Document ID: SEC-2013-0868-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2013-05-08T04:00Z

[Federal Register Volume 78, Number 89 (Wednesday, May 8, 2013)]
[Notices]
[Pages 26828-26832]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-10876]

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SECURITIES AND EXCHANGE COMMISSION

Release No. 34-69504; File No. SR-CBOE-2013-027]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule Change, as 
Modified by Amendment No. 1, Relating to Trading Ahead of Customer 
Orders and Best Execution and Interpositioning Requirements

May 2, 2013.

I. Introduction

    On March 5, 2013, Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt CBOE Rules 53.2 
(Prohibition Against Trading Ahead of Customer Orders) and 53.8 (Best 
Execution and Interpositioning). The proposed rule change was published 
for comment in the Federal Register on March 21, 2013.\3\ On April 12, 
2013, CBOE filed Amendment No. 1 to the proposed rule change.\4\ The 
Commission did not receive any comments on the proposed rule change. 
This order approves the proposed rule change, as modified by Amendment 
No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 69146 (March 15, 
2013); 78 FR 17454 (``Notice'').
    \4\ See Amendment No. 1 dated April 12, 2013. Amendment No. 1 
corrected minor errors in the rule text of proposed Rules 53.2 and 
53.8. Because Amendment No. 1 is technical in nature, it is not 
subject to notice and comment.
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II. Description of Proposed Rule Change

    The Exchange proposes to amend Rule 53.2 of the CBSX Rules, which 
governs the treatment of customer orders and prohibits a CBSX Trading 
Permit Holder from proprietarily trading ahead of a customer order, and 
to adopt Rule 53.8 in the CBSX Rules to govern Trading Permit Holders' 
best execution and interpositioning requirements. The Exchange 
represented that the proposed rule change is consistent with Financial 
Industry Regulatory Authority (``FINRA'') Rules 5320 (Prohibition 
Against Trading Ahead of Customer Orders) \5\ and 5310 (Best Execution 
and Interpositioning),\6\ respectively, in the Consolidated FINRA 
Rulebook.
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    \5\ See Securities Exchange Act Release No. 63895 (February 11, 
2011), 76 FR 9386 (February 17, 2011) (SR-FINRA-2009-090) (order 
approving FINRA Rule 5320, ``Prohibition Against Trading Ahead of 
Customer Orders''). Other exchanges have adopted substantially 
similar rules prohibiting trading ahead of customer orders. See, 
e.g., Securities Exchange Act Release No. 64418 (May 6, 2011), 76 FR 
27735 (May 12, 2011) (SR-CHX-2011-008) (notice of filing and 
immediate effectiveness of proposed rule change of Chicago Stock 
Exchange, Inc. to adopt customer order protection language 
consistent with FINRA Rule 5320); Securities Exchange Act Release 
No. 65165 (August 18, 2011), 76 FR 53009 (August 24, 2011) (SR-
NYSEAmex-2011-059) (notice of filing and immediate effectiveness of 
proposed rule change of NYSE Amex LLC (now known as NYSE MKT LLC) to 
adopt customer order protection language that is substantially the 
same as FINRA Rule 5320); and Securities Exchange Act Release No. 
65166 (August 18, 2011), 76 FR 53012 (August 24, 2011) (SR-NYSEArca-
2011-057) (notice of filing and immediate effectiveness of proposed 
rule change of NYSE Arca, Inc. to adopt customer order protection 
language that is substantially the same as FINRA Rule 5320).
    \6\ See Securities Exchange Act Release No. 65895 (December 5, 
2011), 76 FR 77042 (December 9, 2011) (SR-FINRA-2011-052) (order 
approving FINRA Rule 5310, ``Best Execution and Interpositioning''). 
Other exchanges have similar best execution and interpositioning 
rules. See, e.g., NASDAQ Stock Market LLC Rule 2320 (Best Execution 
and Interpositioning) and IM-2320; and NASDAQ OMX PHLX LLC Rule 764 
(Best Execution and Interpositioning).

