Document ID: SEC-2017-1158-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2017-07-12T04:00Z

[Federal Register Volume 82, Number 132 (Wednesday, July 12, 2017)]
[Notices]
[Pages 32210-32213]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-14557]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81085; File No. SR-CBOE-2017-054]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change to Rule 6.47A, Automated Improvement Mechanism

July 6, 2017.
    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 June 30, 2017, 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 Exchange filed the proposal as a ``non-controversial'' 
proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 
\3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange seeks to amend its rules related to Automated 
Improvement Mechanism (``AIM'') auctions.

(additions are italicized; deletions are [bracketed])
* * * * *
Chicago Board Options Exchange, Incorporated Rules
* * * * *
Rule 6.74A. Automated Improvement Mechanism (``AIM'')
    Notwithstanding the provisions of Rule 6.74, a Trading Permit 
Holder that represents agency orders may electronically execute an 
order it represents as agent (``Agency Order'') against principal 
interest or against a solicited order provided it submits the Agency 
Order for electronic execution into the AIM auction (``Auction'') 
pursuant to this Rule.
    (a) No change.
    (b) Auction Process. Only one Auction may be ongoing at any given 
time in a series and Auctions in the same series may not queue or 
overlap in any manner. The Auction may not be cancelled and shall 
proceed as follows:
    (1) Auction Period and request for Responses (RFRs).
    (A)-(C) No change.
    (D) Each Market-Maker with an appointment in the relevant option 
class may submit responses to the RFR (specifying prices and sizes). 
[Such responses cannot cross the disseminated Exchange quote on the 
opposite side of the market.] Responses that cross the opposite side of 
the Exchange's disseminated quote that exists at the conclusion of the 
Auction will be priced at the Exchange's disseminated quote on the 
opposite side of the market.
    (E) Trading Permit Holders acting as agent for orders resting at 
the top of the Exchange's book opposite the Agency Order may submit 
responses to the RFR (specifying prices and sizes) on behalf such 
orders. Such responses [cannot cross the disseminated Exchange quote on 
the opposite side of the market, and] may not exceed the size of the 
booked order being represented. Responses that cross the opposite side 
of the Exchange's disseminated quote that exists at the conclusion of 
the Auction will be priced at the Exchange's disseminated quote on the 
opposite side of the market.
    (F)-(I) No change.
    (2) Conclusion of Auction. The Auction shall conclude at the sooner 
of (A) through (F) below with the Agency Order executing pursuant to 
paragraph (3) below.
    (A)-(C) No change.
    (D) Reserved[Any time an RFR response matches the Exchange's 
disseminated quote on the opposite side of the market from the RFR 
responses];
    (E)-(F) No change.
    (3) No change.
    . . . Interpretations and Policies:
    .01-.09 No change.
* * * * *
    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

[[Page 32211]]

