Notice2022-04562
Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating To Modify How Drill-Through Price Protection Applies to Users' Orders When Multiple Stop (Stop-Loss) and Stop-Limit Orders Are Triggered by the Same Price
Primary source
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Published
March 4, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 43 (Friday, March 4, 2022)</title>
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[Federal Register Volume 87, Number 43 (Friday, March 4, 2022)]
[Notices]
[Pages 12523-12526]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-04562]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94325; File No. SR-C2-2022-005]
Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change Relating
To Modify How Drill-Through Price Protection Applies to Users' Orders
When Multiple Stop (Stop-Loss) and Stop-Limit Orders Are Triggered by
the Same Price
February 28, 2022.
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 February 17, 2022, Cboe C2 Exchange, Inc. (the ``Exchange'' or
``C2'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
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. (``C2'' or the ``Exchange'') is filing with
the Securities and Exchange Commission (the ``Commission'') a proposal
to modify how drill-through price protection applies to Users' \5\
orders when multiple Stop (Stop-Loss) and Stop-Limit orders are
triggered by the same price. The text of the proposed rule change is
provided in Exhibit 5.
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\5\ The Term ``User'' shall mean any Trading Privilege Holder
(TPH) or Sponsored User who is authorized to obtain access to the
System pursuant to Rule 5.5.
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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
[[Page 12524]]
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 purpose of this rule filing is to amend current Rule
5.34(a)(4), Order and Quote Price Protection Mechanisms and Risk
Controls, to add new Rule 5.34(a)(4)(E), which modifies what the drill-
through price will be for Stop (Stop-Loss) \6\ and Stop-Limit \7\
orders when multiple Stop and Stop-Limit orders are triggered by the
same stop price specified by Users.
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\6\ A ``Stop (Stop-Loss)'' order is an order to buy (sell) that
becomes a market order when the consolidated last sale price
(excluding prices from complex order trades if outside of the NBBO)
or NBB (NBO) for a particular option contract is equal to or above
(below) the stop price specified by the User. Users may not
designate a Stop Order as All Sessions. Users may not designate bulk
messages as Stop Orders. A User may not designate a Stop order as
Direct to PAR. See Rule 5.6(c) (definition of ``Stop (Stop-Loss)''
order).
\7\ A ``Stop-Limit'' order is an order to buy (sell) that
becomes a limit order when the consolidated last sale price
(excluding prices from complex order trades if outside the NBBO) or
NBB (NBO) for a particular option contract is equal to or above
(below) the stop price specified by the User. A User may not
designate a Stop-Limit Order as All Sessions. Users may not
designate bulk messages as Stop-Limit Orders. A User may not
designate a Stop-Limit order as Direct to PAR. See Rule 5.6(c)
(definition of ``Stop-Limit'' order).
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Drill-through price protection is currently described in Exchange
Rule 5.34(a)(4)(A). Rule 5.34(a)(4)(A) equates the drill-through
reference price for a buy (sell) order to a price up to a buffer amount
(the Exchange determines the buffer amount on a class and premium
basis) above (below) the offer (bid) limit of the Opening Collar or the
NBO (NBB) that existed at the time of order entry, respectively (the,
``drill-through price'').\8\
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\8\ See Rule 5.34(a)(4)(A).
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Currently, when multiple Stop (Stop-Loss) or Stop-Limit orders are
triggered by the same price, the System \9\ considers them separate
orders received in sequence and enters them sequentially into the
Book.\10\ As such, when determining the drill-through price for each
order, the System uses the contra side NBBO that existed at the time
each of the orders was entered into the Book.\11\ By applying drill-
through price protection in this manner, the Exchange has observed,
particularly in thinly traded markets, that the first order triggered
will trade with the best priced contra-side order, while the second
triggered order can trade at prices that may be multiple price levels
away, as it is using the NBBO that existed after the first triggered
order executed. Accordingly, the Exchange seeks to enhance the drill-
through price functionality as it relates to Stop (Stop-Loss) and Stop
Limit Orders, through the addition of proposed Rule 5.34(a)(4)(E).