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[[Page 26829]]

Rule 53.2--Prohibition Against Trading Ahead of Customer Orders

    The proposed rule change would replace in its entirety the text of 
current Rule 53.2 and add a number of exceptions. Proposed Rule 53.2 
includes customer order protection language that states if a Trading 
Permit Holder holds an order in an equity security from its own 
customer or a customer of another broker-dealer, the Trading Permit 
Holder is prohibited from trading that security on the same side of the 
market for its own account at a price that would satisfy the customer 
order. The proposed rule change states that this prohibition does not 
apply if a Trading Permit Holder, who has traded proprietarily ahead of 
a customer order, immediately thereafter executes the customer order up 
to the size and at the same or better price at which it traded for its 
own account. In other words, in the event that a Trading Permit Holder 
trades ahead of an unexecuted customer order at a price that is equal 
to or better than the unexecuted customer order on the CBSX System, the 
Trading Permit Holder is required to execute the customer order at the 
price received by the Trading Permit Holder or better; otherwise the 
Trading Permit Holder will be in violation of improperly trading ahead 
of the customer order.\7\ The proposed rule change also would establish 
the minimum amount of price improvement necessary for a Trading Permit 
Holder to execute an order on a proprietary basis when holding an 
unexecuted limit order.\8\
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    \7\ For example, if a Trading Permit Holder buys 100 shares of a 
security at $10 per share while holding customer limit orders in the 
same security to buy at $10 per share equaling, in aggregate, 1000 
shares, the Trading Permit Holder is required to fill 100 shares of 
the customer limit orders at $10 per share or better.
    \8\ See proposed Rule 53.2, Interpretation and Policy .05. For 
example, for customer limit orders priced greater than or equal to 
$1.00, the minimum amount of price improvement required would be 
$0.01.
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    The Exchange proposes to establish that a Trading Permit Holder 
must have written procedures in place governing the execution and 
priority of all pending orders that is consistent with proposed Rule 
53.2 and the best execution requirements of proposed Rule 53.8 and must 
ensure that these procedures are applied consistently.
    In furtherance of ensuring customer order protection, the proposed 
rule change clarifies Trading Permit Holder obligations in handling 
marketable customer orders. In meeting these obligations, a Trading 
Permit Holder must make every effort to execute a marketable customer 
order that it receives fully and promptly. A Trading Permit Holder that 
is holding a customer order that is marketable and has not been 
immediately executed must make every effort to cross the order with any 
other order received by the Trading Permit Holder on the other side of 
the market up to the size of such order at a price that is no less than 
the best bid and no greater than the best offer at the time that the 
subsequent order is received by the Trading Permit Holder and that is 
consistent with the terms of the orders. In the event that a Trading 
Permit Holder is holding multiple orders on both sides of the market 
that have not been executed, the Trading Permit Holder must make every 
effort to cross or otherwise execute these orders in a manner that is 
reasonable and consistent with the objectives of the proposed rule 
change and with the terms of the orders. A Trading Permit Holder can 
satisfy the crossing requirement by contemporaneously buying from the 
seller and selling to the buyer at the same price.\9\
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    \9\ See proposed Rule 53.2, Interpretation and Policy .06.
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Large Orders and Institutional Accounts Exception \10\
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    \10\ See proposed Rule 53.2, Interpretation and Policy .01.
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    One exception to the prohibition on trading ahead of customer 
orders permits Trading Permit Holders to negotiate terms and conditions 
on the acceptance of certain large-sized orders (orders of 10,000 
