Notice2022-20944
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 5.34 Concerning Drill-Through Protection and Fat Finger Check
Primary source
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Published
September 28, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 187 (Wednesday, September 28, 2022)</title>
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[Federal Register Volume 87, Number 187 (Wednesday, September 28, 2022)]
[Notices]
[Pages 58872-58876]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-20944]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95870; File No. SR-CBOE-2022-046]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Rule 5.34 Concerning Drill-Through Protection and Fat Finger Check
September 22, 2022.
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 September 15, 2022, 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
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.
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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 amend Rule 5.34. 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,
[[Page 58873]]
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 amend Rule 5.34. Specifically, the
Exchange proposes to amend its drill-through protection mechanism for
both simple and complex orders and its limit order fat finger check.
The Exchange proposes to amend Rule 5.34(a)(4) and (b)(6) to update
the drill-through protection mechanism for simple and complex orders,
respectively, to provide orders with additional execution
opportunities. Pursuant to the current simple drill-through protection,
if a buy (sell) order enters the Book at the conclusion of the opening
auction process or would execute or post to the Book at the time of
order entry, the System executes the order 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 \3\ or the
national best bid (``NBO'') (national best offer (``NBB'')) that
existed at the time of order entry, respectively (the ``drill-through
price'').\4\ The System enters a limit order (as long as it has a Time-
in-Force of Day, Good-til-Cancelled or Good-til-Day) (or unexecuted
portion) not executed pursuant to the provision in the immediately
preceding sentence in the Book with a displayed equal to the drill-
through price.\5\ The order (or unexecuted portion) rests in the Book
at the drill-through price \6\ until the earlier to occur of its full
execution and the end of the duration of a number of consecutive time
periods (the Exchange determines on a class-by-class basis the number
of periods, which may not exceed five, and the length of the time
period in milliseconds, which may not exceed three seconds).\7\
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\3\ See Rule 5.31(a) for the definition of Opening Collars.
\4\ See Rule 5.34(a)(4)(A).
\5\ See Rule 5.34(a)(4)(C).
\6\ The proposed rule change adds ``at the drill-through price''
in the first sentence of subparagraph (a)(1)(C)(i), which is a
nonsubstantive change, as it reflects current functionality and is
stated in the introductory paragraph to Rule 5.34(a)(1)(C). The
proposed rule change merely includes this detail in the next portion
of the rule for additional clarity.
\7\ See Rule 5.34(a)(4)(C)(i).
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The proposed rule change amends Rule 5.34(a)(4)(C)(i) to eliminate
the concept that there will be a maximum number of time periods and
proposes that the order (or unexecuted portion) will rest in the Book
at the drill-through price for the duration of consecutive time
periods.\8\ The proposed rule change makes conforming changes to
subparagraph (ii) by deleting references to ``the final period'' and
subparagraph (iv) by deleting the reference to ``any remaining time
period(s),'' as there will no longer be an Exchange-determined limited
number of time periods. Currently, as set forth in current subparagraph
(i), the drill-through mechanism will continue until the earlier to
occur of the order's full execution and the end of the duration of the
Exchange-determined number of time periods. The Exchange proposes to
amend subparagraph (iv) to describe when the drill-through process will
conclude. Specifically, proposed Rule 5.34(a)(4)(C)(iv) provides that
the order continues through the process described in subparagraph (ii)
(as proposed to be amended) until the earliest of the following to
occur: (a) the order fully executes; (b) the User cancels the order;
and (c) the order's limit price equals or is less than (if a buy order)
or greater than (if a sell order) the drill-through price at any time
during application of the drill-through mechanism, in which case the
order rests in the Book at its limit price, subject to a User's
instructions. In other words, the order will continue through
consecutive time periods until it fully executes (unless it is
cancelled by the User or reaches its limit price prior to full
execution), compared to today when the order will continue through
consecutive time periods until it fully executes or reaches the
Exchange-determined final time period, at which time the order would
route to PAR for manual handling (unless it is cancelled by the User or
reaches its limit price prior to full execution). The Exchange believes
eliminating the limit on the number of time periods may increase
execution opportunities for limit orders, which will still continue to
be bound by their limit prices and protected by the limit order fat
finger check.\9\
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\8\ The Exchange will continue to determine on a class-by-class
basis the length of the time periods in milliseconds, which may
continue to not exceed three seconds.
