Document ID: SEC-2016-2204-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2016-12-15T05:00Z

[Federal Register Volume 81, Number 241 (Thursday, December 15, 2016)]
[Notices]
[Pages 90896-90903]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30082]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79520; File No. SR-CBOE-2016-071]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1, Relating To Opening and Closing Rotations Under the 
HOSS System

December 9, 2016.

I. Introduction

    On October 7, 2016, 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 amend its rules relating to 
the opening of series for trading on the Exchange. The Commission 
published the proposed rule change for comment in the Federal Register 
on October 27, 2016.\3\ On November 18, 2016, the Exchange filed 
Amendment No. 1 to the proposed rule change.\4\ The Commission received 
no comments on the proposal. This order provides notice of filing of 
Amendment No. 1 and approves the proposed rule change, as modified by 
Amendment No. 1, on an accelerated basis.
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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. 79133 (October 21, 
2016), 81 FR 74828 (October 27, 2016) (``Notice'').
    \4\ In Amendment No. 1, the Exchange updated a cross-reference 
to Rule 6.2B in Rule 6.13. To promote transparency of its proposed 
amendment, when CBOE filed Amendment No. 1 with the Commission, it 
also submitted Amendment No. 1 as a comment letter to the file, 
which the Commission posted on its Web site and placed in the public 
comment file for SR-CBOE-2016-071 (available at https://www.sec.gov/comments/sr-cboe-2016-071/cboe2016071.shtml). The Exchange also 
posted a copy of its Amendment No. 1 on its Web site (http://www.cboe.com/aboutcboe/legal/submittedsecfilings.aspx), when it 
filed it with the Commission.
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II. Description of the Proposed Rule Change

    CBOE proposes to amend its rules relating to the opening of series 
for trading on the Exchange. Rule 6.2B describes the process (referred 
to as ``HOSS'') that the Exchange's Hybrid Trading System (the 
``System'') uses to open series on the Exchange each trading day. The 
Exchange may also use HOSS for closing series or opening

[[Page 90897]]

series after a trading halt. The Exchange is proposing various changes 
to reorganize and simplify the rule and to more accurately reflect 
current System functionality.\5\
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    \5\ See Notice, supra note 3, at 74829.
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    According to the Exchange, HOSS generally processes the opening of 
each series in four stages: \6\
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    \6\ See id.
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    (1) Pre-Opening Period: During the pre-opening period, the System 
accepts orders and quotes and disseminates messages that contain 
information based on resting orders and quotes in the book, which may 
include the expected opening price (``EOP''), expected opening size 
(``EOS''), any reason why a series may not open, and imbalance 
information, including the size and side of an imbalance (collectively, 
``expected opening information'' or ``EOIs'').
    (2) Initiation of the Opening Rotation: The System then initiates 
the opening rotation procedure and distributes a ``Rotation Notice'' to 
market participants.
    (3) Opening Rotation Period: During the opening rotation period, 
the System matches and executes orders and quotes against each other to 
establish an opening Exchange best bid and offer (``BBO'') and trade 
price for each series while continuing to disseminate EOIs.
    (4) Opening of Trading: The System then opens series for trading, 
subject to the satisfaction of certain conditions.
    According to CBOE, the proposed rule change is designed to more 
clearly organize Rule 6.2B in this sequential order and makes the 
additional specific changes discussed in more detail below.