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 seeks to amend its rules related to Automated 
Improvement Mechanism (``AIM'') auctions. Specifically, the Exchange 
seeks to amend Rule 6.74A(b)(2)(D) to allow AIM auctions to continue 
for the full auction exposure period (no less than 100 milliseconds and 
no more than 1 second) \5\ when an auction response matches the 
Exchange's disseminated quote on the opposite side of the market from 
the auction response.
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    \5\ See Rule 6.74A(b)(1)(C). See also SR-CBOE-2017-029, which 
amended Rule 6.74A(b)(1)(C) to allow the Exchange to designate the 
auction exposure period to last no less than 100 milliseconds and no 
more than 1 second.
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    An AIM auction consists of an Agency Order and a contra-side order. 
A Trading Permit Holder (``TPH'') may initiate an AIM auction provided 
that the Agency Order is in a class and of sufficient size as 
determined by the Exchange. An Agency Order must also be stopped at: 
(1) The better of the NBBO or the Agency Order's limit price (if the 
Agency Order is for 50 standard option contracts or more) or (2) the 
better of the NBBO price improved by one minimum price improvement 
increment or the Agency Order's limit price (if the Agency Order is for 
less than 50 standard option contracts).\6\
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    \6\ See Rule 6.74A(a).
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    Additionally, an AIM auction will currently conclude at the sooner 
of: The end of the auction period; upon receipt by the Hybrid System of 
an unrelated order (in the same series as the Agency Order) that is 
marketable against either the Exchange's disseminated quote (when such 
quote is the NBBO) or the auction responses; upon receipt by the Hybrid 
System of an unrelated limit order (in the same series as the Agency 
Order and on the opposite side of the market as the Agency Order) that 
improves any auction response; any time an auction response matches the 
Exchange's disseminated quote on the opposite side of the market from 
the auction response; any time there is a quote lock on the Exchange 
pursuant to Rule 6.45(c); or any time there is a trading halt in the 
series on the Exchange.
    As noted above, AIM auctions end when an auction response matches 
the Exchange's disseminated quote on the opposite side of the market 
from the auction response.\7\ For example, assume the NBBO and the 
Exchange's BBO are 1.00-1.20 when an auction is initiated. If the 
Agency Order is an order to buy and an auction response is to sell at 
1.00, the auction will end early (i.e., prior to the full duration of 
the auction exposure period). An individual auction response may not 
exceed the size of the Agency Order.\8\ A response to sell at 1.00 will 
end the auction early and necessarily does not have sufficient size to 
execute both the Agency Order and all priority customer interest in the 
book at 1.00. Thus, with priority customer interest in the book at 1.00 
the Agency Order will execute against the auction response at one 
minimum auction response increment worse than the final auction price 
(1.01 in the above example).\9\
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    \7\ See Rule 6.74A(b)(2)(D).
    \8\ See Rule 6.74A(b)(1)(H).
    \9\ See Rule 6.74A(b)(3)(I).
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    When an auction ends early because an auction response matches the 
Exchange's disseminated quote on the opposite side of the market from 
the auction response, the auction's termination prevents the Exchange 
from receiving more auction responses. More auction responses increase 
the opportunity that the auction responses, in the aggregate, will have 
enough size to allow the Exchange to execute both the Agency Order and 
priority customer interest in the book against the auction responses. 
In cases where there is sufficient auction response interest to satisfy 
both the Agency Order and all priority customer interest in the book, 
then the Agency Order receives an execution price that is one minimum 
price increment better than would occur without this change (i.e., the 
Agency Order in the above example is executed at 1.00 instead of 1.01). 
Thus, the Exchange seeks to amend subparagraph (D) of Rule 6.74(b)(2) 
to allow an AIM auction to continue for the full duration of the 
auction exposure period any time an auction response matches the 
Exchange's disseminated quote on the opposite side of the market from 
the auction response.
    Furthermore, the Exchange also seeks to amend subparagraphs (D) and 
(E) of Rule 6.74A(b)(1) to provide further clarity as to how the 
Exchange's systems will function. Subparagraphs (D) and (E) of Rule 
6.74A(b)(1) provide that auction responses cannot cross the 
disseminated Exchange quote on the opposite side of the market. 
Currently, the Exchange does not reject responses that cross the 
disseminated Exchange quote on the opposite side of the market but 
instead systematically enforces the restriction in subparagraphs (D) 
and (E) by treating all responses that cross the disseminated Exchange 
quote on the opposite side of the market as a response at the 
disseminated price, which, in accordance with subparagraph (D) of Rule 
6.74A(b)(2) described above, currently ends the auction early because 
such a response is marketable with the Exchange's disseminated quote on 
the opposite side of the market from the auction response. Since 
auctions will no longer conclude early upon the receipt of a marketable 
response, the Exchange seeks to amend subparagraphs (D) and (E) to 
specify that responses that cross the opposite side of the Exchange's 
disseminated quote that exists at the conclusion of the Auction will be 
priced at the Exchange's disseminated quote on the opposite side of the 
market.
    The below examples describe the manner in which the current rule 
operates as well as how the proposed rule will operate.
    Example #1 (current rule):
     The disseminated Exchange quote prior to the initiation of 
an auction is 1.00-1.20.
     The Agency Order is an order to buy and is stopped at 
1.19.
     The Exchange receives an auction response priced at .99 or 
lower.
     An auction response priced at .99 or lower when the 
Exchange's quote is 1.00-1.20 is marketable against the Exchange's 
disseminated quote on the opposite side of the market form the auction 
responses. Thus, pursuant to Rule 6.74A(b)(2) the auction is 
terminated.
     At the conclusion of the auction the Exchange's market is 
1.00-1.20.
     An auction response at .99 or lower is treated as a 
response at 1.00, and the Agency Order is allocated in accordance with 
Rule 6.74A(b)(3). If the 1.00 bid in the book is a public customer and 
there are not enough responses priced at 1.00 to allow the booked 
public customer order and the Agency Order to be executed, the Agency 
Order is executed at 1.01 pursuant to subparagraph (I) of Rule 
6.74A(b)(3).
    Example #2 (proposed rule):
     The disseminated Exchange quote prior to the initiation of 
an auction is 1.00-1.20.
     The Agency Order is an order to buy and is stopped at 
1.19.
     The Exchange receives an auction response priced at .99 or 
lower.
     The Exchange does not end the auction early. The auction 
will instead last for the full auction exposure period,

[[Page 32212]]

which, again, allows for the possibility of more auction responses. As 
described above, more auction responses increases the opportunity that 
the auction responses, in the aggregate, will have enough size to allow 
the Exchange to execute both the Agency Order and priority customer 
interest in the book against the auction responses.
     At the conclusion of the auction the Exchange's market is 
1.00-1.20.
     An auction response priced at .99 or lower is treated as a 
response at 1.00, and the Agency Order is allocated in accordance with 
Rule 6.74A(b)(3). If the 1.00 bid in the book is a public customer and 
there are not enough responses priced at 1.00 to allow the booked 
public customer order and the Agency Order to be executed, the Agency 
Order is executed at 1.01 pursuant to subparagraph (I) of Rule 
6.74A(b)(3).
    Example #3 (proposed rule):
     The disseminated Exchange quote prior to the initiation of 
an auction is 1.00-1.20.
     The Agency Order is an order to buy and is stopped at 
1.19.
     The Exchange's disseminated bid is updated to 1.05 during 
the auction so the market is now 1.05-1.20.
     The Exchange receives an auction response priced at 1.04 
or lower.
     The Exchange does not end the auction early. The auction 
will instead last for the full auction exposure period, which, again, 
allows for the possibility of more auction responses. As described 
above, more auction responses increases the opportunity that the 
auction responses, in the aggregate, will have enough size to allow the 
Exchange to execute both the Agency Order and priority customer 
interest in the book against the auction responses.
     At the conclusion of the auction the Exchange's market is 
1.05-1.20.
     An auction response priced at 1.04 or lower is treated as 
a response at 1.05, and the Agency Order is allocated in accordance 
with Rule 6.74A(b)(3). If the 1.05 bid in the book is a public customer 
and there are not enough responses priced at 1.05 to allow the booked 
public customer order and the Agency Order to be executed, the Agency 
Order is executed at 1.06 pursuant to subparagraph (I) of Rule 
6.74A(b)(3).
    Example #4 (proposed rule):
     The disseminated Exchange quote prior to the initiation of 
an auction is 1.00-1.20.
     The Agency Order is an order to buy and is stopped at 
1.19.
     The Exchange's disseminated bid is updated to 1.05 during 
the auction so the market is now 1.05-1.20.
     The Exchange receives an auction response priced at 1.04.
     The Exchange does not end the auction early. The auction 
will instead last for the full auction exposure period, which, again, 
allows for the possibility of more auction responses. As described 
above, more auction responses increases the opportunity that the 
auction responses, in the aggregate, will have enough size to allow the 
Exchange to execute both the Agency Order and priority customer 
interest in the book against the auction responses.
     The 1.05 bid is cancelled prior to the end of the auction 
and the market returns to 1.00-1.20.
     At the conclusion of the auction the Exchange's market is 
1.00-1.20.
     At the conclusion of the auction the auction response 
priced at 1.04 remains a response at 1.04 because the market is 1.00-
1.20 at the conclusion of the auction (i.e., the response priced at 
1.04 does not cross the disseminated quote on the opposite side of the 
market from the auction response), and the Agency Order is allocated in 
accordance with Rule 6.74A(b)(3).
    The Exchange notes that if the Exchange's systems were designed to 
reject the 1.04 in example #4 the Agency Order would not have received 
price improvement beyond the stop price of 1.19.
    Allowing an AIM auction to continue for the full duration of the 
auction exposure period any time an auction response matches the 
Exchange's disseminated quote on the opposite side of the market from 
the auction response provides more opportunity for the Exchange to 
receive auction responses that satisfy priority interest in the book as 
well as the Agency Order. The Exchange is not amending the manner in 
which orders are allocated at the conclusion of an AIM auction. Orders 