shares or more and greater than or equal to $100,000 in value) or 
orders from institutional accounts.\11\ These terms and conditions will 
permit Trading Permit Holders to continue to trade alongside or ahead 
of these customer orders if the customer agrees. A Trading Permit 
Holder will be permitted to trade a security on the same side of the 
market for its own account at a price that will satisfy a customer 
order provided that the Trading Permit Holder provides clear and 
comprehensive written disclosure to each customer at account opening 
and annually thereafter that: (1) Discloses that the Trading Permit 
Holder may trade proprietarily at prices that would satisfy the 
customer order, and (2) provides the customer with a meaningful 
opportunity to opt in to the Rule 53.2 protections with respect to all 
or any portion of its order(s).
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    \11\ Proposed Rule 53.2, Interpretation and Policy .01 defines 
``institutional account'' as an account of: (a) A bank, savings and 
loan association, insurance company, or registered investment 
company; (b) an investment adviser registered either with the 
Commission under Section 203 of the Investment Advisers Act of 1940 
or with a state securities commission (or any agency or office 
performing like functions); or (c) any other entity (whether a 
natural person, corporation, partnership, trust, or otherwise) with 
total assets of at least $50 million.
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    If a customer does not opt in to the Rule 53.2 protections with 
respect to all or any portion of its order(s), the Trading Permit 
Holder may reasonably conclude that the customer has consented to the 
Trading Permit Holder trading a security on the same side of the market 
for its own account at a price that will satisfy the customer's 
order.\12\
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    \12\ As is always the case, customers retain the right to 
withdraw consent at any time. Therefore, a Trading Permit Holder's 
reasonable conclusion that a customer has consented to the Trading 
Permit Holder trading along with the customer's order is subject to 
further instruction and modification from the customer.
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    In lieu of providing written disclosure to customers at account 
opening and annually thereafter, proposed Rule 53.2 will permit Trading 
Permit Holders to provide clear and comprehensive oral disclosure to, 
and obtain consent from, a customer on an order-by-order basis, 
provided that the Trading Permit Holder documents who provided that 
consent and that the consent evidences the customer's understanding of 
the terms and conditions of the order. In addition, where a customer 
has opted in to the Rule 53.2 protections, a Trading Permit Holder may 
still obtain consent on an order-by-order basis to trade ahead of or 
along with an order from that customer, provided that the Trading 
Permit Holder documents who provided the consent and that the consent 
evidences the customer's understanding of the terms and conditions of 
the order.\13\
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    \13\ While a Trading Permit Holder organization relying on this 
or any exception must be able to proffer evidence of its eligibility 
for and compliance with the exception, the Exchange believes that 
when obtaining consent on an order-by-order basis, Trading Permit 
Holders must, at a minimum, document not only the terms and 
conditions of the order (e.g., the relative price and size of the 
allocated order/percentage split with the customer), but also the 
identity of the person at the customer who approved the trade-along 
request. For example, the identity of the person must be noted in a 
manner that will enable subsequent contact with that person if a 
question as to the consent arises (i.e., first names only, initials, 
and nicknames will not suffice). A ``trade along'' request would be 
when a Trading Permit Holder asks to trade for his/her proprietary 
account while simultaneously holding and working a customer order in 
that same stock.
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No-Knowledge Exception \14\
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    \14\ See proposed Rule 53.2, Interpretation and Policy .02.
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    The Exchange also proposes to add a ``no-knowledge'' exception to 
CBSX's

