Notice2022-22738
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Its Rules Relating to the Processing of Auction Responses
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Published
October 20, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 202 (Thursday, October 20, 2022)</title>
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[Federal Register Volume 87, Number 202 (Thursday, October 20, 2022)]
[Notices]
[Pages 63830-63834]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-22738]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96081; File No. SR-CBOE-2022-051]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Amend Its Rules Relating to the
Processing of Auction Responses
October 14, 2022.
Pursuant to FR 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 October 3, 2022, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission (the
``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 its rules relating to the processing of auction responses. 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, and
[[Page 63831]]
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 seeks to amend its rules related to its auction
responses.
Background
The Exchange currently offers a variety of auction mechanisms which
provide price improvement opportunities for eligible orders.
Particularly, the Exchange offers the following auction mechanisms:
Complex Order Auction (``COA''),\3\ Step Up Mechanism (``SUM''),\4\
Automated Improvement Mechanism (``AIM''),\5\ Complex AIM (``C-
AIM''),\6\ Solicitation Auction Mechanism (``SAM''),\7\ Complex SAM
(``C-SAM''),\8\ FLEX Auction Process,\9\ FLEX AIM \10\ and FLEX
SAM.\11\ The Exchange notes that eligible orders are electronically
exposed for an Exchange-determined period (collectively referred to
herein as ``auction response period'') in accordance with the
applicable Exchange Rule, during which time Users may submit responses
(collectively referred to herein as ``auction responses'' or ``auction
response messages'') to an auction message. Trading Permit Holders
(``TPHs'') may submit auction responses via logical port
connectivity.\12\ An auction response may only execute in the
applicable auction and is cancelled if it does not execute during an
auction. If an auction response is unable to be processed by the System
during the auction response period, that auction response is unable to
receive any execution opportunity or provide liquidity (and possible
price improvement) on the Exchange.
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\3\ See Rule 5.33(d).
\4\ See Rule 5.35.
\5\ See Rule 5.37.
\6\ See Rule 5.38.
\7\ See Rule 5.39.
\8\ See Rule 5.40.
\9\ See Rule 5.72(c).
\10\ See Rule 5.73.
\11\ See Rule 5.74.
\12\ A User connects to the Exchange using a logical port
available through an API, such as the industry-standard FIX or BOE
protocol. Logical ports represent a technical port established by
the Exchange within the Exchange's trading system for the delivery
and/or receipt of trading messages, including orders, cancels, and
auction responses.
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By way of further background, auction response messages
historically have waited in the same System queue as all other order
and quote message traffic. If an auction response is submitted at a
time where there is a deep queue of other message traffic such as mass
cancellation messages or other orders and quotes, it is possible that
the auction response may not be ``processed'' by the System in
sufficient time (i.e., prior to the end of the auction response
period).\13\ Particularly, the queued auction response may not be able
to participate in the applicable auction mechanism because the System
had unprocessed (queued) messages at the time of the auction execution
despite the fact that the User submitted the auction response prior to
the end of the auction response period. Auctioned orders may therefore
be missing out on potential price improvement that may have otherwise
resulted if queued timely auction response(s) were able to participate
in the auction. Indeed, the Exchange notes that its review of auction
responses during July 2022 indicated that approximately 55% of auction
responses had no opportunity to execute in their respective auctions,
notwithstanding being submitted within the auction response period.
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\13\ For example, it takes the Exchange's system approximately
10 microseconds to process a single order/quote or auction response
message and, on average, approximately 190 microseconds to process a
mass cancel message. As such, under the current system, an auction
response that is entered after a mass cancel message is more likely
to be detrimentally delayed as compared to a mass cancel message
that is entered after an auction response (i.e., a 190 microsecond
``wait time'' versus a 10 microsecond ``wait time'').
