Document ID: SEC-2014-1020-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Stock Exchange, Inc.
Posted Date: 2014-06-19T04:00Z

[Federal Register Volume 79, Number 118 (Thursday, June 19, 2014)]
[Notices]
[Pages 35206-35208]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-14313]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72387; File No. SR-CHX-2014-09]

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Remove Obsolete Rule Language and To Permit the Exchange To Enable or 
Disable Trade Adjustment Functionalities Pursuant to Notice

June 13, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on June 10, 2014, the Chicago Stock Exchange, Inc. (``CHX'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``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

    CHX proposes to amend Article 1, Rule 1 (Definitions); Article 20, 
Rule 4 (Eligible Orders); Article 20, Rule 9 (Cancellation or 
Adjustment of Bona Fide Error Trades); Article 20, Rule 9A (Error 
Correction Transactions); and Article 20, Rule 11 (Cancellation or 
Adjustment of Stock Leg Trades) to remove obsolete rule language and to 
permit the Exchange to enable or disable trade adjustment 
functionalities pursuant to notice. The Exchange has designated this 
proposal as non-controversial and provided the Commission with the 
notice required by Rule 19b-4(f)(6)(iii) under the Act.\3\
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    \3\ 17 CFR 240.19b-4(f)(6)(iii).
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    The text of this proposed rule change is available on the 
Exchange's Web site at (www.chx.com) and in 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 CHX included statements 
concerning the purpose of and basis for the proposed rule changes 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 CHX 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 Article 1, Rule 1 (Definitions); 
Article 20, Rule 4 (Eligible Orders); Article 20, Rule 9 (Cancellation 
or Adjustment of Bona Fide Error Trades); Article 20,

[[Page 35207]]

Rule 9A (Error Correction Transactions); and Article 20, Rule 11 
(Cancellation or Adjustment of Stock Leg Trades) to remove obsolete 
rule language and to permit the Exchange to enable or disable trade 
adjustment functionalities pursuant to notice. Aside from these 
amendments, the Exchange does not propose to modify the operation of 
any of the foregoing rules.
Background
    On October 31, 2013, the Securities and Exchange Commission 
(``Commission'') approved a proposed rule change to amend Article 20, 
Rule 9 to adopt new and modified rules for the cancellation and 
adjustment of trades based on Bona Fide Error; to adopt Article 20, 
Rule 9A to detail the Exchange's then-current requirements for Error 
Correction Transactions; and to adopt Article 20, Rule 11 to adopt new 
and modified rules for the cancellation or adjustment of the stock leg 
trade of Stock-Option or Stock-Future orders.\4\
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    \4\ See Securities Exchange Act Release No. 70791 (October 31, 
2013), 78 FR 66791 (November 6, 2013) (Order Approving a Proposed 
Rule Change to Adopt Standards for the Cancellation or Adjustment of 
Bona Fide Error Trades, the Submission of Error Correction 
Transactions, and the Cancellation or Adjustment of Stock Leg Trades 
of Stock-Option or Stock-Future Orders).
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    Subsequently, on November 12, 2013, the Exchange filed a proposed 
rule change to, inter alia, adopt an operative date of December 2, 2013 
for all changes approved under 34-70791 and to readopt the previous 
version of Article 20, Rule 9 (Cancellation of Transactions), so that 
it would remain operative through December 1, 2013.\5\
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    \5\ See Securities Exchange Act Release No. 70894 (November 18, 
2013), 78 FR 70085 (November 22, 2013) (SR-CHX-2013-19).
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Proposed Deletion of Obsolete Rule Language
    Given that the rule amendments approved under 34-70791 are all 
currently operative, the Exchange proposes to delete the previous 
version of Article 20, Rule 9, as it ceased to be operative as of 
December 2, 2013. The Exchange also proposes to delete language under 
current Article 1, Rule 1 and Article 20, Rules 9, 9A and 11 that 
provide that these rules ``shall be operative as of December 2, 2013,'' 
as all of these rules are currently operative.
Proposed Amendments to Article 20, Rules 9(b) and 11(c)(3)
    Current Article 20, Rule 9(b) permits a Participant to request an 
adjustment of trades made in Bona Fide Error to the extent necessary to 
correct Bona Fide Errors.\6\ Moreover, current Article 20, Rule 
11(c)(3) permits the Participant that submitted the stock leg trade to 
request an adjustment of the stock leg trade, pursuant to one of the 
options enumerated under subparagraphs (A)-(C), per Stock-Option or 
Stock-Future order.\7\
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    \6\ CHX Article 1, Rule 1(ii) defines ``Bona Fide Error'' as 
follows:
    ``Bona Fide Error'' means:
    (1) The inaccurate conveyance or execution of any term of an 
order, including, but not limited to, price, number of shares or 
other unit of trading; identification of the security; 
identification of the account for which securities are purchased or 
sold; lost or otherwise misplaced order tickets; or the execution of 
an order on the wrong side of a market;
    (2) the unauthorized or unintended purchase, sale, or allocation 
of securities, or the failure to follow specific client 
instructions;
    (3) the incorrect entry of data into relevant systems, including 
reliance on incorrect cash positions, withdrawals, or securities 
positions reflected in an account; or
    (4) a delay, outage, or failure of a communication system used 
to transmit market data prices or to facilitate the delivery or 
execution of an order.