[[Page 26830]]

customer order protection rule. This proposed exception will allow a 
proprietary trading unit of a Trading Permit Holder organization to 
continue trading in a proprietary capacity and at prices that will 
satisfy customer orders that are being held by another, separate 
trading unit at the Trading Permit Holder organization. The ``no-
knowledge'' exception will be applicable with respect to NMS stocks, as 
defined in Rule 600 of SEC Regulation NMS. In order to avail itself of 
the ``no-knowledge'' exception, a Trading Permit Holder organization 
will first be required to implement and utilize an effective system of 
internal controls (such as appropriate information barriers) that 
operate to prevent the proprietary trading unit from obtaining 
knowledge of the customer orders that are held at a separate trading 
unit. For example, in the case of a CBSX Broker \15\ that conducts both 
a proprietary and agency brokerage business and has implemented and 
utilized an effective system of internal controls, the ``walled off'' 
proprietary desk(s) of the CBSX Broker will be permitted to trade at 
prices that will satisfy the customer orders held by the agency 
brokerage desk without any requirement that these proprietary 
executions trigger an obligation to fill pending customer orders at the 
same price. The ``no-knowledge'' exception will also apply to a Trading 
Permit Holder organization's market-making unit.
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    \15\ A ``CBSX Broker'' is a Trading Permit Holder who enters 
orders as an agent. See Rule 50.3(5).
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    A Trading Permit Holder organization that structures its order 
handling practices in NMS stocks to permit its proprietary and/or 
market-making desk to trade at prices that will satisfy customer orders 
held by a separate trading unit must disclose in writing to its 
customers, at account opening and annually thereafter, a description of 
the manner in which customer orders are handled by the Trading Permit 
Holder and the circumstances under which the Trading Permit Holder may 
trade proprietarily at its market-making desk at prices that will 
satisfy the customer order. This proposed disclosure may be combined 
with the disclosure and negative consent statement permitted in 
connection with the proposed large order and institutional account 
exceptions.
    If a Trading Permit Holder intends to rely on the no-knowledge 
exception by implementing information barriers, those information 
barriers must (1) provide for the organizational separation of a 
Trading Permit Holder's trading unit that holds customer orders and a 
proprietary trading unit; (2) ensure that one trading unit does not 
exert influence over the other trading unit; (3) ensure that 
information relating to each trading unit's stock positions, trading 
activities, and clearing and margin arrangements is not improperly 
shared (except with persons in senior management who are involved in 
exercising general managerial oversight of one or both entities); (4) 
require each trading unit to maintain separate books and records (and 
separate financial accounting); (5) require each trading unit to 
separately meet all required capital requirements; (6) ensure the 
confidentiality of each trading unit's book as provided by Exchange 
rules; and (7) ensure that any other material, non-public information 
(e.g., information related to any business transactions between a 
trading unit and an issuer or any research reports or recommendations 
issued by the trading unit) is not made improperly available to the 
other trading unit in any manner that will allow that trading unit to 
take undue advantage of that information while trading on CBSX. A 
Trading Permit Holder will be required to submit the proposed 
information barriers in writing to the Exchange upon request.
    The proposed rule change requires Trading Permit Holders that 
intend to rely on the no-knowledge exception by implementing 
information barriers to have ``appropriate'' information barriers. The 
Exchange stated its belief that including these specific information 
barrier requirements will clarify for Trading Permit Holders the types 
of information barriers that will be deemed appropriate information 
barriers and thus better allow Trading Permit Holders to rely on this 
exception. The Exchange noted that its surveillance procedures will 
continue to include a review of all orders for compliance with the 
prohibition on trading ahead of customer orders, and part of that 
review will include review of Trading Permit Holders' information 
barriers to determine whether they are sufficient for Trading Permit 
Holders to avail themselves of the no-knowledge exception for each 
applicable order. These requirements regarding information barriers are 
substantially similar to those set forth in CBOE Rule 54.8, which 
includes special provisions for trading commodity-based trust shares on 
CBSX, except that the proposed rule change provides that information 
barriers must be submitted upon request while CBOE Rule 54.8 provides 
that information barriers must be submitted and approved in advance. 
The Exchange stated its belief that it is appropriate and efficient to 
request from a Trading Permit Holder its information barriers as part 
of its surveillance procedures with respect to the customer order 
protection rule.

