Document ID: SEC-2014-0918-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2014-06-04T04:00Z

[Federal Register Volume 79, Number 107 (Wednesday, June 4, 2014)]
[Notices]
[Pages 32342-32345]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-12884]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72271; File No. SR-CBOE-2014-046]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to Exchange Rule 24.20

May 29, 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 May 19, 2014, Chicago Board Options Exchange, Incorporated (the 
``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III below, which Items have been prepared by the 
Exchange. 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 Exchange Rule 24.20 to: (a) require 
Trading Permit Holders (``TPHs'') that may determine to utilize the 
special open outcry trading procedures for SPX Combo Orders to indicate 
an order is eligible for the procedure by including an indicator with 
the order upon systematization,\3\ and (b) make other changes to the 
rule text. 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.
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    \3\ Orders must be systematized in accordance with Rule 6.24 
(Required Order Information). Generally, subject to certain 
exceptions, each order, cancellation of, or change to an order 
transmitted to the Exchange must be ``systematized,'' in a format 
approved by the Exchange, either before it is sent to the Exchange 
or upon receipt on the floor of the Exchange. An order is 
systematized if: (i) the order is sent electronically to the 
Exchange; or (ii) the order that is sent to the Exchange non-
electronically (e.g., telephone orders) is input electronically into 
the Exchange's systems contemporaneously upon receipt on the 
Exchange, and prior to representation of the order.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to add language to Exchange Rule 24.20 to 
require TPHs that may determine to utilize the special open outcry 
trading procedures for the SPX Combo Orders, as described in Rule 
24.20, to indicate an order is eligible for the procedure by including 
an SPX Combo Order indicator with the order upon systematization. The 
Exchange believes this added requirement to Rule 24.20 will enhance the 
Exchange's audit trail by identifying orders that are eligible to 
receive the relief under Rule 24.20, whether or not those orders are 
ultimately executed using the SPX Combo Order provisions, and limiting 
the availability of the procedure only to those orders so designated 
upon systematization as such. Orders without this indicator will not be 
eligible for the special procedure set out in Rule 24.20.\4\ The 
Exchange is also proposing to make other edits to the current 
provisions of Rule 24.20.
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    \4\ The Exchange notes that the inclusion of the indicator will 
simply signify that an order is eligible for the special procedure 
set out in Rule 24.20. It will not obligate a TPH to use the 
procedure if an order has been designated as eligible for the 
procedure set out in in [sic] Rule 24.20 (e.g., the TPH could elect 
to trade the order as the TPH would trade another complex order 
under Rule 6.45B(b)). Moreover, it will not obligate a TPH to apply 
the indicator to an order if the TPH has no intention of utilizing 
the procedure set out in Rule 24.20.
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Background
    An ``SPX Combo Order'' is currently defined in Rule 24.20 as an 
order to purchase or sell SPX options and the offsetting number of SPX 
combinations

[[Page 32343]]