    \7\ Under CHX Article 20, Rule 11(c)(3), assuming that the other 
requirements of Article 20, Rule 11 are met, a Participant may 
request to adjust (A) the price of a stock leg trade to maintain the 
originally-agreed aggregate cash flow of all components of the 
related Stock-Option or Stock-Future order; (B) the quantity of a 
stock leg trade to maintain the originally-agreed hedge ratio 
between all components of the related Stock-Option or Stock-Future 
order; or (C) the quantity of a stock leg trade to maintain the 
originally-agreed delta-based hedge ratio of all components of the 
related Stock-Option order.
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    While current Article 20, Rules 9 and 11 provide that Exchange 
operations personnel shall decide whether or not the requirements for 
trade cancellations or adjustments have been met, the rules do not, 
however, explicitly provide that the adjustment functionalities 
described therein shall be made available to Participants at the 
discretion of the Exchange. The Exchange submits that this discretion 
is necessary to provide the Exchange with rule-based authority to 
disable certain adjustment functionalities for all Participants when, 
for example, the Exchange decides to upgrade tools used to receive and 
verify a specific adjustment option, so as to better ensure compliance 
with CHX rules and securities laws. If the Exchange deactivates certain 
adjustment functionalities pursuant to the proposed rule, the 
Participant seeking a trade adjustment would still be permitted to 
cancel Bona Fide Error trades pursuant to Article 20, Rule 9(b) and 
stock leg trades pursuant to Article 20, Rule 11(b).
    As such, the Exchange now proposes adopt the following language 
within current Article 20, Rule 9(b):

    Bona Fide Error trade adjustments shall be available to 
Participants at the discretion of the Exchange. Announcements 
regarding the availability of Bona Fide Error trade adjustments 
shall be made by the Exchange via Information Memorandum and will be 
provided in a manner to give reasonable advance notice to its 
Participants.

In addition, the Exchange proposes to adopt the similar language within 
current Article 20, Rule 11(c)(3):

    The following adjustment options under subparagraphs (A)-(C) 
shall be available to Participants at the discretion of the 
Exchange. Announcements regarding the availability of the adjustment 
options shall be made by the Exchange via Information Memorandum and 
will be provided in a manner to give reasonable advance notice to 
its Participants.

Both proposed paragraphs are similar to current Article 20, Rule 4(b), 
which permits the Exchange to designate which general order types, 
modifiers, and related terms listed under Article 1, Rule 2 may be 
eligible for entry to and acceptance by the Matching System, with 
notice via Regulatory Circular to its market participants.
    Incidentally, the Exchange proposes to amend Article 20, Rule 4(b) 
to replace the term ``Regulatory Circular'' with the more accurate 
``Information Memorandum'' and replace the term ``market 
participants,'' with the more accurate ``Participants,'' which is a 
defined term under Article 1, Rule 1(s).
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder that are applicable to a national securities exchange, and, 
in particular, with the requirements of Section 6(b) of the Act.\8\ 
Specifically, the proposal is also consistent with Section 6(b)(1) of 
the Act,\9\ which requires that an exchange be so organized and have 
the capacity to be able to carry out the purposes of 15 U.S.C. 78a et 
seq. and to comply, and to enforce compliance by its members and 
persons associated with its members, with the provisions of 15 U.S.C. 
78a et seq., the rules and regulations thereunder, and the rules of the 
exchange. The proposal is also consistent with Section 6(b)(5) of the 
Act,\10\ which requires exchange rules to promote just and equitable 
principles of trade, remove impediments to, and perfect the mechanism 
of, a free and open market and a national market system, and, in 
general, protect investors and the public interest.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(1).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed deletion of obsolete rule

[[Page 35208]]

language is consistent with Sections 6(b)(1) and 6(b)(5) of the Act 
because it promotes clarity of CHX rules by removing unnecessary and/or 
redundant language. This will, in turn, provide clear CHX rules for 
Participants to follow and the Exchange to enforce.
    The Exchange also believes the proposed amendment to provide the 
Exchange with the discretion to enable or disable certain trade 
adjustment functionalities will prevent Participants from utilizing 
adjustment functionalities that are in the process of being optimized 
by Exchange operations personnel (e.g., systems upgrade for verifying 
adjustment parameters).\11\ Moreover, the notice requirements will 
provide Participants with reasonable notice as to the availability of 
such adjustment options. As such, the proposed rule change is also 
consistent with the requirements of Sections 6(b)(1) and 6(b)(5) of the 
Act.
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    \11\ Any substantive changes to adjustment options will only be 
effected through a Rule 19b-4 filing.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the proposal is consistent with Section 
6(b)(8) of the Act \12\ in that it does not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. The proposed rule change either deletes obsolete 
non-substantive language or provides the Exchange with operational 
flexibility concerning the availability of certain trade adjustment 
functionalities that are already codified under CHX rules.
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    \12\ 15 U.S.C. 78(f)(b)(8) [sic].
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-4(f) 
thereunder,\14\ CHX has designated this proposal as one that effects a 
change that (A) does not significantly affect the protection of 
investors or the public interest; (B) does not impose any significant 
burden on competition; and (C) by its terms, does not become operative 
for 30 days after the date of the filing, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest. The Exchange has also provided the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.\15\ The 
Exchange notes that this proposal does not propose any new policies or 
provisions that are unique or unproven, as all changes proposed herein 
correct non-substantive taxonomy issues and set an operative date for 
functionality that has already been approved by the Commission. Given 
these factors, this rule filing qualifies for immediate effectiveness 
as a ``non-controversial'' rule change under paragraph (f)(6) of Rule 
19b-4.\16\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ 17 CFR 240.19b-4(f)(6)(iii).
    \16\ Id.
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    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 shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal 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 No. SR-CHX-2014-09 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549.

All submissions should refer to File No. SR-CHX-2014-09. 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 changes 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 CHX. 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 No. SR-CHX-2014-09 and should be 
submitted on or before July 10, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-14313 Filed 6-18-14; 8:45 am]
BILLING CODE 8011-01-P