Notice2021-16456
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Enhance and Clarify its Price Adjust Process for Certain Market-Maker Interest, Specifically Book Only Orders and Bulk Messages Submitted Through Bulk Ports and Modify the Bulk Message Fat Finger Check
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Published
August 3, 2021
Issuing agencies
Securities and Exchange Commission
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<title>Federal Register, Volume 86 Issue 146 (Tuesday, August 3, 2021)</title>
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[Federal Register Volume 86, Number 146 (Tuesday, August 3, 2021)]
[Notices]
[Pages 41877-41880]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-16456]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92518; File No. SR-CBOE-2021-042]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Enhance
and Clarify its Price Adjust Process for Certain Market-Maker Interest,
Specifically Book Only Orders and Bulk Messages Submitted Through Bulk
Ports and Modify the Bulk Message Fat Finger Check
July 28, 2021.
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 July 16, 2021, Cboe Exchange, Inc. (``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
Exchange filed the proposal as a ``non-controversial'' proposed rule
change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule
19b-4(f)(6) thereunder.\4\ 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.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
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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 enhance and clarify its Price Adjust process and modify the bulk
message fat finger check. 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 (<a href="http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx">http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx</a>), 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 enhance its Price Adjust (as defined
below) process for certain Market-Maker interest--specifically Book
Only \5\ orders and bulk messages \6\ submitted through bulk ports
\7\--and clarify other parts of that process, as well as modify the
bulk message fat finger check.
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\5\ Rule 5.6(c) defines a ``Book Only'' order as an order the
System ranks and executes pursuant to Rule 5.32, subjects to the
Price Adjust process pursuant to Rule 5.32, or cancels, as
applicable (in accordance with User instructions), without routing
away to another exchange. Users may designate bulk messages as Book
Only as set forth in Rule 5.5(c).
\6\ The term ``bulk message'' means a single electronic message
a User submits with an M Capacity (for the account of a Market-
Maker) to the Exchange in which the User may enter, modify, or
cancel up to an Exchange-specified number of bids and offers. A User
may submit a bulk message through a bulk port as set forth in Rule
5.6(c)(3). The System handles a bulk message bid or offer in the
same manner as it handles an order or quote unless the Rules specify
otherwise. See Rule 1.1.
\7\ A ``bulk port'' is a dedicated logical port that provides
Users with the ability to submit bulk messages, single orders, and
auction responses, each subject to certain restrictions. See Rule
5.5(c)(3).
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Rule 5.32(b) describes the Price Adjust process, which applies to
an order by default or not designated as Cancel Back.\8\ The System
adjusts the price (``Price Adjust'') of an order designated as Price
Adjust (or an order not designated as Cancel Back) as follows:
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\8\ Rule 5.6(c) defines a ``Cancel Back'' order as an order
(including a bulk message) a User designates to not be subject to
the Price Adjust Process pursuant to Rule 5.32 that the System
cancels or rejects (immediately at the time the System receives the
order or upon return to the System after being routed away) if
displaying the order on the Book would create a violation of Rule
5.67, or if the order cannot otherwise be executed or displayed in
the Book at its limit price.
(A) If a buy (sell) non-all-or-none (``AON'') order at the time
of entry, would lock or cross:
(i) A Protected Quotation of another options exchange or the
Exchange, the System ranks and displays the order at one minimum
price variation below (above) the current national best offer
(``NBO'') (national best bid (``NBB''); or
(ii) the offer (bid) of a sell (buy) AON order resting on the
Book at or better than the Exchange's best offer (bid), the System
ranks the resting AON order one minimum price variation above
(below) the bid (offer) of the non-AON order.
(B) Incoming AON Orders. If a buy (sell) AON order, at the time
of entry, would:
(i) Cross a Protected Offer (Bid) of another options exchange or
a sell (buy) AON order resting on the Book at or better than the
Exchange's best offer (bid), the System ranks the incoming AON order
at a price equal to the Protected Offer (Bid) or the offer (bid) of
the resting AON order, respectively; or
(ii) lock or cross a Protected Offer (Bid) of the Exchange, the
System ranks the incoming AON order at a price one minimum price
variation below (above) the Protected Offer (Bid).