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The Exchange proposes to adopt new functionality under proposed
Rule 5.25(e) which would apply across all of its auction mechanisms to
increase the likelihood that timely submitted auction responses may
participate in the applicable auction, even during periods of high
message traffic. Under the proposed functionality, at the time an
auction response period ends, the System will continue to process its
inbound queue for any messages that were received before the end of the
auction period (including auction messages) for up to an Exchange-
determined period of time, not to exceed 100 milliseconds (which the
Exchange may determine on a class-by-class basis). That is, any auction
responses that were in the queue before the conclusion of the auction
(as identified by the Network Interface Card (``NIC'') timestamp on the
message) \14\ would be processed as long as the Exchange-determined
time on a class-by-class basis (not to exceed 100 milliseconds) is not
exceeded. Only auction messages received prior to the execution of the
applicable auction are eligible to be processed for that auction. The
applicable auction will execute once all messages, including auction
responses, received before the end time of the auction response period
have been processed or the Exchange-determined maximum time limit of up
to 100 milliseconds has elapsed, whichever occurs first. This
continuation of processing the queue for an additional amount of time
for messages that were received before the end of the auction allows
for auction responses that would otherwise have been canceled due to
the conclusion of the auction response period to still have an
opportunity to participate in the auction. This provides such responses
with increased opportunities to participate in the auction, even during
periods of high message traffic, while still providing a processing cut
off time to ensure auction executions aren't unduly delayed.
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\14\ All incoming messages are ``timestamped'' by the Exchange's
System.
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By way of an example, if an auction with an auction response period
set to 100 milliseconds were to start at 9:00:00 a.m., only auction
responses that were able to be processed by the System by the
conclusion of the auction at 9:00:100 would participate in the auction.
Accordingly, if, for example, an auction response that was submitted at
9:00:090 (within the auction time response period), is still in the
message queue at 9:00:100, that response under the current System
functionality would be canceled and not eligible to participate in the
auction. Under the proposal, at 9:00:100, because the System continues
to process all messages timestamped before 9:00:100, that same auction
response submitted at 9:00:090 would not automatically be canceled but
rather included in the auction as long as it was able to be processed
within an additional 50 milliseconds, which is the additional
processing time set by the Exchange for that class in this example.
Once that auction response is up for
[[Page 63832]]
processing (because the System processes messages sequentially in time
order sequence), the response will be able to participate in the
auction so long as it's processed by 9:00:150, notwithstanding such
processing would occur after the 100-millisecond auction response
period has concluded. Any auction responses for the pending auction
that are still pending after the execution of the auction would be
canceled.\15\ The Exchange notes that using the same example, if an
auction response was submitted at 9:00:120, it would not be eligible
for processing because the timestamp would identify it as being
submitted outside the auction response period which was otherwise set
to conclude at 9:00:100.
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\15\ If, for example, the System processed all messages received
before 9:00:100 by 9:00:110, then the auction would execute at
9:00:110 (i.e., the System does not need to wait until 9:00:150 to
execute an auction if all messages submitted prior to the end time
of the auction have been processed).
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The Exchange believes the proposed rule change will result in
increased execution opportunities for liquidity providers that submit
auction responses and enhance the potential for price improvement for
orders submitted to each mechanism to the benefit of investors and
public interest. Indeed, the Exchange believes the proposed
functionality will increase the possibility that timely submitted
auction responses are processed by the Exchange and have an opportunity
for execution in the applicable auction mechanism, even if there is a
deep pending message queue. The Exchange believes the proposed maximum
amount of additional time for processing is both an adequate amount of
time to provide pending auction responses with such execution
opportunity, but also an amount minimal enough that impact to other
message traffic, if any, would be de minimis. Indeed, the Exchange
anticipates that in the vast majority of cases, the additional time
needed after the conclusion of auction response period, if any, to
process all pending auction responses will be shorter than the maximum
100 milliseconds. All message traffic (including auction responses)
will continue to be processed in time-priority.
The Exchange also believes the proposal will continue to allow the
Exchange to set each auction response period to an amount of time that
provides TPHs with sufficient time to respond to, compete for, and
provide price improvement for orders while continuing to provide
auctioned orders with timely executions that may reduce market and
execution risk. It also provides timely submitted auction responses
with more execution opportunities in the applicable, even during
periods of high message traffic, thereby potentially providing
customers with additional opportunities for price improvement.
