Daily Rules, Proposed Rules, and Notices of the Federal Government
The Exchange is proposing to amend its rules to (i) address the authority of CBOE Stock Exchange, LLC ("CBSX," CBOE's stock execution facility) to cancel orders (or release routing-related orders) when a technical or systems issue occurs; and (ii) describe the operation of a CBSX error account(s) and routing broker error account(s), which may be used to liquidate unmatched executions that may occur in the provision of CBSX's routing service. The text of the rule proposal is available on the Exchange's Web site (
In its filing with the Commission, the self-regulatory organization 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 those 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 parts of such statements.
The purpose of the proposed rule change is to adopt new Rule 52.3A to address the authority of CBSX to cancel orders (or release routing-related orders) when a technical or systems issue occurs and to adopt new Rule 52.10A to describe the operation of a CBSX Error Account(s) ("CBSX Error Account(s)") and routing broker error account(s), which may be used to liquidate unmatched executions that may occur in the provision of CBSX's routing service.
By way of background, CBSX operates a system of trading that allows automatic executions to occur electronically. As part of this infrastructure, CBSX also automatically routes orders to other trading centers under certain circumstances. These routing services are provided in conjunction with one or more routing brokers that are not affiliated with CBSX.
In the normal course, the routing broker reports an execution or cancellation of the routed order back to CBSX. Routed orders that are executed at another trading center are submitted for clearance and settlement in the name of the routing broker. The routing broker then coordinates with CBSX to arrange for any resulting securities positions to be delivered to the TPH that submitted the original order to CBSX (
From time to time, CBSX encounters situations in which it becomes necessary to cancel orders (or release routing-related orders) and resolve error positions that result from errors of CBSX, routing brokers, or another trading center.
The Exchange proposes to adopt new Rule 52.3A to address the authority of CBSX to cancel orders when a technical or systems issue occurs. Specifically, paragraph (a) of the proposed rule would expressly authorize CBSX to cancel orders as it deems to be necessary to maintain fair and orderly markets if a technical or systems issue occurs at CBSX,
Paragraph (b) of the proposed rule provides that CBSX may also determine to release orders being held on CBSX awaiting another trading center execution as it deems to be necessary to maintain fair and orderly markets if a technical or systems issues occurs at CBSX, a routing broker, or another trading center to which an order has been routed (the process for "releasing" orders is illustrated in more detail below). Paragraph (c) of the proposed rule would provide that, for purposes of Rule 52.10A, technical or system issues would include, without limitation, instances where CBSX has not received confirmation of an execution (or cancellation) on another trading center from a routing broker within a response time interval designated by CBSX, which interval may not be less than three (3) seconds.
The examples set forth below describe some of the circumstances in which CBSX may decide to cancel (or release) orders.
Proposed Rule 52.10A would provide that each routing broker shall maintain, in the name of the routing broker, one or more accounts for the purpose of liquidating unmatched trade positions that may occur in connection with the another trading center routing service provided under Rule 52.10 ("error positions").
Paragraph (a) of the proposed rule would provide that errors to which the rule would apply include any action or omission by CBSX, a routing broker, or another trading center to which a CBSX order has been routed, either of which result in an unmatched trade position due to the execution of an order that is subject to the away market routing service and for which there is no corresponding order to pair with the execution (each a "routing error"). Such routing errors would include, without limitation, positions resulting from determinations by CBSX to cancel or release an order pursuant to proposed Rule 52.3A (as described above).
Paragraph (b) of the proposed rule would provide that, generally, each routing broker will utilize its own error account to liquidate error positions. However, in certain circumstances, CBSX may utilize a CBSX Error Account. In particular, in instances where the routing broker is unable to utilize its own error account (
CBSX believes it is reasonable and appropriate to address routing errors through the error account of a routing broker in the manner proposed because, among other reasons, it is the executing broker associated with these transactions. CBSX also believes that having the flexibility to determine to utilize a CBSX Error Account in the limited circumstances described above allows for administrative convenience and contributes to CBSX's ability to maintain a fair and orderly market.
By definition, an error position in a CBSX Error Account would only include unmatched trades due to a routing error. In that regard, paragraph (c) of the proposed rule would provide that CBSX shall not accept any positions in a CBSX Error Account from an account of a Trading Permit Holder or permit any Trading Permit Holder to transfer any positions from the Trading Permit Holder's account to a CBSX Error Account.
To the extent a routing broker utilizes its own account to liquidate error positions, paragraph (d) of the proposed rule provides that the routing broker shall liquidate the error positions as soon as practicable. The routing broker could determine to liquidate the position itself or have a third party broker-dealer liquidate the position on the routing broker's behalf. Paragraph (d) also provides that the routing broker establish and enforce policies and procedures reasonably designed to (i) adequately restrict the flow confidential and proprietary information associated with the liquidation of the error position in accordance with Rule 52.10,
Paragraph (e) of the proposed rule would provide that, to the extent a CBSX Error Account is utilized to liquidate error positions, CBSX shall liquidate the error positions as soon as practicable. In liquidating error positions in a CBSX Error Account, CBSX shall provide complete time and price discretion for the trading to liquidate error positions in a CBSX Error Account to a third-party broker-dealer and shall not attempt to exercise any influence or control over the timing or methods of such trading.
Examples of such error positions due to a routing error may include, without limitation, the following:
In each of the circumstances described above, CBSX and its routing broker may not learn about an error position until T+1. For instance, CBSX and its routing broker may not learn about an error position until either (i) during the clearing process when a routing destination has submitted to DTCC a transaction for clearance and settlement for which CBSX/routing broker never received an execution confirmation, or (ii) when another trading center does not recognize a transaction submitted by a routing broker to DTCC for clearance and settlement. Moreover, the affected TPHs' trade may not be nullified absent express authority under Exchange Rules.
The proposed rule change is consistent with Section 6(b) of the Act
CBOE does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.
The Exchange neither solicited nor received comments on the proposal.
Within 45 days of the date of publication of this notice in the
(A) By order approve or disapprove the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule change should be disapproved.
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, 100 F Street NE., Washington, DC 20549-1090.