Document ID: SEC-2017-0153-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2017-02-03T05:00Z

[Federal Register Volume 82, Number 22 (Friday, February 3, 2017)]
[Notices]
[Pages 9267-9270]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-02260]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79899; File No. SR-CBOE-2016-080]

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, To Amend CBOE Rule 6.53C

January 30, 2017.

I. Introduction

    On November 17, 2016, Chicago Board Options Exchange, Incorporated 
(``CBOE'' or the ``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 CBOE Rule 6.53C, 
Interpretation and Policy .10, to provide for the electronic trading of 
complex orders consisting of series authorized for trading on the 
Hybrid 3.0 Platform and series authorized for trading on the Hybrid 
Trading System (``Hybrid'' or ``Hybrid Trading System''). The proposed 
rule change was published for comment in the Federal Register on 
December 2, 2016.\3\ The Commission received no comment letters 
regarding the proposed rule change. On December 30, 2016, the Exchange 
filed Amendment No. 1 to the proposed rule change.\4\ On January 12, 
2017, the Commission extended the time for Commission consideration of 
the proposal until March 2, 2017.\5\ 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. 79406 (November 28, 
2016), 81 FR 87102 (``Notice'').
    \4\ As discussed more fully below, Amendment No. 1 revises the 
proposal to describe the treatment of an SPX/SPXW order resting on 
the complex order book (``COB'') that becomes marketable against 
orders residing in the EBook for the individual legs of the order; 
indicate when an incoming SPX/SPXW order will be subject to a 
complex order auction (``COA''); indicate that non-customer SPX/SPXW 
orders that are marketable upon receipt will not be COA-eligible; 
describe the treatment of SPX/SPXW orders during extended trading 
hours; and indicate that CBOE will announce the implementation date 
of the proposal via Regulatory Circular at least seven days prior to 
the implementation date. 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 CBOE-2016-080 (available at https://www.sec.gov/comments/sr-cboe-2016-080/cboe2016080-1454634-130131.pdf). CBOE also 
posted a copy of its Amendment No. 1 on its Web site (http://www.cboe.com/framed/PDFframed.aspx?content=/publish/RuleFilingsSEC/SR-CBOE-2016-080.a1.pdf§ion=SEC_ABOUT_CBOE_BOD&title=Proposal+Regarding+Complex+Orders+Consisting+of+SPX+Options+Series+and+SPXW+Options+Series) 
when it filed Amendment No. 1 with the Commission.
    \5\ See Securities Exchange Act Release No. 79783 (January 12, 
2017), 82 FR 6673 (January 19, 2017).
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II. Description of the Proposed Rule Change