Finally, in light of the proposed change, the Exchange proposes to
modify Rule 5.25 to make clear that the Exchange may determine whether
or not to establish a Priority Queue for Auction response messages
(indeed, the Exchange anticipates implementing the proposed
functionality at this time in lieu of a Priority Queue). The Exchange
previously adopted Priority Queue functionality under Rule 5.25, which
provides that auction response messages may be processed through a
Priority Queue, and all remaining messages would be processed through a
General Queue. If the Exchange utilizes a Priority Queue, the System
would process a certain number of messages, as determined by the
Exchange, from each queue on an alternating basis and prioritize
processing messages in each respective queue in the order in which the
System receives them (i.e., in time priority). The Exchange adopted
Rule 5.25 for similar purposes as this proposal, which is to increase
the likelihood that submitted auction responses would have the
opportunity to participate in auctions notwithstanding any potential
deep queue of pending message traffic. The Exchange believes however,
that the proposed new functionality is a more streamlined approach and
would further increase the likelihood that timely submitted auction
responses are able to participate in an applicable auction.
Particularly, under the priority queue functionality, auction responses
not processed by the conclusion of the auction response period would
still be canceled, whereas, under the proposal, timely submitted
auction responses would have the opportunity to be processed for up to
an additional 100 milliseconds following the conclusion of the auction
response period. Should the Exchange determine its necessary to utilize
a priority queue for auction responses in the future, it would provide
notice to all TPHs pursuant to Rule 1.5.
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 FR 6(b) of the Act.\16\ Specifically, the Exchange
believes the proposed rule change is consistent with the FR 6(b)(5)
\17\ 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 FR 6(b)(5)
\18\ requirement that the rules of an exchange not be designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers.
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\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
\18\ Id.
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In particular, the Exchange believes modifying its System to allow
it to potentially process more, if not all, timely submitted auction
responses may provide further opportunities for auctioned orders to
receive price improvement, which removes impediments to a free and open
market and ultimately protects and benefits investors. In particular,
the proposed rule change will continue to provide investors with timely
processing of their options quote and order messages, while providing
investors who submit auction eligible orders with additional auction
liquidity. Indeed, the proposed rule change may allow more investors
additional opportunities to receive price improvement through an
auction mechanism. While the Exchange may increase the length of
auction response periods to accommodate more auction responses, the
Exchange believes the proposed rule change will accommodate more
auction responses and allow the Exchange to continue to mitigate the
market risk that may accompany a longer auction period for auctioned
orders by setting the length of an auction response period to a
timeframe that allows an adequate amount of time for TPHs to respond to
an auction message and providers orders with fast executions.
Additionally, the Exchange believes the proposed functionality may
provide liquidity providers that submit auction responses with
additional execution opportunities in auctions, which may encourage the
submission of more auction responses, which may contribute to a deeper,
more liquid auction process that provides investors
[[Page 63833]]
with additional price improvement opportunities.
The Exchange believes adopting the proposed functionality for
auction responses would better provide customers with additional
opportunities for price improvements with little to no impact to non-
auction response message traffic. Currently, auction responses account
for an incredibly small fraction of message traffic submitted to the
Exchange. Indeed, based on the Exchange's analysis in July 2022,
auction response messages accounted for a mere 0.04% of all message
traffic submitted to the Exchange. The Exchange believe the processing
of such a small amount of message traffic, even after the conclusion of
an auction response period, would therefore have de minimis, if any,
impact on the processing of non-auction response messages waiting in
the queue. The Exchange also notes that all messages are currently
processed one at a time by the System. Therefore, the System still
needs to ``process'' all pending auction responses, regardless of
whether that processing involves canceling the pending auction response
because it wasn't processed in time to participate in the auction or
actually processing the response to participate in the auction. Either
way, the non-auction response messages will still have to wait for
processing of any pending responses ahead of it. Conversely, the
current system may cause investors to miss out on opportunities to
receive price improvement through the Exchange's auction mechanisms as
the System is configured to cancel pending auction responses that
``miss'' the auction execution, even if such responses were timely
submitted but not processed due to the System being otherwise occupied
processing messages in queue ahead of it. The Exchange therefore
believes its proposal will make it more likely that the System
processes timely submitted auction responses and includes them in
applicable auctions, thus providing them with more opportunities to
execute against auctioned orders, even during periods of high message
traffic. The Exchange further believes the proposal will continue to
allow the Exchange to set an auction response period to an amount of
time that provides TPHs with sufficient time to respond to, compete
for, and provide price improvement for orders while also continuing to
provide auctioned orders with quick executions that may reduce market
and execution risk. Accordingly, the Exchange believes the proposal
would provide customers with additional opportunities for price
improvement and enhance the quality of the auctions, thereby removing
impediments to and perfecting the mechanism of a free and open market
and a national market system, and, in general protecting investors and
the public interest.