Pre-Opening Period

    Rule 6.2B(a) currently provides that the System accepts orders and 
quotes, for regular trading hours, for a period of time before the 
opening of trading in the underlying security or, in the case of index 
options, prior to 8:30 a.m.,\7\ and for extended trading hours, for a 
period of time prior to 2:00 a.m.\8\ The Exchange proposes to amend 
Rule 6.2B(a) to provide that, for each trading session, the pre-opening 
period will begin no later than 15 minutes prior to the expected 
initiation of an opening rotation and no earlier than 2:00 a.m. for 
regular trading hours and no earlier than 4:00 p.m. on the previous day 
for extended trading hours.\9\
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    \7\ All times set forth in Rule 6.2B are central time. See id. 
at 74829, n.3.
    \8\ The precise time periods are determined by the Exchange on a 
class-by-class basis. See id. at 74829. In addition, since the 
System begins the pre-opening period at the same time for each class 
within each type of option (equity, index and exchange-traded 
products (``ETPs'')), the proposed rule change deletes the provision 
of the current rule that says the Exchange will determine the time 
on a class-by-class basis. See id.
    \9\ The Exchange notes that the pre-opening period currently 
begins at approximately 6:30 a.m. for regular trading hours and 
approximately 4:00 p.m. on the previous day for extended trading 
hours. See id. at 74829, n.4.
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    Under the proposal, the Exchange generally will not restrict the 
size or origin code of orders that may be submitted during the pre-
opening period. Therefore, the proposed rule change amends Rule 
6.2B(a)(i) to add certainty to the rule by deleting the provision that 
requires the Exchange to designate--on a class-by-class basis--the 
eligible order size, eligible order type, and eligible order origin 
code (i.e., public customer orders, non-Market Maker broker-dealer 
orders, and Market Maker broker-dealer orders) which the System will 
accept.\10\ Additionally, the proposed rule change clarifies that the 
System will accept all quotes and all order types during the pre-
opening period except for immediate-or-cancel, fill-or-kill, 
intermarket sweep orders, and Market-Maker trade prevention orders.\11\ 
The proposed rule change also adds that if an order entered during the 
pre-opening period for regular trading hours is not eligible for book 
entry (e.g., minimum volume, not held, and market-if-touched orders), 
the System will route the order via CBOE's order handling system 
pursuant to Rule 6.12.\12\
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    \10\ See Notice, supra note 3, at 74829.
    \11\ See id. at 74829-30 for a discussion of these order types, 
which are defined in Rule 6.53.
    \12\ See id. at 74830. The Exchange notes that orders not 
eligible for book entry may only be traded open outcry on the 
Exchange floor. According to the Exchange, because only electronic 
trading is permitted during extended trading hours, the System will 
not accept these orders during the extended hours trading session 
and therefore, this proposed provision is not applicable during that 
trading session. See id. at 74830, n.6.
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    The proposed rule change amends Rule 6.2B(a)(ii) in several ways. 
First, it defines EOIs and specifies the timing of their dissemination. 
EOIs contain information based on resting orders and quotes in the 
Book, including the EOP, the EOS, any reason why a series may not open 
pursuant to paragraph (d) of Rule 6.2B,\13\ and any imbalance 
information, including the size and side of the imbalance. EOIs will be 
disseminated to all market participants that have elected to receive 
them beginning at a time determined by the Exchange, which will be no 
earlier than three hours prior to the expected initiation of an opening 
rotation for a series. The System will then disseminate EOI at regular 
intervals of time, or less frequently if there are no updates since the 
previously disseminated EOI.\14\
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    \13\ Proposed paragraph (d) of Rule 6.2B sets forth certain 
Opening Conditions, which are discussed in greater detail below.
    \14\ See Notice, supra note 3, at 74830.
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    The proposed rule change further modifies Rule 6.2B(a)(ii) to 
redefine the terms EOP and EOS and address when that information will 
be disseminated. Currently, Rule 6.2B(a)(ii) states that the EOP is the 
price at which the greatest number of orders and quotes in the book are 
expected to trade and provides that an EOP will only be calculated if 
(a) there are market orders in the book, or the book is crossed or 
locked and (b) at least one quote is present. The proposed rule change 
revises this language to state that the EOP is the price at which any 
opening trade is expected to execute and adds that the EOS is the size 
of any expected opening trade. The proposed rule change further states 
the System will only disseminate EOP and EOS messages: (a) If the width 
between the highest quote bid and lowest quote offer on the Exchange is 
no wider than the OEPW range (as defined below), in classes in which 
the Hybrid Agency Liaison (``HAL'') \15\ is not activated for openings; 
or (b) if the width between the highest quote bid and lowest quote 
offer on the Exchange or disseminated by other exchanges is no wider 
than the OEPW range, in classes in which HAL is activated for openings 
(``HALO'').\16\
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    \15\ HAL provides automated order handling in designated Hybrid 
classes for electronic orders that are not automatically executed by 
the System. HAL exposes these orders at the national best bid or 
offer, and Trading Permit Holders may submit responses to trade with 
the orders. See Rule 6.14A.
    \16\ See Notice, supra note 3, at 74830, for more detailed 
discussion of these changes to the pre-opening period.
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Opening Rotation Initiation and Notice

    Rule 6.2B(b) currently provides that, unless unusual circumstances 
exist, at a randomly selected time within a number of seconds after the 
opening trade and/or the opening quote is disseminated in the market 
for the underlying security \17\ (or after 8:30 a.m. for index options) 
with respect to regular trading hours, or after 2:00 a.m. with respect 
to extended trading hours, the System initiates the opening rotation

[[Page 90898]]

procedure and sends a notice (``Rotation Notice'') to market 
participants.\18\
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    \17\ The ``market for the underlying security'' is currently the 
primary listing market, the primary volume market (defined as the 
market with the most liquidity in that underlying security for the 
previous two calendar months), or the first market to open the 
underlying security. Since the Exchange does not designate the 
primary volume market as the market for the underlying security for 
any class, the proposed rule change deletes that option. The 
proposed rule change also changes the term ``market'' to 
``exchange'' and clarifies that the Exchange determines on a class-
by-class basis which market is the market for the underlying 
security. See Notice, supra note 3, at 74830, n.10.
    \18\ See id. at 74830-31.
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    The Exchange proposes to amend Rule 6.2B(b) to provide that the 
System will initiate the opening rotation procedure and send out a 
Rotation Notice on a class-by-class basis as follows:
     For regular trading hours:
    [cir] With respect to equity and ETP options, after the opening 
trade or the opening quote is disseminated in the market for the 
underlying security, or at 8:30 for classes determined by the Exchange 
(including over-the-counter equity classes); or
    [cir] with respect to index options, at 8:30 a.m., or at the later 
of 8:30 a.m. and the time the Exchange receives a disseminated index 
value for classes determined by the Exchange; and
     For extended trading hours, at 2:00 a.m.\19\
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    \19\ See id. at 74831 (providing detailed description of the 
Exchange's changes to initiating the opening rotation).
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Opening Rotation Period