will continue to be allocated in accordance with Rule 6.74A(b)(3). The 
Exchange notes that other exchanges with similar auctions allow the 
auctions to continue for the full duration when an auction response 
matches the disseminated quote on the opposite of the market from the 
auction response.\10\
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    \10\ See Bats EDGX Exchange, Inc. (``EDGX'') Rule 21.19(b)(2); 
Nasdaq BX, Inc. (``Nasdaq'') Rules, Section 9; Nasdaq PHLX LLC 
(``Phlx) [sic] Rule 1080(n); and International Securities Exchange, 
LLC (``ISE'') Rule 723.
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    The Exchange will announce the implementation date of the proposed 
rule change in a Regulatory Circular to be published no later than 90 
days following the effective date. The implementation date will be no 
later than 180 days following the effective date.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\11\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \12\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in 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) \13\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ Id.
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    In particular, the Exchange believes allowing an AIM auction to 
continue for the full duration of the auction exposure period any time 
an auction response matches the Exchange's disseminated quote on the 
opposite side of the market from the auction response will provide 
increased opportunities for the Agency Order and priority interest in 
the book to be executed, which helps to perfect the mechanism of a free 
and open market and, in general, helps to protect investors and the 
public interest. The Exchange notes that other exchanges with similar 
auctions allow the auctions to continue for the full duration when an 
auction response matches the disseminated quote on the opposite of the 
market from the auction response.\14\ The Exchange also notes that the 
proposal helps protect the public interest by treating responses that 
cross the opposite side of the Exchange's disseminated quote as 
responses priced at the Exchange's disseminated quote because doing so 
allows Agency Orders to receive price improvement beyond the stopped 
price.
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    \14\ See EDGX Rule 21.19(b)(2); Nasdaq Rules, Section 9; Phlx 
Rule 1080(n); and ISE Rule 723.
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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

[[Page 32213]]

burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The proposal simply provides 
more opportunity for Agency Orders and priority interest in the book to 
be executed in full when an auction response matches the Exchange's 
disseminated quote on the opposite of the market from the auction 
response. The Exchange notes that another exchange with a similar 
auction allows the auction to continue for its full duration when an 
auction response matches the disseminated quote on the opposite of the 
market from the auction response. The Exchange also notes that the 
proposal helps protect the public interest by treating responses that 
cross the opposite side of the Exchange's disseminated quote as 
responses priced at the Exchange's disseminated quote because doing so 
allows Agency Orders to receive price improvement beyond the stopped 
price.

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

    Because the foregoing proposed rule change does not:
    A. Significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \15\ and 
Rule 19b-4(f)(6) \16\ thereunder. 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 will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
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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-2017-054 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-2017-054. 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-2017-054 and should be 
submitted on or before August 2, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-14557 Filed 7-11-17; 8:45 am]
BILLING CODE 8011-01-P