Document ID: SEC-2017-0501-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2017-03-24T04:00Z

[Federal Register Volume 82, Number 56 (Friday, March 24, 2017)]
[Notices]
[Pages 15085-15090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05852]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80279; File No. SR-CBOE-2017-019]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Related to 
Complex Orders

March 20, 2017.
    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 March 7, 2017, 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 Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules related to complex orders. 
The text of the proposed rule change is 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
    The Exchange proposes to amend its rules related to complex orders 
to: (i) Simplify the definitions of the complex order types that may be 
made available on a class-by-class basis and remove references to 
certain specific complex order types that will no longer be defined; 
(ii) with respect to complex orders in open outcry, set forth 
applicable ratios for an order to be eligible for complex order 
priority within applicable priority rules; (iii) with respect to 
complex orders in open outcry, make explicit the priority applicable 
when there are other complex orders or quotes represented at the same 
net price, whether such other orders or quotes are in the complex order 
book (``COB'') or being represented in open outcry; and (iv) with 
respect to complex orders in open outcry, clarify the applicable 
minimum increment.
    First, with respect to definitions, the Exchange proposes to amend 
Rule 6.53 to remove the definitions of spread order, combination order, 
straddle order and ratio order and replace them with a more general 
definition of a complex

[[Page 15086]]

order (which includes a stock-option order and a security future-option 
order) to simplify the descriptions of the complex order types that may 
be made available on a class-by-class basis. The proposed definition of 
a ``complex order'' is any order for the same account as defined below:
     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 for the purpose of executing a 
particular investment strategy.
     A ``stock-option order'' is an order to buy or sell a 
stated number of units of an underlying stock or a security convertible 
into the underlying stock (``convertible security'') coupled with 
either (i) the purchase or sale of options contract(s) on the opposite 
side of the market representing either (A) the same number of units of 
the underlying stock or convertible security, or (B) the number of 
units of the underlying stock or convertible security necessary to 
create a delta neutral position, or (ii) the purchase or sale of an 
equal number of put and call option contracts, each having the same 
exercise price, expiration date and each representing the same number 
of units of stock as, and on the opposite side of the market from, the 
underlying stock or convertible security portion of the order.\3\
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    \3\ Rule 1.1(ii) currently defines a ``stock-option order'' as 
an order to buy or sell a stated number of units of an underlying or 
a related security coupled with either (i) the purchase or sale of 
option contract(s) on the opposite side of the market representing 
either the same number of units of the underlying or related 
security or the number of units of the underlying security necessary 
to create a delta neutral position or (ii) the purchase or sale of 
an equal number of put and call option contracts, each having the 
same exercise price, expiration date and each representing the same 
number of units of stock as, and on the opposite side of the market 
from, the underlying or related security portion of the order.
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     A ``security future-option order'' is an order to buy or 
sell a stated number of units of a security future or a related 
security convertible into a security future (``convertible security 
future'') coupled with either (i) the purchase or sale of option 
contract(s) on the opposite side of the market representing either the 
same number of the underlying for the security future or convertible 
security future or the number of units of the underlying for the 
security future or convertible security future necessary to create a 
delta neutral position or (ii) the purchase or sale of an equal number 
of put and call option contracts, each having the same exercise price, 
expiration date and each representing the same number of the underlying 
for the security future or convertible security future, as and on the 
opposite side of the market from, the underlying for the security 
future or convertible security future portion of the order. \4\
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    \4\ Rule 1.1(zz) defines a ``security future-option order,'' 
which is deemed a type of Inter-regulatory Spread Order as that term 
is defined in Rule 1.1(ll), as an order to buy or sell a stated 
number of units of a security future or a related security 
convertible into a security future (``convertible security future'') 
coupled with either (i) the purchase or sale of option contract(s) 
on the opposite side of the market representing either the same 
number of the underlying for the security future or convertible 
security future or the number of units of the underlying for the 
security future or convertible security future necessary to create a 
delta neutral position or (ii) the purchase or sale of an equal 
number of put and call option contracts, each having the same 
exercise price, expiration date and each representing the same 
number of the underlying for the security future or convertible 
security future, as and on the opposite side of the market from, the 
underlying for the security future or convertible security future 
portion of the order. Rule 1.1(ll) defines an ``Inter-regulatory 
Spread Order'' as an order involving the simultaneous purchase and/
or sale of at least one unit in contracts each of which is subject 
to different regulatory jurisdictions at stated limits, or at a 
stated differential, or at market prices on the floor of the 
Exchange.