    Rule 6.2B(c) provides that after the Rotation Notice is sent, the 
System enters into a rotation period, during which the opening price is 
established for each series. The proposed rule change reorganizes 
paragraph (c) to more clearly demarcate and further describe (1) when 
the opening rotation period begins, (2) what happens during the period, 
(3) the handling of EOIs during the period, and (4) when the period 
ends.\20\
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    \20\ See proposed Rule 6.2B(c). See also Notice, supra note 3, 
at 74831.
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    During the opening rotation period, the System establishes the 
opening trade price and the opening BBO by matching and executing 
resting orders and quotes against each other. The proposed rule change 
modifies the definition of the opening trade price of a series to be 
the ``market-clearing'' price, which is the single price at which the 
largest number of contracts in the book can execute, leaving bids and 
offers that cannot trade with each other.\21\ The proposed rule change 
also states that all orders (except complex orders and, in classes in 
which the Exchange has not activated HALO, all-or-none orders and 
orders with a stop contingency) and quotes in a series in the book 
prior to the opening rotation period participate in the opening 
rotation for a series. The Exchange notes that Contingency Orders that 
participate in the opening rotation may execute during the opening 
rotation period only if their contingencies are triggered.\22\
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    \21\ See Notice, supra note 3, at 74831. If there are multiple 
prices at which the same number of contracts would clear, the System 
will use (a) the price at or nearest to the midpoint of the opening 
BBO, or the widest offer (bid) point of the OEPW range if the 
midpoint is higher (lower) than that price point, in classes in 
which the Exchange has not activated HALO; or (b) the price at or 
nearest to the midpoint of the range consisting of the higher of the 
opening NBB and widest bid point of the OEPW range, and the lower of 
the opening NBO and widest offer point of the OEPW range, in classes 
in which the Exchange has activated HALO. See id.
    \22\ See id. at 74831-32. Further, the Exchange notes that the 
proposed rule change moves the rule provision regarding the priority 
order of orders and quotes during this matching process from current 
subparagraph (c)(iv) to proposed subparagraph (c)(i)(C). The System 
prioritizes orders in the following order: (1) Market orders, (2) 
limit orders and quotes whose prices are better than the opening 
price, and (3) resting orders and quotes at the opening price. The 
proposed rule change also notes contingency orders are prioritized 
as set forth in Rules 6.45A and 6.45B. See id. at 74832, n.13.
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    The proposed rule change clarifies that the System will continue to 
disseminate EOIs (not just the EOP and EOS) during the opening rotation 
period, which may be disseminated at more frequent intervals closer to 
the opening.\23\ In addition, the proposed rule change updates the 
description of the length of the opening rotation period and adds 
detail to the description of how the System processes series to open 
following the opening rotation period. Specifically, current 
subparagraph (c)(ii) states that the System will process the series of 
a class in a random order and the series will begin opening after a 
period following the Rotation Notice, which period may not exceed sixty 
seconds and will be established on a class-by-class basis by the 
Exchange.\24\ Proposed subparagraph (c)(iii) retains that process, but 
clarifies that CBOE will determine the length and number of these 
intervals for all classes.\25\
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    \23\ See id. at 74832.
    \24\ See id. at 74832.
    \25\ According to the Exchange, currently, the Exchange has set 
the period of time that must pass before the System begins 
processing series to open at two seconds, and the Exchange has set 
the number of intervals to two and the length of the intervals to 
one second. As a result, the opening rotation period currently lasts 
two to four seconds. See Regulatory Circular RG11-072; see also 
Notice, supra note 3, at 74832 n.14.
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Opening Quote and Trade Price

    In its filing, the Exchange represented that, pursuant to the 
Options Price Reporting Authority (``OPRA'') Plan, once a series opens, 
the System disseminates all quote and trade price information to OPRA, 
including opening quote and trade price information.\26\ Accordingly, 
the Exchange proposes to delete text in current paragraph (d) of Rule 
6.2B stating that the opening price is determined by series and that 
CBOE disseminates opening quote and trade information through OPRA 
because the Exchange already disseminates such information pursuant to 
the OPRA Plan, and therefore believes that this provision is 
unnecessarily repetitive.\27\ Despite the deletion of that language 
from the rule concerning reporting data through OPRA, the Exchange is 
not proposing a substantive change to reporting this information 
through OPRA.
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    \26\ See Notice, supra note 3, at 74832.
    \27\ See id. at 74832.
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Opening Conditions

    Current Rule 6.2B(e) provides that the System will not open a 
series if one of a number of specified conditions is met, including the 
absence of a quote that complies with the bid/ask differential 
requirements or if the opening price would not be within an acceptable 
range or would leave a market order imbalance.\28\ The proposed rule 
change amends these conditions to provide that, in classes in which the 
Exchange has not activated HALO:
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    \28\ See id. at 74832. The final provision of current paragraph 
(e) provides the following: If the first or second condition is 
present, the senior official in the Control Room may authorize the 
opening of the affected series where necessary to ensure a fair and 
orderly market; if the second condition is present, the System will 
not open the series but will send a notification to market 
participants indicating the reason; if the third condition is 
present, a notification will be sent to market participants 
indicating the size and direction of the market order imbalance. In 
this case, the System will not open the series until the condition 
causing the delay is satisfied, and the System will repeat this 
process until the series is open. The proposed rule change combines 
the exceptions in current paragraph (e) with the applicable opening 
conditions in current subparagraphs (e)(i) through (iii) into 
proposed paragraph (d)(i). See id. at n.16.
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    (1) If there are no quotes in the series on the Exchange, the 
System will not open the series;
    (2) if the width between the Exchange's best quote bid and best 
quote offer is wider than an acceptable opening price range (as 
determined by the Exchange on a class-by-class and premium basis) (the 
``Opening Exchange Prescribed Width range'' or ``OEPW range'') \29\ and 
there are orders or quotes marketable against each other, the System 
will not open the series. However, if the opening quote width is no 
wider than the intraday acceptable price range for the series (``IEPW 
range'') \30\ and there are no orders or quotes marketable against each 
other, the System will open the series. If the opening quote width is 
wider than the IEPW range, the System will not open the series. 
Additionally, according to