This Price Adjust process applies to Book Only orders and bulk
messages submitted that are designated as Price Adjust (and not
designated as Cancel Back). Separately, a Book Only order or bulk
message bid or offer (or unexecuted portion) is rejected if submitted
by a Market-Maker with an appointment in the class through a bulk port
if it would execute against a resting offer or bid, respectively with a
capacity of M. Therefore, if a Book Only bulk message bid of an
appointed Market-Maker does not execute upon entry and would rest at
the same price as an offer not represented by a capacity of M, that bid
price would be adjusted and rest on the book at one minimum price
variation below the offer. However, if the offer was represented by a
capacity of M, the System would reject the bid since it may not execute
against that resting offer.
The proposed rule change amends the Price Adjust process so that an
appointed Market-Maker's Book Only bids and offers submitted through a
bulk port may have the opportunity to rest on the book if they are
submitted at the same price as the opposite side of the market when
represented by Market-Maker interest. Specifically, the proposed rule
change adds
[[Page 41878]]
subparagraph (C) to Rule 5.32(b)(1), which states if the bid (offer) of
a Book Only buy (sell) non-AON order or bulk message \9\ submitted
through a bulk port at the time of entry would lock or cross (1) a
protected offer (bid) of another options exchange \10\ or a resting
offer (bid) with a Capacity of M, the System ranks and displays the
order at one minimum price variation below (above) the better of the
current away best offer (``ABO'') (away best bid (``ABB'')) or resting
M-Capacity offer (bid); or (2) the offer (bid) of a sell (buy) AON
order resting on the Book at or better than the Exchange's best offer
(bid), the System ranks the resting AON order one minimum price
variation above (below) the bid (offer) of the non-AON order.\11\ This
will permit appointed Market-Maker orders and quotes submitted through
bulk ports (the primary purpose of which is to provide liquidity to the
Book) that are subject to the Price Adjust process (indicating the
submitting Market-Makers prefer a price adjustment to rejection) so
their quotes may rest in the Book if they would otherwise lock interest
against which they could not execute.
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\9\ The Exchange notes that pursuant to Rule 5.5(c), only
appointed Market-Makers may submit such orders and bulk messages
through a bulk port.
\10\ This is how these orders and messages are currently handled
pursuant to Rule 5.32(b)(1)(A)(i).
\11\ This is how these orders and messages are currently handled
pursuant to Rule 5.32(b)(1)(A)(ii).
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The proposed rule change makes nonsubstantive changes to current
Rules 5.32(b)(1)(A) and (B) to set forth to which orders and bulk
messages the functionality in each subparagraph will apply; the
proposed rule change has no impact on how the Price Adjust process
applies to orders and bulk messages other than Book Only orders and
bulk messages submitted through a bulk port that would otherwise
execute against resting M-Capacity interest. Similarly, the proposed
rule change updates Rule 5.32(c)(6) to indicate that provision will
only apply to Cancel Back Book Only orders and bulk messages submitted
through bulk ports. Book Only orders and bulk messages submitted
through a bulk port may either be Price Adjust or Cancel Back. As Price
Adjust Book Only orders and bulk messages submitted through a bulk port
will be handled as described above if they would execute against
resting M-Capacity interest, this provision will now only apply to
Cancel Back Book Only bulk messages and orders submitted through bulk
ports.\12\
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\12\ The proposed rule change also clarifies in Rule 5.32(c)(6)
that it applies if the incoming order or bulk message would execute
against or lock resting M-Capacity interest. It is possible a Cancel
Back Book Only order or bulk message may otherwise not execute
against resting M-Capacity interest but would instead lock that
interest if it rested in the book, so the System would reject that
order or bulk message to prevent the dissemination of a locked
market.
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The proposed rule change also clarifies in Rule 5.32(b)(1) that the
Price Adjust process applies to an order or remaining portion that does
not execute upon entry. This is consistent with current functionality,
as Price Adjust orders may execute upon entry against resting
interest--the price adjustment applies only to permit any remaining
interest from an incoming order to rest at a price that would not lock
or cross opposite side interest in accordance with the linkage plan.
