Daily Rules, Proposed Rules, and Notices of the Federal Government
The Exchange proposes to amend its rules regarding Hybrid Trading System (the "System")
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.
The Exchange proposes to amend its rules regarding System access, connectivity, and testing by Trading Permit Holders. The Exchange makes available to Trading Permit Holders various application programming interfaces ("APIs"),
After a Trading Permit Holder registers with the Exchange to use a specific API, the Exchange may require the Trading Permit Holder to use a specific connectivity protocol that, among other things, may require the input of certain information (e.g. trading acronym, category of Trading Permit Holder) during the connectivity process in accordance with technical specifications established by the Exchange. The Exchange may prescribe a specific connectivity protocol for all Trading Permit Holders, or for certain categories of similarly situated Trading Permit Holders (e.g. Floor Brokers, Designated Primary Market-Makers ("DPMs"), or Market-Makers).
It is imperative for the Exchange to receive during the connectivity process information regarding a Trading Permit Holder's identification so that the Exchange can ensure that the connecting party is a Trading Permit Holder authorized to access the System and that the Exchange is aware of what type of Trading Permit Holder the connecting party is. Requiring a specific connectivity protocol allows the Exchange to receive this information in a uniform manner for all Trading Permit Holders, or categories of similarly situated Trading Permit Holders, as the Exchange deems necessary. This information allows the Exchange to, among other things, perform the necessary surveillances applicable to the Trading Permit Holder and determine whether the Trading Permit Holder is complying with all relevant Exchange Rules. Many of the Exchange's surveillances are conducted by type of Trading Permit Holders, as different types have different responsibilities they must meet under the Exchange rules.
The Exchange also periodically requires Trading Permit Holders that have been authorized to access the System to conduct or participate in the testing of their computer systems to ascertain the compatibility of these systems with the System. The Exchange believes that it is critical that Trading
The Exchange proposes to codify these current Exchange practices and requirements related to System access and connectivity. Proposed Rule 6.23A(c) clarifies in the Rules that only Trading Permit Holders (and their associated persons) may be authorized to access the System to enter and execute orders. This proposed provision also provides that the Exchange will require a Trading Permit Holder to enter into a software user or license agreement with the Exchange in a form or forms prescribed by the Exchange in order to obtain authorized access to the System if the Trading Permit Holder elects to use an API for which the Exchange has determined that this type of an agreement is necessary. In other words, whether the Exchange requires a Trading Permit Holder to enter into a user or license agreement will depend solely on the objective criteria of what type of API the Trading Permit Holder opts to use.
Proposed Rule 6.23A(d) provides that the Exchange may prescribe technical specifications pursuant to which all Trading Permit Holders, or categories of similarly situated Trading Permit Holders (e.g., Floor Brokers, DPMs, Market-Makers), may establish an electronic connection to the System and its facilities. The Exchange will announce to Trading Permit Holders via Regulatory Circular any connectivity protocol prescription.
Proposed Rule 6.23A(e)(i) provides that each Trading Permit Holder that the Exchange designates as required to participate in a system test must conduct or participate in the testing of its computer systems to ascertain the compatibility of such systems with the System in the manner and frequency prescribed by the Exchange. The Exchange will designate Trading Permit Holders as required to participate in a system test based on: (1) The category of the Trading Permit Holder (e.g. Floor Broker, DPM, Market-Maker); (2) the computer system(s) the Trading Permit Holder uses; and (3) the manner in which the Trading Permit Holder connects to the System. The Exchange will give Trading Permit Holders reasonable notice of any mandatory systems test, which notice will specify the nature of the test and Trading Permit Holders' obligations in participation in the test.
In connection with this mandatory system testing, proposed Rule 6.23A(e)(ii) provides that every Trading Permit Holder required by the Exchange to conduct or participate in testing of computer systems must provide to the Exchange any reports relating to the testing as the Exchange may prescribe. Trading Permit Holders must maintain adequate documentation of tests required by this Rule and results of this testing for examination by the Exchange.
Proposed Rule 6.23A(e)(iii) states that a Trading Permit Holder that fails to conduct or participate in mandatory systems tests, fails to file the required reports, or fails to maintain the required documentation, as required by proposed Rule 6.23A(e)(i) and (ii), may be subject to summary suspension or other action taken pursuant to Chapter XVI (Summary Suspension) and/or disciplinary action pursuant to Chapter XVII (Discipline) of the Exchange Rules. Disciplinary action may include fines pursuant to proposed Rule 17.50(g)(19), which provides that Trading Permit Holders that violate proposed Rule 6.23A(e) may be subject to fines under the Exchange's minor rule violation plan.
