Notice2023-10128
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 21.8 Regarding Certain Cancel-Replace Messages
Primary source
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Published
May 12, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 92 (Friday, May 12, 2023)</title>
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[Federal Register Volume 88, Number 92 (Friday, May 12, 2023)]
[Notices]
[Pages 30817-30820]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-10128]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97457; File No. SR-CboeBZX-2023-029]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Rule 21.8 Regarding Certain Cancel-Replace Messages
May 8, 2023.
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 April 25, 2023, Cboe BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') 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 BZX Exchange, Inc. (the ``Exchange'' or ``BZX Options'')
proposes to amend Rule 21.8. 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/equities/regulation/rule_filings/bzx/">http://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.
[[Page 30818]]
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 21.8 to describe the impact on
option order priority of a cancel/replace message, including a ``no-
change'' order \3\ (i.e., an order submitted to cancel or replace a
resting order that does not change any terms of an order). The Rules
are currently silent regarding how the System handles a cancel-replace
message (that either changes or does not change any terms of the
resting order). The Exchange recently determined that if the System
receives a no-change order, the resting order will lose its priority
position; however, if the System receives a ``no-change'' bid or offer
in a bulk message, the resting bid or offer will not lose its priority
position. The Exchange proposes to harmonize the handling of all no-
change orders and quotes so that any ``no-change'' order or bulk
message bid or offer will lose priority and describe this behavior in
the Exchange's Rules.
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\3\ In this context, the term ``order'' includes bids and offers
submitted in bulk messages. A bulk message means a bit or offer
included in a single electronic message a user submits with an M
(Market-Maker) capacity to the Exchange in which the user may enter,
modify, or cancel up to an Exchange-specified number of bids and
offers. See Rule 16.1 (definition of bulk message, which provides
that the System handles a bulk message bid or offer in the same
manner as it handles an order or quote, unless the Rules specify
otherwise).
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Additionally, the Exchange proposes to describe in the Exchange's
Rules how the System in general handles all cancel/replace messages
submitted by users, including those that change or do not change the
price and size of a resting order's terms. Specifically, the Exchange
proposes to codify current System functionality that causes a resting
order to lose its priority position (including if the price of an order
is changed or the quantity is increased) if any cancel/replace message
is submitted if any term other than a decrease to the quantity, the Max
Floor (if a Reserve Order),\4\ or the stop price (if a Stop or Stop
Limit Order) \5\ is modified.
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\4\ ``Reserve Orders'' are limit orders that have both a portion
of the quantity displayed (``Display Quantity'') and with a reserve
portion of the quantity (``Reserve Quantity'') that is not
displayed. Both the Display Quantity and Reserve Quantity of the
Reserve Order are available for potential execution against incoming
orders. If the Display Quantity of a Reserve Order is fully
executed, the System will, in accordance with the user's
instruction, replenish the Display Quantity from the Reserve
Quantity using one of the replenishment instructions set forth in
the Rules. If the remainder of an order is less than the
replenishment amount, the Exchange will replenish and display the
entire remainder of the order. A user must instruct the Exchange as
to the quantity of the order to be initially displayed by the System
(``Max Floor'') when entering a Reserve Order, which is also used to
determine the replenishment amount. A new timestamp is created for
both the Display Quantity and the Reserve Quantity of the order each
time it is replenished from reserve. See Rule 21.1(d)(1).
\5\ ``Stop Orders'' are orders that become market orders when
the stop price is elected. ``Stop Limit Orders'' are orders that
become limit orders when the stop price is elected. A Stop or Stop
Limit Order to buy is elected when the consolidated last sale in the
option occurs at or above, or the NBB is equal to or higher than,
the specified stop price. A Stop or Stop Limit Order to sell is
elected when the consolidated last sale in the option occurs at or
below, or the NBO is equal to or lower than, the specified stop
price. See Rule 21.1(d)(10) and (11).
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Therefore, the proposed rule change amends Rule 21.8 to add that if
a user submits a cancel/replace message for a resting order, regardless
of whether the cancel/replace message modifies any terms of the resting
order, the order loses its priority position and is placed in a
priority position based on the time the System receives the cancel/
replace message, unless the user only (1) decreases the quantity of an
order, (2) modifies the Max Floor (if a Reserve Order), or (3) modifies
the stop price (if a Stop or Stop-Limit order), in which case the order
retains its priority position.
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.\6\ Specifically, the
Exchange believes the proposed rule change is consistent with the
section 6(b)(5) \7\ 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) \8\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(5).
\8\ Id.
