[Federal Register Volume 85, Number 118 (Thursday, June 18, 2020)]
[Notices]
[Pages 36907-36910]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13122]
[[Page 36907]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89062; File No. SR-CBOE-2020-050]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Amend Rules 5.37 and 5.73
June 12, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 3, 2020, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to amend Rules 5.37 and 5.73. The text of the proposed rule change is
provided below.
(additions are italicized; deletions are [bracketed])
* * * * *
Rules of Cboe Exchange, Inc.
* * * * *
Rule 5.37. Automated Improvement Mechanism (``AIM'' or ``AIM Auction'')
A Trading Permit Holder (the ``Initiating TPH'') may electronically
submit for execution an order it represents as agent (``Agency Order'')
against principal interest or a solicited order(s) [(except for an
order for the account of any Market-Maker with an appointment in the
applicable class on the Exchange)] (an ``Initiating Order'') provided
it submits the Agency Order for electronic execution into an AIM
Auction pursuant to this Rule. For purposes of this Rule, the term
``NBBO'' means the national best bid or national best offer at the
particular point in time applicable to the reference, and the term
``Initial NBBO'' means the national best bid or national best offer at
the time an Auction is initiated. Bulk messages are not eligible for
AIM.
* * * * *
(c) AIM Auction Process. Upon receipt of an Agency Order that meets
the conditions in paragraphs (a) and (b), the AIM Auction process
commences.
(1)-(4) No change.
(5) AIM Auction Responses. [All Users] Any User other than the
Initiating TPH (the System rejects a response with the same EFID as the
Initiating Order) may submit responses to an AIM Auction that are
properly marked specifying price, size, side of the market, and the
Auction ID for the AIM Auction to which the User is submitting the
response. An AIM response may only participate in the AIM Auction with
the Auction ID specified in the response.
* * * * *
Rule 5.73. FLEX Automated Improvement Mechanism (``FLEX AIM'' or ``FLEX
AIM Auction'')
A FLEX Trader (the ``Initiating FLEX Trader'') may electronically
submit for execution an order (which may be a simple or complex order)
it represents as agent (``Agency Order'') against principal interest or
a solicited order(s) [(except, if the Agency Order is a simple order,
for an order for the account of any FLEX Market-Maker with an
appointment in the applicable FLEX Option class on the Exchange)] (an
``Initiating Order'') provided it submits the Agency Order for
electronic execution into a FLEX AIM Auction pursuant to this Rule.
* * * * *
(c) FLEX AIM Auction Process. Upon receipt of an Agency Order that
meets the conditions in paragraphs (a) and (b), the FLEX AIM Auction
process commences.
(1)-(4) No change.
(5) FLEX AIM Responses. Any FLEX Trader other than the Initiating
FLEX Trader (the System rejects a response with the same EFID as the
Initiating Order) may submit responses to a FLEX AIM Auction that are
properly marked specifying price, size, side, and the Auction ID for
the FLEX AIM Auction to which the FLEX Trader is submitting the
response. A FLEX AIM response may only participate in the FLEX AIM
Auction with the Auction ID specified in the response.
* * * * *
The text of the proposed rule change is also available on the
Exchange's website (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 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 proposes to permit orders for the accounts of Market-
Makers with an appointment in the applicable class to be solicited for
the Initiating Order \3\ submitted for execution against an Agency
Order in a proprietary index option class into a simple AIM Auction
pursuant to Rule 5.37 or a simple FLEX AIM Auction pursuant to Rule
5.73. Currently, the introductory paragraphs of Rules 5.37 and 5.73
prohibit orders for the accounts of Market-Makers with an appointment
in the applicable class to be solicited to execute against the Agency
Order in a simple AIM or FLEX AIM Auction, respectively.\4\ This
provision was initially included in Rules regarding these auctions
because the Exchange initially only permitted appointed Market-Makers
(and TPHs representing customers at the top of the Book) to submit
responses to AIM and FLEX Auctions. However, the Exchange now permits
any user to submit responses to simple AIM and FLEX AIM Auctions.\5\
Therefore, while market participants other than appointed Market-Makers
may contribute liquidity to these crossing auctions as either contra
orders or responses, appointed Market-Makers, who are the primary
source of liquidity on the Exchange in
[[Page 36908]]
their appointed classes, are limited in the manner in which they may
provide liquidity to these auctions. Given that contra orders that
comprise Initiating Orders may be allocated a percentage of the Agency
Order at the conclusion of the auctions, the limited ability of
appointed Market-Makers to participate in simple AIM and FLEX AIM
Auctions may reduce the execution opportunities for these liquidity
providers, which execution opportunities are available to other market
participants who may be solicited or submit responses. The Exchange
believes providing appointed Market-Makers with an additional way to
participate in electronic auctions will expand available liquidity for
these auctions, which may increase execution and price improvement
opportunities for customers' orders.
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\3\ The ``Initiating Order'' is the order comprised of principal
interest or a solicited order(s) submitted to trade against the
order the submitting Trading Permit Holder (the ``Initiating TPH''
or ``Initiating FLEX Trader,'' as applicable) represents as agent
(the ``Agency Order'').
\4\ The proposed rule change amends the introductory paragraph
of Rule 5.73 to add an end quotation market to the defined term
``Initiating FLEX Trader'' in the parenthetical, which was
inadvertently omitted.
\5\ See Securities Exchange Act Release No. 87072 (September 24,
2019), 84 FR 51673 (September 30, 2019) (SR-CBOE-2019-045).
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No similar restriction applies to crossing transactions in open
outcry trading.\6\ Brokers seeking liquidity to execute against
customer orders on the trading floor regularly solicit appointed
Market-Makers in the applicable class for this liquidity, as they are
generally the primary source of liquidity in a class (as noted above).
Therefore, the Exchange believes the proposed rule change will further
align open outcry and electronic crossing auctions and the execution
and price improvement opportunities available in both auctions by
permitting the same participants to be solicited as contras in both
types of auctions across all classes at all times.
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\6\ See Rules 5.86 and 5.87.
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As of March 16, 2020, the Exchange suspended open outcry trading to
help prevent the spread of the novel coronavirus and began operating in
an all-electronic configuration.\7\ As a result, the Exchange adopted a
temporary rule change to permit Market-Makers to be solicited for
electronic crossing transactions in its exclusively listed index
options when the Exchange's trading floor was inoperable. The Exchange
believed this would help ensure the same sources of liquidity for
customer orders that executed in open outcry would be available for
those orders in an electronic-only environment.\8\ The Exchange
believed not permitting Market-Makers to participate as contras could
have created a risk that brokers may have difficulty finding sufficient
liquidity to fill their customer orders that may currently be traded
against orders from solicited Market-Makers appointed in the applicable
class. For example, when the Exchange operates in its normal hybrid
manner (with electronic and open outcry trading), if a customer order
is not fully executable against electronic bids and offers, a floor
broker can attempt to execute the order, or remainder thereof, on the
trading floor, where the liquidity to trade with this remainder is
generally provided by Market-Makers in the open outcry trading crowd.
Additionally, brokers may solicit liquidity from upstairs Market-Maker
firms.
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\7\ The Exchange continues to operate in an all-electronic
environment, but currently plans to reopen its trading floor on June
8, 2020.
\8\ See Rule 5.24(e)(1)(A); see also Securities Exchange Act
Release No. 88886 (May 15, 2020), 85 FR 31008 (May 21, 2020) (SR-
CBOE-2020-047).
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The Exchange believes appointed Market-Makers should have the
ability to provide liquidity to these electronic auctions, including
when the Exchange is operating in its normal hybrid trading
environment. Market-Makers are subject to quoting obligations and must
expend resources to comply with these obligations to provide liquidity
to the lit market. Given these additional costs and obligations, the
Exchange does not believe these Market-Makers should have fewer
execution opportunities with respect to volume submitted for execution
through AIM auctions and not for electronic execution against interest
in the book. The Exchange believes there is no reason to restrict
Market-Makers' ability to provide liquidity into electronic auctions
when they are able to similarly provide that liquidity in open outcry
trading. By permitting brokers to solicit primary liquidity providers
in a class for electronic auctions, regardless of whether the trading
floor is operational, the Exchange believes brokers will be able to
more efficiently locate liquidity to fill their customer orders,
particularly during times of volatility, which may create additional
execution and price improvement opportunities for customers at all
times.
Appointed Market-Makers frequently serve as contra parties to
crossing transactions on the trading floor. For example, during the
last week of February 2020 (when the trading floor was open), over 70%
of open outcry trades (consisting of over 30% of volume) across all
classes executed on the trading floor consisted of a crossing
transaction that included an order of a Market-Maker one side of the
transaction. This demonstrates the importance of the liquidity
appointed Market-Makers to the market with respect to crossing
transactions, which they are currently unable to do with respect to
electronic crossing transactions.
The Exchange notes solicited orders submitted as the Initiating
Order for AIM Auctions are almost always comprised of orders for the
accounts of away market-makers. For example, in April of 2020,
approximately 99.6% of the orders submitted into all AIM Auctions had
Initiating Orders comprised of orders for accounts of away market-
makers, making up approximately 86.2% of the volume executed through
AIM auctions. The Exchange understands these away market-makers often
serve as both appointed Market-Makers on the Exchange and market-makers
on other options exchanges, and thus have accounts for both purposes.
These firms, as a result, can use their accounts for their away market-
maker activities for being solicited with respect to AIM Auctions.
Therefore, the Exchange believes the current restriction has a negative
impact on the ability of firms that serve as Market-Makers on the
Exchange but not other options exchanges, as well as Market-Makers for
single or exclusively listed classes, to participate in AIM Auctions.
During April 2020, when Initiating Orders could be comprised of orders
for accounts of appointed Market-Makers pursuant to a temporary rule,
while approximately 81.5% of the orders in exclusively listed index
options submitted into all AIM Auctions had Initiating Orders comprised
of orders for accounts of away market-makers, these orders represented
only approximately 12.2% of the volume executed through AIM Auctions.
The majority of the volume was represented by orders for accounts of
appointed Market-Makers. This demonstrates the difficulty brokers have
to find sufficient interest to fill customer orders in these classes
when appointed Market-Makers may not be solicited. The Exchange
believes there is no reason to not permit Initiating Orders to be
comprised of orders for the accounts of appointed Market-Makers in all
classes at all times. The Exchange believes the proposed rule change
will provide all firms that act as Market-Makers on the Exchange in all
classes with consistent access to AIM Auctions, which may further
increase liquidity in these auctions and price improvement
opportunities for customers.
The proposed rule change also amends Rules 5.37(c)(5) and
5.73(c)(5) to codify that any User or FLEX Trader, respectively, other
than the Initiating TPH or FLEX Trader, respectively, may submit
responses to AIM and FLEX AIM Auctions. As set forth in Rules 5.37(e)
and 5.73(e), the Initiating Order may receive an entitlement of 40% or
50% of the Agency Order. The Exchange believes it is appropriate to not
permit the Initiating TPH or Initiating FLEX Trader, as applicable, to
also submit
[[Page 36909]]
responses in order to try to trade against a larger percentage of the
Agency Order. This is consistent with allocation rules, pursuant to
which the Initiating Order may only receive more than 40% or 50%, as
applicable, of the Agency Order if there are remaining contracts after
all other interest has executed.
The Rule change also notes that the System will reject a response
with the same EFID \9\ as the Initiating Order. The Exchange notes that
orders for the same User may have different EFIDs. However, the rule
prohibits all responses from the same User, even with different EFIDs.
The System is currently only able to reject responses with the same
EFID as the Initiating Order, which is why that is specified in the
proposed rule. If the same User submits a response to an auction in
which that same User had an order comprising the Initiating Order (even
with a different EFID), the Exchange may take regulatory action against
that User for a violation of the proposed rule. The Exchange currently
applies this restriction to simple AIM and FLEX AIM Auctions, but it
was inadvertently omitted from the Rules, so the proposed rule change
adds transparency to the Rules. This restriction is also currently in
the Rules related to AIM for complex orders, so the proposed rule
change adds consistency to the rules of Exchange auctions.\10\
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\9\ See Rule 1.1, which defines EFID as an Executing Firm ID.
\10\ See Rule 5.38(c)(5).
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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 the proposed rule change will
benefit investors. The proposed rule change will provide the primary
liquidity providers on the Exchange with an additional way to
participate in electronic auctions. Additionally, by permitting brokers
to solicit primary liquidity providers in a class for electronic
auctions, regardless of whether the trading floor is operational, the
Exchange believes brokers will be able to more efficiently locate
liquidity to fill their customer orders, particularly during times of
volatility. As a result, the Exchange believes the proposed rule change
will likely expand available liquidity for these auctions, which may
create additional execution and price improvement opportunities for
customers at all times, which ultimately benefits investors.
The Exchange also believes the proposed rule change will promote
just and equitable principles of trade and remove impediments to and
perfect the mechanism of a free and open market and a national market
system because it will further align open outcry and electronic
crossing auctions and the execution and price improvement opportunities
available in both auctions by permitting the same participants to be
solicited as contras in both types of auctions across all classes.
Currently, appointed Market-Makers may be solicited with respect to
crossing transactions on the trading floor but may not be solicited
with respect to electronic crossing transactions. The Exchange believes
there is no reason to restrict Market-Makers ability to provide
liquidity into electronic auctions when they are able to similarly
provide that liquidity in open outcry trading. The Exchange notes the
electronic crossing price improvement auction of another options
exchange currently permits orders for the accounts of appointed market-
makers to be solicited as the contra orders for that auction.\14\
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\14\ See NYSE Arca, Inc. (``Arca'') Rule 971.1NY.
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Finally, the Exchange believes the proposed rule change is not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers because it will be permit orders for accounts of
appointed Market-Makers to be solicited in the same manner as orders
for the accounts of all other market participants. Currently, all
market participants other than appointed Market-Makers may be solicited
as the contra and submit responses in AIM Auctions, while appointed
Market-Makers are restricted to only submitting responses. Given the
additional costs and obligations associated with being an appointed
Market-Maker, the Exchange does not believe these Market-Makers should
have fewer execution opportunities with respect to volume submitted for
execution through AIM auctions and not for electronic execution against
interest in the book. This is particularly true for Market-Makers that
do not serve in a market-making capacity on other exchanges or that
serve as a Market-Maker in a singly or exclusively listed class. While
it is possible for an order to be solicited for the account of an away
market-maker in a singly or exclusively listed class, it is less common
given the order must be for market-making purposes with respect to that
class. The Exchange believes the proposed rule change will provide all
Market-Makers on the Exchange with the same ability to participate in
AIM in all classes at all times. This may further increase execution
and price improvement opportunities for customers, particularly those
that submit orders in singly or exclusively listed classes where the
ability for away market-makers to provide liquidity is limited.
The Exchange believes the proposed rule change to codify that any
User or FLEX Trader, respectively, other than the Initiating TPH or
FLEX Trader, respectively, may submit responses to AIM and FLEX AIM
Auctions will promote just and equitable principles of trade so that
market participants may not trade against a larger percentage of the
Agency Order than permitted by the rules. The proposed rule change is
consistent with allocation rules. The proposed rule change is
consistent with current functionality and the rules related to AIM for
complex orders, and therefore adds consistency and transparency to the
Rules, which ultimately benefits investors.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange 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 does not
believe the proposed rule change will impose any burden on intramarket
competition that is not necessary or appropriate in furtherance of the
purposes of the Act because it provides the same execution
opportunities in AIM Auctions to appointed Market-Makers that are
[[Page 36910]]
currently available to all other market participants. Additionally, the
proposed rule change it will further align open outcry and electronic
crossing auctions and the execution and price improvement opportunities
available in both auctions by permitting the same participants to be
solicited as contras in both types of auctions across all classes. The
Exchange does not believe the proposed rule change will impose any
burden on intermarket competition that is not necessary or appropriate
in furtherance of the purposes of the Act because it relates to orders
submitted into an auction mechanism on the Exchange. Additionally, the
Exchange notes that the rules of at least one other options exchange
permits orders for the accounts of appointed market-makers to be
solicited as contra orders for that exchange's electronic crossing
price improvement auction.\15\ The Exchange believes the proposed rule
change may improve price competition within AIM Auctions, because the
primary liquidity providers will be able to increase participation in
AIM Auctions.
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\15\ See Arca Rule 971.1NY.
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The Exchange believes the proposed rule change to codify that any
User or FLEX Trader, respectively, other than the Initiating TPH or
FLEX Trader, respectively, may submit responses to AIM and FLEX AIM
Auctions will not impose any burden on intramarket competition that is
not necessary or appropriate in furtherance of the purposes of the Act,
because it codifies current system functionality. Additionally, it
applies to all market participants that submit orders into AIM
Auctions. The Exchange believes the proposed rule change will not
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act, because it
relates solely to which market participants may submit responses into
Exchange auction. The proposed rule change is consistent with current
allocation rules and the rules related to AIM for complex orders, and
therefore adds consistency and transparency to the Rules, which
ultimately benefits investors.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be 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-CBOE-2020-050 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-2020-050. 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 website (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 website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CBOE-2020-050, and should be submitted
on or before July 9, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-13122 Filed 6-17-20; 8:45 am]
BILLING CODE 8011-01-P