Notice2021-25989
Self-Regulatory Organizations; Cboe Exchange, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Amend Cboe Rule 5.4 and Make Corresponding Changes to Other Rules
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Published
November 30, 2021
Issuing agencies
Securities and Exchange Commission
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<title>Federal Register, Volume 86 Issue 227 (Tuesday, November 30, 2021)</title>
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[Federal Register Volume 86, Number 227 (Tuesday, November 30, 2021)]
[Notices]
[Pages 68001-68004]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-25989]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93655; File No. SR-CBOE-2021-046]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change To Amend Cboe Rule 5.4 and Make Corresponding
Changes to Other Rules
November 23, 2021.
I. Introduction
On August 6, 2021, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') 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 allow all complex orders to be quoted and
executed in $0.01 increments.\3\ The
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proposed rule change was published for comment in the Federal Register
on August 25, 2021.\4\ The Commission received two comment letters
regarding the proposal.\5\ Cboe responded to the comments on September
23, 2021.\6\ On September 28, 2021, pursuant to Section 19(b)(2) of the
Act,\7\ 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 approve or disapprove
the proposed rule change.\8\ On November 1, 2021, the Exchange filed
Amendment No. 1 to the proposed rule change.\9\ This order institutes
proceedings pursuant to Section 19(b)(2)(B) of the Act \10\ to
determine whether to approve or disapprove the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The term ``complex order'' means an order involving the
concurrent execution of two or more different series in the same
underlying security or index (the ``legs'' or ``components'' of the
complex order), for the same account, occurring at or near the same
time and for the purpose of executing a particular investment
strategy with no more than the applicable number of legs (which
number the Exchange determines on a class-by-class basis). The
Exchange determines in which classes complex orders are eligible for
processing. Unless the context otherwise requires, the term complex
order includes stock-option orders and security future-option
orders. For purposes of Rules 5.33 and 5.85(b)(1), the term
``complex order'' means a complex order with any ratio equal to or
greater than one-to-three (.333) and less than or equal to three-to-
one (3.00), an Index Combo order, a stock-option order, or a
security future-option order. For the purpose of applying these
ratios to complex orders comprised of legs for both mini-options and
standard options, ten mini-option contracts represent one standard
option contract. For the purpose of applying these ratios to complex
orders comprised of legs for both micro-options and standard
options, 100 micro-option contracts represent one standard option
contract. See Cboe Rule 1.1.
\4\ See Securities Exchange Act Release No. 92709 (August 19,
2021), 86 FR 47529 (``Notice'').
\5\ See letter to Vanessa Countryman, Secretary, Commission,
from Alanna Barton, General Counsel, BOX Exchange LLC, dated
September 14, 2021 (``BOX Letter''); and letter from Mary Smith,
dated August 19, 2021 (``Smith Letter''). Comments received
regarding the proposal are available on the Commission's website at:
<a href="https://www.sec.gov/comments/sr-cboe-2021-046/srcboe2021046.htm">https://www.sec.gov/comments/sr-cboe-2021-046/srcboe2021046.htm</a>.
\6\ See letter to Vanessa Countryman, Secretary, Commission,
from Laura G. Dickman, Vice President and Associate General Counsel,
Cboe Options, dated September 23, 2021 (``Exchange Response''). The
Exchange Response is available on the Commission's website at:
<a href="https://www.sec.gov/comments/sr-cboe-2021-046/srcboe2021046.htm">https://www.sec.gov/comments/sr-cboe-2021-046/srcboe2021046.htm</a>.
\7\ 15 U.S.C. 78s(b)(2).
\8\ See Securities Exchange Act Release No. 93159 (September 28,
2021), 86 FR 54780 (October 4, 2021). The Commission designated
November 23, 2021, as the date by which the Commission shall approve
or disapprove, or institute proceedings to determine whether to
approve or disapprove, the proposed rule change.
