Document ID: SEC-2013-0085-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2013-01-16T05:00Z

[Federal Register Volume 78, Number 11 (Wednesday, January 16, 2013)]
[Notices]
[Pages 3486-3489]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-00789]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68615; File No. SR-CBOE-2012-133]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Codify in the CBOE Stock Exchange Rules a Cross 
Order Type Tied to a Related Derivative Component

January 10, 2013.
    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 December 31, 2012, 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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[[Page 3487]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to codify in its rules the availability of a 
cross order type tied to a related derivative component on CBOE Stock 
Exchange (``CBSX''). The text of the proposed rule change is provided 
below.

(additions are italicized; deletions are [bracketed])
* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *

CHAPTER L--CBOE Stock Exchange (CBSX) Rules

* * * * *

Rule 51.8 Types of Orders Handled

    At the discretion of CBSX, and once the CBSX System is so 
enabled, any of the following types of orders may be accommodated on 
the CBSX System:
* * * * *
    (u) Tied Cross Only Order. A Tied Cross Only Order is an order 
to trade the stock component of a qualified contingent trade which 
meets the qualified contingent trade exemption pursuant to Rule 
611(d) of Regulation NMS under the Exchange Act. A Tied Cross Only 
Order may be executed without regard to the protected NBBO. The 
order may only be executed against a contra Tied Cross Only Order 
for the same size and price and may only be executed at prices at or 
within the CBSX BBO and, when at the CBSX BBO, consistent with the 
requirements of Rule 52.11.
* * * * *

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
    Contingent trades play an important role in the investment and 
trading strategies of investors and the securities industry generally. 
A contingent trade is a multi-component trade involving orders for a 
security and a related derivative, or, in the alternative, orders for 
related securities, that are executed at or near the same time. The 
financial instruments in a contingent trade may be equities, options, 
futures, bonds, and combinations thereof. The economics of the 
transaction are based on the relationship between the prices of the 
security and the related derivative, or between the prices of the 
related securities, and the execution of one order is contingent upon 
the execution of the other order(s). The sought-after spread or ratio 
between the relevant instruments is known and specified at the time of 
order placement, and this sought-after spread or ratio stands 
regardless of the prevailing price at the time of execution. Therefore, 
the parties to these transactions are focused on the net price of the 
transaction for all of the component instruments, rather than on the 
absolute price of any single component instrument. Indeed, with this 
focus on the relative prices of the component instruments to a 
contingent trade, the price of a component of a particular trade may or 
may not correspond to the prevailing market price of the security. The 
parties to the trade will not execute one side of the trade without the 
other component or components being executed in full (or in ratio) and 
at the specified spread or ratio.\3\
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    \3\ Letter to Nancy M. Morris, Secretary, Commission, from 
Andrew Madoff, SIA Trading Committee, SIA, dated June 21, 2006 
(``SIA Exemption Request''), page 2.
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    The Commission noted that qualified contingent trades potentially 
could become too risky and costly to be employed successfully if they 
were required to meet the trade-through provisions of Rule 611 of 
Regulation NMS under the Securities Exchange Act of 1934 (the 
``Exchange Act''). Absent an exemption, participants in contingent 
trades often would need to use the Rule's intermarket sweep order 
exception and route orders to execute against protected quotations with 
better prices than an NMS stock component of the contingent trade. Any 
executions of these routed orders could throw the participants ``out of 
hedge'' and necessitate additional transactions in an attempt to 
correct the imbalance. As a practical matter, the difficulty of 
maintaining a hedge, and the risk of falling out of hedge, could 
dissuade participants from engaging in contingent trades, or at least 
raise the cost of such trades. The elimination or reduction of this 
trading strategy potentially could remove liquidity from the market.\4\
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    \4\ See Exchange Act Release No. 54389 (August 31, 2006), page 
7-8.
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    Due to the above reasons, on August 31, 2006, pursuant to Rule 
611(d) of Regulation NMS, the Commission granted an exemption from the 
provisions of Rule 611 of Regulation NMS to each NMS stock component of 
certain qualified contingent trades (as defined in the exemptive order) 
(the ``QCT Exemption'').\5\ On April 4, 2008, pursuant to Rule 611(d) 
of Regulation NMS under the Exchange Act, the Commission issued an 
order modifying the QCT Exemption.\6\
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    \5\ See Exchange Act Release No. 54389 (August 31, 2006).
    \6\ See Exchange Act Release No. 57620 (April 4, 2008).
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    In addition to incorporating several exceptions codified in Rule 
611(b) of Regulation NMS, CBSX Rule 52.7 also incorporates exemptions 
from the Order Protection Rule granted by Commission Order.\7\ The 
Exchange now wishes to further clarify that the CBSX System 
accommodates Tied Cross Only Orders, which are orders to trade the 
stock component of a qualified contingent trade (that qualifies for the 
QCT Exemption) on CBSX pursuant to Rule 611 of Regulation NMS under the 
Exchange Act, as approved by the Commission and as may be amended by 
the Commission pursuant to Rule 611(d) of Regulation NMS.
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    \7\ See CBSX Rule 52.7(a)(9).
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    The following examples will explain how Tied Cross Only Orders 
trade on CBSX:
    The NBBO in stock ABC is $10.00-$10.01 (5 x 5), while CBSX is 
quoting $9.99--$10.02 (1 x 1). CBSX receives a Tied Cross Only Order to 
cross 10,000 shares at $10.03 (consisting of an order to buy 10,000 
shares at $10.03 and an order to sell 10,000 shares at $10.03). Since 
the order pair is priced outside the CBSX book, the order will be 
cancelled
    Consider now, in example 2, a situation in which the NBBO is 
$10.00-$10.01 (5 x 5), while CBSX is quoting $9.99--$10.02 (2 x 2). 
CBSX receives a Tied Cross Only Order to cross 10,000 shares at $10.02 
(consisting of an order to buy 10,000 shares at $10.02 and an order to 
sell 10,000 shares at $10.02). The Tied Cross Only Order received is 
also greater in size than any single public customer order currently 
resting on the CBSX Book at $10.02. As a Tied Cross Only Order is a 
qualified contingent trade meeting the QCT Exemption, a trade-through 
is permitted and the shares will not be routed to external markets. 
Rather, the buy order will trade directly against the sell order at 
$10.02, provided that the order meets the requirements of CBSX Rule 
52.11.