[[Page 90899]]

the Exchange, because all quotes entered by Market-Makers (including 
quotes entered during the pre-opening period and opening rotation 
period) must satisfy bid/ask differentials,\31\ the Exchange proposes 
to delete the reference to bid/ask differential requirements in this 
provision;
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    \29\ Current OEPW settings are set forth in Regulatory Circular 
RG 13-025. See Notice, supra note 3, at 74832, n.18.
    \30\ See Rule 6.13(b)(v).
    \31\ See Rule 8.7(d). The Exchange may set different bid/ask 
differential requirements for a Market-Maker's opening quotes than 
for its intraday quotes (which it currently does). The proposed rule 
change specifies this in Interpretation and Policy .02 regarding 
Market-Maker quotes, which currently provides that the Exchange may 
also set a different minimum number of contracts for a Market-
Maker's opening quotes. See Notice, supra note 3, at 74833, n.20.
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    (3) if the opening trade price would be outside of the OEPW range, 
the System will not open the series. The Exchange states that the 
proposed rule change also deletes the language from the current 
provision regarding sending a notification when this condition is 
present because notifications are sent when a series does not open for 
any reason; or
    (4) if the opening trade would leave a market order imbalance, the 
System will not open the series. However, if a sell market order 
imbalance exists, there is no bid in the series, and the best offer is 
$0.50 or less, the System will open the series; if there is no bid in 
the series and the best offer is greater than $0.50, the System will 
not open the series. The proposed rule change deletes the language 
regarding the exception for series that will open at a minimum 
increment.\32\ The proposed rule change also deletes the language from 
the current provision regarding sending a notification when this 
condition is present, because, as stated above, notifications go out 
when a series does not open for any reason.\33\
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    \32\ Pursuant to Rule 6.13(b)(vi), in the situation in which 
there is no bid in the series and the best offer is $0.50 or less, 
the System considers these market orders to be limit orders for the 
minimum increment applicable to the series and enter these orders in 
the book (behind limit orders to sell at the minimum increment 
already resting in the book). Essentially, this creates a situation 
in which a series opens at a minimum price increment (i.e. $0.00-
$0.05). In the situation in which there is no bid in the series and 
the best offer is greater than $0.50, if the no-bid series were to 
open while the best offer is greater than $0.50, under the rules, a 
market order to sell will be handled via the order handling system 
pursuant to Rule 6.12 rather than route to the book. See Notice, 
supra note 3, at 74833.
    \33\ See Notice, supra note 3, at 74832-33 (describing in 
greater detail opening conditions set forth in proposed Rule 
6.2B(d)(i)).
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    Separately, current Interpretation and Policy .03 to Rule 6.2B 
describes opening conditions that apply to classes in which the 
Exchange has activated HALO.\34\ Among other things, the current 
conditions take into consideration whether the opening trade would be 
at a price that is not the national best bid or offer.\35\ Current 
Interpretation and Policy .03(b) further describes what happens when 
each of these conditions is present, including exposure of marketable 
orders at the NBBO under certain conditions. The proposed rule change 
would amend the opening conditions applicable to classes in which the 
Exchange has activated HALO to provide as follows:
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    \34\ See id. at 74833-34 (providing a detailed description of 
the current opening conditions that apply to classes in which HALO 
is activated). The Exchange proposes to reorganize Rule 6.2B to keep 
the description of the applicable opening conditions for all classes 
in a single location within the rules. Therefore, the proposed rule 
change moves these opening conditions to proposed subparagraph 
(d)(ii) of Rule 6.2B. See id. at 74834, n.23.
    \35\ See id. at 74833.
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    (1) If there are no quotes on the Exchange or disseminated from at 
least one away exchange present in the series, the System will not open 
the series;
    (2) if the width between the best quote bid and best quote offer, 
which may consist of Market-Makers quotes or bids and offers 
disseminated from an away exchange, is wider than the OEPW range and 
there are orders or quotes marketable against each other or that lock 
or cross the OEPW range, the System will not open the series. However, 
if the opening quote width is no wider than the IEPW range and there 
are no orders or quotes marketable against each other or that lock or 
cross the OEPW range, the System will open the series. If the opening 
quote width is wider than the IEPW range, the System will not open the 
series. If the opening quote for a series consists solely of bids and 
offers disseminated from an away exchange(s), the System will open the 
series by matching orders and quotes to the extent they can trade and 
will report the opening trade, if any, at the opening trade price. The 
System will then exposes any remaining marketable buy (sell) orders at 
the widest offer (bid) point of the OEPW range or NBO (NBB), whichever 
is lower (higher).\36\
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    \36\ Additionally, according to the Exchange, because all quotes 
entered by Market-Makers (including quotes entered during the pre-
opening period and opening rotation period) must satisfy bid/ask 
differentials, the Exchange proposes to delete the reference to bid/
ask differential requirements from Rule 6.2B. See id. at 74834, n.24 
and accompanying text.
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    (3) if the opening trade price would be outside the OEPW range or 
the NBBO, the System will open the series by matching orders and quotes 
to the extent they can trade and will report the opening trade, if any, 
at an opening trade price not outside either the OEPW range or NBBO. 
The System will then expose any remaining marketable buy (sell) orders 
at the widest offer (bid) point of the OEPW range or NBO (NBB), 
whichever is lower (higher);
    (4) if the opening trade would leave a market order imbalance, the 
System will open the series by matching orders and quotes to the extent 
they can trade and will report the opening trade, if any, at the 
opening trade price. The System will then expose any remaining 
marketable buy (sell) orders at the widest offer (bid) point of the 
OEPW range or NBO (NBB), whichever is lower (higher); or
    (5) if the opening quote bid (offer) or the NBB (NBO) crosses the 
opening quote offer (bid) or the NBO (NBB) by more than an amount 
determined by the Exchange on a class-by-class and premium basis, the 
System will not open the series.\37\ If the opening quote bid (offer) 
or NBO (NBO) crosses the opening quote offer (bid) or NBO (NBB) by no 
more than the specified amount, the System will open the series by 
matching orders and quotes to the extent they can trade and will report 
the opening trade, if any, at the opening trade price. The System then 
exposes any remaining marketable buy (sell) orders at the widest offer 
(bid) point of the OEPW range or NBO (NBB), whichever is lower 
(higher). If the best away market bid and offer are inverted by no more 
than the specified amount, there is a marketable order on each side of 
the series, and the System opens the series, the System will expose the 
order on the side with the larger size and route for execution the 
order on the side with the smaller size to an away exchange that is at 
the NBBO.\38\
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    \37\ Currently, this amount is $0.25 for options with prices 
less than $3.00 and $0.50 for options with prices of $3.00 or more. 
See id. at 74835, n.26.
    \38\ See id. at 74834-35.
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    In addition, the proposed rule change makes other changes to 
current Interpretation and Policy .03, while retaining and moving 
around certain other provisions.\39\ Among other things, for example, 
because the Exchange no longer uses an allocation period, it proposes 
to delete the provision regarding the allocation period of the HAL 
openings.\40\ In addition, the proposed rule change deletes 
Interpretation and Policy .03(c)(i) regarding the priority of orders 
and quotes during the open for classes in which the Exchange has 
activated HAL