\9\ If a limit price is ``too far away'' from the market, the
order will continue to be subject to the limit order fat finger
protection set forth in Rule 5.34(c)(1) and thus will still be
subject to protection against a potentially erroneous execution due
to an order pricing error upon submission.
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The proposed rule change makes a similar change to the drill-
through protection mechanism for complex orders. Specifically, the
proposed rule change eliminates the concept that, for complex orders
for which the user does not establish a buffer amount (and instead the
Exchange-determined default buffer amount applies),\10\ there will be a
maximum number of time periods and proposes that the complex order (or
unexecuted portion) will rest in the Book at the drill-through price
for the duration of consecutive time periods.\11\ Currently, similar to
the drill-through protection mechanism for simple orders (as described
above), if a user enters a buy (sell) complex order into the System
(and does not enter its own buffer amount), the System executes the
order \12\ up to a buffer amount above (below) the Synthetic National
Best Offer (``SNBO'') (Synthetic National Best Bid (``SNBB'')) that
existed at the time of entry (the ``drill-through price'') or initiates
a complex order auction (``COA'') at the drill-through price if the
order would initiate a COA.\13\ For complex orders for which the user
did not establish a buffer amount, the complex order (or unexecuted
portion) rests in the COB with a displayed price equal to the drill-
through price until the earlier to occur of the complex order's full
execution and the end of the duration of a number of time periods (the
Exchange determines on a class-by-class basis the number of periods,
which may not exceed five, and the length of the time period in
milliseconds, which may not exceed three seconds). Following the end of
each period prior to the final period, the System adds (if a buy order)
[[Page 58874]]
or subtracts (if a sell order) one buffer amount to the drill-through
price displayed during the immediately preceding period (each new price
becomes the ``drill-through price''). The complex order (or unexecuted
portion) rests in the COB at that new drill-through price during the
subsequent period. Following the end of the final period, the System
cancels or routes to PAR for manual handling, subject to a User's
instructions (such as to cancel the order), the complex order (or
unexecuted portion) not executed during any time period.\14\
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\10\ See Rule 5.34(b)(6)(A).
\11\ See proposed Rule 5.34(b)(6)(B). The proposed rule change
has no impact on how the drill-through protection mechanism applies
to a complex order for which the inputting user establishes a buffer
amount, as in that situation, there is only a single time period
pursuant to the current rule (which will continue to be the case).
\12\ Executions occur pursuant to Rule 5.33(e).
\13\ Unlike the simple order drill-through protection mechanism,
the complex order drill-through protection mechanism permits users
to establish a buffer amount different than the Exchange-determined
default buffer amount. See Rule 5.34(b)(6)(A). A description of COAs
is located in Rule 5.33(d).
\14\ See current Rule 5.34(b)(6)(B)(i) and (ii). As set forth in
current subparagraph (iv), if the complex order's limit price is
reached during the application of the drill-through mechanism, the
order will rest in the COB at its limit price.
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The proposed rule change amends Rule 5.34(b)(6)(B)(i) and (ii) to
eliminate the concept that there will be a maximum number of time
periods and proposes that the order (or unexecuted portion) will rest
in the COB at the drill-through price for the duration of consecutive
time periods when a User does not establish its own buffer amount.\15\
The proposed rule change makes conforming changes to current
subparagraphs (i), (ii), and (iv) (proposed subparagraphs (ii) and
(iii)) by deleting references to ``the final period'' and deleting the
reference to ``any remaining time period(s),'' as there will no longer
be an Exchange-determined limited number of time periods. Currently, as
set forth in current subparagraphs (i), (ii), and (iv), if the
inputting User does not establish a buffer amount for the complex
order, the drill-through mechanism will continue until the earlier to
occur of the order's full execution and the end of the duration of the
Exchange-determined number of time periods (unless it is cancelled by
the User or reaches its limit price prior to full execution), at which
time the order would route to PAR for manual handling. The Exchange
proposes to add to the end of proposed subparagraph (ii) when the
drill-through process will conclude and what happens at that time for
complex orders for which the user did not establish a buffer amount.