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    The proposed rule change moves the definitions of a ``stock-option 
order'' from Rule 1.1(ii) and ``security future-option order'' from 
Rule 1.1(zz) to Rule 6.53 (and replaces them in Rule 1.1 with cross-
references to the new location of the definitions) so that all 
definitions of the various types of complex orders are located in the 
same place within the rules. The current and proposed definitions of 
stock-option order are substantially similar. However, the Exchange 
believes the language in the proposed definition of stock-option order 
is more consistent with the language in other rules, including Rules 
6.53C (related to electronic handling of complex orders) and 6.80 
(related to order protection, which relates to the Options Order 
Protection and Locked/Crossed Markets Plan, also commonly referred to 
as the Options Distributive Linkage Plan). The current and proposed 
definitions of security future-option order have no substantive 
differences. The proposed complex order definition is in part modeled 
after the definition of a complex order (including a stock-option 
order) already contained in Rule 6.53C(a).
    The Exchange proposes conforming changes to Rules 6.9 (including 
Interpretation and Policy .03), 6.42(4) (including Interpretation and 
Policy .01), 6.45(b)(ii), 6.48(b), 6.73(c), 6.74(d)(iii) and 8.51 to 
harmonize these rules with the proposed changes in Rule 6.53 to 
consistently reference the proposed new definition of a complex 
order.\5\ As a result of the proposed changes to Rule 6.53, the 
Exchange proposes to update related cross-references in Rules 6.53C.08, 
6.74(d)(iii), 7.12(b)(i)(E), 24A.5 and 24B.5. The Exchange notes that, 
while Trading Permit Holders (``TPHs'') may represent in open outcry a 
complex order with any number of legs, and in any ratio, only complex 
orders in the proposed applicable ratios are eligible for complex order 
priority (subject to certain exceptions, including multi-class spreads 
and SPX Combo Orders (see Rules 24.19 and 24.20, respectively) set 
forth in Rule 6.45 and minimum increment relief set forth in Rule 
6.42(4).
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    \5\ The proposed rule change also deletes the paragraph 
lettering from the order type definitions and puts the order types 
in alphabetical order, which the Exchange believes will allow 
investors to more easily locate the order type definitions within 
the rules. Other than proposed changes to the definition of complex 
orders as described above, the proposed rule change makes no 
substantive changes to the order type definitions.
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    Second, with respect to complex orders represented and executed in 
open outcry, the Exchange is proposing to amend Rule 6.45 (pertaining 
to order and quote priority and allocation). Specifically, the proposed 
changes amend Rule 6.45(b)(ii) to set forth the following applicable 
ratio requirements for complex orders to be eligible for complex order 
priority and minimum increment relief when represented and executed in 
open outcry: \6\
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    \6\ To be eligible for electronic processing via the CBOE Hybrid 
System's COB and complex order RFR auction (``COA''), the system 
requires that a complex order be entered on a single order ticket to 
be electronically processed. Under existing Rule 6.53C(a)(1) and 
(2), the Exchange may determine on a class-by-class basis the 
applicable number of legs of a complex order or stock-option order 
that is eligible for processing via COB and COA. Under the same 
provisions, the Exchange may determine on a class-by-class basis 
within certain parameters the applicable ratio of a complex order or 
stock-option order that is eligible for processing via COB and COA. 