[[Page 90900]]

for openings, as it is the same as the priority in proposed 
subparagraph (c)(i)(C).\41\
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    \39\ The proposed rule change stipulates that any remaining 
balances of orders not executed after the exposure period will enter 
the book at their limit prices (to the extent consistent with Rule 
6.53) or route via the order handling system pursuant to Rule 6.12 
in accordance with their routing instructions. See Notice, supra 
note 3, at 74835, n.27.
    \40\ See id. at 74835.
    \41\ See id.
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    The Exchange also proposes to add subparagraph (d)(iii), which 
provides that if the System does not open a series pursuant 
subparagraphs (i) or (ii), notwithstanding proposed paragraph (c) 
(which states the opening rotation period may not last more than 60 
seconds), the opening rotation period continues (including the 
dissemination of EOIs) until the condition causing the delay is 
satisfied or the Exchange otherwise determines it is necessary to open 
a series in accordance with proposed paragraph (e).\42\
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    \42\ Current Rule 6.2B(h) and proposed Rule 6.2B(g) provide that 
the opening procedures described in the rule may also be used after 
the close of a trading session for series that open pursuant to 
HOSS. The proposed rule change makes non-substantive changes to 
proposed paragraph (g) to more clearly and simply state the 
potential applicability of the opening procedures to a closing 
rotation for series that open pursuant to HOSS and to include 
additional detail regarding the notification to Trading Permit 
Holders regarding the decision to conduct a closing rotation. The 
proposed rule change also amends the name of Rule 6.2B to indicate 
that the procedures may also be used for closing rotations. See id. 
at 74835, n.28.
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Hybrid 3.0 Classes

    The proposed rule change moves Rule 6.2B, Interpretation and Policy 
.01(a), which establishes a modified opening procedure for classes that 
trade on the Hybrid 3.0 platform, into the body of the rule in proposed 
paragraph (h). Interpretation and Policy .01 generally describes the 
modified opening procedures for Hybrid 3.0 series that are used to 
calculate volatility indexes.\43\ The Exchange noted in its filing that 
current paragraph (a), however, applies to Hybrid 3.0 classes on all 
trading days, not just the days on which the Exchange uses the modified 
opening procedures.\44\ The proposed rule change therefore moves this 
provision to proposed paragraph (h) within the body of the rule, rather 
than the Interpretation and Policy.
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    \43\ The only series trading on Hybrid 3.0 are SPX index 
options. See, e.g., CBOE FAQs, available at: https://www.cboe.org/publish/mmfaq/mmfaq.pdf (``All option classes on CBOE are Hybrid 
classes, except SPX, which contains both Hybrid series (SPX Weeklys 
under trading symbol SPXW) and Hybrid 3.0 series (all other SPX 
series under trading symbol SPX).'').
    \44\ See Notice, supra note 3, at 74835-36.
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    The introduction to proposed paragraph (h) states that all the 
provisions set forth in Rule 6.2B apply to the opening of Hybrid 3.0 
series except as follows in subparagraphs (i) and (ii). Proposed 
paragraph (h)(i) provides that only the LMM or DPM with an appointment 
or allocation, respectively, to the class or series may enter quotes 
prior to the opening of trading, subject to the obligation set forth in 
Rule 8.15 or 8.85, respectively. Proposed paragraph (h)(ii) states that 
during the pre-opening period, the System will accept all order types 
eligible for entry from public customers (consistent with current 
paragraph (a) in Interpretation and Policy .01), but adds that the 
System only accepts opening rotation orders from non-public 
customers.\45\
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    \45\ See id. at 74836. Pursuant to Rule 7.4(a), public customer 
orders are eligible for entry into the electronic book. While non-
public customers may submit orders in Hybrid classes for entry into 
the book, the Exchange may determine on a class-by-class basis that 
non-public customers may also submit orders in Hybrid 3.0 classes 
for entry into the book; currently, the Exchange has determined not 
to permit this. See id. at 74836, n.31.
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Modified Opening Procedures on Volatility Index Settlement Dates

