Makers and (ii) orders to purchase and orders to sell 
FLEX Options entered by FLEX Traders, in each case into the 
electronic book. See CBOE Rule 24B.1(j).
    \27\ See Notice, supra note 3, at 90014.
    \28\ See id.

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[[Page 8461]]

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with Section 6(b) of the Act.\29\ In particular, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\30\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect customers, issuers, brokers and dealers.
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    \29\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \30\ 15 U.S.C. 78f(b)(5).
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    As part of its proposal, the Exchange provided summary data on 
Exhibit 3 of its filing for the period January through June 2015, which 
the Exchange and Commission both publicly posted on their respective 
Web sites. Among other things, this data is useful in assessing the 
level of price improvement in the Auction, in particular for orders of 
fewer than 50 contracts; the degree of competition for order flow in 
such Auctions; and a comparison of liquidity in the Auctions with 
liquidity on the Exchange generally.\31\ Based on the data provided by 
the Exchange, the Commission believes that the Exchange's price 
improvement auction generally delivers a meaningful opportunity for 
price improvement to orders, including orders for fewer than 50 
contracts. In addition, the Commission notes that AIM currently 
requires price improvement for Agency Orders of fewer than 50 
contracts.\32\ The Commission further believes that the Exchange's 
proposed modification to the FLEX AIM to require the Agency Order to be 
stopped at the better of the BBO price improved by one minimum price 
increment or the Agency Order's limit price will better align the FLEX 
AIM auction rules with those applicable to standard AIM auctions and 
will provide price improvement for additional FLEX AIM orders.
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    \31\ See Exhibit 3 to SR-CBOE-2016-084.
    \32\ See CBOE Rule 6.74A(a)(3).
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    The Commission believes that the data provided by the Exchange 
support its proposal to make the Pilot permanent. The data demonstrate 
that the Auction generally provides price improvement opportunities to 
orders, including orders of retail customers; that there is meaningful 
competition for orders on the Exchange; and that there exists an active 
and liquid market functioning on the Exchange outside of the 
Auction.\33\ Thus, the Commission has determined to approve the 
Exchange's proposed revisions to Interpretations and Policies .03 and 
.06 to Rule 6.74A, Rule 24B.5A(a)(2), and Interpretations and Policies 
.03 to Rule 24B.5A, and to approve the Pilot, as proposed to be 
modified, on a permanent basis.
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    \33\ See Exhibit 3 to SR-CBOE-2016-084.
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IV. Solicitation of Comments on Amendment No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
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-2016-084 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-2016-084. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2016-084 and should be 
submitted on or before February 15, 2017.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the 30th day after the 
date of publication of the notice of Amendment No. 1 in the Federal 
Register. As noted above, in Amendment No. 1, the Exchange described 
additional data relating to complex orders submitted through AIM and 
provided further support for its proposal to approve the aspects of AIM 
currently operating on a pilot basis as applicable to complex orders. 
Because Amendment No. 1 provides additional support for the Exchange's 
original proposal and does not make any substantive changes to the 
proposal, the Commission believes that good cause exists for 
accelerated approval of the proposed rule change, as modified by 
Amendment No. 1. The Commission further notes that the original 
proposal was subject to a 21 day comment period and no comments were 
received on the proposal. Accordingly, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Act,\34\ to approve the proposed 
rule change prior to the 30th day after the date of publication of the 
notice of Amendment No. 1 in the Federal Register.
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    \34\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the 
Act,\35\ that the proposed rule change (SR-CBOE-2016-084), as modified 
by Amendment No. 1, be and hereby is approved on an accelerated basis.
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    \35\ 15 U.S.C. 78s(b)(2).

[[Page 8462]]

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-01614 Filed 1-24-17; 8:45 am]
 BILLING CODE 8011-01-P