Currently, the Exchange has limited COB and COA to orders of no more 
than four (4) legs and ratios equal to or greater than one-to-three 
(.333) and less than or equal to three-to-one (3.00) (and, for 
stock-option orders, ratios no greater than eight-to-one (8.00)). 
Under this current structure, orders with more than four (4) legs or 
that do not satisfy the ratio requirements are not eligible for 
electronic processing via COB or COA, but would instead be routed 
for handling in open outcry. The proposed rule change adds language 
to the introductory paragraph of Rule 6.53C(a) to explicitly state 
that the definitions of complex orders contained in that rule apply 
only for purposes of the electronic handling of complex orders 
pursuant to that rule, notwithstanding the proposed broader 
definition of complex order contained in Rule 6.53. Because there 
are two separate definitions of complex orders, the Exchange 
believes this additional language will bring clarity to the rules 
about when the definition of complex orders in Rule 6.53C(a) 
applies, which is in the context of electronic trading.
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     For a complex order, the order is in a ratio that is less 
than or equal to three-

[[Page 15087]]

to-one (3.00) or the order is in a ratio that is larger than three-to-
one (3.00) but the order is fully hedged (without regard to any prior 
existing position). An order will be considered fully hedged if the 
order is delta neutral +/-10% or if the party representing the order 
can demonstrate that the complex order is fully hedged using reasonable 
risk-valuation methodologies;
     for a stock-option order, the options leg(s) must (A) 
represent the same number of units of the underlying stock or 
convertible security in the stock leg or (B) represent the number of 
units of the underlying stock or convertible security necessary to 
create a delta neutral position, but in no case in a ratio greater than 
eight-to-one (8.00), where the ratio represents the total number of 
units of the underlying stock or convertible security in the options 
leg to the total number of units of stock or convertible security in 
the stock leg; and
     for a security futures-option order, the options leg(s) 
must (A) represent the same number of units of the underlying stock in 
the security future leg or (B) represent the number of units of the 
underlying stock necessary to create a delta neutral position, but in 
no case in a ratio greater than eight-to-one (8.00), where the ratio 
represents the total number of units of the underlying stock in the 
options leg to the total number of units of stock or convertible 
security in the security-futures leg.
    The proposed rule change also adds to the respective rules that, 
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.
    As discussed above, proposed Rule 6.45(b)(ii)(A) sets forth the 
ratio that determines whether a complex order executed in open outcry 
is eligible for priority; however, proposed Rule 6.45(b)(ii)(B) sets 
forth the terms of the priority for complex orders. The Exchange 
proposes to add the following language to Rule 6.45(b)(ii)(B):
     A complex order may be executed without consideration to 
prices of the same complex order that might be available on other 
exchanges. A complex order with a ratio greater than three-to-one 
(3.00) may not trade through prices in the individual option series 
that are available on other exchanges.\7\
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    \7\ This is consistent with Rule 6.53C(c)(ii), which states that 
``[c]omplex orders that are submitted to the COB may be executed 
without consideration to prices of the same complex orders that 
might be available on other exchanges[.]''
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    The above language is consistent with the order protection rules 
implemented by all options exchanges.\8\ The Exchange is simply 
proposing to add the language to proposed Rule 6.45(b)(ii)(B) in order 
to avoid confusion with regards to the ability of a complex order to 
trade-through away markets.
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    \8\ Rule 6.81(b)(7) indicates that Trading Permit Holders need 
not prevent Trade-Throughs where the ``transaction that constituted 
the Trade-Through was effected as a portion of a Complex Trade[.]'' 