[[Page 3488]]

CBSX Rule 52.11 provides that a CBSX Trader may cross two original 
orders at the established bid or offer irrespective of existing 
interest at such bid/offer so long as the cross transaction is (i) for 
at least 5,000 shares; (ii) is for a principal amount of at least 
$100,000; and (iii) is greater in size than any single public customer 
order resting on the CBSX Book at the proposed cross price. In this 
example, the Tied Cross Only Order meets all three criteria; the order 
is for 10,000 shares, is for the principal amount of $100,200 and is 
greater in size than any single public customer order currently resting 
on the CBSX Book at the proposed cross price. Therefore, the buy order 
will trade against the sell order at $10.02
    In this third example, the NBBO is $10.00-$10.01 (5 x 5), while 
CBSX is quoting $9.99-$10.02 (2 x 2). CBSX receives a Tied Cross Only 
Order to cross 9,000 shares at $10.02 (consisting of an order to buy 
9,000 shares at $10.02 and an order to sell 9,000 shares at $10.02). 
The Tied Cross Only Order received is also greater in size than any 
single public customer order currently resting on the CBSX Book at 
$10.02. In this scenario however, the Tied Cross Only Order does not 
meet all the requirements of Rule 52.11. Although the order is for over 
5,000 shares and is greater than any single customer order on the CBSX 
book at $10.02, it is for a principal amount of only $90,180, which is 
less than the required $100,000. Consequently, if there is any existing 
interest at the proposed cross price resting on the CBSX Book, the Tied 
Cross Only Order will be cancelled.
    In this final example, the NBBO is $10.00-$10.01 (5 x 5), while 
CBSX is quoting $9.99--$10.03 (2 x 2). CBSX receives a Tied Cross Only 
Order to cross 10,000 shares at $10.02 (consisting of an order to buy 
10,000 shares at $10.02 and an order to sell 10,000 shares at $10.02). 
In this example, the order pair is priced within the CBSX BBO. 
Accordingly, the buy order would cross against the sell order at 10,000 
shares at $10.02.
    Finally, it should be noted that it is incumbent on the user 
placing a Tied Cross Only Order to represent to the Exchange that the 
transaction meets the QCT exemption.
    The Exchange believes that the codification of this order type will 
clarify that CBSX accommodates market participants with flexibility in 
executing transactions that meet the specific requirements of this 
order type.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder and, in particular, 
the requirements of Section 6(b) of the Act.\8\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \9\ requirements that the rules of an exchange be 
designed to promote just and equitable principles of trade, to prevent 
fraudulent and manipulative acts, to remove impediments to and to 
perfect the mechanism for a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
Tied Cross Only Orders provide investors with an additional tool to 
facilitate the execution of qualified contingent trades, a type of 
trade recognized by the Commission as beneficial to market 
participants. The clarification that CBSX accommodates this order type 
should clear up any possible confusion and therefore inform investors. 
Further, the proposed rule change is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers, in that 
all such investors may enter Tied Cross Only Orders.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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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 not necessary or appropriate in furtherance of 
the purposes of the Act. Rather, the proposed rule change merely 
codifies the availability of a cross order type tied to a related 
derivative component. As discussed above, Tied Cross Only Orders are 
orders to trade the stock component of a qualified contingent trade, a 
type of trade already recognized by the Commission as beneficial to 
market participants.

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:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) impose any significant burden on competition; and
    (iii) 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) \10\ of the Act and 
Rule 19b-4(f)(6) \11\ thereunder.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of this 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.

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-2012-133 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2012-133. 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.,

[[Page 3489]]

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-2012-133 and should be 
submitted on or before February 6, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-00789 Filed 1-15-13; 8:45 am]
BILLING CODE 8011-01-P