Notice2023-11925
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Its Fees Schedule
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
June 6, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 108 (Tuesday, June 6, 2023)</title>
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[Federal Register Volume 88, Number 108 (Tuesday, June 6, 2023)]
[Notices]
[Pages 37102-37107]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-11925]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97630; File No. SR-CBOE-2023-028]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Its Fees Schedule
May 31, 2023.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on May 19, 2023, 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 Fees Schedule. 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 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 its Fees Schedule to modify the fee
for the SPX (and SPXW) Floor Market-Maker Tier Appointment Fee.\3\
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\3\ The Exchange initially filed the proposed fee change, among
other changes, on June 1, 2022 (SR-CBOE-2022-026). On June 10, 2022,
the Exchange withdrew that filing and submitted SR-CBOE-2022-029. On
August 5, 2022, the Exchange withdrew that filing and submitted SR-
CBOE-2022-042. On September 26, 2022, the Exchange withdrew that
filing and submitted SR-CBOE-2022-050 to address the proposed fee
change relating to the SPX/SPXW Floor Market-Maker Tier Appointment
Fee. On November 23, 2022, the Exchange advised of its intent to
withdraw that filing and submitted SR-CBOE-2022-060. On January 20,
2023, the Exchange withdrew SR-CBOE-2022-060 and submitted SR-CBOE-
2023-008. On March 21, 2023, the Exchange withdrew SR-CBOE-2023-008
and submitted SR-CBOE-2023-016. On May 19, 2023, the Exchange
withdrew SR-CBOE-2023-016 and submitted this proposal. No comment
letters were received in connection with any of the foregoing rule
filings.
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By way of background, Exchange Rule 5.50(g)(2) provides that the
Exchange may establish one or more types of tier appointments and
Exchange Rule 5.50(g)(2)(B) provides such tier appointments are subject
to such fees and charges the Exchange may establish. In 2010, the
Exchange established the SPX Tier Appointment and adopted an initial
fee of $3,000 per Market-Maker trading permit, per month.\4\ The SPX
(and SPXW) Tier Appointment fee for Floor Market-Makers currently
applies to any Market-Maker that executes any contracts in SPX and/or
SPXW on the trading floor.\5\ The Exchange now seeks to increase the
fee for the SPX/SPXW Floor Market-Maker Tier Appointment from $3,000
per Market-Maker Floor Trading Permit to $5,000 per Market-Maker Floor
Trading Permit.
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\4\ See Securities Exchange Act Release No. 62386 (June 25,
2010), 75 FR 38566 (July 2, 2010) (SR-CBOE-2010-060).
\5\ The Exchange notes that the fee is not assessed to a Market-
Maker Floor Permit Holder who only executes SPX (including SPXW)
options transactions as part of multi-class broad-based index spread
transactions. See Cboe Options Fees Schedule, Market-Maker Tier
Appointment Fees, Notes.
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In connection with the proposed change, the Exchange also proposes
to update Footnote 24 in the Fees Schedule, as well as remove the
reference to Footnote 24 in the Market-Maker Tier Appointment Fee
Table. By way of background, in June 2020, the Exchange adopted
Footnote 24 to describe pricing changes that would apply for the
duration of time the Exchange trading floor was being operated in a
modified manner in
[[Page 37103]]
connection with the COVID-19 pandemic.\6\ Among other changes, Footnote
24 provided that the monthly fee for the SPX/SPXW Floor Market-Maker
Tier Appointment Fee was to be increased to $5,000 per Trading Permit
from $3,000 per Trading Permit. As the Exchange now proposes to
maintain the $5,000 rate on a permanent basis (i.e., regardless of
whether the Exchange is operating in a modified state due to COVID-19
pandemic), the Exchange proposes to eliminate the reference to the SPX/
SPXW Floor Market-Maker Tier Appointment Fee in Footnote 24.\7\
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\6\ See Securities Exchange Act Release No. 89189 (June 30,
2020), 85 FR 40344 (July 6, 2020) (SR-CBOE-2020-058).
\7\ The Exchange notes that since its transition to a new
trading floor facility on June 6, 2022, it has not been operating in
a modified manner. As such Footnote 24 (i.e., the modified fee
changes it describes) does not currently apply.
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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.\8\ Specifically, the
Exchange believes the proposed rule change is consistent with the
section 6(b)(5) \9\ 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) \10\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers. The Exchange also believes the proposed rule
change is consistent with section 6(b)(4) of the Act, which requires
that Exchange rules provide for the equitable allocation of reasonable
dues, fees, and other charges among its Trading Permit Holders and
other persons using its facilities.
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\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(5).
\10\ Id.
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The Exchange operates in a highly competitive environment. On May
21, 2019, the SEC Division of Trading and Markets issued non-rulemaking
fee filing guidance titled ``Staff Guidance on SRO Rule Filings
Relating to Fees'' (``Fee Guidance''), which provided, among other
things, that in determining whether a proposed fee is constrained by
significant competitive forces, the Commission will consider whether
there are reasonable substitutes for the product or service that is the
subject of a proposed fee.\11\ As described in further detail below,
the Exchange believes substitutable products \12\ are in fact available
to market participants, including in the Over-the-Counter (OTC)
markets. Indeed, there are currently 16 registered options exchanges
that trade options, with a 17th options exchange expected to launch in
2023. Based on publicly available information, no single options
exchange has more than 15% of the market share as of January 19,
2023.\13\ Further, low barriers to entry mean that new exchanges may
rapidly and inexpensively enter the market and offer additional
substitute platforms to further compete with the Exchange and the
products it offers, including exclusively listed products as discussed
further below. For example, there are 3 exchanges that have been added
in the U.S. options markets in the last 5 years (i.e., Nasdaq MRX, LLC,
MIAX Pearl, LLC, and MIAX Emerald LLC) and one additional options
exchange that is expected to launch in 2023 (i.e., MEMX LLC).