Additionally, a ``Complex Trade'' is defined as ``(i) the execution 
of an order in an option series in conjunction with the execution of 
one or more related order(s) in different option 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 (3.0) and for the purpose of executing a 
particular investment strategy (for the purpose of applying the 
aforementioned ratios to complex trades comprised of both mini-
option contracts and standard option contracts, ten (10) mini-option 
contracts will represent one (1) standard option contract); or (ii) 
the execution of a stock-option order to buy or sell a stated number 
of units of an underlying stock or a security convertible into the 
underlying stock (``convertible security'') coupled with the 
purchase or sale of option contract(s) on the opposite side of the 
market representing either (A) the same number of units of the 
underlying stock or convertible security, or (B) the number of units 
of the underlying stock or convertible security necessary to create 
a delta neutral position, but in no case in a ratio greater than 
eight-to-one (8.00), where the ratio represents the total number of 
units of the underlying stock or convertible security in the option 
leg to the total number of units of the underlying stock or 
convertible security in the stock leg.'' See Rule 6.80.
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    Third, with respect to complex orders in classes where the COB is 
available, the Exchange also proposes to make explicit the open outcry 
priority applicable when there are other complex orders or quotes 
represented at the same net price, whether such other orders or quotes 
are in the COB or being represented in open outcry. Specifically, the 
Exchange proposes to amend Rule 6.45(b)(ii) to provide that if a 
complex order would trade in open outcry at the same net debit or 
credit price as another complex order, priority would go first to 
public customer orders in COB (with multiple public customer orders 
ranked based on time), then to complex order bids and offers 
represented in the trading crowd (with multiple bids and offers ranked 
in accordance with the allocation principles applicable to in-crowd 
market participants contained in Rule 6.45(b)(i)(B) and (D), 
respectively), and then to all other orders and quotes in the COB (with 
multiple bids and offers ranked in accordance with the allocation 
algorithm in effect pursuant to Rule 6.53C).\9\ This methodology for 
prioritizing multiple complex orders for open outcry trading is 
consistent with the methodology applicable for prioritizing multiple 
simple orders for open outcry trading and how the Exchange has 
interpreted and applied complex order priority.\10\ The Exchange is 
merely proposing to reflect this existing interpretation within its 
rule text for added clarity. The Exchange is proposing no changes to 
the existing prioritization methodology.
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    \9\ The Exchange notes that, for purposes of this provision, 
Voluntary Professionals and Professionals, as defined in Rules 
1.1(fff) and (ggg), respectively, are treated in the same manner as 
broker-dealers in classes where the Voluntary Professional and 
Professional designations are available.
    \10\ The Exchange notes that the provision of Rule 
6.45(b)(i)(D), applicable to TPHs relying on Section 11(a)(1)(D) of 
the Securities Exchange Act of 1934 (the ``Act'') and Rule 11a1-1(T) 
thereunder (commonly known as the ``G'' exemption rule'') would 
apply to complex orders in the same manner as it applies to simple 
orders. Those rule provisions provide that in open outcry, any TPH 
relying on the G exemption rule as an exemption must yield priority 
to any bid (offer) at the same price of public customer orders and 
broker-dealer orders resting in the electronic book, as well as any 
other bids and offers that have priority over such broker-dealer 
orders under those rules. Under these provisions, a TPH relying on 
the G exemption rule would yield priority to simple public customer 
orders and broker-dealer orders resting in the book and complex 
public customer orders and broker-dealer orders resting in the COB, 
as well as any other simple and complex bids and offers that have 
priority over such broker-dealer orders under those rules.
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    Fourth, with respect to minimum increments for bids and offers on 
complex orders, the Exchange proposes to clarify in Rule 6.42(4) which 
complex orders are eligible for the relief in Rule 6.42(4). 
Specifically, as discussed above, the Exchange proposes to add the 
below language to Rule 6.42(4):
     Complex orders that do not meet the requirements of Rule 
6.45(b)(ii)(A) are not eligible for the minimum increment relief in 
this paragraph (4) (including the penny increment relief of 
subparagraph (a) below).
    In short, if a complex order is in a ratio that is larger than the 
3 to 1 and the order is not fully hedged, the order would not be 
eligible for the minimum increment relief.\11\ Instead, each leg would 
have to satisfy the minimum increment applicable to simple orders 
generally.\12\
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    \11\ As previously noted, the order would also not be eligible 
for complex order priority set forth in Rule 6.45(b)(ii)(B).