\9\ Amendment No. 1 revises the proposal to provide rationale
for allowing complex orders with any ratio equal to or greater than
one-to-three and less than or equal to three-to-one to trade
electronically; provide information regarding the number of
additional contracts that would be permitted to trade in $0.01
increments under the proposal; and express the view that the rules
of another options exchange do not clearly specify the minimum
trading increment applicable to complex orders traded on that
exchange's trading floor. Amendment No. 1 is available on the
Commission's website at <a href="https://www.sec.gov/comments/sr-cboe-2021-046/srcboe2021046.htm">https://www.sec.gov/comments/sr-cboe-2021-046/srcboe2021046.htm</a>.
\10\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change, as Modified by Amendment
No. 1
Currently, Exchange Rule 5.4 provides that, except as provided in
Exchange Rule 5.33, the minimum increment for bids and offers on
complex orders with any ratio equal to or greater than one-to-three and
less than or equal to three-to-one for equity and index options, and
Index Combo orders, is $0.01 or greater, which the Exchange may
determine on a class-by-class basis, and the legs may be executed in
$0.01 increments. The rule further provides that the minimum increment
for bids and offers on complex orders with any ratio less than one-to-
three or greater than three-to-one for equity and index options (except
for Index Combo orders) is the standard increment for the class
pursuant to Exchange Rule 5.4(a), and the legs may be executed in the
minimum increment applicable to the class pursuant to Exchange Rule
5.4(a).\11\ The Exchange proposes to amend Exchange Rule 5.4(a) to
allow complex orders with any ratio to be quoted in increments of $0.01
or greater, as determined by the Exchange on a class-by-class basis,
and executed in $0.01 increments.
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\11\ The minimum increment for bids and offers on complex orders
in options on the S&P 500 Index (SPX) or on the S&P 100 Index (OEX
and XEO), except for box/roll spreads, is $0.05 or greater, or any
increment, which the Exchange may be determine on a class-by-class
basis. See Cboe Rule 5.4(a).
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The Exchange states that if complex orders cannot be expressed in
increments smaller than the increment for the class (such as $0.05), it
may be difficult for brokers to obtain the desired prices for their
customers' complex orders because the parties to a trade must perform
complicated and time-consuming calculations to break down the orders
into the required contract quantities and prices to fit within the
constraint of executing the orders at a minimum increment other than
$0.01.\12\ In addition, the Exchange notes that the calculation process
for larger-ratio complex orders is time-consuming because these orders
generally are entered in large quantities with a large number of
legs.\13\ As a result, brokers executing larger-ratio complex orders on
active trading days cannot be as efficient in representing other
customer orders they are holding.\14\ The Exchange states that the
proposal to allow larger-ratio complex orders to be quoted and executed
in $0.01 increments will provide market participants with flexibility
in pricing their investment strategies and allow Trading Permit Holders
(``TPHs'') to execute these orders more efficiently and at better
prices for their customers.\15\
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\12\ See Notice, 86 FR at 47530.
\13\ See Exchange Response at 4.
\14\ See Notice, 86 FR at 47530.
\15\ See id. at 47530-1.
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The Exchange notes that, in general, because fewer than one third
of complex orders executed on the Exchange's trading floor have ratios
greater than three-to-one, a significant majority of the complex orders
traded on the Exchange are eligible to execute in pennies.\16\
Accordingly, if the proposal increases the number of complex orders
submitted with ratios greater than three-to-one (and thus the number of
orders that may trade in pennies), the Exchange believes that any
increase would represent a nominal increase in the volume that would be
eligible to execute in pennies.\17\
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\16\ See Amendment No. 1 at 4.
\17\ See id.
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Currently, the Exchange permits complex orders with any ratio less
than one-to-three or greater than three-to-one to trade only on the
Exchange's trading floor.\18\ The Exchange proposes to allow these
larger-ratio orders to be traded electronically, as well as in open
outcry.\19\ The Exchange states that electronic trading of larger-ratio
complex orders will provide investors with additional flexibility in
executing these orders and will increase the investment strategies
available to investors who prefer to or solely trade
electronically.\20\
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\18\ See Notice, 86 FR at 47529.
