Document ID: SEC-2013-1961-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2013-11-19T05:00Z

[Federal Register Volume 78, Number 223 (Tuesday, November 19, 2013)]
[Notices]
[Pages 69487-69490]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-27623]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70857; File No. SR-CBOE-2013-107]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change To Amend Its 
Rules Regarding Option Orders That Are Tied to Stock Orders

November 13, 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 October 31, 2013, Chicago Board Options

[[Page 69488]]

Exchange, Incorporated (the ``Exchange'' or ``CBOE'') filed with the 
Securities and Exchange Commission (the ``Commission'') the proposed 
rule change as described in Items I, II, and III below, which Items 
have been prepared by the Exchange. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its rules regarding option orders 
that are tied to stock orders. The text of the proposed rule change is 
provided below.

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

Chicago Board Options Exchange, Incorporated Rules

* * * * *

Rule 6.53. Certain Types of Orders Defined

    One or more of the following order types may be made available on a 
class-by-class basis. Certain order types may not be made available for 
all Exchange systems. The classes and/or systems for which the order 
types shall be available will be as provided in the Rules, as the 
context may indicate, or as otherwise specified via Regulatory 
Circular.
    (a)-(x) No change.
    (y) Tied to Stock. A tied to stock order is an option order that is 
tied to a stock order at the time of order entry (i.e. option order 
that, at the time it is entered into the System, is part of a trading 
strategy consisting of two or more orders, at least one of which is an 
order for the underlying stock, even though the component orders were 
submitted separately). Each tied to stock order submitted to the 
Exchange must be marked as ``tied to stock'' upon entry into the 
System.

. . . Interpretation and Policies:

    .01-.05 No change.
* * * * *

Rule 6.77. Order Service Firms

    (a)-(d) No change.
    (e) Order service firms must submit reports pursuant to Rule 15.2A 
with respect to the stock transactions it executes on behalf of market-
makers pursuant to this Rule 6.77.
* * * * *

Rule 15.2A. Reports of Execution of Stock Transactions

    In a manner and form prescribed by the Exchange, each Trading 
Permit Holder must submit to the Exchange as soon as practicable 
following the close of trading on each trading day a report of the 
following information regarding the stock legs of tied to stock orders, 
QCC orders, stock-option orders and other option orders that include 
stock components on the same ticket executed on that trading day: (a) 
time of execution, (b) execution quantity, (c) execution price, (d) 
venue of execution, and (e) any other information requested by the 
Exchange.

. . . Interpretation and Policies:

    .01 The Exchange will announce by Regulatory Circular any 
determinations, including the manner and form of the report, that it 
must make pursuant to Rule 15.2A.
    .02 Trading Permit Holders do not need to report information 
pursuant to Rule 15.2A with respect to stock-option orders or other 
option orders that include stock components on the same ticket that 
were submitted to the Exchange for electronic processing.
* * * * *
    The text of the proposed rule change is also 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 regarding option orders 
that are tied to stock orders. The proposed rule change adds Rule 
6.53(y), which defines a ``tied to stock order'' as an option order 
that is tied to a stock order at the time of order entry. In other 
words, a ``tied to stock'' order is an option order that, at the time 
it is entered into the System, is part of a trading strategy consisting 
of two or more orders, at least one of which is an order for the 
underlying stock, even though the component orders were submitted 
separately). Tied to stock orders do not include standard hedging 
strategies that include stock orders, as further discussed below. The 
proposed rule requires that each tied to stock order submitted to the 
Exchange be marked as ``tied to stock'' upon entry into the system. A 
tied to stock order can be a simple or complex order.
    Tied to stock orders do not include qualified contingent cross 
(``QCC'') orders,\3\ stock-option orders that are submitted on the same 
order ticket or submitted to the Exchange for electronic processing 
(such as to the complex order book (``COB''), complex order auction 
(``COA'') or automated improvement mechanism (``AIM'')),\4\ or

[[Page 69489]]

other option orders that include stock components on the same order 
ticket. Thus, those types of orders do not need to be marked as ``tied 
to stock.'' The Exchange is already aware that these types of orders 
include stock components, and thus does not require market participants 
to add the ``tied to stock'' marking to indicate the stock components 
for regulatory purposes, as discussed below.
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    \3\ A QCC order is an order to buy (sell) at least 1,000 
standard option contracts or 10,000 mini-option contracts that is 
identified as being part of a qualified contingent trade coupled 
with a contra-side order to sell (buy) an equal number of contracts. 
These orders may only be entered in the standard increments 
applicable to simple orders in the options class under Rule 6.42. 
For purposes of this order type, a ``qualified contingent trade'' is 
a transaction consisting of two or more component orders, executed 
as agent or principal, where: (a) At least one component is an NMS 
stock, as defined in Rule 600 of Regulation NMS under Act; (b) all 
components are effected with a product or price contingency that 
either has been agreed to by all the respective counterparties or 
arranged for by a broker-dealer as principal or agent; (c) the 
execution of one component is contingent upon the execution of all 
other components at or near the same time; (d) the specific 
relationship between the component orders (e.g., the spread between 
the prices of the component orders) is determined by the time the 
contingent order is placed; (e) 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 cancelled; and (f) the transaction is fully hedged 
(without regard to any prior existing position) as a result of other 
components of the contingent trade. QCC orders may execute without 
exposure provided the execution is not at the same price as a public 
customer order resting in the electronic book and is at or between 
the national best bid or offer. A QCC order will be cancelled if it 
cannot be executed. See Rule 6.53(u).
    \4\ 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 
the purchase or sale of options contract(s) on the opposite side of 
the market representing either (i) the same number of units of the 
underlying stock or convertible security, or (ii) 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 or convertible security in the option leg to the 
total number of units of the underlying stock or convertible 
security in the stock leg (or such lower ratio as may be determined 
by the Exchange on a class-by-class basis). Only those stock-option 
orders with no more than the applicable number of legs, as 
determined by the Exchange on a class-by-class basis, are eligible 
for processing.
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    The proposed rule change also adopts Rule 15.2A, which provides 
that each Trading Permit Holder must submit to the Exchange as soon as 
practicable following the close of trading on each trading day a report 
of the following information regarding the stock legs of any tied to 
stock orders, QCC orders, stock-option orders and other option orders 
that include stock components executed on that trading day: (a) Time of 
execution, (b) execution quantity, (c) execution price, (d) venue of 
execution, and (e) any other information requested by the Exchange. 
Proposed Interpretation and Policy .01 provides that the Exchange will 
designate by Regulatory Circular any determinations \5\ that it must 
make under Rule 15.2A, including the manner and form in which Trading 
Permit Holders should submit these reports to the Exchange. Proposed 
Interpretation and Policy .02 provides that Trading Permit Holders do 
not need to report information pursuant to Rule 15.2A with respect to 
stock-option orders or other option orders with stock components that 
[sic] on the same order ticket submitted to the Exchange for electronic 
processing (such as to COB, COA or AIM). Because the Exchange routes 
for execution through a routing broker to stock exchanges or trading 
centers the stock components of these orders, the Exchange will already 
have access to the transaction information for the stock components of 
these orders.
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    \5\ This includes any updates or changes to any determinations 
made by the Exchange.
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    The Exchange is responsible for regulating its markets and Trading 
Permit Holders. To carry out its regulatory responsibilities, the 
Exchange needs to have sufficient trade data to effectively monitor 
cross-market trading activity, assist with investigations of potential 
violations of federal securities laws and Exchange rules, and perform 
market reconstructions or other analysis necessary to understand 
trading activity. CBOE currently requires Trading Permit Holders to 
submit various execution data in real-time or daily to help the 
Exchange monitor trading activity.\6\ The Exchange believes that as use 
of electronic, interconnected markets continues to increase, access to 
additional cross-market order information, specifically information 
regarding stock trades tied to option orders, would enhance the 
Exchange's ability to monitor this trading activity and therefore allow 
it to more effectively fulfill its regulatory responsibilities.
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    \6\ See, e.g., Rules 4.13 (requires Trading Permit Holders to 
submit reports to the Exchange related to position limits); 6.24 
(which requires Trading Permit Holders to systemize certain order 
information); 6.51 (requires Trading Permit Holders to report to the 
Exchange certain information regarding transactions on and off the 
Exchange); 8.9 (requires Clearing Trading Permit Holders to report 
to the Exchange executed orders by Market-Makers for the purchase or 
sale of equity securities, as well as opening and closing positions 
in those securities); 15.2 (requires Trading Permit Holders to 
submit to the Exchange a daily report of all transactions); and 15.3 
(requires Trading Permit Holders, upon request of the Exchange, to 
submit a report of the total uncovered short positions in each 
option contract class); see also Rule 15.1, Interpretation and 
Policy .01. Pursuant to Appendix A--Applicability of Rules of the 
Exchange to Chapter L of the CBOE Rules, these rules (except for 
Rule 6.24) also apply to CBSX Trading Permit Holders.
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    The Exchange believes the additional information it will receive 
pursuant to proposed Rule 15.2A (including information from orders 
service firms) will enhance its ability to effectively monitor and 
conduct surveillance of the CBOE market and its Trading Permit Holders, 
and their relevant cross-market trading activity, and thus to detect 
and investigate illegal activity in a more timely fashion. The Exchange 
also believes that the proposed rule change will improve its ability to 
conduct more timely and accurate trading analyses, market 
reconstructions, complex enforcement inquiries or investigations, and 
inspections and examinations. The proposed marking of tied to stock 
orders will greatly improve the Exchange's ability to tie an executed 
stock leg to the applicable option order and thus the Exchange's 
ability to conduct surveillances related to these orders, such as 
surveillances for compliance with Regulation SHO and frontrunning 
rules.
    The Exchange believes the proposed rule change to mark tied to 
stock orders will place minimal additional burden on Trading Permit 
Holders, because the marking will merely be adding one additional 
notation when entering a tied to stock order. The Exchange also 
believes the proposed rule change to report to the Exchange information 
regarding stock trades will place minimal additional burden on Trading 
Permit Holders because they already have the capability to gather the 
required information, as the Exchange believes that stock exchanges (on 
which stock legs will be executed) require reporting of transaction 
information for stock trades in a similar manner as the Exchange does 
for option trades. Additionally, as discussed above, Exchange rules 
already require Trading Permit Holders to systemize or report various 
types of information regarding their orders and transactions to the 
Exchange. Further, the Exchange believes that this proposed rule change 
will substantially decrease its administrative burden in having to 
otherwise manually gather this cross-market information and tie stock 
legs to option orders in connection with its regulatory duties.
    Order service firms,\7\ which are Trading Permit Holders, will be 
subject to the reporting requirements set forth in proposed Rule 15.2A 
with respect to stock transactions that they execute on behalf of 
market-makers on the floor of the Exchange. The proposed rule change 
adds paragraph (e) to Rule 6.77 to include this reporting requirement, 
as the Exchange believes that including all requirements applicable to 
order service firms in a single Exchange rule will benefit these firms.
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    \7\ Order service firms are regular Trading Permit Holder 
organizations that are registered with the Exchange for the purpose 
of taking orders for the purchase or sale of stocks or commodity 
futures contracts (and options thereon) from market-makers on the 
floor of the Exchange and forwarding such orders for execution. Rule 
6.77(a).
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    The Exchange will announce the implementation date of the proposed 
rule change in a Regulatory Circular to be published no later than 90 
days following the effective date. The implementation date will be no 
later than 180 days following the effective 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.\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 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