    The proposed rule change amends the modified opening procedures for 
classes and series used to calculate volatility indexes on the exercise 
and final settlement dates. Current Interpretation and Policy .01(b) 
requires the DPM or LMM to enter opening quotes in all series in a 
Hybrid 3.0 class during a modified opening procedure. The proposed rule 
change deletes this obligation. As a result, the opening quoting 
obligations in Rules 8.15 and 8.85, as applicable, would apply to LMMs 
and DPMs, respectively, in Hybrid 3.0 classes on volatility settlement 
days.\46\
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    \46\ See id. at 74836.
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    Current Rule 6.2B, Interpretation and Policy .01(c) describes a 
modified opening procedure that applies to series in Hybrid 3.0 classes 
that are used to calculate a volatility index on expiration and final 
settlement dates for those indexes.\47\ The introductory paragraph of 
current paragraph (c) states that to facilitate the calculation of 
exercise or final settlement values for options or futures contracts on 
volatility indexes, the Exchange will utilize a modified HOSS opening 
procedure for any Hybrid 3.0 series with respect to which a volatility 
index is calculated. This modified opening procedure will be utilized 
only on the expiration and final settlement dates of the options or 
futures contracts on the applicable volatility index for each 
expiration. The Exchange states that the proposed introductory 
paragraph to Interpretation and Policy .01 simplifies these two 
sentences, which CBOE believes are redundant, and states that on the 
dates on which the exercise and final settlement values are calculated 
for options \48\ or (security) futures contracts on a volatility index 
(i.e., expiration and final settlement dates), the Exchange will 
utilize the modified opening procedure described in that Interpretation 
and Policy for all series used to calculate the exercise/final 
settlement value of the volatility index for expiring options and 
(security) futures contracts (i.e., constituent options).\49\
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    \47\ Interpretation and Policy .08 has a substantially similar 
procedure for series in Hybrid classes that are used to calculate 
volatility indexes on settlement dates. As discussed below, the 
proposed rule change deletes Interpretation and Policy .08 and 
applies Interpretation and Policy .01 to all classes. All proposed 
changes to Interpretation and Policy .01 described in this section 
of the rule filing will thus apply to the modified opening procedure 
for both Hybrid and Hybrid 3.0 classes. See id. at 74836, n.34.
    \48\ The proposed rule references Rules 24.9(a)(5) and (6) 
(which references are also included in current Rule 6.2B, 
Interpretation and Policy .08), which describe the method of 
determining the day on which the exercise settlement value will be 
calculated for volatility indexes with a 30-day volatility period 
and VXST, respectively. See id. at 74836, n.35.
    \49\ See id. at 74836.
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    Current Interpretation and Policy .01(c)(i) states that all orders, 
other than spread or non-OPG contingency orders, will be eligible to be 
placed on the electronic book for those option contract expirations 
whose prices are used to derive the volatility indexes on which options 
and futures are traded, for the purpose of permitting those orders to 
participate in the opening price calculation for the applicable series. 
Since the Exchange permits the same order types during the modified 
opening procedure as it does during the standard procedure, the 
proposed rule change deletes this paragraph.\50\
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    \50\ See Notice, supra note 3, at 74836-37. The Exchange 
requires, and will continue to require, LMMs (or DPMs) in Hybrid 3.0 
classes to enter opening quotes in series that may be used to 
calculate the exercise and final settlement values of options or 
futures on the volatility index on expiration and final settlement 
dates. Additionally, LMMs and DPMs must enter quotes within a 
certain timeframe on all trading days. See id. at 74832.
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Exchange Determinations

    Current Rule 6.2B provides in various places, including paragraphs 
(b)(ii), (e) and (f) and Interpretations and Policies .01 and .08, that 
Exchange Floor Officials may determine whether to modify the opening 
procedures when they deem necessary. The Exchange proposes to delete 
these references and combine them into current paragraph (f) and 
proposed paragraph (e). Additionally, the Exchange proposes to amend 
proposed paragraph (e) to state that senior Help Desk personnel make 
these determinations.\51\ The proposed

