Document ID: SEC-2014-0577-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2014-04-09T04:00Z

[Federal Register Volume 79, Number 68 (Wednesday, April 9, 2014)]
[Notices]
[Pages 19697-19699]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-07889]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71859; File No. SR-CBOE-2014-029]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change To Enhance the 
Exchange Audit Trail

April 3, 2014.
    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 March 27, 2014, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to enhance its audit trail by adding an 
additional element to existing Rules 6.73 (Responsibility of Floor 
Brokers) and 7.12 (PAR Official). The text of the proposed rule change 
is provided below. (additions are italicized; deletions are 
[bracketed])
* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *

Rule 6.73. Responsibilities of Floor Brokers

    (a)-(c) No changes.

. . . Interpretations and Policies:

    .01-.04 No changes.
    .05 Representation. Pursuant to Rule 6.73(a), a Floor Broker's 
representation of an order shall require the Floor Broker to 
electronically record the time the order is initially represented in 
the trading crowd via Exchange-approved functionality.
* * * * *

Rule 7.12. PAR Official

    (a) No change.
    (b) The PAR Official shall be responsible for the following 
obligations with respect to the classes of options assigned to him/her:
    (i)-(iv) No change.
    (v) A PAR Official shall electronically record the time an order is 
initially represented by the PAR Official in the trading crowd.
* * * * *
    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 is proposing to add a new interpretation and policy to 
Rule 6.73 and new language to Rule 7.12(b). The proposed change will 
require Floor Brokers and PAR Officials to electronically capture the 
time in which orders are initially verbally presented in the Exchange's 
trading crowd via a ``Represent Button'' which will be located on PAR 
workstations and other Exchange-approved devices including, i.e. Floor 
Broker Workstation (``FBW'') and PULSe.\3\ This will enhance the

[[Page 19698]]

