[Federal Register Volume 85, Number 230 (Monday, November 30, 2020)]
[Notices]
[Pages 76642-76645]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26279]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90482; File No. SR-CBOE-2020-110]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change Amending Rule 5.52(d) in Connection
With a Market-Maker's Electronic Volume Transacted on the Exchange
November 23, 2020.
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 November 13, 2020, Cboe Exchange, Inc. (the ``Exchange'' or
``Cboe Options'') 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
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 Rule 5.52(d) in connection with a Market-Maker's electronic
volume transacted on the Exchange. The text of the proposed rule change
is provided in Exhibit 5.
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 amend Rule 5.52(d) in connection with a
Market-Maker's electronic volume transacted on the Exchange. Current
Rule 5.52(d)(1) provides that if a Market-Maker never trades more than
20% of the Market-Maker's contract volume electronically in an
appointed class during any calendar quarter, a Market-Maker will not be
obligated to quote electronically in any designated percentage of
series within that class pursuant to subparagraph (d)(2) (which governs
the continuous electronic quoting requirements for Market-Makers in
their appointed classes). That is, once a Market-Maker surpasses the
20% electronic volume threshold in an appointed class, the Market-Maker
is required to provide continuous electronic quotes in that appointed
classes going forward. Neither Rule 5.52(d)(1) nor (d)(2) permit a
Market-Maker to reduce its electronic volume after surpassing the 20%
threshold in order to reset the electronic volume trigger or otherwise
undo the resulting obligation to stream electronic quotes once the 20%
threshold is triggered in an appointed class.
Market-Makers accustomed to executing volume on the trading floor
have sophisticated and complicated risk modeling associated with their
floor trading activity, including quoting, monitoring, and responding
to the trading crowd. However, the Exchange understands that while such
Market-Makers do have separate systems or third-party platforms for
quoting, monitoring and responding to electronic markets, because these
Market-Makers are almost exclusively floor-based, their technology or
other platforms enabling them to quote electronically do not achieve
the level of sophistication or complexity as the systems used by
Market-Makers accustomed to quoting electronically. Indeed, to satisfy
the continuous electronic quoting requirements, a Market-Maker must
provide continuous bids and offers for 90% of the time the Market-Maker
is required to provide electronic quotes in an appointed option class
on a given trading day and must provide continuous quotes in 60% of the
series of the Market-Maker's appointed classes. The Exchange determines
compliance by a Market-Maker with this quoting obligation on a monthly
basis. In addition to this, a Market-Makers must, among other things,
compete with other Market-Makers in its appointed classes, update
quotations in response to changed market conditions in its appointed
classes, maintain active markets in its appointed classes, and,
overall, engage in a course of dealings reasonably calculated to
contribute to the maintenance of a fair and orderly market. Market-
Makers that are predominantly floor-based generally do not have the
technology or electronic trading sophistication to fully satisfy the
continuous electronic quoting obligations, as well as other heightened
standards required of a Market-Maker in its appointed classes
electronically, once the 20% electronic volume threshold is triggered.
The Exchange has observed that in the past year, particularly given
the significant increase in market volatility and unpredictability of
market conditions in the months leading up to and during the COVID-19
pandemic,\3\ Market-Makers that almost exclusively execute their volume
in open outcry and had not prior triggered an electronic quoting
obligation pursuant to Rule 5.52(d)(2), incidentally breached the 20%
electronic volume threshold in certain appointed classes during a
single quarter and were thereby obliged to provide continuous
electronic quotes in those classes going forward. As stated above, once
a Market-Maker surpasses the electronic volume threshold in an
appointed class, and the electronic quoting obligation is triggered,
Rules 5.52(d)(1) and (d)(2) do not permit a Market-Maker to reset the
trigger -- a Market-Maker is required to stream electronic quotes in
that appointed class beginning the next calendar quarter and from there
on out. As such, once the
[[Page 76643]]
20% threshold was surpassed by Market-Makers accustomed to quoting on
the trading floor, these Market-Makers had to be equipped to uphold
continuous electronic quoting obligations by just the next calendar
quarter, production of which was exacerbated by the volatile and
unusual market conditions present in the markets over the past year. As
a result, the Exchange has observed that at least one Market-Maker \4\
has been unable to successfully fulfill its new continuous electronic
quoting obligations in subsequent months. The Exchange understands this
is due to the Market-Maker not having the appropriate technology to
successfully provide continuous electronic quotes. The Exchange
believes requiring a Market-Maker not accustomed to and lacking the
appropriate technology to provide continuous electronic quotes may
potentially pose risk to the maintenance of fair and order markets as
well as risk to the Market-Makers themselves as they are not able to
compete in the electronic markets.