Under proposed Rule 5.34(a)(4)(E), rather than using separate drill-
through prices for each individual Stop and Stop-Limit order, the
System will instead use the contra-side NBBO that existed at the time
the first order in sequence was entered into the Book as the drill-
through price, for all orders. This is the drill-through price that
would apply to each Stop or Stop-Limit order if it was the only one
triggered at that price. By way of illustration, consider the following
examples:
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\9\ ``System'' means the Exchange's hybrid trading platform that
integrates electronic and open outcry trading of option contracts on
the Exchange and includes any connectivity to the foregoing trading
platform that is administered by or on behalf of the Exchange, such
as a communications hub. See Rule 1.1. (definition of, ``System'').
\10\ ``Book'' means 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 Rule 1.1 (definition of, ``Book'').
\11\ See Rule 5.34(a)(4)(A).
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Example 1--Current Functionality
Assume that the drill-through price buffer \12\ for a certain
option series is $0.25, and that the following quotes are in the Book:
Quote 1 (NBBO): 5.00 x 7.00; Quote 2: 4.00 x 8.00. Each quote has a
size of 1. Additionally, the following Stop-Loss/Stop Limit orders are
being held in the System when the Quote 1 offer is updated to $6.50
(they were received by the System in sequence):
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\12\ The Exchange determines the buffer amount on a premium and
class basis.
Order 1: Sell 1 @Market, Stop Price = $6.50
Order 2: Sell 1 @Market, Stop Price = $6.55
Order 3: Sell 1 @Market, Stop Price = $6.50
Per current Rule 5.34(a)(4), the following will occur:
1. Orders 1, 2 and 3 are held in the System, and handled as
separate orders received in sequence. Each have stop prices less than
the NBO, and are therefore triggered by the 6.50 quote, and enter the
Book for execution or posting. Under today's functionality, the System
assigns each order a separate drill-through price, equal to the contra-
side NBBO in existence at the time each order separately entered the
Book for execution.
2. Order 1 will execute against Quote 1 @$5.00. Using the NBB of
$5.00 as the drill-through price, the System would prevent execution
beyond $4.75.
3. When Order 1 executes against Quote 1 @5.00, that NBB will no
longer be in the Book. Instead Order 2 will execute against Quote 2
@4.00 and use the NBB of 4.00 as the drill-through price, and prevent
execution beyond $3.75.
4. Order 3 will cancel due to no liquidity left at the drill-
through price of $3.75.
Example 2--Proposed Functionality
Again, assume that the drill-through price buffer for a certain
option series is $0.25, and that the following quotes are in the Book:
Quote 1 (NBBO): 5.00 x 7.00; Quote 2: 4.00 x 8.00. Each quote has a
size of 1. Additionally, the following Stop-Loss/Stop Limit orders are
being held in the System when Quote 1 offers is updated to $6.50 (they
were received by the System in sequence):
Order 1: Sell 1 @Market, Stop Price = $6.50
Order 2: Sell 1 @Market, Stop Price = $6.55
Order 3: Sell 1 @Market, Stop Price = $6.50
Per proposed Rule 5.34(a)(4)(E), the following will occur:
1. Orders 1, 2 and 3 each have stop prices less than the NBO, and
will therefore be triggered by the 6.50 quote, and enter the Book for
execution or posting. A drill-through price for all three orders is set
at the contra-side NBB of 5.00.
2. Order 1 will execute against Quote 1 @$5.00.
3. Orders 2 and 3 will cancel due to no liquidity left at the
drill-through price of $4.75.
The Exchange notes that aside from the difference in drill-through
price, the drill-through mechanism will apply in the same manner to
these orders. The Exchange is not proposing wholly new drill-through
protection behavior, but rather only seeks to modify the reference
price utilized by the drill-through price protection for Stop (Stop-
Loss) and Stop Limit orders if multiple such orders are triggered and
entered into the Book for execution due to the same price event. By
using the same drill-through price for all triggered orders eligible
for execution, the proposed modification will help the drill-through
protection prevent
[[Page 12525]]
executions too far away from the NBBO when multiple Stop (Stop-Loss)
and Stop Limit orders become eligible for execution. In doing so, Stop
(Stop-Loss) and Stop Limit orders will receive executions at prices
more closely aligned to the stop prices specified by Exchange Users.