    Currently, there are two trading platforms operating on CBOE's 
trade engine, CBOE Command: (i) Hybrid; and (ii) the Hybrid 3.0 
Platform.\6\ For each Hybrid 3.0 class, CBOE may determine to authorize 
a group of series of the class for trading on Hybrid.\7\ CBOE may 
establish Hybrid trading parameters for such a group on a group basis 
to the extent that CBOE's rules otherwise allow CBOE to establish such 
trading parameters on a class basis.\8\ Currently, options on the 
Standard & Poor's 500 Index (``S&P 500''), trading under the symbol 
SPX, are the only Hybrid 3.0 Platform class.\9\ CBOE has authorized a 
group of series within the S&P 500 options class, trading under the 
symbol SPXW, to trade on Hybrid.\10\ The SPX options series, which 
trade on the Hybrid 3.0 Platform, are a.m.-settled contracts with 
standard third Friday expirations.\11\ The SPXW options series, which 
trade on Hybrid, are p.m.-settled contracts with non-standard 
expirations.\12\
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    \6\ See Notice, 81 FR at 87103. As described more fully in the 
Notice, CBOE introduced Hybrid, an electronic trading platform 
integrated with CBOE's floor-based open-outcry auction market, in 
2003. See Securities Exchange Act Release No. 47959 (May 30, 2003), 
68 FR 34441 (June 9, 2003) (order approving File No. SR CBOE-2002-
05). CBOE subsequently implemented an enhanced version of Hybrid, 
known as Hybrid 2.0, which allows remote quoting in option classes. 
See Securities Exchange Act Release No. 50003 (July 12, 2004), 69 FR 
43028 (July 19, 2004) (order approving File No. SR-CBOE-2004-24). 
CBOE later implemented the Hybrid 3.0 Platform, a trading platform 
on Hybrid that allows one or more quoters to submit electronic 
quotes that represent the aggregate Market Maker quotation interest 
in a series for the trading crowd. See Securities Exchange Act 
Release No. 55874 (June 7, 2007), 72 FR 32688 (June 13, 2007) (order 
approving File No. SR-CBOE-2006-101). In 2008, CBOE removed the 
distinction between Hybrid and Hybrid 2.0 classes and deleted 
references to the Hybrid 2.0 platform because CBOE migrated all 
option classes, other than classes traded on the Hybrid 3.0 
Platform, from Hybrid to Hybrid 2.0. See Securities Exchange Act 
Release No. 58153 (July 14, 2008), 73 FR 41386 (July 18, 2008) 
(notice of filing and immediate effectiveness of File No. SR-CBOE-
2008-067). Following the removal of the Hybrid 2.0 distinction, all 
options classes, other than those trading on the Hybrid 3.0 
Platform, have been referred to as Hybrid classes trading on the 
Hybrid Trading System.
    \7\ See CBOE Rule 8.14, Interpretation and Policy .01.
    \8\ See CBOE Rule 8.14, Interpretation and Policy .01(c).
    \9\ See CBOE Rule 8.3(c)(iii).
    \10\ See Notice, 81 FR at 87103.
    \11\ See id. at 87103-87104.
    \12\ See id. at 87104.
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    Currently, when CBOE receives a complex order consisting of both 
SPX and SPXW options series (an ``SPX/SPXW order'') during regular 
trading hours, the order is routed to a PAR workstation pursuant to 
CBOE Rule 6.12(a)(1) to provide an opportunity for the order to trade 
in open outcry.\13\ If CBOE receives an SPX/SPXW order during extended 
trading hours, the order is rejected back to the sender.\14\ CBOE 
handles SPX/SPXW orders in this manner because its system currently 
cannot accept complex orders consisting of series that trade on 
different trading platforms.\15\ CBOE is updating its system to accept 
SPX/SPXW orders so they will be able to trade with other SPX/SPXW 
orders electronically during regular trading hours and extended trading 
hours.\16\ As described in more detail below, the proposal amends 
CBOE's rules to specify the manner in which SPX/SPXW orders, and any 
other complex orders consisting of series that trade on Hybrid and on 
the Hybrid 3.0 Platform, will be executed electronically.\17\
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    \13\ See id.
    \14\ See id. See also CBOE Rule 6.1A(b) and RG15-013.
    \15\ See Notice, 81 FR at 87104.
    \16\ See id.
    \17\ Although the proposal focuses on SPX/SPXW orders, the 
proposed rules will apply to all complex orders consisting of series 
that trade on Hybrid and series that trade on the Hybrid 3.0 
Platform. See Notice, 81 FR at 87104. See also CBOE Rule 6.53C, 
Interpretation and Policy .10.
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    CBOE Rule 6.53C, Interpretation and Policy .10 provides rules 
governing the execution of complex orders in Hybrid 3.0 classes trading 
on the Hybrid 3.0 Platform. CBOE proposes to amend CBOE Rule 6.53C, 
Interpretation and Policy .10 to provide that if CBOE authorizes a 
group of series of a Hybrid 3.0 class for trading on Hybrid pursuant to 
CBOE Rule 8.14, Interpretation and Policy .01, CBOE Rule 6.53C, 
Interpretation and Policy .10 will apply to a complex order with at 
least one leg in a series from the group authorized for trading on the 
Hybrid 3.0 Platform, including if the order has another leg(s)