\19\ See id. at n. 6.
\20\ See Amendment No. 1 at 5.
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The Exchange asserts that it is unlikely that market participants
would submit orders with any ratio equal to or greater than one-to-
three and less than or equal to three-to-one that is not a bona fide
trading strategy solely for the purpose of trading in $0.01
increments.\21\ The Exchange states that it is unlikely that other
market participants would be willing to execute against an order that
is not a bona fide trading strategy, thereby reducing the likelihood
that a market participant would be able to execute such a strategy.\22\
The Exchange further states that adding an extra leg to a large order
to be able to improve the book by $0.01 would be unnecessary because
such order could be executed in an AIM Auction in $0.01 increments.\23\
In addition, the Exchange notes that these orders would be subject to
review by the
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Exchange's regulatory division, which could determine that the
submission of such orders was in violation of the Exchange's rules,
including Exchange Rule 8.1, which prohibits TPHs from engaging in acts
or practices inconsistent with just and equitable principles of
trade.\24\
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\21\ See Notice, 86 FR at 47531.
\22\ See id.
\23\ See id.
\24\ See id.
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The proposal does not extend the complex order priority provisions
applicable to complex orders with any ratio equal to or greater than
one-to-three and less than or equal to three-to-one to complex orders
with any ratio less than one-to-three or greater than three-to-one.\25\
The proposal amends Exchange Rule 5.33(f)(2)(A)(v) to provide that a
complex order that has any ratio less than one-to-three or greater than
three-to-one will not execute at a net price that would cause any
component of the complex strategy to be executed at a price ahead of a
Priority Customer order on the Simple Book \26\ without improving the
BBO \27\ of each component of the complex strategy with a Priority
Customer order at the BBO.\28\ As a result, a complex order with any
ratio less than one-to-three or greater than three-to-one may be
executed at a net debit or credit price only if each leg of the order
betters the corresponding bid (offer) of a Priority Customer order(s)
in the Simple Book.\29\ Accordingly, the Exchange states that the
complex order priority rules will continue to protect Priority Customer
interest on the Simple Book.\30\
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\25\ See Notice, 86 FR at 47530.
\26\ The Simple Book is the electronic book of simple orders and
quotes maintained by the System, which single book is used during
both the Regular Trading Hours and Global Trading Hours trading
sessions. See Exchange Rule 1.1.
\27\ The BBO is the best bid or offer disseminated on the
Exchange.
\28\ See Exchange Rule 1.1. Exchange Rule 5.33(f)(2)(A)(v) will
continue to provide that a complex order that has any ratio equal to
or greater than one-to-three and less than or equal to three-to-one,
or an Index Combo order, will not execute at a net price that would
cause any component of the complex strategy to be executed at a
price ahead of a Priority Customer Order on the Simple Book without
improving the BBO of at least one component of the complex strategy.
\29\ See Notice, 86 FR at 47530.
\30\ See id.
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III. Summary of Comments and Exchange's Response
The Commission received two comment letters regarding the
proposal.\31\ One commenter states that the proposal would solely
benefit high-speed traders and result in worse prices for retail
traders due to decreased quotes.\32\
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\31\ See supra note 5.
\32\ See Smith Letter.
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The Exchange states that the proposal is designed to increase the
efficiency of trading larger-ratio, highly complex orders and is not
intended to benefit high-speed traders.\33\ The Exchange further states
that the proposal has minimal relevance to high-speed traders, who
generally participate in listed options trading as market makers rather
than as brokers conducting agency businesses.\34\ The Exchange
concludes that the proposal ``will have minimal impact on either high-
speed traders or retail traders (or on the simple market), as it is
intended to increase the efficiency and precision available to brokers
attempting to execute highly complicated yet bona-fide multi-leg option
strategies on the Exchange, which strategies are not common among high-
speed traders or retail traders.'' \35\ In addition, the Exchange notes
that the proposal is unrelated to quoting and that the increased number
of complex orders that would be eligible for more flexible pricing
under the proposal could increase the number of complex orders entered
on the Exchange that may leg into the Simple Book, thereby increasing
execution opportunities for resting customer orders.\36\
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\33\ See Exchange Response at 1-2.