Specifically, proposed Rule 5.34(b)(6)(B)(ii) provides that the complex
order continues through the process described in proposed subparagraph
(ii) until the earliest of the following to occur: (a) the complex
order fully executes; (b) the User cancels the order; and (c) the
complex order's limit price equals or is less than (if a buy order) or
greater than (if a sell order) the drill-through price at any time
during application of the drill-through mechanism, in which case the
complex order rests in the COB at its limit price, subject to a User's
instructions.\16\ In other words, a complex order for which the User
did not establish a buffer amount will continue through consecutive
time periods until it fully executes (or is cancelled or reaches its
limit price), compared to today when the complex order will continue
through consecutive time periods until it fully executes or reaches the
Exchange-determined final time period, at which time the order would
route to PAR for manual handling (unless otherwise cancelled by the
User or reaches its limit price, as described in current subparagraph
(iv)). The Exchange believes eliminating the limit on the number of
time periods may increase execution opportunities for limit orders,
which will still continue to be bound by their limit prices and
protected by the limit order fat finger check.\17\
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\15\ The Exchange will continue to determine on a class-by-class
basis the length of the time periods in milliseconds, which may
continue to not exceed three seconds.
\16\ Proposed clause (c) is applicable today and located in
current subparagraph (iv). As described below, the proposed rule
change merely moves this provision from current subparagraph (iv) to
proposed subparagraph (ii).
\17\ If a limit price is ``too far away'' from the market, the
order will continue to be subject to the limit order fat finger
protection set forth in Rule 5.34(c)(1) and thus will still be
subject to protection against a potentially erroneous execution due
to an order pricing error upon submission.
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The proposed rule change also makes certain nonsubstantive changes
to Rule 5.34(b)(6). Specifically, the proposed rule change moves all
provisions specific to the application of the drill-through mechanism
if the user establishes a buffer amount into Rule 5.34(b)(6)(B)(i) and
moves all provisions specific to the application of the drill-through
mechanism if the user does not establish a buffer amount into Rule
5.34(b)(6)(B)(ii). This includes incorporating into each of proposed
subparagraphs (i) and (ii) how the System handles a complex order if
its limit price equals or less than (if a buy order) or greater than
(if a sell order) the drill-through price, as described in current
subparagraph (iv). As a result, the proposed rule change deletes
current subparagraph (iv). Additionally, the proposed rule change moves
certain language regarding what happens if the SBBO changes during any
period, which applies to all complex orders subject to the drill-
through protection mechanism, regardless of whether the user input its
own buffer amount, to proposed subparagraph (iii) from current
subparagraph (ii) and correspondingly changes current subparagraph
(iii) to proposed subparagraph (iv). The proposed rule change makes a
nonsubstantive change to the beginning of proposed subparagraph (iii)
by changing ``However'' to ``Notwithstanding the above,'' as the
Exchange believes that phrase is more appropriate.
In addition, the Exchange proposes to amend Rule 5.34(c)(1)(D) to
add Limit-on-Close orders \18\ to the list of orders to which the limit
order fat finger check does not apply. Pursuant to the limit order fat
finger check, if a User submits a buy (sell) limit order to the System
with a price that is more than a buffer amount \19\ above (below) the
NBO (NBB) for simple orders or the SNBO (SNBB) for complex orders, the
System cancels or rejects the order.\20\ Currently, the limit order fat
finger check does not apply to bulk messages, stop-limit orders, or
Multi-Class Spread Orders.\21\ The Exchange proposes to also not apply
the limit order fat finger check to Limit-on-Close orders. The limit
order fat finger check applies to orders upon entry to the System.
However, the limit price of a Limit-on-Close order is intended to
relate to the price at the RTH market close, and thus may intentionally
be further away from the NBBO or SNBBO, as applicable, at the time the
order is entered. This may cause the order to be inadvertently rejected
pursuant to this check. The Exchange believes it is not appropriate for
this limit order to be subject to the fat finger check, as the check
may inadvertently cause rejections for orders with limit prices that
are intentionally ``far away'' from the market at the time of order
entry.