[[Page 90901]]

rule change lists examples of actions Senior Help Desk personnel may 
take in the interests of commencing or maintaining a fair and orderly 
market, in the event of unusual market conditions, or in the public 
interest, including delaying or compelling the opening of any series in 
any options class, modifying timers or settings described in Rule 6.2B, 
and not using the modified opening procedure set forth in proposed 
Interpretation and Policy .01. The proposed rule change adds that the 
Exchange will make and maintain records to document all determinations 
to deviate from the standard manner of the opening procedure, and 
periodically review these determinations.\52\
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    \51\ Current paragraph (b)(ii) references the Exchange Control 
Room. The Control Room is now referred to as the Help Desk, so the 
Exchange proposes to delete the references to the Control Room. See 
id. at 74837, n.37.
    \52\ See id. at 74837.
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    In addition, there are various provisions throughout Rule 6.2B that 
allow the Exchange to make certain determinations on a class-by-class 
basis. However, pursuant to Rule 8.14, Interpretation and Policy 
.01,\53\ the Exchange may authorize groups of series of a class to 
trade on different trading platforms, and thus, the Exchange would make 
determinations for each group rather than the class as a whole. 
Proposed Interpretation and Policy .05 provides that, for these groups, 
the Exchange may make determinations pursuant to Rule 6.2B and the 
Interpretations and Policies thereunder on a group-by-group basis that 
would otherwise be made on a class-by-class basis. The proposed rule 
change also adds to proposed Interpretation and Policy .05 that it will 
announce via Regulatory Circular with appropriate advance notice any 
determinations it makes under Rule 6.2B, to ensure Trading Permit 
Holders are aware of these determinations and have sufficient time to 
make any necessary changes in response to the determinations.\54\
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    \53\ Rule 8.14, Interpretation and Policy .01, provides that the 
Exchange may determine to authorize a group of series of a Hybrid 
3.0 class to trade on the Hybrid system, in which case the Exchange 
would establish trading parameters on a group basis to the extent 
rules otherwise provide for such parameters to be established on a 
class basis. See id. at 74838, n.39.
    \54\ See id. at 74838.
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Obsolete and Duplicate Language

    The proposed rule change proposes to delete certain provisions 
because it believes the language is obsolete or duplicative. Those 
changes include the following:
     Current Rule 6.2B(b)(ii) describes how a DPM or LMM, as 
applicable, takes part in determining the cause of a delay in the 
opening of an underlying security, and that the Exchange may consider 
such information when deciding whether to open a series despite the 
delay in the opening of the underlying. According to CBOE, the CBOE 
Help Desk generally is aware of delayed openings in the underlying 
securities and thus this provision is no longer necessary. 
Additionally, the Exchange's Help Desk would have the ability to compel 
the opening of a series pursuant to proposed Rule 6.2B(f) and therefore 
proposes to delete this provision.\55\
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    \55\ See id. at 74837.
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     The Exchange also proposes to delete current 
Interpretation and Policy .01(c)(v), which states the HOSS system will 
automatically generate cancels immediately prior to the opening of the 
applicable index option series for broker-dealer, Market-Maker, away 
market-maker, and specialist (i.e., non-public customer) orders that 
remain on the book following the modified HOSS opening procedures. 
Since the System will cancel opening rotation orders that do not 
execute during the opening rotation of a series, the Exchange believes 
this provision is redundant. Further, the Exchange proposes to delete 
current Interpretation and Policy .01(c)(vi) regarding publication of 
an imbalance of contracts, as this is covered by proposed Rule 
6.2B(d)(iii) regarding dissemination of expected opening messages if a 
series does not open.
     The proposed rule change deletes Interpretation and Policy 
.08. The modified opening procedures described in Interpretations and 
Policies .01 and .08 are nearly identical for Hybrid and Hybrid 3.0 
classes. Therefore, the proposed rule change applies Interpretation and 
Policy .01 (as amended by this proposed rule change) to all 
classes.\56\
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    \56\ See Notice, supra note 3, at 74838. The proposed rule 
change deletes references to VXST, the CBOE Short-Term Volatility 
Index, in Interpretation and Policy .01, as VXST is only one type of 
volatility index and is not unique in its treatment under this rule. 
See id. at n.38.
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Non-Substantive Changes

    The proposed rule change, as modified by Amendment No. 1, makes 
numerous non-substantive and clerical changes throughout Rule 6.2B and 
in Rules 6.1A(e)(iii)(C), 6.13(b)(v)(B)(V), 6.53(l), 8.15(b)(v), 
8.85(a)(xi), and 17.50(g)(14), including adding or amending headings 
and defined terms, updating cross-references, adding introductory and 
clarifying language, using consistent language and punctuation, and 
replacing terms such as ``option series'' with series.\57\ The proposed 
rule change also amends current Rule 6.2B(g) and proposed Rule 6.2B(f) 
to clarify that the procedure described in Rule 6.2B may be used to 
reopen a series, in addition to a class, after a trading halt to 
address a potential situation in which only certain series are 
subjected to halt. The proposed rule change also adds detail regarding 
notice of use of this opening procedure following a trading halt and 
clarifies that the procedure would be the same, though depending on 
facts and circumstances, there may be no pre-opening period or a 
shorter pre-opening period. Proposed paragraph (f) further states the 
Exchange will announce the reopening of a class or series after a 
trading halt as soon as practicable via verbal message to the trading 
floor and electronic message to Trading Permit Holders that request to 
receive such messages.\58\
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    \57\ The Exchange notes that all series listed for trading on 
the Exchange are for options, therefore it does not believe that 
including the word ``option'' is necessary. See id. at 74838.
    \58\ See id. at 74838. CBOE also notes that the Exchange may 
reopen a class after a trading halt as otherwise set forth in the 
Rules, including Rules 6.3, 6.3B, and 6.3C. See id. at n.40.
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    The Exchange also proposes to amend Interpretation and Policy .04, 
which states the Exchange may determine on a class-by-class basis which 
electronic algorithm from Rule 6.45A or 6.45B, as applicable, applies 
to the class during rotations. The proposed rule change makes the 
electronic algorithm that applies to a class intraday the default 
algorithm during rotations, but leaves the Exchange flexibility to 
apply a different algorithm to a class during rotations if it deems 
necessary or appropriate.\59\
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    \59\ See id. at 74838.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act,\60\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\61\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\62\ 
which requires, among other things, that a national securities exchange 
have rules designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of