The proposed rule change also amends Rule 50.2(a) in the CBOE Stock Exchange, LLC ("CBSX")
Codification of these requirements gives the Exchange the ability to discipline any Trading Permit Holders that fail to comply with these requirements. While Trading Permit Holders generally comply with these requirements, their inclusion in the Rules (and the resulting potential for discipline for noncompliance) may enhance Trading Permit Holders' overall compliance with them.
Codification of these requirements is also consistent with the Rules of other exchanges. Proposed Rule 6.23A(c) is substantially similar to: BATS Exchange, Inc. ("BATS") Rule 11.3(a); BOX Options Exchange LLC ("BOX") Rule 7000(a); EDGA Exchange, Inc. ("EDGA") Chapter XI, Rule 11.3(a); EDGX Exchange, Inc. ("EDGX") Chapter XI, Rule 11.3(a); International Securities Exchange, LLC ("ISE") Rule 706(a); NASDAQ Option Market ("NOM") Chapter V, Section 1(a); NYSE Arca, Inc. ("NYSE Arca") Rule 6.2A(a); and NYSE MKT LLC ("NYSE MKT") Rule 902.1NY(a). Proposed Rule 6.23A(e) is substantially similar to: BATS Rule 18.13; BOX Rule 3180; ISE Rule 419; and NOM Chapter III, Section 13. BOX Rule 12140(d)(7) and ISE Rule 1614(d)(8) also allow those exchanges to fine their members for violations of their respective mandatory system provisions
Additionally, proposed Rule 6.23A(c) is consistent with Rule 15c3-1 [sic] under the Act.
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.
The proposed rule change codifies current Exchange requirements that enhance CBOE's market surveillances and System functionality. Proposed Rule 6.23A(c) is consistent with Rule 15c3-5 under the Act, and the Exchange believes the proposed rule change promotes compliance by Trading Permit Holders with the market access requirements under that rule. The Exchange believes that proposed Rule 6.23A(d) allows the Exchange to receive from Trading Permit Holders, or categories of similarly situated Trading Permit Holders, information in a uniform format, which aids the Exchange's efforts to monitor and regulate CBOE's markets and Trading Permit Holders and helps prevent fraudulent and manipulative practices. This also helps coordinate the ability of Trading Permit Holders to electronically trade on the Exchange with the Exchange's ability to receive the necessary information to regulate those transactions. Proposed Rule 6.23A(e) allows the Exchange to ensure that Trading Permit Holders' connections to the System function correctly, which promotes efficiency and enhances compliance by Trading Permit Holders with Exchange Rules. The proposed changes to the CBSX Rules clarify for CBSX Trading Permit Holders that they are subject to and must comply with the requirements in proposed Rule 6.23A.
In addition, codification of these requirements is consistent with the Act because it gives the Exchange the ability to discipline Trading Permit Holders that fail to comply with these requirements, which may enhance overall Trading Permit Holder compliance with these requirements. This proposed rule change will also promote consistency in the minor rule violation programs of other exchanges and allow the Exchange to carry out its regulatory responsibilities more quickly and efficiently by including violations of the mandatory system testing provision in the Exchange's minor rule violation plan.
The Exchange believes that the proposed rule change is designed to not permit unfair discrimination among Trading Permit Holders, as the proposed rule change provides for the Exchange to impose requirements on Trading Permit Holders in an objective manner. For example, under proposed Rule 6.23A(d), the Exchange may impose connectivity protocol requirements on all Trading Permit Holders, or similarly situated Trading Permit Holders. Additionally, under proposed Rule 6.23A(c), whether the Exchange requires a Trading Permit Holder to enter into a software user or license agreement depends solely on what type of API the Trading Permit Holder opts to use to connect to the System.
Finally, the proposed rule change will help remove impediments to and promote a free and open market and a national market system because it is consistent with rules in place at other exchanges and imposes substantially similar requirements on Trading Permit Holders as those rules do on those exchanges' members.
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.
The Exchange neither solicited nor received comments on the proposed rule change.
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)
At any time within 60 days of the filing of this 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.
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:
* Use the Commission's Internet comment form (
* Send an email to
* Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission,