[Federal Register Volume 85, Number 167 (Thursday, August 27, 2020)]
[Notices]
[Pages 53051-53054]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18827]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89635; File No. SR-CBOE-2020-050]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of Amendment Nos. 1 and 2 and Order Instituting Proceedings To
Determine Whether To Approve or Disapprove a Proposed Rule Change, as
Modified by Amendment Nos. 1 and 2, To Amend Rules 5.37 and 5.73
Related to the Solicitation of Market Makers for SPX Initiating Orders
in the Automated Improvement Mechanism and FLEX Automated Improvement
Mechanism
August 21, 2020.
I. Introduction
On June 3, 2020, Cboe Exchange, Inc. (``Exchange'' or ``Cboe'')
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
permit orders for the accounts of market makers with an appointment in
S&P 500[supreg] Index Options (``SPX'') to be solicited for the
initiating order submitted for execution against an agency order into
an Automated Improvement Mechanism (``AIM'') auction or a FLEX AIM
auction. The proposed rule change was published for comment in the
Federal Register on June 18, 2020.\3\ On July 2, 2020, the Exchange
submitted Amendment No. 1 to the proposed rule change, which replaced
and superseded the proposed rule change in its entirety.\4\ On July 22,
2020, the Exchange submitted Amendment No. 2 to the proposed rule
change.\5\ On July 27, 2020, pursuant to Section 19(b)(2) of the
Act,\6\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\7\ The Commission is publishing this notice and
order to solicit comment on the proposed rule change, as modified by
Amendment Nos. 1 and 2, from interested persons and to institute
proceedings pursuant to Section 19(b)(2)(B) of the Act \8\ to determine
whether to approve or disapprove the proposed rule change, as modified
by Amendment Nos. 1 and 2.
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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. 89062 (June 12,
2020), 85 FR 36907. Comments received on the proposed rule change
are available on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-050/srcboe2020050.htm.
\4\ In Amendment No. 1, the Exchange: (1) Limited the scope of
its original proposal, which would have permitted orders for the
accounts of market makers with an appointment in any class to be
solicited for the initiating order in an AIM or FLEX AIM auction in
that class, to only allow market makers with an appointment in SPX
to be solicited for the initiating order in an AIM or FLEX AIM
auction in SPX; and (2) provided additional data, justification, and
support for its modified proposal. The full text of Amendment No. 1
is available on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-050/srcboe2020050-7382058-218888.pdf.
\5\ In Amendment No. 2, the Exchange: (1) Provided additional
data, justification, and support for its proposal; and (2) made
technical corrections and clarifications to the description of the
proposal. The full text of Amendment No. 2 is available on the
Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-050/srcboe2020050-7464399-221161.pdf.
\6\ 15 U.S.C. 78s(b)(2).
\7\ See Securities Exchange Act Release No. 89398, 85 FR 46197
(July 31, 2020). The Commission designated September 16, 2020 as the
date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\8\ 15 U.S.C. 78s(b)(2)(B).
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II. Exchange's Description of the Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2
The Exchange proposes to permit orders for the accounts of Market-
Makers with an appointment in SPX to be solicited for the Initiating
Order \9\ submitted for execution against an Agency Order in SPX
options into a simple AIM Auction pursuant to Rule 5.37 or a simple
FLEX AIM Auction pursuant to Rule 5.73. The Exchange does not generally
activate AIM for SPX options, and AIM for SPX options is currently not
activated.\10\ 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. No similar
restriction applies to crossing transactions in open outcry trading,
where a significant portion of SPX options trade.\11\ As further
discussed below, brokers seeking liquidity to execute against customer
orders on the trading floor regularly solicit appointed SPX Market-
Makers for this liquidity, as they are generally the primary source of
pricing and liquidity for those options.
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\9\ 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'').
\10\ FLEX AIM is generally activated, and currently is
activated, for FLEX SPX options.
\11\ 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.\12\ As a result, the Exchange
activated AIM for SPX options for the first time to provide market
participants with a mechanism to cross SPX options while the floor was
inoperable, which would otherwise not be possible without open outcry
trading The Exchange adopted a temporary rule change to permit Market-
Makers to be solicited for electronic crossing transactions in its
exclusively listed index options (including SPX options) when the
Exchange's trading floor was inoperable. The Exchange believed this
would make the same sources of liquidity for customer orders that are
generally available in open outcry available for those orders in an
electronic-only environment.\13\ This was particularly true for SPX
options, for which the Exchange enabled AIM for the first time. The
Exchange believed not permitting Market-Makers to participate as
contras could have made it difficult for brokers to find sufficient
liquidity to fill their customer orders, which liquidity they generally
solicited from SPX Market-Makers on the trading floor. For example,
when the Exchange operates in its a hybrid manner as it currently is
(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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\12\ The Exchange continues to operate in an all-electronic
environment, but currently plans to reopen its trading floor on June
8, 2020.