[[Page 90902]]

trade, to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.
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    \60\ 15 U.S.C. 78f.
    \61\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \62\ 15 U.S.C. 78f(b)(5).
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    In particular, the proposed rule change reorganizes and attempts to 
clarify the description of the opening (and sometimes closing) 
procedures, deletes text that the Exchange believes is either obsolete 
or unnecessary, removes certain discretion for the Exchange to make 
determinations under the rule on a class-by-class basis where CBOE no 
longer needs that discretion, and is intended to promote greater 
consistency across Rule 6.2B. The Commission notes that these changes 
may offer market participants a better understanding of how the 
Exchange's opening (and sometimes closing) procedures operate. To the 
extent the changes achieve that goal, they may promote transparency, 
reduce the potential for investor confusion, and assist market 
participants in deciding whether to participate in CBOE's trading 
rotations and, if they do participate, have confidence and certainty as 
to how their orders will be processed by the CBOE System.
    The Commission believes that the proposed rule change is designed 
to promote just and equitable principles of trade by seeking to ensure 
that series open in a fair and orderly manner with sufficient liquidity 
and opportunities for execution at prices that are determined by market 
forces. In particular, the Exchange notes that the proposed rule change 
is designed to ensure that market participants are aware of the 
circumstances under which the System may not open a series.\63\ 
Further, although the proposed rule change deletes the obligation for 
LMMs in Hybrid 3.0 classes to enter opening orders and quotes on 
volatility settlement dates, the Exchange has represented that it does 
not believe that this change will impact the balance of LMM obligations 
and benefits, as this obligation has been applied only to a brief 
period of time on a limited number of days.\64\ In addition, LMMs in 
Hybrid 3.0 must enter opening quotes in accordance with the obligation 
in Rule 8.15, including in series of classes that may be used to 
calculate the exercise and final settlement values of options or 
futures on the volatility index on settlement dates.\65\ The Exchange 
believes that the standard opening quoting obligation, in addition to 
other general obligations applicable to LMMs, provides sufficient 
liquidity in these series on the volatility settlement days.\66\ Thus, 
CBOE does not believe it is necessary to impose additional opening 
quoting obligations on LMMs on those days.
---------------------------------------------------------------------------

    \63\ See Notice, supra note 3, at 74839.
    \64\ See id.
    \65\ See id.
    \66\ See id.
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    Further, the proposed change more clearly specifies the situations 
in which the modified opening procedures replace the opening procedures 
on settlement dates for certain series. The proposed rule change also 
sets out the circumstances when the Exchange may exercise discretion 
and strives to narrow that discretion within certain established 
parameters.\67\ The proposed rule change further requires the Exchange 
to document and periodically review Exchange decisions made under the 
rule, including any deviations from the standard opening procedures, 
and specifies that only senior Exchange officials can make those 
determinations and must do so in limited specified circumstances with 
specific regard to the public interest.\68\ In this manner, Exchange 
determinations made under the rule should be transparent and made with 
due regard to the Exchange's obligations under the Act.
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    \67\ Exchange determinations, including the establishment of 
parameters governing the opening process, will be set forth in 
Regulatory Circulars (or as otherwise specified by the Exchange 
under the proposed rule). On account of the critical importance of 
this information to investors' understanding of how the Exchange's 
System operates, CBOE should ensure that such information is 
prominently displayed, readily searchable and retrievable, up-to-
date, and comprehensive.
    \68\ See proposed Rule 6.2B(e). See also Notice, supra note 3, 
at 74837.
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    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with Section 
6(b)(5) of the Act and the rules and regulations thereunder applicable 
to a national securities exchange.

IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
to 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-2016-071 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2016-071. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2016-071, and should be 
submitted on or before January 5, 2017.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of notice of the amended proposal in the 
Federal Register. In Amendment No. 1,\69\ CBOE updated a cross-
reference to Rule 6.2B in Rule 6.13. This change is consistent with the 
proposal as initially filed, and corrects

[[Page 90903]]

a now-obsolete rule reference. The change does not introduce material, 
new, or novel concepts. Accordingly, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Act,\70\ to approve the proposed 
rule change, as modified by Amendment No. 1, on an accelerated basis.
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    \69\ See Amendment No. 1, supra note 4.
    \70\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\71\ that the proposed rule change (SR-CBOE-2016-071), as modified 
by Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.
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    \71\ 15 U.S.C. 78s(b)(2).
    \72\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\72\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-30082 Filed 12-14-16; 8:45 am]
 BILLING CODE 8011-01-P