    \12\ See Rules 6.42(1)-(3).
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    Finally, the proposed rule change makes other non-substantive, 
technical changes to Rules 6.45, 6.53C(a), 6.73, 24A.5 and 24B.5, 
including deleting extra spaces, adding spaces where necessary, 
correction of typos and revising rule headings to be consistent with 
other headings.
Discussion
    Table 1 below summarizes this proposal as it relates to complex 
orders executed in open outcry and whether

[[Page 15088]]

those orders (based on their ratio) qualify for complex order minimum 
increment relief, complex order priority, and trade-through relief.

                                                     Table 1
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                                                                          Eligible to trade-
                                     Eligible for        Eligible for       through complex   Eligible to trade-
                                     complex order       complex order     order book prices  through leg prices
              Ratio                minimum increment    priority-- Rule        on other       on other exchanges
                                     relief-- Rule      6.45(b)(ii)(B)     exchanges-- Rules      (Rule 6.81)
                                        6.42(4)                             6.45(b)(ii)(B)
----------------------------------------------------------------------------------------------------------------
<=3 to 1........................  Yes...............  Yes...............  Yes...............  Yes.
>3 to 1 But Fully Hedged........  Yes...............  Yes...............  Yes...............  No.
>3 to 1 But Not Fully Hedged....  No................  No................  Yes \13\..........  No.
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    When the definition of ``ratio order'' was first instituted in 2003 
(which generally defined a permissible ratio as one that is less than 
or equal to 3 to 1), multi-leg strategies were in their infancy. 
Regardless, the Commission held that ``ratio orders within certain 
permissible ratios may provide market participants with greater 
flexibility and precision in effectuating trading and hedging 
strategies.'' \14\ Today, multi-leg strategies are crucial pieces of 
market participants' overall trading strategies, and the permissible 
ratio has not been updated to reflect the reality of today's 
marketplace, which is valid, risk-reducing multi-leg orders may have 
ratios larger than 3 to 1. The Exchange believes having a mechanism by 
which a complex order in a ratio larger than 3 to 1 may receive the 
complex order benefits listed in Table 1 will allow market participants 
to execute more sophisticated multi-leg strategies, which will also 
allow market participants to more efficiently and effectively craft 
finely tuned risk profiles.
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    \13\ Exchanges are not required to honor the prices of a complex 
order on other exchanges.
    \14\ See Securities Exchange Act Release 48858 (December 1, 
2003), 68 FR 68128 (December 5, 2003) (SR-CBOE-2003-007) (``Approval 
Order''). In approving ratio orders, the Commission stated that 
``[t]he Commission believes that ratio orders within certain 
permissible ratios may provide market participants with greater 
flexibility and precision in effectuating trading and hedging 
strategies. In addition, the Commission believes that including such 
ratio orders in the exception to the priority rules provided in CBOE 
Rule 6.45(e) will facilitate the execution of ratio orders. In this 
regard, the Commission believes that the procedures governing the 
execution of complex orders, such as ratio orders, serve to reduce 
the risk of incomplete or inadequate executions while increasing 
efficiency and competitive pricing by requiring price improvement 
before the order can receive priority over other orders.'' Id. 
Pursuant to SR-CBOE-2017-009, Rule 6.45(e) was replaced with Rule 
6.45(b)(ii).