[[Page 69490]]

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) \10\ requirement that the rules of an exchange not be designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ Id.
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    In particular, the Exchange believes the proposed rule change will 
significantly aid the Exchange's efforts to prevent fraudulent and 
manipulative acts and practices with respect to option orders that are 
tied to stock, because it will greatly improve the Exchange's ability 
to tie executed stock legs to the applicable option orders that were 
separately entered. This, along with the additional stock transaction 
information that the Exchange will receive pursuant to proposed Rule 
15.2A, will provide the Exchange with information that will permit CBOE 
to more efficiently and effectively conduct its regulatory 
surveillances of CBOE trading activity and cross-market trading 
activity, such as surveillances to ensure compliance with Regulation 
SHO and frontrunning rules. Because the proposed rule change will 
enhance the Exchange's surveillance of cross-market trading activity, 
the Exchange believes the proposed rule change will also remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system. In addition, the Exchange believes the 
proposed rule change will promote just and equitable principles of 
trade and protect investors by allowing the Exchange to detect and 
investigate illegal activity in a more timely fashion and improving the 
Exchange's ability to conduct more timely and accurate trading 
analyses, market reconstructions, complex enforcement inquiries or 
investigations, and inspections and examinations. Finally, the Exchange 
believes that the proposed changes to Rule 6.77 will benefit investors 
by including all requirements with respect to stock transactions 
executed by orders service firms, respectively, in a single place 
within the Exchange's rules.

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. The proposed rule change will impose the same 
marking and reporting requirements on all Trading Permit Holders that 
submit tied to stock orders to CBOE. The Exchange believes that the 
proposed rule change does not impose any burden on intermarket 
competition not necessary or appropriate in furtherance of the purposes 
of the Act. While the proposed rule change may impose requirements with 
respect to tied to stock orders submitted to CBOE that other options 
exchanges do not, the Exchange believes that, as discussed above, any 
additional burden imposed on Trading Permit Holders by this proposed 
rule change is minimal. The Exchange believes that stock exchanges (on 
which stock legs will be executed) already require reporting of 
transaction information for stock trades in a similar manner as the 
proposed rule change will require. Additionally, the marking 
requirement for tied to stock orders is only one additional piece of 
information that the Trading Permit Holder must enter when submitting a 
tied to stock order. The Exchange believes the benefits that the 
proposed rule change will provide with respect to its regulatory 
responsibilities far outweigh any minimal additional burden imposed on 
Trading Permit Holders.

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-2013-107 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-2013-107. 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 20549-1090 on official business days between the hours 
of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be 
available for inspection and copying at the principal offices 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-2013-107, and should be submitted on or before December 10, 2013.
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    \11\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-27623 Filed 11-18-13; 8:45 am]
BILLING CODE 8011-01-P