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In particular, the Exchange believes the proposed rule change will
remove impediments to and perfect the mechanism of a free and open
market as well as protect investors by adding transparency to the Rules
regarding how the System handles all cancel/replace messages, including
those that change no order terms. The Exchange believes consistency in
handling of all no-change orders and quotes will simplify order
handling, which will promote just and equitable principles of trade and
thus further benefit investors. The Exchange believes it is reasonable
for a user's resting order to lose priority if that user submits a
cancel/replace order, including a no-change order, to replace that
resting order (other than the three proposed exceptions). Ultimately,
the purpose of a cancel and replace message is to replace a resting
order with a new order; therefore, it is appropriate for the System to
treat that replacement order as a new order for purposes of priority.
Despite the fact that a cancel/replace message may not modify the price
or size of a resting order (and thus has no investment purpose), a user
elected to send that new order to the Exchange despite having an
identical order resting on the Exchange's book and used System capacity
to do so. Therefore, the Exchange believes it promotes just and
equitable principles of trade to treat that replacement order as a new
order for priority purposes. The Exchange believes the proposed rule
change encourages users to submit to the Exchange only bona fide
cancel/replace orders that have legitimate investment purposes and
discourages use of System capacity to send unnecessary message traffic.
The Exchange believes it will remove impediments to and perfect the
mechanism of a free and open market as well as protect investors by
adding transparency to codify current System functionality regarding
all cancel/replace messages, including those that do not cause a loss
of priority position. Under current System functionality, a cancel/
replace order that changes the price of a resting order or increases
the size of a resting order the order loses its priority position and
is placed in a
[[Page 30819]]
priority position based on the time the System receives the cancel/
replace message, as increasing the price or quantity of a resting order
could cause it to gain priority over other resting orders if it did not
otherwise get a new timestamp. Additionally, under current System
functionality, cancel/replace order that decreases the size of a
resting order (and changes no other terms) does not result in a loss of
priority position. Unlike a no-change order, an order to reduce the
size of a resting order may have a legitimate investment purpose, such
as to reduce execution risk, but would not impact its priority compared
to other resting orders (e.g., resting orders are often decreased in
size if they receive partial execution, and the remainders retain their
priority status; unlike an increase in size, a decrease in size would
not cause a resting order to otherwise gain priority over other resting
orders).
Additionally, under current System functionality, a cancel/replace
message that changes the Max Floor (if a Reserve Order) or the stop
price (if a Stop or Stop-Limit order) and no other terms will not cause
a resting order to lose priority because it is unnecessary given the
handling of those orders and the fact that at that time there is no
priority to lose. Such handling is consistent with the definitions and
handling of both of those order types. Specifically, as set forth in
the definition of a Reserve Order, the Max Floor amount is relevant for
replenishment of the Display Quantity of the order after execution, and
once replenished, the System creates a new timestamp for both the
Display Quantity and Reserve Quantity of the order each time it is
replenished from reserve (i.e., prioritizes it in the book at the time
of replenishment). Therefore, there is no need for a loss in priority
due to a change in the Max Floor amount because that order will have
its priority reset once it is replenished with that new amount.
Similarly, as set forth in the definitions of Stop and Stop-Limit
orders, those orders become market or limit orders, respectively, once
triggered and thus placed on the book as market or limit orders and
prioritized based on that time. The stop price is the piece of
information that determines when these orders will be triggered. As a
result, there is no need for an order to lose priority due to a change
in the stop price given that those orders have not yet been prioritized
on the Book and will be prioritized once triggered and entered into the
Book for potential execution.
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 System will handle
all cancel/replace orders from all users in the same manner. All
cancel/replace orders, including all no-change orders, except for the
three exceptions, will cause the resting order to lose priority. The
three types of cancel/replace orders that will not cause a resting
order to lose priority are consistent with current order handling
rules.
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 the
proposed rule change only impacts priority of orders resting on the
Exchange's book and thus will have no impact on terms of an order that
are disseminated to market participants or on trading outside of 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
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 \9\ and
Rule 19b-4(f)(6) \10\ 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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\9\ 15 U.S.C. 78s(b)(3)(A).
\10\ 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#85f7f0e9e0a8e6eae8e8e0ebf1f6c5f6e0e6abe2eaf3"><span class="__cf_email__" data-cfemail="bbc9ced7de96d8d4d6d6ded5cfc8fbc8ded895dcd4cd">[email protected]</span></a>. Please include
File Number SR-CboeBZX-2023-029 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-2023-029. 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 offices of the Exchange. Do not include
personal identifiable information in submissions; you should submit
only information that you wish to make available publicly. We may
redact in part or withhold entirely from publication submitted material
that is obscene or subject to copyright protection. All submissions
should refer to File Number SR-CboeBZX-2023-029, and should be
submitted on or before June 2, 2023.
[[Page 30820]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-10128 Filed 5-11-23; 8:45 am]
BILLING CODE 8011-01-P
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