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\3\ The Exchange notes that after volatility and unusual market
conditions beginning at the end of 2019 and continuously increasing
through 2020 as a result of the impact of COVID19 and related
factors, some market participants may have experienced significant
trading losses, resulting in their limiting their trading behavior
and risk exposure. The Exchange understands that firms, not
otherwise highly active in the electronic markets, may have executed
electronically in order to close positions, reduce exposure, and
otherwise mitigate losses and reduce risk in light of market
conditions experienced at various points throughout the year. These
firms may have also reduced open outcry activity as part of the same
risk-reducing strategy, resulting in a coincidental change in the
mix of electronic versus open outcry volume for such generally
floor-based Market-Makers.
\4\ The Exchange is aware of at least two Market-Makers which
have (1) triggered the 20% electronic volume threshold in the
proposed timeframe and (2) have subsequently been unable to satisfy
the continuous electronic quoting obligations for at least two
consecutive months within the same timeframe. One such Market-Maker
has been registered as a Market-Maker on the Exchange since 1997
(however, such firm has recently been dissolved) and one has been
registered as a Market-Maker on the Exchange since 2001. The
Exchange also notes that there are other Market-Makers that are not
currently subject to the continuous electronic quoting requirements
in their appointed classes. For example, the Exchange is aware of at
least three Market-Makers that are not currently obligated to
provide continuous electronic quotes in SPX.
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Therefore, the Exchange proposes to amend Rule 5.52(d)(1) in a
manner that allows Market-Makers that, up until recently, have not
before been obliged to provide continuous electronic quotes in their
appointed classes to essentially reset the trigger on their electronic
volume threshold in Rule 5.52(d)(1). Specifically, the proposed rule
change adopts Rule 5.52(d)(1)(B) \5\ which provides that if, between
October 1, 2019 and December 31, 2020, a Market-Maker (i) has, for the
first time, traded more than 20% of the Market-Maker's contract volume
electronically in an appointed class during any calendar quarter and,
subsequently, (ii) has not provided electronic continuous quotes
pursuant to subparagraph (d)(2) below for any two consecutive months,
then, beginning January 1, 2021, the Market-Maker will be subject to
subparagraph (d)(1)(A) above. Proposed Rule 5.52(d)(1)(A) amends the
current language in Rule 5.52(d)(1) to provide that if a Market-Maker
never trades more than 20% of the Market-Maker's contract volume
electronically in an appointed class during any two consecutive
calendar quarters, a Market-Maker will not be obligated to quote
electronically in any designated percentage of series within that class
pursuant to subparagraph (d)(2).\6\ In this way, the proposed rule
change allows those Market-Makers that predominantly provide liquidity
on the trading floor and surpassed the electronic volume threshold only
in the past year due to extraordinary and extreme volatility, and,
subsequently, are not able to satisfy the continuous electronic quoting
requirement on a monthly basis going forward, to again be subject only
to open outcry quoting requirements so they may focus on providing
liquidity in open outcry in accordance with their business models.\7\
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\5\ The proposed rule change also updates the format of Rule
5.51(d)(1) by adopting the title ``Electronic Volume Threshold'' and
Rule 5.51(d)(1)(A) to govern the provision under current Rule
5.51(d)(1), and adopts the title ``Continuous Electronic Quotes''
for Rule 5.52(d)(2).
\6\ The proposed rule change also updates Rule 5.52(d)(2) to
reflect the proposed two consecutive quarter language where the Rule
refers to the electronic volume threshold.