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    The Exchange understands that the Commission is concerned that the 
simple order market may be somehow disadvantaged by allowing certain 
multi-legged orders that have ratios larger than 3 to 1 to receive the 
complex order benefits listed in Table 1. The chief concern appears to 
be that if the ratios are too greatly expanded market participants 
will, for example, enter multi-legged strategies designed primarily to 
gain priority over orders on the limit order book or in the trading 
crowd, rather than to effectuate a bona fide trading or hedging 
strategy. Although the marketplace may in fact be better served by a 
structure that does not require multi-legged orders to, among other 
things, yield priority to a simple order (which cannot on its own 
satisfy the terms of a multi-leg order), this proposal does not require 
the Commission to pass judgment on the issue. Instead, this proposal 
strikes a balance between the Commission's concerns and the overall 
benefit of giving market participants the ability to efficiently 
execute bona-fide, multi-leg trading or hedging strategies. To ensure 
complex orders in ratios larger than 3 to 1 are receiving the complex 
order benefits listed in Table 1 only when the complex orders represent 
bona-fide multi-legged trading or hedging strategies, the Exchange is 
proposing that any complex order in a ratio larger than 3 to 1 must be 
fully hedged in order to receive the complex order benefits listed in 
Table 1.\15\
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    \15\ A Complex order in a ratio of 3 to 1 or less already 
receive the benefits listed in Table 1. The Exchange is not 
proposing to change the benefits as they relate to a complex order 
in a ratio of 3 to 1 or less.
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    The ``fully hedged'' concept of this proposal is based, in part, on 
SEC Rules related to qualified contingent trades (``QCTs'').\16\ 
Specifically, the Commission granted an exemption from Rule 611(a) for 
any trade-throughs of quotations in NMS stocks caused by the execution 
of an order involving one or more NMS stocks that are components of a 
QCT. More specifically, in order for a transaction to qualify as a QCT, 
the Commission requires, among other things, that the exempted NMS 
Stock Transaction be ``fully hedged (without regard to any prior 
existing position) as a result of the other components of the 
contingent trade.'' \17\ The Exchange is simply proposing that the 
fully hedged concept be used to determine whether a multi-legged order 
in a ratio larger than 3 to 1 qualifies to receive the complex order 
benefits described in Table 1. Consistent with the QCT exemption, for 
the purposes of the complex order benefits a multi-legged order must be 
evaluated without regard to any prior existing position. In addition, 
in order to have a reasonable basis to conclude that an order is fully 
hedged market participants must use reasonable risk-valuation 
methodologies.\18\
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    \16\ The Commission granted an exemption from Rule 611(a) for 
any trade-throughs of quotations in NMS stocks caused by the 
execution of an order involving one or more NMS stocks that are 
components of a QCT. See Securities Exchange Act Release 54389 
(August 31, 2006), 71 FR 52829 (September 7, 2006) and Securities 
Exchange Act Release 57620 (April 4, 2008), 73 FR 19271 (April 9, 
2008). The Commission defines a QCT as a transaction consisting of 
two or more component orders, executed as agent or principal, where: 
(1) At least one component order is in an NMS stock; (2) all 
components are effected with a product or price contingency that 
either has been agreed to by the respective counterparties or 
arranged for by a broker-dealer as principal or agent; (3) the 
execution of one component is contingent upon the execution of all 
other components at or near the same time; (4) the specific 
relationship between the component orders (e.g., the spread between 
the prices of the component orders) is determined at the time the 
contingent order is placed; (5) the component orders bear a 
derivative relationship to one another, represent different classes 
of shares of the same issuer, or involve the securities of 
participants in mergers or with intentions to merge that have been 
announced or since cancelled; and (6) the Exempted NMS Stock 
Transaction is fully hedged (without regard to any prior existing 
position) as a result of the other components of the contingent 
trade. Id.
    \17\ Id.
    \18\ See QCT Exemptive Order, FN 16 (providing that a trading 
center may demonstrate that an Exempted NMS Stock Transaction is 
fully hedged based on the use of reasonable risk-valuation 
methodologies).
