Notice2021-17079
Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Enhance and Clarify Its Price Adjust Process and Modify the Bulk Message Fat Finger Check
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Published
August 11, 2021
Issuing agencies
Securities and Exchange Commission
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<title>Federal Register, Volume 86 Issue 152 (Wednesday, August 11, 2021)</title>
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[Federal Register Volume 86, Number 152 (Wednesday, August 11, 2021)]
[Notices]
[Pages 44084-44087]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-17079]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92574; File No. SR-C2-2021-011]
Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Enhance
and Clarify Its Price Adjust Process and Modify the Bulk Message Fat
Finger Check
August 5, 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 28, 2021, Cboe C2 Exchange, Inc. (``Exchange'' or ``C2'') 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 C2 Exchange, Inc. (the ``Exchange'' or ``C2 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://markets.cboe.com/us/options/regulation/rule_filings/ctwo/">http://markets.cboe.com/us/options/regulation/rule_filings/ctwo/</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 bid or offer included in a
single electronic message a User submits with an M Capacity 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 5.5(c)(3). The
System handles a bulk message 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 unless a user enters instructions for the order to not be
subject to the Price Adjust process. The System ranks and displays a
buy (sell) order that at the time of entry would lock or cross a
Protected Quotation of the Exchange or another exchange at one minimum
price increment below (above) the current national best offer (``NBO'')
(national best bid (``NBB'')) (``Price Adjust'').
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 subparagraph (1)(B) to Rule 5.32(b),\8\ which states if the
bid (offer) of a Book Only 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
[[Page 44085]]
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).\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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\8\ To accommodate this change, the proposed rule change numbers
the current introductory paragraph to Rule 5.32(b) as subparagraph
(1) (some of which becomes subparagraph (A)) and makes
nonsubstantive changes to reflect two subparagraphs to new
subparagraph (1).
\9\ The Exchange notes that pursuant to Rule 5.5(c)(3)(A), 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).
\11\ This is how these orders and messages are currently handled
pursuant to Rule 5.32(b).
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The proposed rule change makes nonsubstantive changes to current
Rule 5.32(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
\12\ 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.\13\
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\12\ 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 that the System cancels or rejects if
displaying the order on the book would create a violation of the
linkage rules or if the order cannot otherwise be executed or
displayed in the book at its limit price. The System executes a Book
Only--Cancel Back order against resting orders, and cancels or
rejects a Post Only--Cancel Back order, that locks or crosses the
opposite side of the BBO.
\13\ 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 proposed 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, current Rule 5.32(b)(1) (which the proposed rule
change renumbers as subparagraph (2) provides that if the NBBO changes
so that an order subject to Price Adjust would not lock or cross a
Protection Quotation,\14\ the System gives the Price Adjust order a new
timestamp. Currently, the rule states the System displays the order at
a price that at the price that locked the Protected Quotation at the
time of entry. Pursuant to current subparagraph (3), the ranked and
displayed price of an order subject to Price Adjust may be adjusted
once or multiple times depending upon the instructions of a User and
changes to the prevailing NBBO. The proposed rule change deletes
current subparagraph (2) and moves the concept of single or multiple
price adjust to proposed subparagraph (2).\15\ 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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\14\ The Exchange notes that a change in the NBBO 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.
\15\ 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). The
proposed rule change also renumbers current subparagraph (3) to be
subparagraph (4).
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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 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 NBO (NBB) by more than a specified amount
determined by the Exchange.\16\ The proposed rule change indicates that
the Exchange may also determine a minimum and maximum dollar value for
the bulk message fat finger check.\17\ 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-
[[Page 44086]]
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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\16\ This check does not apply to bulk messages submitted prior
to the conclusion of the opening process or when no NBBO is
available.
\17\ 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.\18\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \19\ 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) \20\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
\20\ 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.\21\
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\21\ 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 \22\ and
Rule 19b-4(f)(6) \23\ thereunder. At any time within 60 days 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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\22\ 15 U.S.C. 78s(b)(3)(A).
\23\ 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
[[Page 44087]]
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#6715120b024a04080a0a020913142714020449000811"><span class="__cf_email__" data-cfemail="88fafde4eda5ebe7e5e5ede6fcfbc8fbedeba6efe7fe">[email protected]</span></a>. Please include
File Number SR-C2-2021-011 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-C2-2021-011. 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-C2-2021-011 and should be submitted on
or before September 1, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-17079 Filed 8-10-21; 8:45 am]
BILLING CODE 8011-01-P
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