\7\ The Exchange notes that the proposed rule change does not
preclude the application of Rule 13.15(g)(14)(A), which, as part of
the Minor Rule Violation Plan (``MRVP''), allows the Exchange to
impose a fine on Market-Makers for failure to meet their continuous
quoting obligations, including on any Market-Maker that is able to
``reset'' on January 1, 2021. The Exchange additionally notes that
the proposed rule change also does not preclude the Exchange from
referring matters covered under the MRVP for formal disciplinary
action, pursuant to Rule 13.15(f), whenever it determines that any
violation is intentional, egregious or otherwise not minor in
nature.
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The proposed rule change to change the electronic volume threshold
trigger from one calendar quarter to two consecutive calendar quarters
is designed to mitigate any potential future risk that Market-Makers
accustomed to providing liquidity on the trading floor that
incidentally trigger the threshold as market volatility and unusual
market conditions arise have to quote electronically. The proposed rule
change provides a grace period for such Market-Makers to reduce their
electronic volume in the subsequent quarter, thus not automatically
subjecting them to the continuous electronic quoting requirements and
providing them the opportunity to continue to focus on providing liquid
markets in open outcry in accordance with their business models. As
such, the proposed rule change is designed to maintain fair and orderly
markets, in that, it reduces the likelihood that Market-Makers not
equipped to compete and stream quotes in the electronic markets at
competitive prices because their business models apply primarily to
open outcry trading are not compelled to attempt do so. The Exchange
believes imposing continuous electronic quoting obligations on such
Market-Makers may result in their inability to consistently stream
electronic quotes on a monthly basis going forward and to comply with
their other Market-Maker responsibilities, including engaging in a
course of dealings that must be reasonably calculated to contribute to
the maintenance of a fair and orderly market, refraining from making
bids or offers that are inconsistent with such course of dealings, and
updating quotations in response to changed market conditions. The
proposed rule change instead allows those Market-Makers to continue to
provide liquidity to their appointed classes in open outcry. By
allowing for a grace period for a Market-Maker to reduce their
electronic volume if the electronic volume threshold is triggered in a
preceding quarter, the proposed rule change is intended to support the
overall purpose of the rule in providing open outcry Market-Makers the
opportunity to continue to provide liquid markets on the Exchange's
trading floor without having to quote electronically in accordance with
their intended business model. The Exchange notes that the proposed
rule change would not impact streaming quotes and liquidity in the
electronic markets, as any Market-Maker subject to the continuous
electronic quoting obligation prior to October 1, 2019 will continue to
be subject this obligation.
Finally, the proposed rule change also removes the rollout period
for new classes in Rule 5.52(d)(1), which currently provides that for a
period of 90 days commencing immediately after a class begins trading
on the System, this subparagraph (d)(1) governs trading in that class.
The rollout period was implemented in connection with the transition of
certain classes to the Exchange's former Hybrid System.\8\ As of 2018,
all classes listed for trading on the Exchange now trade on the same
platform, the Exchange's System. Therefore, a rollout period is no
longer necessary. All Market-Makers in new classes and likewise all new
Market-Makers will be equally subject to the electronic volume
threshold pursuant to Rule 5.52(d)(1) and (d)(2) upon starting out.
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\8\ See Securities Exchange Act Release No. 47959 (May 30,
2003), 68 FR 34441 (June 9, 2003) (SR-CBOE-2002-05).
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[[Page 76644]]
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.\9\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \10\ 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) \11\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
\11\ Id.