\13\ 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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Upon the reopening of the trading floor, the Exchange deactivated
AIM for SPX options. While AIM was activated
[[Page 53052]]
for SPX options, the Exchange observed price improvement benefits AIM
auctions provided to smaller, retail-sized SPX options.\14\ As a
result, the Exchange intends to reactivate AIM for SPX options while
the trading floor is operable for orders up to a maximum size to
continue to provide these price improvement opportunities for retail-
sized SPX orders.\15\ Regardless of whether the trading floor is open,
the Exchange believes brokers will have difficulty finding sufficient
liquidity to initiate AIM auctions from only market participants that
are not SPX Market-Makers. If the Exchange determines to reactivate AIM
for SPX options, the Exchange believes it is appropriate to permit
orders for the account of an appointed SPX Market-Maker to be submitted
as the contra order, as the Exchange believes the liquidity provided by
SPX Market-Makers will need to be available for brokers to initiate AIM
Auctions and create potential price improvement opportunities for those
retail-sized orders. Currently, there are 28 TPHs with SPX
appointments, which represent a significant pool of SPX liquidity that
would be available to participate in AIM Auctions through both contra
orders and auction responses. To demonstrate the importance of the
liquidity provided by SPX Market-Makers, in January and February 2020,
the percentage of smaller simple Customer orders (20 or fewer) that
executed in open outcry against an SPX Market-Maker as contra was
approximately 85%, and the percentage of smaller simple Customer orders
(20 or fewer) that executed electronically against an SPX Market-Maker
as contra was approximately 87%. If SPX Market-Makers cannot be
solicited for SPX AIM Auctions, the Exchange believes brokers may not
be able to initiate as many AIM Auctions for their retail orders as
they were able to do while the trading floor was closed, which may
reduce the price improvement opportunities available for those orders.
While the trading floor was closed, orders for the accounts of SPX
Market-Makers created opportunities for customer orders to be submitted
in AIM Auctions and receive price improvement. The Exchange believes
those SPX Market-Maker orders should be permitted to be solicited at
all times for SPX AIM Auctions in order to create similar price
improvement opportunities for those customer orders.
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\14\ See Securities Exchange Act Release No. 89058 (June 12,
2020), 85 FR 36918 (June 18, 2020) (SR-CBOE-2020-051).
\15\ Id.
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In multi-list classes, many market-makers serve as both appointed
Market-Makers on the Exchange and as market-makers on other options
exchanges. These firms, as a result, can use their accounts for their
away market-maker activities for being solicited with respect to AIM
Auctions. In general, 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. However, SPX is an exclusively listed class on the
Exchange, so a firm cannot serve as an SPX market-maker at another
options exchange. During April and May 2020, when Initiating Orders
could be comprised of orders for accounts of SPX Market-Makers pursuant
to a temporary rule, approximately 22% of Initiating Orders executed in
SPX AIM Auctions were comprised of orders for SPX Market-Makers,
representing approximately 45% of SPX volume executed in AIM Auctions.
While approximately 76% of Initiating Orders executed in SPX AIM
Auctions were comprised of orders for accounts of away market-makers,
those orders represented only approximately 5% of the SPX volume
executed through AIM Auctions. The Exchange notes SPX Market-Makers
also executed approximately 31% of SPX volume executed through AIM
Auctions with auction responses. This demonstrates the difficulty
brokers may have to find sufficient interest to fill customer orders in
SPX if the Exchange activates AIM for SPX without permitting appointed
Market-Makers to be solicited. If brokers may solicit primary liquidity
providers in SPX for electronic auctions, regardless of whether the
trading floor is operational, the Exchange believes brokers will be
able to more efficiently locate liquidity to initiate AIM Auctions to
fill their customer orders, particularly during times of volatility,
which may create additional execution and price improvement
opportunities for customers at all times. The Exchange believes the
proposed rule change will, therefore, provide retail-sized orders with
similar price improvement opportunities when AIM is activated while the
trading floor is open that those orders realized while the trading
floor was closed.
Permitting SPX Market-Makers to serve as contra parties to crossing
transactions submitted into an AIM Auction will also further align AIM
Auctions with SPX crossing executions that occur on the trading floor.
SPX Market-Makers frequently serve as contra parties to crossing
transactions on the trading floor. For example, during February 2020
(when the trading floor was open), approximately 76% of SPX orders
crossed on the trading floor (consisting of 2,944,161 contracts)
included an order of an SPX Market-Maker one side of the transaction.
This further demonstrates the importance of appointed SPX Market-
Makers to the provision of liquidity in the SPX market with respect to
crossing transactions, which liquidity would not be available to
initiate electronic crossing transactions under the current AIM rule.
Therefore, the Exchange believes the proposed rule change will permit
it to activate AIM in SPX in a manner that aligns open outcry and
electronic crossing auctions, and thus aligns 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
in SPX at all times.
