Notice2022-22178
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 21.17 Concerning Drill-Through Protection and Fat Finger Check
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Published
October 13, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 197 (Thursday, October 13, 2022)</title>
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[Federal Register Volume 87, Number 197 (Thursday, October 13, 2022)]
[Notices]
[Pages 62125-62129]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-22178]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95995; File No. SR-CboeEDGX-2022-044]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend Rule 21.17 Concerning Drill-Through Protection and Fat Finger
Check
October 6, 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 October 4, 2022, Cboe EDGX Exchange, Inc.
[[Page 62126]]
(``Exchange'' or ````EDGX'''') 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 EDGX Exchange, Inc. (the ``Exchange'' or ``EDGX Options'')
proposes to amend Rule 21.17. The text of the proposed rule change is
provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (<a href="http://markets.cboe.com/us/options/regulation/rule_filings/edgx/">http://markets.cboe.com/us/options/regulation/rule_filings/edgx/</a>), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 21.17. Specifically, the
Exchange proposes to amend its drill-through protection mechanism and
limit order fat finger check for both simple and complex orders.
The Exchange proposes to amend Rule 21.17(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 an order (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 21.7(a) for the definition of Opening Collars.
\4\ See Rule 21.17(a)(4)(A).
\5\ See Rule 21.17(a)(4)(B).
\6\ The proposed rule change adds ``at the drill-through price''
in the first sentence of subparagraph (a)(1)(B)(i), [sic] which is a
nonsubstantive change, as it reflects current functionality and is
stated in the introductory paragraph to Rule 21.17(a)(1)(B). [sic]
The proposed rule change merely includes this detail in the next
portion of the rule for additional clarity.
\7\ See Rule 21.17(a)(4)(B)(i).
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The proposed rule change amends Rule 21.17(a)(4)(B)(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 21.17(a)(4)(B)(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 be
cancelled (unless it 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 21.17(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
[[Page 62127]]
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) 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, the complex
order (or unexecuted portion) not executed during any time period.\14\
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\10\ See Rule 21.17(b)(6)(A).
\11\ See proposed Rule 21.17(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 21.20(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 21.17(b)(6)(A). A description of
COAs is located in Rule 21.20(d).
\14\ See current Rule 21.17(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 21.17(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 reaches its limit
price prior to full execution), at which time the order would be
cancelled. 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
21.17(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 be cancelled (unless
it 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 21.17(a)(2) and (b)(7) 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 21.17(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 21.17(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
21.17(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 21.17(a)(2) and
(b)(7) to add Limit-on-Close orders \18\ to the list of orders to which
the limit order fat finger check (for simple and complex orders,
respectively) 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 simple limit
order fat finger check does not apply to bulk messages.\21\ The
Exchange proposes to also not apply the limit order fat finger check to
Limit-on-Close orders (simple and complex). 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 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
[[Page 62128]]
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, for an order so
designated, a limit order that may not execute on the Exchange until
three minutes prior to 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 21.8. The System cancels an LOC
order (or unexecuted portion) that does not execute by the market
close. Users may not designate bulk messages as LOC. See Rule
21.1(f)(7) (definition of ``Limit-on-Close'' and ``LOC'' order).
\19\ The Exchange determines a default buffer amount on a class-
by-class basis; however, for complex orders, a User may establish a
higher or lower amount than the Exchange default for a class.
\20\ Rule 21.17(a)(2).
\21\ Id.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\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 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
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 to <a href="/cdn-cgi/l/email-protection#3143445d541c525e5c5c545f4542714254521f565e47"><span class="__cf_email__" data-cfemail="483a3d242d652b2725252d263c3b083b2d2b662f273e">[email protected]</span></a>. Please include
File Number SR-CboeEDGX-2022-044 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-CboeEDGX-2022-044. 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
[[Page 62129]]
change that are filed with the Commission, and all written
communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549 on official
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
the filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change. Persons submitting comments are cautioned that we do
not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
CboeEDGX-2022-044 and should be submitted on or before November 3,
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. Lynn Taylor,
Assistant Secretary.
[FR Doc. 2022-22178 Filed 10-12-22; 8:45 am]
BILLING CODE 8011-01-P
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