Exchange's audit trail and surveillance of open out-cry trading.
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    \3\ The Exchange notes that there are currently other devices 
utilized on the Exchange's trading floor, but these devices are not 
utilized to represent orders in Exchange trading crowds and will not 
be required to have this functionality.
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    Currently, Trading Permit Holders are permitted to use Exchange-
approved devices to systematize orders pursuant to Exchange Rule 
6.24.\4\ However, the Exchange does not currently require an electronic 
capture of the time when orders are represented in the trading crowd on 
any of these devices.
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    \4\ Orders must be systematized in accordance with Rule 6.24 
(Required Order Information). Generally, subject to certain 
exceptions, each order, cancellation of, or change to an order 
transmitted to the Exchange must be ``systematized,'' in a format 
approved by the Exchange, either before it is sent to the Exchange 
or upon receipt on the floor of the Exchange. An order is 
systematized if: (i) The order is sent electronically to the 
Exchange; or (ii) the order that is sent to the Exchange non-
electronically (e.g., telephone orders) is input electronically into 
the Exchange's systems contemporaneously upon receipt on the 
Exchange, and prior to representation of the order.
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    The proposed rule change will require the electronic capture of the 
time an order is initially verbally represented in the trading crowd. 
As proposed, this obligation will be fulfilled via an electronic 
mechanism, a ``Represent Button,'' made available on Exchange-approved 
devices, including, for example, Exchange-supplied PAR workstations, 
FBWs and PULSe workstations.\5\ The Exchange believes this proposed 
addition would help to track the time when an order is initially 
represented in the trading crowd for open outcry trading.
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    \5\ Any newly introduced floor based order management device 
must have the ``Represent Button'' functionality before it is 
approved to be used on the Exchange trading floor if it will be 
utilized to represent orders.
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    The procedure Floor Brokers and PAR Officials currently follow to 
represent orders and consummate trades on the Exchange's trading floor 
will not change aside from the added step of capturing the time an 
order was initially represented in the trading crowd.
    The following is an example of how the proposed ``Represent 
Button'' would operate:
     At 10:00:00, the National Best Bid and Offer (``NBBO'') is 
1.10-1.20. A Floor Broker enters a trading crowd to represent an 
already systematized order resident on a FBW to buy 200 contracts at 
1.15. Concurrent with the representation in the crowd, the ``Represent 
Button'' on that FBW must be pressed.
     At 10:00:10, while the NBBO remains 1.10-1.20, a Market-
Maker (``MM-A'') in the trading crowd verbally commits to trade against 
the order for 200 contracts priced at 1.15. A trade has occurred.
     At 10:00:11, the NBBO updates to 1.05-1.10. At the same 
time, while the NBBO is 1.05-1.10, the order is transmitted to a PAR 
workstation for endorsement and processing.\6\
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    \6\ Orders represented on FBW must be sent to a PAR workstation 
for endorsement and processing because the post-execution process 
cannot be completed on FBW. The Exchange notes that, at this time, 
the PAR workstations are systematically configured to require the 
usage of the ``Represent Button'' upon selection of the order.
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     Finally, at 10:00:12, while the NBBO is still 1.05-1.10, 
the Floor Broker completes the endorsement of the trade and reporting 
process via PAR.
    With the addition of the proposed rule text, open out-cry trading 
on the Exchange will generally continue to operate as it currently 
does. The proposed rule text, however, merely adds another requirement 
to capture the representation time electronically. With the creation of 
the additional requirement, the Exchange is attempting to enhance its 
audit trail for regulatory purposes.
    The Exchange will announce the implementation date of the proposed 
rule change in a Regulatory Circular to be published no later than 30 
days following the approval date. The Exchange represents that all 
devices currently utilized to represent orders in the trading crowd by 
Floor Brokers and PAR Officials will have this functionality by the 
time of implementation of the obligation.
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.\7\ Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \8\ 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 
facilitation [sic] 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. Additionally, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \9\ requirement that the rules 
of an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ Id.
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    In particular, the proposed addition to Rules 6.73 and 7.12 would 
promote just and equitable principles of trading by enhancing the 
Exchange's audit trail. The proposed requirement applies to all 
participants that handle agency orders in the trading crowd, and, as 
such, we do not believe the requirement is unfairly discriminatory. In 
addition, all Floor Brokers and PAR Officials will have the same 
requirement to utilize the Represent Button, making the rule equitable 
to similarly situated participants on the Exchange's trading floor. 
These times will promote the Exchange's ability to develop and 
implement surveillances that adequately cover the Exchange's Rules 
including, but not limited to, due diligence requirements of Floor 
Brokers \10\ and other Exchange priority rules. The proposed rule 
change is attempting to protect investors and the public interest by 
enhancing the audit trail used to monitor trading on the Exchange 
trading floor.
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    \10\ See Exchange Rule 6.73.
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    The Exchange also believes the proposed rule change is consistent 
with Section 6(b)(1) of the Act,\11\ which provides that the Exchange 
be organized and have the capacity to be able to carry out the purposes 
of the Act and to enforce compliance by the Exchange's Trading Permit 
Holders and persons associated with its Trading Permit Holders with the 
Act, the rules and regulations thereunder, and the rules of the 
Exchange. In particular, the proposed additions will enhance the 
Exchange's audit trail improving the regulation of the Exchange. With 
an enhanced audit trail, the Exchange will be able to better monitor 
trading activity on the Exchange.
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    \11\ 15 U.S.C. 78f(b)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. In particular, the proposed 
rule change will not impose any burden on any intramarket competition 
as it will be applied to similarly situated groups trading on the 
Exchange's trading floor equally. The Exchange does not believe the 
proposed rule change will impose any burden on intermarket completion 
as the proposed changes merely pose an electronic recording component 
to the Exchange's open outcry representation

[[Page 19699]]

requirements on the trading floor to enhance the Exchange's audit 
trail.

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-2014-029 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-2014-029. 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-2014-029, and should be submitted on or before April 30, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Kevin M. O'Neill,
Deputy Secretary.
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    \12\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2014-07889 Filed 4-8-14; 8:45 am]
BILLING CODE 8011-01-P