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In particular, the proposed rule change is consistent with the Act
in that it removes impediments to and perfects the mechanism of a free
and open market and in general protects investors by allowing Market-
Makers accustomed to quoting on the trading floor and, therefore, not
readily equipped to successfully stream electronic quotes on a
continuous basis going forward, to essentially reset the trigger on
their electronic volume threshold. As described above, the Exchange
understands that certain Market-Makers who primarily operate on the
trading floor do not support systems with the level of sophistication
and complexity that would allow them to compete in the electronic
markets or satisfy the continuous electronic quoting obligations month-
to-month pursuant to the Exchange Rules. Therefore, the Exchange
believes the proposed rule change to essentially reset the electronic
volume threshold for any Market-Maker that breached the threshold since
October 1, 2019 (in which the markets regularly experienced periods of
high volatility and overall unusual market conditions) and to implement
two consecutive quarters in connection with the 20% electronic volume
threshold will assist in the maintenance of a fair and orderly market,
and the protection of investors generally, by reducing the likelihood
that Market-Makers without sufficient equipment to stream competitive
electronic quotes on an ongoing basis that may incidentally trigger the
electronic volume threshold, especially in light of market volatility
and unusual market conditions that continue to arise as a result of the
ongoing COVID-19 pandemic, are not necessarily required to do so. In
turn, the Exchange believes the proposed rule change will provide these
Market-Makers with the opportunity to continue to focus on providing
liquidity on the trading floor and satisfy their obligation to engage
in a course of dealings reasonably calculated to contribute to the
maintenance of a fair and orderly market and their other Market-Maker
obligations. Therefore, the Exchange also believes the proposed rule
change furthers the objectives of Section 6(c)(3) of the Act,\12\ which
authorizes the Exchange to, among other things, prescribe standards of
financial responsibility or operational capability and standards of
training, experience and competence for its Trading Permit Holders and
person associated with Trading Permit Holders.
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\12\ 15 U.S.C. 78f(c)(3).
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In addition to this, the Exchange believe that the proposed rule
change is reasonably designed to apply to those Market-Makers that
incidentally breached the electronic volume threshold during a specific
timeframe in which the Exchange observed regular periods of volatility
and overall unusual market conditions, which led to higher volume that
the Exchange believes resulted in certain Market-Makers triggering the
continuous electronic quoting requirement threshold. The Exchange also
believes that the specific timeframe and application of proposed rule
does not affect Market-Makers that fall outside the scope of the
proposed rule, as such Market-Makers were, prior to the proposed
timeframe, already obliged to provide continuous electronic quotes in
their appointed classes and will continue to be obligated to satisfy
such monthly quoting requirements. The Exchange believes that the
proposed rule change will generally protect investors as it is designed
to support the overall purpose of the rule in permitting open outcry
Market-Makers to continue to conduct their business as intended--
providing liquid markets on the Exchange's trading floor without having
to quote electronically.
Finally, the Exchange believes that the proposed rule change to
remove the rollout provision for new classes will remove impediments to
and perfect the mechanism of a free and open market and national market
system because it removes a provision that is no longer necessary as a
result of the full transition of all classes listed on the Exchange to
trading on the Exchange's System. All Market-Makers in new classes, and
likewise all new Market-Makers, will continue to have the opportunity
to acclimate to their market making obligations in newly appointed
classes as they will be equally subject to the electronic volume
threshold pursuant to Rule 5.52(d)(1) and (d)(2) upon starting out.
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 that 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 the proposed rule
change will apply in the same manner to all Market-Makers that, for the
first time ever, reached the electronic volume threshold between
October 1, 2019 and December 31, 2020. The proposed 20% threshold will
continue to apply equally to all Market-Makers, yet Market-Makers that
incidentally reach the threshold may have a grace period to realign
their volume in accordance with their intended business model--
providing liquid markets on the Exchange's trading floor without having
to quote electronically. The Exchange also does not believe that the
proposed rule change would impose any significant burden on those
Market-Makers that do not fall within the scope of the proposed rule
because all such Market-Makers will continue to be obligated to provide
continuous electronic volume in their appointed classes as they do
today. In addition to this, the proposed deletion of the new class
rollout period would not impose any burden on competition as it merely
removes a rollout period related to the Exchange's prior transition of
classes to its former Hybrid System that is no longer necessary. All
new classes and all new Market-Makers will be equally subject to the
electronic volume threshold pursuant to Rule 5.52(d)(1) and (d)(2) upon
starting out.
The Exchange does not believe that 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 the
electronic volume threshold applies only for the purposes of
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determining when a Market-Maker is subject to certain quoting
obligations on the Exchange.
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-2020-110 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-2020-110. 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-2020-110 and should be submitted on
or before December 21, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-26279 Filed 11-27-20; 8:45 am]
BILLING CODE 8011-01-P