[[Page 9268]]

in a series from the group authorized for trading on Hybrid. In 
addition, CBOE proposes to amend CBOE Rule 6.53C, Interpretation and 
Policy .10(a) to indicate that a marketable complex order that consists 
solely of a group of series that is authorized for trading on the 
Hybrid 3.0 Platform will execute automatically against individual 
orders residing in the EBook, provided the complex order can be 
executed in full (or in a permissible ratio) by orders in the EBook and 
the orders in the EBook are priced equal to or better than the 
individual quotes residing in the EBook. A marketable complex order 
that consists of a group of series that is authorized for trading on 
the Hybrid 3.0 Platform and a group of series authorized for trading on 
Hybrid will not automatically execute against individual orders 
residing in the EBook.\18\ CBOE states that SPX/SPXW complex orders 
(unlike SPX complex orders) will not automatically execute against 
individual orders residing in the EBook because of system limitations 
that would be prohibitively expensive to modify.\19\ SPX/SPXW orders 
that are marketable against individual orders residing in the EBook 
instead will be routed to a PAR workstation during regular trading 
hours and rejected during extended trading hours, consistent with the 
existing treatment of SPX/SPXW orders.\20\ Except for this difference, 
SPX/SPXW orders will be executed in accordance with CBOE Rule 6.53C, 
Interpretation and Policy .10 in the same manner as complex orders 
consisting solely of series that are authorized for trading on the 
Hybrid 3.0 Platform, i.e., SPX complex orders.\21\
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    \18\ See CBOE Rule 6.53C, Interpretation and Policy .10(a).
    \19\ See Notice, 81 FR at 87104.
    \20\ See id.
    \21\ See id.
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    CBOE states that SPX/SPXW orders will trade using a price-time 
matching algorithm.\22\ During regular trading hours, CBOE will handle 
SPX/SPXW orders in the following manner:
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    \22\ See id. See also CBOE Rules 6.45B(a) (giving CBOE the 
ability to determine the matching algorithm) and Rule 8.14, 
Interpretation and Policy .01(c).
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     SPX/SPXW orders with more than four legs will be routed 
for manual handling, consistent with the manner in which CBOE handles 
SPX complex orders.\23\
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    \23\ See Notice, 81 FR at 87104. The current number of legs 
permitted for complex orders for electronic processing is four. See 
CBOE Rule 6.53C(a)(1) (providing that complex orders with no more 
than the applicable number of legs as determined by the Exchange are 
eligible for processing). Pursuant to CBOE Rule 6.12(a)(1), orders 
initially routed for electronic processing that are not eligible for 
automatic execution or book entry will by default route to PAR or 
back to the Trading Permit Holder.
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     SPX/SPXW orders for the accounts of non-customers \24\ 
will not be allowed to rest in the Complex Order Book (``COB''), but 
will instead be routed for manual handling, consistent with the manner 
in which CBOE handles SPX complex orders.\25\ SPX/SPXW orders from all 
other participants will be allowed to rest in the COB.\26\
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    \24\ CBOE notes that, in this context, ``non-customers'' would 
include CBOE market makers, non-CBOE market makers, and proprietary 
firms. See Amendment No. 1.
    \25\ See Notice, 81 FR at 87104. See also CBOE Rule 6.53C(c)(i) 
(allowing CBOE to determine which classes and order origin types are 
eligible for entry into the COB) and RG15-195.
    \26\ See id.
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     SPX/SPXW orders for the accounts of customers and non-
customers will be permitted to participate in the COB opening process 
and trade against SPX/SPXW orders resting in the COB, consistent with 
the manner in which CBOE handles SPX complex orders.\27\
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    \27\ See Notice, 81 FR at 87104. See also CBOE Rule 6.53C.11 and 
RG15-195. CBOE notes that, as with SPX complex orders, customers and 
non-customers submitting SPX/SPXW orders during extended trading 
hours may use the contingency OPG to book orders that will 
participate in the regular trading hours opening. Any portion of an 
SPX/SPXW order marked OPG that is not executed during the opening 
will be cancelled. In addition, customers may use a non-OPG 