defined by the delta. An ``SPX combination'' is a long SPX call and a 
short SPX put having the same expiration date and strike price. The 
``delta'' is defined as the positive (negative) number of SPX 
combinations that must be sold (bought) to establish a market neutral 
hedge with an SPX option position.
    Rule 24.20 provides limited relief by allowing the component legs 
of an SPX Combo Order to be traded in open outcry outside the market 
quotes (``out-of-range'') under certain circumstances. Specifically, 
Rule 24.20(b)(2) currently provides that, if an SPX Combo Order is not 
executed immediately, the SPX Combo Order may be executed and printed 
at the prices originally quoted for each of the component options 
series within two hours after the time of the original quotes, provided 
that the prices originally quoted satisfy the requirements of paragraph 
(b)(1) of Rule 24.20.\5\
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    \5\ See note 5 [sic], infra. The Exchange notes that existing 
paragraphs (b)(1) and (b)(2) of Rule 24.20 are proposed to be 
renumbered to paragraphs (b)(2) and (b)(3), respectively.
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SPX Combo Order Indicator
    Under the current Rule 24.20 procedures, TPHs are required to 
designate each of the component series of the order as being part of an 
SPX Combo Order transaction when submitting the trade to the Exchange 
for price reporting. For example, on a PAR workstation this is 
accomplished by selecting the ``CMBO ENDORSE'' button. When an SPX 
Combo Order execution is reported, the prices of the component series 
are reported to the trading floor and to the Options Price Reporting 
Authority (``OPRA'') using an indicator that identifies the trade as 
being part of an SPX Combo Order transaction. The SPX Combo Order 
indicator acts as notice to the public that the reported prices are 
part of an SPX Combo Order transaction and helps avoid investor 
confusion regarding out-of-range SPX prices.
    The Exchange is now proposing to add language to Rule 24.20 to 
require the TPH to indicate an order as eligible for the SPX Combo 
Order trading procedures upon systematization rather than when 
reporting an execution as currently required. The Exchange believes 
this requirement will enhance the Exchange's audit trail because it 
will identify eligible orders even if they are not ultimately executed 
using the SPX Combo Order trading procedures. In addition, the Exchange 
notes that TPHs are already required to apply an indicator to identify 
Combo Order transactions at the time of trade report (via the ``CMBO 
ENDORSE'' button). The proposed rule change only seeks to modify the 
timing to instead require that the indicator be applied at time of 
order systematization. More specifically, TPHs will merely need to add 
the indicator to a field upon order entry.\6\ As such, the Exchange 
does not anticipate the proposed changes will be unduly burdensome on 
TPHs.
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    \6\ The Exchange notes that though TPHs are generally allowed to 
utilize any Exchange approved device to systematize orders on the 
trading floor, it is the Exchange's understanding that the majority 
of SPX Combo Orders are systematized by Exchange Floor Brokers via 
the Exchange provided devices Floor Broker Workstation and PULSe. 
Because these are Exchange provided devices, both have been updated 
by the Exchange to support the proposed SPX Combo Order Indicator. 
In addition, this order designation was originally announced in June 
2013. (See Exchange Regulatory Circular RG13-083.) As such, the 
Exchange believes that appropriate notice was given to the TPHs not 
utilizing Floor Broker Workstation or PULSe for compliance with the 
requirement, and it is the Exchange's understanding that these TPHs 
will be prepared for the requirement within the timeframes outlined 
by the Exchange.
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Other Amendments
    The Exchange is also proposing to revise the existing SPX Combo 
Order rule text to make other amendments. The Exchange notes that these 
amendments are not intended to modify the existing operation of the 
special procedures, and are not intend [sic] to expand the relief 
granted under current Rule 24.20. The Exchange believes that these 
amendments will harmonize the language found throughout the current 
rule along [sic] more sufficiently explain the existing application of 
the Rule.
    In particular, the Exchange is proposing to change the title of the 
rule from ``SPX Combination Orders'' to ``SPX Combo Orders'' to 
harmonize the references within the Rule. Next, the Exchange is 
proposing to revise the definition of an ``SPX combination.'' As noted 
above, currently an SPX combination is defined as ``a long SPX call and 
a short SPX put having the same expiration date and strike price.'' The 
Exchange is proposing to revise the definition to include a short SPX 
call and a long SPX put having the same expiration date and strike 
price. By definition, both strategies are permissible under the 
existing rule (otherwise one would never have a contra-side with which 
to trade; also, this clarification is consistent with other provisions 
of the rule that recognize both buy-side and sell-side interest). In 
addition, instead of using the terms ``long'' and ``short,'' the 
Exchange is proposing to use the terms ``purchase'' and ``sale'' to be 
consistent with the language in the existing definitions of ``SPX Combo 
Order'' and ``delta'' (which are noted above). Thus, as revised, an 
``SPX combination'' would be defined as ``a purchase (sale) of an SPX 
call and a sale (purchase) of an SPX put having the same expiration 
date and strike price.''
    The Exchange is also proposing to revise the definitions of a 
``delta'' and an ``SPX Combo Order'' to replace the phrase ``SPX option 
positions'' [sic] and ``SPX options'' that appear within the respective 
definitions with the phrase ``one or more SPX option series.'' As 
revised, a ``delta'' would be ``the positive (negative) number of SPX 
combinations that must be sold (bought) to establish a market neutral 
hedge with one or more SPX option series.'' The definition of an ``SPX 
Combo Order'' would be ``an order to purchase or sell one or more SPX 
option series and the offsetting number of SPX combinations defined by 
the delta''. The use of the phrase ``one or more SPX option series'' is 
intended to make it clear that an SPX Combo Order is intended to 
consist of an SPX combination (which has two component legs) that 
establish a market neutral hedge with one or more SPX option series 
(which can consist of one or more component legs). The Exchange again 
notes that it does not intended [sic] to expand the relief granted 
under the current Rule but only intended [sic] to provide greater 
clarity on the existing requirements under the Rule.
    Finally, the Exchange is proposing to change a reference in the 
current Rule 24.20(b)(1)(B) from ``SPX combination'' to the word 
``order.'' \7\ This change is intended to codify the existing 
application of the rule. The use of the word ``order'' (which is 
intended to capture the broader SPX Combo Order) is consistent with the 
terminology used elsewhere in the existing rule text \8\ and with the 
Exchange's general priority provisions for complex orders.\9\ As