ISO Exception\16\
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    \16\ See proposed Rule 53.2, Interpretation and Policy .03.
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    The proposed rule change also clarifies that a Trading Permit 
Holder will be exempt from the obligation to execute a customer order 
in a manner consistent with CBSX's customer order protection rule with 
regard to trading for its own account that is the result of an 
intermarket sweep order routed in compliance with Regulation NMS 
(``ISO'') \17\ where the customer order is received after the Trading 
Permit Holder routed the ISO. Where a Trading Permit Holder routes an 
ISO to facilitate a customer order and that customer has consented to 
not receiving the better prices obtained by the ISO, the Trading Permit 
Holder also will be exempt with respect to any trading for its own 
account that is the result of the ISO with respect to the consenting 
customer's order.
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    \17\ 17 CFR 242.600(b)(30)(ii).
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Odd Lot and Bona Fide Error Transaction Exception \18\
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    \18\ See proposed Rule 53.2, Interpretation and Policy .04.
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    The Exchange proposes applying an exception for a firm's 
proprietary trade that (1) offsets a customer odd lot order (i.e., an 
order less than one round lot, which is typically 100 shares); or (2) 
corrects a bona fide error. With respect to bona fide errors, Trading 
Permit Holder will be required to demonstrate and document the basis 
upon which a transaction meets the bona fide error exception. For 
purposes of this proposed Rule, the definition of a ``bona fide error'' 
is as defined in Regulation NMS's exemption for error correction 
transactions.\19\
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    \19\ See Securities Exchange Act Release No. 55884 (June 8, 
2007), 72 FR 32926 (June 14, 2007) (Order Exempting Certain Error 
Correction Transactions from Rule 611 of Regulation NMS under the 
Securities Exchange Act of 1934).
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Trading Outside Normal Market Hours \20\
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    \20\ See proposed Rule 53.2, Interpretation and Policy .07.
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    The proposed rule change will expand CBSX's customer order 
protection requirements to apply at all times that a customer order is 
executable by the Trading Permit Holder, even outside the period of 
normal market hours. Thus, customers

[[Page 26831]]

will have the benefit of the customer order protection rules at all 
times where such order is executable by the Trading Permit Holder, 
subject to any applicable exceptions. This exception will apply to 
those Trading Permit Holders that accept customer orders after normal 
market hours.