contingency to allow their SPX/SPXW orders to remain on the COB 
after the opening. See Amendment No. 1.
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     As discussed above, marketable SPX/SPXW orders will not be 
eligible to automatically execute against individual orders residing in 
the EBook for the legs of the order.\28\ CBOE notes that not allowing 
SPX/SPXW orders to automatically execute against individual orders 
residing in the EBook for the legs of the SPX/SPXW order effectively 
means that CBOE is not changing the manner in which CBOE treats these 
SPX/SPXW orders.\29\
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    \28\ See CBOE Rule 6.53C, Interpretation and Policy .10(a).
    \29\ See Notice, 81 FR at 87104.
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     Marketable SPX/SPXW orders will be eligible to 
automatically execute against other SPX/SPXW orders resting in the COB, 
provided the execution is at a net price that has priority over the 
individual orders and quotes residing in the EBook, consistent with the 
manner in which CBOE handles SPX complex orders.\30\
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    \30\ See id. See also CBOE Rule 6.53C, Interpretation and Policy 
.10(b).
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     Marketable SPX/SPXW orders will not be eligible to 
automatically execute against individual Market-Maker quotes resting in 
the EBook for the legs, consistent with the manner in which CBOE 
handles SPX complex orders.\31\
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    \31\ See CBOE Rule 6.53C.10 (providing that the Exchange may 
determine to not allow marketable complex orders entered into COB 
and/or COA to automatically execute against individual quotes 
residing in the EBook) and RG 12-025 (providing marketable SPX 
complex orders will not execute with individual quotes).
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     SPX/SPXW orders resting in the COB that become marketable 
against Market-Maker quotes in the individual legs will be subject to a 
complex order auction (``COA''),\32\ consistent with the manner in 
which CBOE handles SPX complex orders.\33\ Such an order (or the 
remaining portion of such an order) that is not executed but is still 
marketable will be routed for manual handling, consistent with the 
manner in which CBOE handles SPX complex orders.\34\
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    \32\ See CBOE Rule 6.53C(d)(i)(1).
    \33\ See Notice, 81 FR at 87104. See also CBOE Rule 6.53C, 
Interpretation and Policy .10(d).
    \34\ See Notice, 81 FR at 87104-87105. See also CBOE Rule 6.53C, 
Interpretation and Policy .10(d).
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     Pursuant to CBOE Rule 6.53C, Interpretation and Policy 
.10(e), CBOE will submit incoming customer SPX/SPXW orders to a COA if 
they are COA-eligible.\35\ Incoming non-customer SPX/SPXW orders that 
are marketable upon receipt will not be COA-eligible, and will instead 
route for manual handling.\36\
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    \35\ See Amendment No. 1.
    \36\ See id.
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    During extended trading hours, SPX/SPXW orders for the accounts of 
customers and non-customers will be allowed to rest in the COB.\37\ Any 
customer or non-customer SPX/SPXW order resting in the COB during 
extended trading hours that becomes marketable will be subject to a 
COA, and any portion of the order that remains unexecuted at the 
conclusion of the COA will be returned to the order entry firm.\38\ 
During extended trading hours, an incoming customer SPX/SPXW order that 
is marketable upon receipt will be subject to a COA, and an incoming 
non-customer SPX/SPXW order that is marketable upon receipt will be 
cancelled.\39\
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    \37\ See Notice, 81 FR at 87105. See also RG15-013.
    \38\ See Amendment No. 1.
    \39\ See id.
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    As with all products that trade during both regular trading hours 
and extended trading hours, no SPX/SPXW order on the COB at the end of 
regular trading hours will interact with or be transferred to the COB 
for extended trading hours, nor will an SPX/SPXW order on the COB at 
the end of extended trading hours interact with or be transferred to 
the COB.\40\
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    \40\ See id.
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    CBOE will announce the implementation date of the proposal,

