Document ID: SEC-2014-0191-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Stock Exchange, Inc.
Posted Date: 2014-01-31T05:00Z

[Federal Register Volume 79, Number 21 (Friday, January 31, 2014)]
[Notices]
[Pages 5502-5504]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-01960]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71400; File No. SR-CHX-2014-02]

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Offer Risk Management Tools Designed To Allow Participants To Monitor 
and Address Exposure to Risk

January 27, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on January 17, 2014, the Chicago Stock Exchange, Inc. (``CHX'' or 
the ``Exchange'') filed

[[Page 5503]]

with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    CHX proposes to offer risk management tools designed to allow 
Participants to monitor and address exposure to risk. The Exchange has 
designated this proposal as non-controversial and provided the 
Commission with the notice required by Rule 19b-4(f)(6)(iii) under the 
Act.\3\ The text of this proposed rule change is available on the 
Exchange's Web site at (www.chx.com) and in the Commission's Public 
Reference Room.
---------------------------------------------------------------------------

    \3\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------

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 CHX included statements 
concerning the purpose of and basis for the proposed rule changes 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 CHX 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
    In order to assist Participants' efforts to manage their risk 
level, the Exchange proposes to offer risk management tools designed to 
allow Participants to monitor and address exposure to risk.
    On October 2, 2012, the Commission conducted a roundtable entitled 
``Technology and Trading: Promoting Stability in Today's Markets'' (the 
``Roundtable'').\4\ While a number of issues were discussed at the 
Roundtable, a large amount of time was devoted to discussing ``kill-
switches,'' a mechanism that would deactivate trading when certain 
thresholds were met. Panelists and commentators on the Roundtable's 
topics generally supported a kill-switch mechanism that would permit 
market centers to terminate a firm's trading activity if such activity 
was posing a threat to market integrity. But there was concern that 
firms would ``be reluctant to systematically cut themselves off from 
the market'' \5\ and therefore, any kill-switch-triggering threshold 
would be set by the firm at a conservative level such that the 
automated disconnect would not occur when actually needed. At the same 
time though, the ability to detect unusual behavior would be invaluable 
to a firm in assessing whether an error was causing an unwanted buildup 
in risk.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 67802 (Sept. 7, 
2012), 77 FR 56697 (Sept. 13, 2012) (File No. 4-652). A webcast of 
the Roundtable is available at www.sec.gov/news/otherwebcasts/2012/ttr100212.shtml.
    \5\ See Transcript of Roundtable, Sections 0151-0152 (October 2, 
2012) (remarks of Lou Steinberg, TD Ameritrade).
---------------------------------------------------------------------------

    To address the concerns raised during the Roundtable, the Exchange 
proposes to offer optional risk management tools for its Participants 
that would facilitate, among other things, blocking of a Participant's 
orders if certain thresholds were met. As proposed, the risk management 
tools seek to balance the conflicting viewpoints raised during the 
Roundtable by providing risk monitoring services that grant discretion 
to the Participant to define pre-set risk thresholds. The tools are 
designed to act as backstop for Participants' risk controls by 
providing them with the ability to take action to more effectively 
manage their risk levels with respect to orders at the Exchange.
    The risk management tools will provide Participants with the 
ability to segment activity into risk groups and to monitor exposure in 
real time as trades execute. Participants may also take certain actions 
in response to an unwanted buildup in risk levels, such as bulk 
blocking or bulk cancelling orders by risk group. Additionally, 
Participants may define risk limits that may be adjusted intraday and 
elect to have the Exchange take action based on these pre-set limits, 
such as sending alerts as exposure limits are approached and breached 
or automatically blocking orders upon a breach. The tools are meant to 
be supplemental, acting as a backstop for a Participant's internal 
monitoring and procedures related to risk management. The Exchange does 
not guarantee that the tools will be sufficiently comprehensive to meet 
all of a Participant's needs, and the tools are not designed to be the 
sole means of risk control. Moreover, the use of the Exchange's risk 
management tools will not automatically constitute compliance with 
Exchange or federal rules.
    As noted above, the proposed risk management tools will be optional 
for Participants. The Exchange will not provide preferential treatment 
to Participants using Exchange-offered risk management tools and will 
not charge a fee for use of the risk management tools. Should the 
Exchange determine to charge a fee for use of the risk management 
tools, such fee will be proposed through a subsequent rule filing.
    The Exchange will be phasing in its risk management tools as the 
technology supporting the functionality is being implemented and will 
announce by Regulatory Notice when specific risk management tools will 
be available. The Exchange intends to make available the ability to 
segment activity into risk groups, define risk limits, and enter bulk 
block and bulk cancel messages during the first roll out.\6\ Additional 
functionality, such as allowing Participants to elect to have the 
Exchange take automated action based on pre-set limits, will be phased 
in over subsequent months.
---------------------------------------------------------------------------

    \6\ The Exchange expects the first rollout to begin the first 
quarter of 2014.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the requirements of Section 6(b) of the Act,\7\ in general, and Section 
6(b)(5) of the Act,\8\ in particular, in that it is designed to foster 
cooperation and coordination with persons 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 and not to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change will foster 
cooperation and coordination with persons facilitating transactions in 
securities because the Exchange will provide alerts to Participants 
when their trading reaches certain thresholds. As such, the Exchange 
will help Participants monitor their risk levels and provide tools for 
the firms to take action. Additionally, the Exchange believes that the 
proposed rule change will remove impediments to and perfect the 
mechanism of a free and open market and a national market system 
because the tools will provide Participants with the ability to self-
manage their levels of risk while providing an alert system that will 
help to ensure that Participants are aware of

[[Page 5504]]

developing issues. As such, the Exchange believes that the tools will 
provide a means to address potentially market-impacting events, helping 
to ensure the proper functioning of the market.
    Further, the Exchange believes that the proposed rule change is 
designed to protect investors and the public interest because the tools 
are a form of impact mitigation that will aid Participants in 
minimizing their risk exposure and reduce the potential for disruptive, 
market-wide events. The Exchange understands that firms test their 
trading systems in order to identify and mitigate latent defects. The 
proposed tools will serve as a back stop for Participants to assist 
them in identifying any such issues. The Exchange believes the risk 
management tools will assist Participants in managing their financial 
exposure which, in turn, could enhance the integrity of trading on the 
securities markets and help to assure the stability of the financial 
system.
    Finally, the Exchange believes that the proposed rule change does 
not unfairly discriminate among the Exchange's Participants because use 
of the risk management tools is optional and is not a prerequisite for 
participation on the Exchange.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. In fact, the 
Exchange believes that the proposal will have a positive effect on 
competition because, by providing Participants with additional means to 
monitor and control risk, the proposal will increase confidence in the 
proper functioning of the markets. The Exchange believes the risk 
management tools will assist Participants in managing their financial 
exposure which, in turn, could enhance the integrity of trading on the 
securities markets and help to assure the stability of the financial 
system. As a result, the level of competition should increase as public 
confidence in the markets is solidified.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \9\ and Rule 19b-4(f)(6) \10\ 
thereunder.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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-CHX-2014-02 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-CHX-2014-02. 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-CHX-2014-02 and should be 
submitted on or before February 21, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-01960 Filed 1-30-14; 8:45 am]
BILLING CODE 8011-01-P