Additionally, Rule 5.32(b)(2) provides that if the circumstances
that caused the System to adjust the price of an order pursuant to
subparagraph (b)(1) change so that it would not lock or cross, as
applicable, a Protection Quotation or an AON resting on the Book at a
price at or better than the BBO,\13\ the System gives the Price Adjust
order a new timestamp. Currently, the rule states the System ranks or
displays the order at a price that locks or is one minimum price
variation away from the new Protection Quotation or AON resting on the
Book at or better than the BBO, as applicable. Pursuant to current
subparagraph (3), the System adjusts the ranked and displayed price of
an order subject to Price Adjust once or multiple times depending upon
the User's instructions and changes to the prevailing NBBO. The
proposed rule change deletes this subparagraph (3) and moves the
concept of single or multiple price adjust to subparagraph (2).\14\ The
proposed rule change clarifies how each of single price adjust and
multiple price adjust currently function. Specifically, if a User
designated an order as eligible for single price adjust, the System
ranks and displays the order at the price of the Protected Quotation
that was present in the Book at the time of order entry. That is the
price at which the Price Adjust order would have entered the Book but
for the presence of that Protected Quotation.
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\13\ The Exchange notes that a change in the BBO would include a
change in M-Capacity interest resting at the top of the Book that
caused a Book Only bulk message or order to have its price adjusted.
\14\ The proposed rule change also moves the latter part of
current subparagraph (2) regarding the priority of re-ranked and re-
displayed Price Adjust orders to proposed subparagraph (3).
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Additionally, the proposed rule change clarifies that bulk message
bids and offers are only subject to single price adjust. The Exchange
understands that Market-Makers' automated quote streaming systems
review their resting interest when the markets change and update as
appropriate in accordance with their business and risk models.
Therefore, the Exchange does not believe it is necessary for it also to
review resting Market-Maker interest continuously and reprice as the
market changes. The proposed rule change amends proposed subparagraph
(2)(B) to indicate it applies to orders designated as multiple price
adjust, and specifies the repricing described in that paragraph may
occur multiple times as the opposite side of the NBBO changes (up to
the order's limit price). The proposed rule change has no impact on how
the System handles order and bulk messages subject to single or
multiple price adjust; it rather more accurately describes this
process. The proposed rule change also amends this provision to reflect
that a Price Adjust bulk message may be re-priced upon entry due to the
presence of opposite side M Capacity interest (rather than rejected in
accordance with current functionality).
With respect to multiple price adjust functionality, the proposed
rule change clarifies that the price at which the System reprices an
order is the ranked and displayed price (rather than or), which is
consistent with the remainder of paragraph (b). Price Adjust orders are
always ranked and displayed at the same price. Additionally, the
proposed rule change deletes the concept of the new price locking a new
Protected Quotation, as the new price will always be one minimum price
variation away to be consistent with linkage rules. Finally, the
proposed rule change deletes the concept of repricing a Price Adjust
order based on the presence of an AON order. As set forth in Rule
5.32(b)(1), if an incoming order would lock the price of an AON resting
on the book, the System reprices the AON rather than the incoming
order. Therefore, if the AON is no longer in the book, there would be
no reason to reprice the other order, making the reference to AON in
subparagraph (2) regarding repricing is unnecessary.
Finally, the proposed rule change enhances the bulk message fat
finger check set forth in Rule 5.34(a)(5). In accordance with the fat
finger check, the System cancels or rejects any bulk message bid
(offer) above (below) the NOB [sic] (NBB) by more than a specified
amount determined by the Exchange.\15\ The proposed rule change
indicates that the Exchange may also determine a minimum and maximum
dollar value for the bulk message fat
[[Page 41879]]
finger check.\16\ The Exchange believes Market-Makers may be willing to
accept an execution at a price beyond the NBBO at the time of order
entry, but not too far away. The purpose of the fat finger check is
intended to reject bulk message bids and offers that on their face are
likely to be entered at erroneous prices and thus prevent potentially
erroneous executions. The proposed rule change to permit the Exchange
to set a minimum and maximum value will provide the Exchange with the
opportunity to set a meaningful buffer that is not ``too close'' to the
NBBO (in other words, a de minimis buffer) but not ``too far'' from the
NBBO (in other words, a buffer that is more likely to accept
erroneously priced bulk messages). The proposed rule change also
permits the Exchange to set the relevant amounts for the bulk message
fat finger check on a class-by-class basis. Option classes have
different characteristics and trading models, and the proposed
flexibility will permit the Exchange to apply different parameters to
address those differences.