Rule 53.8--Best Execution and Interpositioning

    The Exchange also proposes to adopt a new rule to govern Trading 
Permit Holders' best execution and interpositioning requirements. 
Proposed Rule 53.8(a)(1) will require a Trading Permit Holder or person 
associated with a Trading Permit Holder, in any transaction for or with 
a customer or a customer of another broker-dealer, to use ``reasonable 
diligence'' to ascertain the best market for a security and to buy or 
sell in that market so that the resultant price to the customer is as 
favorable as possible under prevailing market conditions. The proposed 
rule identifies five factors that are among those to be considered in 
determining whether the Trading Permit Holder or person associated with 
a Trading Permit Holder has used reasonable diligence:
    (1) The character of the market for the security;
    (2) the size and type of transaction;
    (3) the number of markets checked;
    (4) the accessibility of the quotation; and
    (5) the terms and conditions of the order as communicated to the 
Trading Permit Holder or person associated with the Trading Permit 
Holder.
    Proposed Rule 53.8(a)(2) relates to interpositioning and prohibits 
a Trading Permit Holder or person associated with a Trading Permit 
Holder, in any transaction for or with a customer or a customer of 
another broker-dealer, from interjecting a third party between the 
Trading Permit Holder or person associated with a Trading Permit Holder 
and the best market for the subject security in a manner inconsistent 
with the best execution requirements in subparagraph (a)(1) of proposed 
Rule 53.8.
    Proposed Rule 53.8 also includes provisions related to the use of a 
broker's broker, the staffing of order rooms, and the application of 
the best execution requirements to other parties. Proposed paragraph 
(b) provides that when a Trading Permit Holder cannot execute directly 
with a market but must employ a broker's broker or some other means in 
order to ensure an execution advantageous to the customer, the burden 
of showing the acceptable circumstances for doing so is on the Trading 
Permit Holder. Proposed paragraph (c) provides that failure to maintain 
or adequately staff a department assigned to execute customers' orders 
cannot be considered justification for executing away from the best 
available market; nor can channeling orders through a third party as 
reciprocation for service or business operate to relieve a Trading 
Permit Holder of its obligations under proposed Rule 53.8. Proposed 
paragraph (d) provides that a Trading Permit Holder through which an 
order is channeled and that knowingly is a party to an arrangement 
whereby the initiating Trading Permit Holder has not fulfilled its 
obligations under Rule 53.8 will also be deemed to have violated Rule 
53.8. Proposed paragraph (e) provides that the obligations in 
paragraphs (a) through (d) apply when the Trading Permit Holder acts as 
agent for the account of its customer as well as when transactions are 
executed as principal.
    Proposed Rule 53.8 includes several Interpretations and Policies to 
provide additional guidance and clarity regarding Trading Permit 
Holders' obligations with respect to the best execution and 
interpositioning requirements. Proposed Interpretation and Policy .01 
reinforces a Trading Permit Holder's duty to make every effort to 
execute a marketable customer order that it receives fully and 
promptly. Proposed Interpretation and Policy .02 defines the term 
``market'' for the purposes of proposed Rule 53.8.\21\
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    \21\ For purposes of proposed Rule 53.8 and the accompanying 
Interpretations and Policies, the term ``market'' or ``markets'' is 
to be construed broadly, and it encompasses a variety of different 
venues, including, but not limited to, market centers that are 
trading a particular security. This expansive interpretation is 
meant to both inform broker-dealers as to the breadth of the scope 
of venues that must be considered in the furtherance of their best 
execution obligations and to promote fair competition among broker-
dealers, exchange markets, and markets other than exchange markets, 
as well as any other venue that may emerge, by not mandating that 
certain trading venues have less relevance than others in the course 
of determining a firm's best execution obligations.
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    Proposed Interpretation and Policy .03 addresses broker-dealers 
that are executing a customer's order against the Trading Permit 
Holder's quote. It provides that a Trading Permit Holder's duty to 
provide best execution in any transaction ``for or with a customer of 
another broker-dealer'' does not apply in instances when another 
broker-dealer is simply executing a customer order against the Trading 
Permit Holders' quote. The duty to provide best execution to customer 
orders received from other broker-dealers arises only when an order is 
routed from the broker-dealer to the Trading Permit Holder for the 
purpose of order handling and execution. This clarification is intended 
to draw a distinction between those situations in which the Trading 
Permit Holder is acting solely as the buyer or seller in connection 
with orders presented by a broker-dealer against the Trading Permit 
Holder's quote, as opposed to those circumstances in which the Trading 
Permit Holder is accepting order flow from another broker-dealer for 
the purpose of facilitating the handling and execution of such orders.
    Proposed Interpretation and Policy .04 provides that when a Trading 
Permit Holder cannot execute directly with a market but must employ a 
broker's broker or some other means in order to ensure an execution 
advantageous to the customer, the burden of showing the acceptable 
circumstances for doing so is on the Trading Permit Holder. Examples of 
acceptable circumstances are where a customer's order is crossed with 
another firm that has a corresponding order on the other side, or where 
the identity of the firm, if known, would likely cause undue price 
movements adversely affecting the cost or proceeds to the customer.
    Proposed Interpretation and Policy .05 addresses the fact that 
markets for securities differ dramatically and provides additional 
guidance regarding a Trading Permit Holder's best execution obligations 
when handling an order involving any security for which there is 
limited pricing information or other quotations available. The 
Interpretation and Policy emphasizes that Trading Permit Holders must 
be especially diligent with respect to best execution obligations where 
there is limited quotation or other pricing information available 
regarding the security that is the subject of the order and requires 
Trading Permit Holders to have written policies and procedures in place 
to address the steps the Trading Permit Holder will take to determine 
the best interdealer market for such a security in the absence of 
multiple quotations or pricing information and to document how they 
have complied with those policies and procedures. The Interpretation 
and Policy specifically notes that, when handling orders for these 
securities, Trading Permit Holders should generally seek out other 
sources of pricing information or potential liquidity, which may 
include obtaining quotations from other sources (e.g., other firms that 
the Trading Permit Holder previously has traded within the security). 
For example, in many instances, particularly in the context of equity 
securities with limited quotation information available, contacting 
other broker-dealers may be necessary to