[[Page 9269]]

which will be within 120 days of the Commission's approval of the 
filing, via Regulatory Circular at leave seven days prior to the 
implementation date.\41\ The Regulatory Circular announcing the 
implementation date also will describe the changes made by the 
proposal.\42\
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    \41\ See id.
    \42\ See id.
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III. Discussion and Commission Findings

    After careful review of the proposed rule change, as modified by 
Amendment No. 1, the Commission finds that the proposed rule change, as 
amended, is consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to a national securities 
exchange.\43\ In particular, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with Section 
6(b)(5) of the Act,\44\ which requires, among other things, that the 
rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest.
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    \43\ 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).
    \44\ 15 U.S.C. 78f(b)(5).
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    Currently, complex orders consisting of one or more series that 
trade on Hybrid and one or more series that trade on the Hybrid 3.0 
Platform must be executed in open outcry because CBOE's system cannot 
accept complex orders consisting of series that trade on different 
trading platforms.\45\ CBOE proposes to update its system to allow 
complex orders consisting of series that trade on Hybrid and series 
that trade on the Hybrid 3.0 Platform, including SPX/SPXW orders, to 
trade against other SPX/SPXW orders electronically during regular 
trading hours and extended trading hours, in addition to trading in 
open outcry. The Commission believes that providing for the electronic 
trading of complex orders consisting of series that trade on Hybrid and 
series that trade on the Hybrid 3.0 Platform could provide additional 
execution and price improvement opportunities for these complex orders. 
As discussed above, complex orders consisting of both Hybrid series and 
Hybrid 3.0 Platform series will be subject to the same trading rules as 
complex orders comprised solely of series that trade on the Hybrid 3.0 
Platform (i.e., complex orders consisting solely of SPX series), except 
that complex orders consisting of series that trade on Hybrid and 
series that trade on the Hybrid 3.0 Platform will not be able to 
execute electronically against orders on the EBook for the individual 
legs of the complex order.\46\ Instead, a complex order that consists 
of series that trade on Hybrid and on the Hybrid 3.0 Platform that is 
marketable against orders on the EBook will be routed to a PAR 
workstation during regular trading hours or returned to the order entry 
firm during extended trading hours, consistent with the existing 
treatment of SPX/SPXW orders.\47\ The Commission notes that CBOE will 
announce the implementation date of the proposal via Regulatory 
Circular at least seven days prior to the implementation date.\48\
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    \45\ See Notice, 81 FR at 87104. If CBOE receives an SPX/SPXW 
order during extended trading hours, it rejects the order back to 
the sender. See id. See also CBOE Rule 6.1A(b) and RG15-013.
    \46\ See CBOE Rule 6.53C, Interpretation and Policy .10 and 
.10(a).
    \47\ See Notice, 81 FR at 87105.
    \48\ See Amendment No. 1.
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IV. Solicitation of Comments on Amendment No. 1

    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-2016-080 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-2016-080. 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-2016-080 and should be 
submitted on or before February 24, 2017.

V. Accelerated Approval of the 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 30th day after the 
date of publication of notice of the amended proposal in the Federal 
Register. Amendment No. 1 modifies the proposal to provide additional 
details regarding the operation of the proposed rules. In particular, 
Amendment No. 1 identifies ``non-customers'' for purposes of the 
proposal; indicates that an SPX/SPXW order resting in the COB that 
become marketable will be subject to a COA, including, during extended 
trading hours, a non-customer SPX/SPXW order; notes that non-customer 
SPX/SPXW orders that are marketable on receipt will not be COA-
eligible, but instead will be routed for manual handling during regular 
trading hours and cancelled during extended trading hours; states that 
both customers and non-customers may submit SPX/SPXW orders with the 
contingency OPG to participate in the regular trading hours opening, 
and that customers may use a non-OPG contingency to allow their SPX/
SPXW orders to remain on the COB after the open; notes that no SPX/SPXW 
order on the COB at the end of regular trading hours will not interact 
with, or be transferred to, the COB for extended trading hours, nor 
will an SPX/SPXW order on the COB at the end of extended trading hours 
interact with, or be transferred to, the COB for regular trading hours; 
and states that CBOE will announce the implementation date of the 
proposal via Regulatory Circular at

[[Page 9270]]

least seven days prior to the implementation date, and that the 
Regulatory Circular announcing the implementation date will describe 
the changes made by the proposal. The Commission believes that 
Amendment No. 1 will benefit investors and other market participants by 
providing them with additional information concerning the handling of 
complex orders consisting of Hybrid and Hybrid 3.0 Platform series, 
including SPX/SPXW orders. Among other things, Amendment No. 1 
identifies ``non-customers'' in the context of the proposal as CBOE 
market makers, non-CBOE market makers, and proprietary trading firms, 
and clarifies the treatment of non-customer SPX/SPXW orders during 
extended trading hours. The changes in Amendment No. 1 provide 
additional detail to the proposal and do not introduce material, new, 
or novel concepts. Accordingly, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Act,\49\ to approve the proposed 
rule change, as modified by Amendment No. 1, on an accelerated basis.
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    \49\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\50\ that the proposed rule change (SR-CBOE-2016-080), as modified 
by Amendment No. 1, is approved on an accelerated basis.
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    \50\ See id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\51\
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    \51\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-02260 Filed 2-2-17; 8:45 am]
 BILLING CODE 8011-01-P