[[Page 32344]]

stated above, the Exchange does not intend to expand the relief under 
the current Rule but is attempting to harmonize the rule language and 
conform the existing requirements.\10\
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    \7\ The current text of Rule 24.20(b)(1) provides in relevant 
part as follows: ``When a Trading Permit Holder holding an SPX Combo 
Order and bidding or offering in a multiple of the minimum increment 
on the basis of a total debit or credit for the order has determined 
that the order may not be executed by a combination of transactions 
with the bids and offers displayed in the SPX limit order book or by 
the displayed quotes of the crowd, then the order may be executed at 
the best net debit or credit so long as (A) no leg of the order 
would trade at a price outside the currently displayed bids or 
offers in the trading crowd or bids or offers in the SPX limit order 
book and (B) at least one leg of the SPX combination would trade at 
a price that is better than the corresponding bid or offer in the 
SPX limit order book.'' (emphasis added). As proposed to be revised, 
the phrase ``SPX combination'' would be replaced with the word 
``order.''
    \8\ See current CBOE Rule 24.20(b)(1)(A).
    \9\ See, e.g., Rules 6.45A(b)(which applies to open outcry 
equity option trades) and 6.45B(b) (which applies to open outcry 
index and ETF option trades).
    \10\ See Securities Exchange Act Release No. 45389 (February 4, 
2002), 67 FR 6291 (February 11, 2002) (order approving SR-CBOE-00-
040).
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    The proposed change to the current Rule 24.20(b)(1)(B) would align 
the language with the language in the current Rule 24.20(b)(1)(A) which 
states that a Combo Order may receive the relief under the Rule if no 
leg of the order would trade at a price outside of the currently 
displayed bids or offers. Thus, the Exchange is proposing to make clear 
that the price improvement requirement necessary to receive the relief 
may be on any leg of the SPX Combo Order rather than only on a leg in 
the SPX combination portion of the SPX Combo Order. The Exchange 
believes the current representation that the price improvement must be 
on one leg of the SPX combination is a result of [sic] drafting error 
and the intent of the Rule has always been that the price improvement 
occur on any one leg of the SPX Combo Order to remain consistent with 
the treatment of regular complex orders on the Exchange.\11\ In 
addition, in its approval order, the Commission specifically stated 
that the procedures in the proposed Rule 24.20 ``are the same as the 
procedures set forth in CBOE Rule 6.45(e)'' which were the Exchange 
priority rules for complex orders at the time of filing.\12\ Thus, the 
Exchange believes that the intention has always been understood to mean 
the price improvement can occur on any one leg of the order. The 
Exchange is now merely proposing to codify this notion.
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    \11\ See note 7 [sic] supra. For example, Rule 6.45B(b)(ii), 
which applies to index options such as the SPX options class, states 
that complex orders may be executed in open outcry without giving 
priority to equivalent bids (offers) in the individual series legs 
that are represented in the trading crowd or in the public customer 
limit order book provided, ``at least one leg of the order betters 
the corresponding bid (offer) in the public customer limit order 
book.'' In that regard, consistent with general open outcry complex 
orders procedures contained Rules 6.45(e), 6.45A(b) and 6.45B(b), 
for purposes of Rule 24.20 references to the trading crowd include 
broker-dealer orders resting in the electronic book and electronic 
quotes of Market-Makers. Also consistent with Rules 6.45(e), 
6.45A(b) and 6.45B(b), for purposes of Rule 24.20 references to the 
SPX limit order book mean the public customer order limit [sic] 
book. See Rules 6.45(e), 6.45A(b)(ii) and 6.45B(b)(ii). The Exchange 
notes that Professional and Voluntary Professional orders are 
treated the same as broker-dealer orders for purposes of Rule 6.45, 
6.45A and 6.45B, and that the Professional and Voluntary 
Professional designation [sic] are not available for SPX options 
series trading on the Hybrid 3.0 platform (symbols SPX and SPXQ). 
See, e.g., Rules 1.1(fff)-(ggg).
    \12\ See note 8 [sic].