[[Page 26832]]

comply with a Trading Permit Holder's best execution obligations.
    When placing an order with a Trading Permit Holder, customers may 
specifically instruct the Trading Permit Holder to route the order to a 
particular market for execution.\22\ Proposed Interpretation and Policy 
.06 addresses situations where the customer has, on an unsolicited 
basis, specifically instructed the Trading Permit Holder to route that 
customer's order to a particular market for execution.\23\ Under those 
circumstances, the Trading Permit Holder will not be required to make a 
best execution determination beyond that specific instruction; however, 
the Interpretation and Policy mandates that Trading Permit Holders 
process that customer's order promptly and in accordance with the terms 
of the order. The Interpretation and Policy also makes clear that where 
a customer has directed the Trading Permit Holder to route an order to 
another specific broker-dealer that is also a Trading Permit Holder, 
the exception will not apply to the receiving Trading Permit Holder to 
which the order was directed.\24\
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    \22\ When the order is for an NMS security, these orders are 
often referred to as ``directed orders.'' See 17 CFR 242.600(b)(19). 
Of note, directed orders are excluded from the order routing 
statistics required to be produced under Rule 606 of SEC Regulation 
NMS. See 17 CFR 242.606.
    \23\ The Interpretation and Policy also clarifies that a Trading 
Permit Holder's best execution obligations extend to all customer 
orders and is intended to avoid the potential misimpression that the 
paragraph limits the scope of the rule's requirements.
    \24\ For example, if a customer of Trading Permit Holder Firm A 
directs Trading Permit Holder Firm A to route an order to Trading 
Permit Holder Firm B, Trading Permit Holder Firm B will continue to 
have best execution obligations to that customer order received from 
Trading Permit Holder Firm A.
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    Proposed Interpretation and Policy .07 codifies a Trading Permit 
Holder's obligation when it undertakes a regular and rigorous review of 
execution quality likely to be obtained from different market centers. 
These obligations are set forth and explained in various Commission 
releases and NASD Notices to Members.\25\
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    \25\ See, e.g., Securities Exchange Act Release No. 37619A 
(September 6, 1996), 61 FR 48290 (September 12, 1996) and NASD 
Notice to Members 01-22 (April 2001).
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III. Commission's Findings

    After careful review of the proposed rule change the Commission 
finds that the proposed rule change, as modified by Amendment No. 1, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to self-regulatory organization.\26\ 
In particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\27\ which requires, among 
other things, that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to 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.
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    \26\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \27\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed rule change is designed 
to protect customer orders by establishing requirements governing the 
trading ahead of customer orders by member firms and governing best 
execution and interpositioning with respect to the handling of customer 
orders. By CBOE aligning its customer protection rules with those of 
FINRA and other exchanges,\28\ the Commission believes that the 
proposed rule change will help reduce the complexity of the customer 
order protection rules for those CBOE firms that also are subject to 
the customer protection rules of FINRA and other exchanges. 
Furthermore, the Commission believes that the proposed rules will help 
assure the protection of customer orders without imposing undue 
regulatory costs on industry participants.
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    \28\ See notes 5 and 6 supra.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-CBOE-2013-027), as modified 
by Amendment No. 1, be, and hereby is, approved.
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    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-10876 Filed 5-7-13; 8:45 am]
BILLING CODE 8011-01-P