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\18\ A ``Limit-on-Close'' or ``LOC'' order is a limit order that
may not execute on the Exchange until three minutes prior to Regular
Trading Hours (``RTH'') market close. At that time, the System
enters LOC orders into the Book in time sequence (based on the times
at which the System initially received them), where they may be
processed in accordance with Rule 5.32. The System cancels an LOC
order (or unexecuted portion) that does not execute by the RTH
market close. Users may not designate an LOC order as All Sessions
or RTH and Curb. Users may not designate bulk messages as LOC. A
User may not designate an LOC order as Direct to PAR. See Rule
5.6(d) (definition of ``Limit-on-Close'' and ``LOC'' order).
\19\ The Exchange determines a default buffer amount on a class-
by-class basis; however, a User may establish a higher or lower
amount than the Exchange default for a class.
\20\ Rule 5.34(c)(1).
\21\ Rule 5.34(c)(1)(D) and (E). The proposed rule change
deletes subparagraph (E) and moves Multi-Class Spread Orders to the
list of orders to which the check does not apply in subparagraph
(D). This is a nonsubstantive change and merely combines two current
provisions that exclude certain order types from the fat finger
check into a single provision.
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[[Page 58875]]
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.\22\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \23\ 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) \24\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\22\ 15 U.S.C. 78f(b).
\23\ 15 U.S.C. 78f(b)(5).
\24\ Id.
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In particular, the Exchange believes the proposed rule change to
eliminate the maximum number of time periods for which a simple or
complex order will rest in the Book or COB, respectively, during
application of the drill-through protection mechanism will remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, protect investors, because
it will provide simple and complex orders with additional execution
opportunities. These orders may continue to be available on the Book or
COB, as applicable, for execution, at a wider range of prices, as
opposed to today when such orders are cancelled or routed to PAR for
manual handling after a specified number of time periods (depending on
the User's instructions and if the order does not reach its limit price
prior to the end of those time periods). The Exchange believes these
additional execution opportunities will benefit investors that submit
such orders and believes such orders will continue to receive
protection against potentially erroneous executions, as the limit order
fat finger check will continue to apply to them.
The Exchange believes the proposed nonsubstantive rule changes to
the complex order drill-through protection mechanism will protect
investors and the public interest, because these changes improve the
organization of this rule's provisions by grouping all provisions that
apply when a User establishes its own buffer and all provisions that
apply when a User does not establish its own buffer, eliminating
potential confusion.
Finally, the Exchange believes excluding Limit-on-Close orders from
the limit order fat finger check will remove impediments to and perfect
the mechanism of a free and open market and a national market system,
and, in general, protect investors, because it may reduce inadvertent
rejections of Limit-on-Close orders, which may be purposely priced
further away from the NBBO or SNBBO, as applicable, at the time of
entry, as their limit prices are intended to relate to price at the RTH
market close. Therefore, this proposed rule change may increase
execution opportunities for Users that submit Limit-on-Close orders.
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 that the proposed rule change will impose any burden on
intramarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act, because the amended drill-
through protection mechanism (for both simple and complex orders) and
limit order fat finger check will continue to apply in the same manner
to orders of all Users and may lead to increased execution
opportunities. 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 purposes of the Act, because
the proposed rule change relates solely to Exchange risk controls and
how the Exchange handles orders subject to those risk controls.
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 \25\ and
Rule 19b-4(f)(6) \26\ 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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\25\ 15 U.S.C. 78s(b)(3)(A).
\26\ 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 <a href="/cdn-cgi/l/email-protection#3b4f54494e575e16585456565e554f487b485e58155c544d"><span class="__cf_email__" data-cfemail="cebaa1bcbba2abe3ada1a3a3aba0babd8ebdabade0a9a1b8">[email protected]</span></a>. Please include File
Number SR-CBOE-2022-046 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 Number SR-CBOE-2022-046. 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
[[Page 58876]]
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-2022-046 and should be submitted on or before October 19, 2022.
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\27\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-20944 Filed 9-27-22; 8:45 am]
BILLING CODE 8011-01-P
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