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Conclusion
    The Exchange believes that these changes will enhance the 
Exchange's audit trail along with provide [sic] clarity for TPHs 
utilizing this trading procedure. Because the SPX Combo Order indicator 
described above will require minor systems enhancements, the Exchange 
will announce the implementation date of the proposed rule change in a 
Regulatory Circular to be published no later than 90 days following the 
effective date of this proposed rule change. The Exchange understands 
that all TPHs currently utilizing the relief granted under Rule 24.20 
will have this functionality by the time of implementation of the 
obligation. As such, the implementation date will be no later than 180 
days following the effective date of this proposed rule change.
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.\13\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \14\ requirements that the rules 
of an exchange be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \15\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ Id.
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    In particular, the proposed addition to Rule 24.20 would promote 
just and equitable principles of trading by enhancing the Exchange's 
audit trail. An enhanced audit trail will help the Exchange to regulate 
these kinds of orders more thoroughly, which should serve to promote 
just and equitable trading of these orders on the Exchange. Finally, 
the Exchange believes that the proposed revisions to the existing SPX 
Combo Order text will not expand the relief currently granted in Rule 
24.20. More specifically, the proposed changes to Rule 24.20(a) will 
harmonize the language found throughout the current rule along with 
[sic] more sufficiently explain the existing application of the Rule. 
The proposed changes in current Rule 24.20(b)(1) will conform the text 
of the SPX Combo Order provisions contained in current Rule 
24.20(b)(1)(B) with language in current Rule 24.20(b)(1)(A) and with 
the general requirements for trading complex orders on the Exchange, 
consistent with the original intention.
    The Exchange also believes the proposed rule change is consistent 
with Section 6(b)(1) of the Act,\16\ which provides that the Exchange 
be organized and have the capacity to be able to carry out the purposes 
of the Act and to enforce compliance by the Exchange's TPHs and persons 
associated with its TPHs with the Act, the rules and regulations 
thereunder, and the rules of the Exchange. With an enhanced audit trail 
of orders that TPHs designate as eligible for the SPX Combo Order 
trading procedures, the Exchange believes it will be able to more 
comprehensively monitor such trading on the Exchange.
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    \16\ 15 U.S.C. 78f(b)(1).
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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. In particular, the proposed 
rule change will not impose any burden on any [sic] intramarket 
competition as it will be applied to similarly situated groups trading 
on the Exchange equally. The Exchange does not believe the proposed 
rule change will impose any burden on intermarket completion [sic] as 
the proposed changes merely pose a requirement for a TPH that may 
determine to utilize the special open outcry trading procedures for SPX 
Combo Orders to apply an indicator to an eligible order upon 
systematization (as opposed to the current requirement to apply an 
indicator when reporting an execution) and amend other SPX Combo Order 
provisions without granting any additional relief.

[[Page 32345]]

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

    Because the foregoing proposed rule change does not:
    A. significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \17\ and 
Rule 19b-4(f)(6) \18\ thereunder. At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6).
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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-2014-046 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-2014-046. 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 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-2014-046, and should be 
submitted on or before June 25, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-12884 Filed 6-3-14; 8:45 am]
BILLING CODE 8011-01-P