\34\ See id. at 2.
\35\ Id. at 3-4.
\36\ See id. at 2.
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Another commenter states that, contrary to statements in the
proposal, each component leg of s of a multi-leg Qualified Open Outcry
Order (``QOO'') on the BOX Exchange LLC's (``BOX'') trading floor
respects the minimum trading increment for the series (e.g., $0.01,
$0.05, $0.10).\37\ The commenter further states that multi-leg QOO
Orders do not meet the definition of Complex QOO Order and are treated
like single-leg QOO Orders for purposes of execution and priority.\38\
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\37\ See BOX Letter at 1.
\38\ See id.
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In its response, the Exchange states that multiple TPHs who are
also members of BOX informed the Exchange that multi-legged orders with
ratios greater than three-to-one or less than one-to-three are executed
regularly on BOX's trading floor in penny increments.\39\ The Exchange
also expressed the view that BOX's rules lack clarity regarding the
increments applicable to QOO Orders that do not satisfy the definition
of a complex order in BOX Rule 7240(a)(7).\40\
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\39\ See Exchange Response at 4.
\40\ See id. at 4-5. See also Amendment No. 1 at 6-7.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2021-046 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \41\ 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 described below, the
Commission seeks and encourages interested persons to provide comments
on the proposed rule change.
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\41\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\42\ 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,\43\ which requires, among other things, that the rules of a
national securities exchange be ``designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, . . . 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,'' \44\ and
not be designed to permit unfair discrimination between customers,
issuers, brokers, or dealers.\45\ The proposal would allow a complex
order with any ratio less than one-to-three or greater than three-to-
one to be quoted and executed in $0.01 increments, regardless of the
trading increment for the class. Thus, the component series of a
complex order with any ratio less than one-to-three or greater than
three-to-one in a class that trades in $0.05 increments would be able
to trade in $0.01 increments, while single-leg orders in those series
would trade in $0.05 increments. The Commission believes that questions
are raised as to whether this disparity in trading increments could
disadvantage market participants trading single-leg orders in classes
with a standard trading increment of $0.05 or $0.10.
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\42\ Id.
\43\ 15 U.S.C. 78f(b)(5).
\44\ Id.
\45\ See id.
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V. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their data, views, 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 proposed rule change
is consistent with Section 6(b)(5) or any other provisions of the Act,
or 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 data, views, and arguments, the
Commission will consider, pursuant to Rule 19b-4 under the Act,\46\ any
request for an opportunity to make an oral presentation.\47\
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\46\ 17 CFR 240.19b-4.
\47\ Section 19(b)(2) of the Act, as amended by the Securities
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants to
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 Acts 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 proposed rule change should be approved
or disapproved by December 21, 2021. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
January 4, 2022. The Commission asks that commenters address the
sufficiency and merit of the Exchange's statements in support of the
proposal, in addition to any other issues raised by the proposed rule
change raised under 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#b7c5c2dbd29ad4d8dadad2d9c3c4f7c4d2d499d0d8c1"><span class="__cf_email__" data-cfemail="cebcbba2abe3ada1a3a3aba0babd8ebdabade0a9a1b8">[email protected]</span></a>. Please include
File No. SR-CBOE-2021-046 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 No. SR-CBOE-2021-046. The 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 No. SR-CBOE-2021-046 and should be submitted by
December 21, 2021. Rebuttal comments should be submitted by January 4,
2022.
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\48\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-25989 Filed 11-29-21; 8:45 am]
BILLING CODE 8011-01-P
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