2. Statutory Basis
The Exchange believes the proposed rule amendment is consistent
with the requirements of Section 6(b) of the Act,\13\ in general, and
Section 6(b)(5) of the Act,\14\ in particular, in that it is 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 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.
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\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(5).
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Specifically, the Exchange believes that proposed Rule
5.34(a)(4)(E) does not unfairly discriminate amongst Users. Under
proposed Rule 5.34(a)(4)(E), all Users with Stop (Stop-Loss) and Stop-
Limit Orders triggered by the same price event will have the same
drill-through reference price. The primary purpose of the drill-through
price protection is to prevent orders from executing at prices ``too
far away'' from the market when they enter the Book for potential
execution. The Exchange believes the proposed rule change is consistent
with this purpose, and thus will promote just and equitable principles
of trade and protect investors, because Users who submit Stop and Stop-
Limit Orders will receive the same level of drill-through price
protection against execution at potentially erroneous prices,
regardless of the sequence in which they enter the Book. As a result of
the proposed rule change, all Users' Stop and Stop-Limit Orders will
receive protection based on the NBBO at the time those orders were
triggered to enter the Book for potential execution, which is
consistent with the drill-through protection as well as Stop Order
functionality.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change imposes
any burden on intramarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act. Under the
current drill-through price protection functionality, the System's use
of separate drill-through prices can result in Stop Orders executed
later in sequence being filled at prices several levels away from the
NBBO in existence at the time they are triggered and entered into the
Book for execution merely because those orders were submitted after
another Stop Order. As discussed above, the proposed rule change will
apply the same drill-through price (and thus the same level of drill-
through price protection) to Stop and Stop-Limit Orders that become
eligible for potential execution at the same time due to the same price
triggering event.
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 it
relates solely to how an Exchange price protection applies to Stop
(Stop-Loss) and Stop Limit orders. The proposed enhancement to the
drill-through protection is consistent with the current protection and
provides orders subject to drill-through price protection with improved
protection against execution at potentially erroneous prices.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposal. No written comments were solicited or
received 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: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days after the date of the filing, or such
shorter time as the Commission may designate, it has become effective
pursuant to Section 19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6)
\16\ thereunder.
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\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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The Exchange has asked the Commission to waive the 30-day operative
delay such that Exchange Users will be able to more quickly benefit
from the proposed Drill through protections that are designed to: (1)
Prevent potentially erroneous executions and (2) more closely align the
execution prices of Stop Orders and Stop Limit Orders that become
eligible for potential execution at the same time due to the same price
triggering event.\17\ The Commission finds that waiving the 30-day
operative delay is consistent with the protection of investors and the
public interest. Specifically, waiver of the operative delay should
allow Exchange Users to utilize Stop Orders and Stop Limit Orders with
an increased likelihood that the execution price of such orders will be
more closely related to the market at the time the order is triggered
for entry onto the C2 Book. Accordingly, the Commission designates the
proposal operative upon filing.\18\
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\17\ 17 CFR 240.19b-4(f)(6)(iii).
\18\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule change's impact on
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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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 shall institute proceedings to
determine whether the proposed rule should be approved or 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
<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#fc8e899099d19f9391919992888fbc8f999fd29b938a"><span class="__cf_email__" data-cfemail="2755524b420a44484a4a424953546754424409404851">[email protected]</span></a>. Please include
File Number SR-C2-2022-005 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-C2-2022-005. This file
number should be included on the subject line if email is used. To help
the Commission process and review your
[[Page 12526]]
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; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-C2-2022-005 and should be submitted on or before March
25, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-04562 Filed 3-3-22; 8:45 am]
BILLING CODE 8011-01-P
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