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    In addition to allowing market participants to devise their own 
reasonable risk-valuation methodologies to determine if an order is 
fully hedged, the Exchange believes it's important to specify in the 
Rules a method for market participants to determine whether a complex 
order in a ratio larger than 3 to 1 is fully hedged. Thus, the Exchange 
is also proposing that a multi-legged order

[[Page 15089]]

in a ratio larger than 3 to 1 that is delta neutral plus or minus 10% 
will be considered fully hedged for the purposes of the complex order 
benefits listed in Table 1. The Exchange believes delta hedging is one 
example of a proven, longstanding risk-valuation methodology, and a 
transaction that is nearly 100% delta neutral represents a bona-fide 
multi-legged strategy that deserves the complex order benefits listed 
in Table 1. For example, a complex order consisting of one leg to buy 
30 VIX calls and another leg to sell 30 VIX puts--both in the same 
series--combined with a third leg to purchase 100 VIX calls in a 
separate series that have a delta of ``30'' (30% or .30) creates a 
delta neutral position, and there is no reason such a transaction 
should not receive the complex order benefits listed in Table 1. 
Additionally, because reasonable minds may disagree as to a particular 
options delta, the plus or minus 10% standard gives market participants 
a reasonable margin for error when determining whether the order should 
receive the complex order benefits listed in Table 1. For example, in 
the above transaction, the Exchange may determine that the delta for 
the 100 VIX calls is 29, which would mean the transaction is not 100% 
delta neutral because the transaction represents a position that is 
long 29 deltas and short 30 deltas. The difference in delta 
calculations should not affect the ability of the order to qualify for 
the complex order benefits listed in Table 1 because whether the 
transaction is 100% delta neutral, or nearly 100% delta neutral, such 
orders represent bona-fide multi-legged strategies that do not 
disadvantage the simple order market because the simple order market 
cannot satisfy the terms of the complex order.
    In short, the Exchange believes this proposal is consistent with 
the Act and SR-CBOE-2003-007 because in the same way that the 
Commission held that ``ratio orders within certain permissible ratios 
may provide market participants with greater flexibility and precision 
in effectuating trading and hedging strategies[,]'' \19\ complex orders 
that are fully hedged may provide market participants with greater 
flexibility and precision in effectuating trading and hedging 
strategies. The Exchange also believe this proposal is consistent with 
the Act and SR-CBOE-2003-007 because in the same way that the 
Commission held that ``including such ratio orders in the exception to 
the priority rules provided in CBOE Rule 6.45(e) \20\ will facilitate 
the execution of ratio orders[,]'' \21\ including fully hedged complex 
orders in the exception to the priority rules provided in CBOE Rule 
6.45(b)(ii) will facilitate the execution of fully hedged complex 
orders. Finally, in the same way that the Commission held that ``the 
procedures governing the execution of complex orders, such as ratio 
orders, serve to reduce the risk of incomplete or inadequate executions 
while increasing efficiency and competitive pricing by requiring price 
improvement before the order can receive priority over other 
orders[,]'' \22\ the Exchange believes the procedures governing the 
execution of fully hedged complex orders serve to reduce the risk of 
incomplete or inadequate executions while increasing efficiency and 
competitive pricing by requiring price improvement before the order can 
receive priority over other orders.
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    \19\ See Approval Order at 68128.
    \20\ As previously noted, pursuant to SR-CBOE-2017-009, Rule 
6.45(e) was replaced by Rule 6.45(b)(ii).
    \21\ See Id.
    \22\ See Id.
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    Upon approval of this rule change filing, 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 
approval date. The implementation date will be no later than 180 days 
following the approval date.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\23\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \24\ 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) \25\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78f(b)(5).
    \25\ Id.
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    In particular, the Exchange believes that (1) removing the 
definitions of spread order, combination order, straddle order and 
ratio order from Rule 6.53 and incorporating the more general 
definition of a complex order (including a stock-option order (and the 
elimination of a redundant definition of stock-option order) and a 
security future-option order) into the Rule and (2) harmonizing rules 
that reference such definitions simplifies and provides more clarity 
and uniformity to the rules, which ultimately benefits investors. The 
Exchange believes the proposed nonsubstantive changes to the rules, 
include the alphabetization of the order type definitions, further 
benefits investors, as they improve the readability of and further 
simplify the rules.