The Exchange also believes the proposed rule change is not designed
to permit unfair discrimination between market participants as all
market participants are allowed to submit auction responses.
Additionally, the Exchange believes it's reasonable to adopt the
proposed functionality for auction responses as compared to other
messages because auction responses are submitted only for the purpose
of executing (and possibly providing price improvement) in auctions
with short durations, whereas other messages are generally submitted to
rest in or execute against the book (and generally not used to submit
liquidity into auctions). As discussed above, the Exchange also
believes the benefits that result from the adoption of the proposed
functionality for auction responses would outweigh any potential
negative impact to other message traffic, including customer orders,
which have an incredibly low chance of being affected by the proposed
change as discussed above and which continue to receive priority
allocation in any event.
The Exchange lastly believes clarifying in Rule 5.25 that the
Exchange may utilize priority queue functionality for auction responses
provides further transparency in the rules. The Exchange believes the
proposed functionality is currently a better alternative to provide
timely submitted auction responses with opportunities to participate in
an applicable auction as compared to the priority queue functionality.
Particularly, under the priority queue functionality, the System may
still be unable to process all submitted auction responses, since the
System will not include any auction responses that are still in queue
at the conclusion of the auction response period in the auction, even
if they were submitted in a timely manner. Under the proposed
functionality, as discussed, the System identifies and looks to process
all auction responses timely submitted and will process such messages
even after the conclusion of the auction response period, up to 100
milliseconds, thereby providing a better chance that more auction
responses are in fact able to participate in the auction. As noted
above, should the Exchange determine its necessary or appropriate to
utilize a priority queue for auction responses in the future, it would
provide notice to all TPHs pursuant to Rule 1.5.
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 changes will impose any burden on intra-
market competition that is not necessary or appropriate in furtherance
of the purposes of the Act, as the proposed rule change would apply
equally to all TPHs that submit auction responses. As noted above, all
market participants are able to submit auction responses. Additionally,
the Exchange believes the adoption of the proposed functionality for
auction responses would have little to no impact on non-auction
response message traffic. As discussed, auction response messages
account for an incredibly small fraction of message traffic submitted
to the Exchange. The Exchange therefore believes the processing of such
a small amount of message traffic by using the functionality would have
a de minimis, if any, impact on the processing of non-auction response
messages. Moreover, the Exchange believes it's reasonable to adopt the
proposed functionality for auction responses as compared to other
messages because auction responses are submitted only for the purpose
of executing (and possibly providing price improvement) in auctions
with short durations, whereas other messages are generally submitted to
rest in or execute against the book (and generally not used to submit
liquidity into auctions). Lastly, the Exchange does not believe the
proposed rule change will impose any burden on inter-market competition
that is not necessary or appropriate in furtherance of the purposes of
the Act, as the proposed change affects how the System processes
auction responses that may only participate in auctions that occur on
the Exchange.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period
[[Page 63834]]
to be appropriate and publishes its reasons for so finding or (ii) as
to which the Exchange consents, the Commission will:
A. by order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be 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#90e2e5fcf5bdf3fffdfdf5fee4e3d0e3f5f3bef7ffe6"><span class="__cf_email__" data-cfemail="0173746d642c626e6c6c646f7572417264622f666e77">[email protected]</span></a>. Please include
File Number SR-CBOE-2022-051 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-2022-051. 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 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-2022-051, and should be submitted
on or before November 10, 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,
Deputy Secretary.
[FR Doc. 2022-22738 Filed 10-19-22; 8:45 am]
BILLING CODE 8011-01-P
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