While FLEX AIM is currently available for SPX orders of all sizes,
the Exchange believes brokers currently have similar difficulties
locating liquidity to initiate FLEX AIM Auctions for SPX orders. Unlike
in simple non-FLEX markets, FLEX Market-Makers have no obligations to
provide liquidity to FLEX classes (and there is book into which FLEX
Market-Makers may submit quotes to rest). Therefore, in FLEX markets,
appointed Market-Makers are on equal footing with all other market
participants with respect to FLEX AIM Auctions. Permitting FLEX Market-
Makers to be solicited provides all market participants with the
opportunity to provide liquidity to execute against Agency Orders in
FLEX AIM Auctions in the same manner (both through solicitation and
responses). The Exchange believes the proposed rule change may result
in additional FLEX AIM auctions occurring in SPX, which may create
additional price improvement opportunities for FLEX SPX orders.\16\ The
Exchange also believes permitting FLEX SPX Market-Makers to be
solicited for FLEX AIM Auctions will provide consistency among
electronic crossing auctions for SPX.
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\16\ The Exchange notes Market-Makers are currently able to be
solicited for complex AIM and complex FLEX AIM for similar reasons.
See Rules 5.38 and 5.73.
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[[Page 53053]]
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 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 \17\ 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.\18\
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\17\ See Rule 1.1, which defines EFID as an Executing Firm ID.
\18\ See Rule 5.38(c)(5).
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III. Summary of the Comment Letters Received
To date the Commission has received two comment letters on the
proposal.\19\ The commenters agreed with Cboe's assertions that the
proposal would increase liquidity for AIM auctions, which could
increase execution and price improvement opportunities.\20\ One
commenter argued that removing the market maker solicitation
prohibition would eliminate an inequity against market makers that
unduly curtails liquidity to customer orders.\21\ This commenter argued
that, because Cboe's rules no longer restrict AIM and FLEX AIM
responses to appointed market makers and trading permit holders
representing customer orders at the top of the book, the market maker
solicitation prohibition is no longer necessary.\22\ The commenters
also supported the proposal because it would better align the execution
and price improvement opportunities in electronic crossing auctions
with those available in open outcry trading, where no similar
solicitation prohibition exists.\23\
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\19\ See letters to Vanessa Countryman, Secretary, Commission,
from Richard J. McDonald, Susquehanna International Group, LLP,
dated July 8, 2020 (``SIG Letter'') and Ellen Greene, Managing
Director, Equities & Options Market Structure, The Securities
Industry and Financial Markets Association, dated July 9, 2020
(``SIFMA Letter'').
\20\ See SIG Letter, supra note 19, at 2 and SIFMA Letter, supra
note 19, at 3.
\21\ See SIG Letter, supra note 19, at 1.
\22\ See id. at 2.
\23\ See id.; SIFMA Letter, supra note 19, at 3.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2020-050, as Modified by Amendment Nos. 1 and 2, and Grounds for
Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \24\ to determine whether the proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. Institution of proceedings
does not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, as stated below, the
Commission seeks and encourages interested persons to provide
additional comment on the proposed rule change, as modified by
Amendment Nos. 1 and 2, to inform the Commission's analysis of whether
to approve or disapprove the proposed rule change.
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\24\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\25\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act, which requires, among other things, that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulate 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 to protect investors and the public interest, and
not be designed to permit unfair discrimination between customers,
issuers, brokers, or dealers; \26\ and Section 6(b)(8) of the Act,
which requires that the rules of the Exchange do not impose any burden
on competition that is not necessary or appropriate in furtherance of
the purposes of the Act.\27\
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\25\ 15 U.S.C. 78s(b)(2)(B).
\26\ 15 U.S.C. 78f(b)(5).
\27\ 15 U.S.C. 89f(b)(8).
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Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the [Act]
and the rules and regulations issued thereunder . . . is on the self-
regulatory organization that proposed the rule change.'' \28\ The
description of a proposed rule change, its purpose and operation, its
effect, and a legal analysis of its consistency with applicable
requirements must all be sufficiently detailed and specific to support
an affirmative Commission finding,\29\ and any failure of a self-
regulatory organization to provide this information may result in the
Commission not having a sufficient basis to make an affirmative finding
that a proposed rule change is consistent with the Act and the
applicable rules and regulations.\30\
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\28\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\29\ See id.
\30\ See id.
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The Commission is instituting proceedings to allow for additional
consideration and comment on the issues raised herein, including as to
whether the proposal is consistent with the Act.
V. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Sections 6(b)(5) and 6(b)(8), or any other provision of
the Act, or the rules and regulations thereunder. Although there do not
appear to be any issues relevant to approval or disapproval that would
be facilitated by an oral presentation of
[[Page 53054]]
views, data, and arguments, the Commission will consider, pursuant to
Rule 19b-4 under the Act,\31\ any request for an opportunity to make an
oral presentation.\32\
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\31\ 17 CFR 240.19b-4.
\32\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by September 17, 2020. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
October 1, 2020. Commission 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 September 17, 2020. Rebuttal comments should be submitted
by October 1, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-18827 Filed 8-26-20; 8:45 am]
BILLING CODE 8011-01-P