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\15\ This check does not apply to bulk messages submitted prior
to the conclusion of the opening process or when no NBBO is
available.
\16\ The proposed rule change also makes a nonsubstantive change
to say the System cancels or rejects any bulk message bid (offer)
more than a buffer amount above (below) the NBO (NBB) to align the
language with other rules.
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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.\17\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \18\ 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) \19\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(5).
\19\ Id.
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In particular, the proposed rule change to enhance the Price Adjust
process to adjust the price of Book Only orders and bulk messages
submitted by Market-Makers through bulk ports will remove impediments
to and perfect the mechanism of a free and open market. Market-Makers
that have elected to have their bulk port interest subject to the Price
Adjust process have indicated their desire to have the prices of that
interest adjusted rather than have the System reject that interest. The
proposed rule change is consistent with that election and will cause
such interest to be repriced rather than rejected in a situation--when
it would otherwise execute or lock against other M-Capacity interest--
in addition to locking an away market. Therefore, the proposed rule
change will permit additional Market-Maker interest to enter the book
rather than be rejected. This additional liquidity may increase
execution opportunities and tighten spreads, which ultimately benefits
all investors.
The Exchange also believes the proposed rule change to codify that
bulk message bids and offers may only be subject to single price adjust
will benefit investors by adding transparency to the Rules. The
Exchange understands that Market-Makers' automated quote streaming
systems review their resting interest when the markets change and
update as appropriate in accordance with their business and risk
models. Therefore, the Exchange does not believe it is necessary for it
also to review resting Market-Maker interest continuously and reprice
as the market changes.
In addition, the Exchange believes the proposed change to the bulk
message fat finger check will protect investors and the public interest
as the check will continue to mitigate potential risks associated with
Market-Makers submitting bulk message bids and offers at unintended
prices, and risks associated with orders and quotes trading at prices
that are extreme and potentially erroneous, which may likely have
resulted from human or operational error. The proposed enhancement that
the Exchange will apply a minimum and maximum to the fat finger check
will permit the Exchange to apply the fat finger check to bulk messages
in a more meaningful way. The Exchange believes class flexibility is
appropriate to permit the Exchange to apply reasonable buffers to
classes, which may exhibit different trading characteristics and have
different market models. The Exchange has other price checks and risk
controls that permit it to set a minimum and maximum, as well as apply
parameters on a class basis.\20\
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\20\ See, e.g., Rule 5.34(a)(2) (market order NBBO width
protection).
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The proposed nonsubstantive and clarifying changes will protect
investors by adding transparency to the Rules.
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, as the proposed changes will apply in the same manner to
all Book Only orders and bulk messages submitted through a bulk port.
The proposed rule change to codify that bulk messages will only be
subject to single price adjust is appropriate given that Market-Makers'
automated quote streaming systems review their resting interest when
the markets change and update as appropriate in accordance with their
business and risk models. Therefore, the Exchange does not believe it
is necessary for it also to review resting Market-Maker interest
continuously and reprice as the market changes. The Exchange does not
believe the proposed rule change will impose any burden on intermarket
competition, as the proposed rule change applies to functionality that
applies to incoming interest that may only rest or execute on the
Exchange's book.
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
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) of the Act \21\ and
Rule 19b-4(f)(6) \22\ thereunder. At any time within 60 days
[[Page 41880]]
of the filing of the 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. If the Commission takes such action, the
Commission will institute proceedings to determine whether the proposed
rule change should be approved or disapproved.
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\21\ 15 U.S.C. 78s(b)(3)(A).
\22\ 17 CFR 240.19b-4(f)(6).
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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
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#087a7d646d256b6765656d667c7b487b6d6b266f677e"><span class="__cf_email__" data-cfemail="740601181159171b1919111a0007340711175a131b02">[email protected]</span></a>. Please include
File Number SR-CBOE-2021-042 on the subject line.
Paper Comments
<bullet> 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-2021-042. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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-2021-042 and should be submitted on
or before August 24, 2021.
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\23\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-16456 Filed 8-2-21; 8:45 am]
BILLING CODE 8011-01-P
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