Notice2022-04565
Self-Regulatory Organizations; Cboe BZX 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 Order and Stop-Limit Orders Are Triggered by the Same Price
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
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 12510-12512]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-04565]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94328; File No. SR-CboeBZX-2022-009]
Self-Regulatory Organizations; Cboe BZX 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 Order 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 BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') 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 BZX Exchange, Inc. (``BZX'' 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 Order 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 Member or Sponsored
Participant who is authorized to obtain access to the System
pursuant to Rule 11.3. See Rule 1.5(cc).
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The text of the proposed rule change is also available on the
Exchange's website (<a href="https://markets.cboe.com/us/equities/regulation/rule_filings/bzx/">https://markets.cboe.com/us/equities/regulation/rule_filings/bzx/</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 purpose of this rule filing is to amend current Rule 21.17,
Additional Price Protection Mechanisms and Risk Controls, to add new
Rule 21.17(d)(3), which modifies what the drill-through price will be
for Stop Orders \6\ and Stop-Limit Orders \7\ when multiple Stop Orders
and Stop-Limit Orders are triggered by the same stop price specified by
Users.
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\6\ A ``Stop Order'' is an order that becomes a BZX market order
when the stop price is elected. A Stop Order to buy is elected when
the consolidated last sale in the security occurs at, or above, the
specified stop price. A Stop Order to sell becomes a limit order
when the consolidated last sale in the security occurs at, or below,
the specified stop price. See Rule 11.9(c)(16).
\7\ A ``Stop-Limit Order'' is an order that becomes a limit
order when the stop price is elected. A Stop Limit Order to buy is
elected when the consolidated last sale in the security occurs at,
or above, the specified stop price. A Stop Limit Order to sell
becomes a sell limit order when the consolidated last sale in the
security occurs at, or below, the specified stop price. See Rule
11.9(c)(17).
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Drill-through price protection is currently described in Exchange
Rule 21.17(d). Rule 21.17(d) provides that if a buy (sell) order enters
the BZX Options Book at the conclusion of the opening auction process
or would execute or post to the BZX Book at the time of order entry,
the System executes the orders 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, respective (the, ``Drill
Through Price'').\8\
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\8\ See Rule 21.17(d).
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Currently, when multiple Stop Orders 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 BZX
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 BZX 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 Orders and
Stop Limit Orders, through the addition of proposed Rule 21.17(d)(3).
Under proposed Rule 21.17(d)(3), rather than using separate Drill-
Through Prices for each individual Stop Order and Stop-Limit Order, the
System will instead use the contra-side NBBO that existed at the time
the first order in
[[Page 12511]]
sequence was entered into the BZX Book as the Drill-Through Price, for
all orders. This is the Drill-Through Price that would apply to each
Stop Order 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 electronic communications and trading
facility designated by the Board through which securities orders of
Users are consolidated for ranking, execution and, when applicable,
routing away. See Rule 1.5(aa).
\10\ ``BZX Book'' means the System's electronic file of orders.
See Rule 1.5.(e).
\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 BZX
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 Orders/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 21.17(d), 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
BZX 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 BZX 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 BZX 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 BZX
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 Orders/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):
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 21.17(d), 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 BZX 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 Orders
and Stop Limit Orders if multiple such orders are triggered and entered
into the BZX 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 executions too far away from the NBBO when multiple
Stop Orders and Stop Limit Orders become eligible for execution. In
doing so, Stop Orders 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 21.17(d)(3)
does not unfairly discriminate amongst Users. Under proposed Rule
21.17(d)(3), all Users with Stop Orders 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 BZX 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 Orders 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 BZX Book. As a
result of the proposed rule change, all Users' Stop Orders and Stop-
Limit Orders will receive protection based on the NBBO at the time
those orders were triggered to enter the BZX 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
BZX 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 Orders 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
Orders 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.
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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 BZX 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="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#1d6f687178307e7270707873696e5d6e787e337a726b"><span class="__cf_email__" data-cfemail="cab8bfa6afe7a9a5a7a7afa4beb98ab9afa9e4ada5bc">[email protected]</span></a>. Please include
File Number SR-CboeBZX-2022-009 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-CboeBZX-2022-009. 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="https://www.sec.gov/rules/sro.shtml">https://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-CboeBZX-2022-009 and should
be submitted on or before March 25, 2022.
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\19\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-04565 Filed 3-3-22; 8:45 am]
BILLING CODE 8011-01-P
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