    Additionally, the Exchange believes the proposed rule change to 
limit complex order priority, complex order increments, and complex 
order trade-through principals to complex orders that satisfy the 
proposed ratio requirements will, in general, help protect investors by 
ensuring that market participants receiving complex order benefits are 
executing bona-fide multi-legged trading or hedging strategies. 
Furthermore, the Exchange believes this proposal is consistent with the 
Act and SR-CBOE-2003-007 because in the same way that the Commission 
held that ``ratio orders within certain permissible ratios may provide 
market participants with greater flexibility and precision in 
effectuating trading and hedging strategies[,]'' \26\ complex orders 
that are fully hedged may provide market participants with greater 
flexibility and precision in effectuating trading and hedging 
strategies. The Exchange also believe this proposal is consistent with 
the Act and SR-CBOE-2003-007 because in the same way that the 
Commission held that ``including such ratio orders in the exception to 
the priority rules provided in CBOE Rule 6.45(e) will facilitate the 
execution of ratio orders[,]'' \27\ including fully hedged complex 
orders in the exception to the priority rules provided in CBOE Rule 
6.45(b)(ii) will facilitate the execution of fully hedged complex 
orders. Finally, in the same way that the Commission held that ``the 
procedures governing the execution of complex orders, such as ratio 
orders, serve to reduce the risk of incomplete or inadequate executions 
while increasing efficiency and competitive pricing by

[[Page 15090]]

requiring price improvement before the order can receive priority over 
other orders[,]'' \28\ the Exchange believes the procedures governing 
the execution of fully hedged complex orders serve to reduce the risk 
of incomplete or inadequate executions while increasing efficiency and 
competitive pricing by requiring price improvement before the order can 
receive priority over other orders.
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    \26\ See Approval Order at 68128.
    \27\ See Id.
    \28\ See Id.
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    In addition, making explicit the open outcry priority applicable 
when there are other complex orders or quotes represented at the same 
net price, whether such other orders or quotes are in the COB or being 
represented in open outcry, provides added clarity to the rule text in 
a manner that is consistent with the existing methodology applicable 
for prioritizing multiple simple orders for open outcry trading and how 
the Exchange has interpreted and applied complex order priority. The 
Exchange notes that it is not proposing to amend how complex orders are 
allocated or the priority afforded to complex orders in open outcry; it 
is merely modifying the requirements for a complex order to be eligible 
for the existing open outcry complex order priority.
    The Exchange notes that TPHs may continue to represent and execute 
in open outcry a complex order with any number of legs and in any 
ratio. However, if a complex order does not satisfy the applicable 
ratio requirements as set forth above, then it will not be eligible for 
the complex order benefits listed in Table 1. Additionally, even if a 
complex order is fully hedged market participants do not have to 
utilize the complex order benefits listed in Table 1 if they choose not 
to. The Exchange believes the proposed changes will increase 
opportunities for execution of complex orders and lead to tighter 
spreads on CBOE, which will benefit investors. The Exchange also 
believes that the proposed rule change is designed to not permit unfair 
discrimination among market participants, as all market participants 
may trade complex orders, and the priority eligibility requirements 
apply to complex orders of all market participants.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange believes that 
simplifying and expanding its rules related to complex orders helps 
provide clarity with regards to the execution of complex orders and 
increases the likelihood that market participants will execute bona-
fide complex orders on CBOE. This proposal promotes fair and orderly 
markets as well as assists the Exchange in its ability to effectively 
attract order flow and liquidity to its market, which ultimately 
benefits all TPHs and all investors. Complex orders are available to 
all TPHs (and all non-TPH market participants through TPHs), and the 
Exchange believes any perceived burden on customers is outweighed by 
customers' ability to execute complex orders as proposed.

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-2017-019 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-2017-019. 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-2017-019 and should be 
submitted on or before April 14, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05852 Filed 3-23-17; 8:45 am]
 BILLING CODE 8011-01-P