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\11\ See Chairman Jay Clayton, Statement on Division of Trading
and Markets Staff Fee Guidance, June 12, 2019. The Fee Guidance also
recognized that ``products need to be substantially similar but not
identical to be substitutable.''
\12\ A substitute, or substitutable good, in economics and
consumer theory refers to a product or service that consumers see as
essentially the same or similar-enough to another product. See
<a href="https://www.investopedia.com/terms/s/substitute.asp">https://www.investopedia.com/terms/s/substitute.asp</a>.
\13\ See Cboe Global Markets U.S. Options Market Volume Summary
(March 17, 2023), available at <a href="https://markets.cboe.com/us/options/market_statistics/">https://markets.cboe.com/us/options/market_statistics/</a>.
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The Exchange believes that competition in the marketplace
constrains the ability of exchanges to charge supracompetitive fees for
access to its products exclusive to that market (``proprietary
products''). Notably, just as there is no regulatory requirement to
become a member of any one options exchange, there is also no
regulatory requirement for any market participant to participate on the
Exchange in any particular capacity, including as a Market Maker, nor
trade any particular product. Additionally, there is no requirement
that any Exchange create or indefinitely maintain any particular
product.\14\ The Exchange also highlights that market participants may
trade an exchange's proprietary products through a third-party without
directly or indirectly connecting to the exchange. Further, market
participants, including Market-Makers, may trade the Exchange's
products, including proprietary products, on or off the Exchange's
trading floor (i.e., all products are available both electronically and
via open outcry on the Exchange's trading floor). Particularly, market
participants are not obligated to trade on the Exchange's trading floor
and therefore a market participant, including Market-Makers, can choose
to trade a product electronically instead of on the Exchange's trading
floor at any time and for any reason, including due to an assessment of
the reasonableness of fees charged. Indeed, the Exchange notes that
only one Market-Maker TPH trades SPX exclusively on the floor. The
Exchange notes that nothing precludes such TPH from also deciding to
trade SPX electronically. Rather, what products a market participant
chooses to trade, and the manner in which they choose to do so, is
ultimately determined by factors relevant and specific to each market
participant, including its business model and associated costs.
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\14\ If an option class is open for trading on another national
securities exchange, the Exchange may delist such option class
immediately. For proprietary products, the Exchange may determine to
not open for trading any additional series in that option class; may
restrict series with open interest to closing transactions, provided
that, opening transactions by Market-Makers executed to accommodate
closing transactions of other market participants and opening
transactions by TPH organizations to facilitate the closing
transactions of public customers executed as crosses pursuant to and
in accordance with Rule 6.74(b) or (d) may be permitted; and may
delist the option class when all series within that class have
expired. See Cboe Rule 4.4, Interpretations and Policies .11.
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Additionally, market participants may trade any options product,
including proprietary products, in the unregulated Over-the-Counter
(OTC) \15\ markets for which there is no requirement for fees related
to those markets to be public. Given the benefits offered by trading
options on a listed exchange, such as increased market transparency and
heightened contra-party creditworthiness due to the role of the Options
Clearing Corporation as issuer and guarantor, the Exchange generally
seeks to incentivize market participants to trade options on an
exchange, which further constrains fees that an Exchange may assess.
Market participants may also access other exchanges to trade other
similar or competing proprietary or multi-listed products. Alternative
[[Page 37104]]
products to the Exchange's proprietary products may include other
options products, including options on ETFs or options futures, as well
as particular ETFs or futures. Particularly, exclusively listed SPX
options (i.e., a proprietary product) may compete with the following
products traded on other markets: multiply-listed SPY options (options
on the ETF that replicates performance of the S&P 500), E-mini S&P 500
Options (options on futures), and E-Mini S&P 500 futures (futures on
index). Indeed, as a practical matter, investors utilize SPX and SPY
options and their respective underlying instruments and futures to gain
exposure to the same benchmark index: the S&P 500.
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\15\ Derivatives that are functionally identical to the
Exchange's exclusively-listed options, including SPX, can be traded
on the OTC market.
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Notably, the Commission itself has affirmed that notwithstanding
the exclusive nature of SPX options, alternatives to this product exist
in the marketplace. For example, in approving a PM-settled S&P 500 cash
settled contract (``SPXPM'') on its affiliate exchange Cboe C2
Exchange, Inc. (which product was later transferred to the Exchange),
the Commission stated that it ``recognizes the potential impact on
competition resulting from the inability of other options exchanges to
list and trade SPXPM. In acting on this proposal, however, the
Commission has balanced the potentially negative competitive effects
with the countervailing positive competitive effects of C2's proposal.
The Commission believes that the availability of SPXPM on the C2
exchange will enhance competition by providing investors with an
additional investment vehicle, in a fully-electronic trading
environment, through which investors can gain and hedge exposure to the
S&P 500 stocks. Further, this product could offer a competitive
alternative to other existing investment products that seek to allow
investors to gain broad market exposure. Also, we note that it is
possible for other exchanges to develop or license the use of a new or
different index to compete with the S&P 500 index and seek Commission
approval to list and trade options on such index.'' \16\
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\16\ See Securities Exchange Act Release No. 65256 (September 2,
2011), 76 FR 55969 (September 9, 2011) (SR-C2-2011-008). The
Exchanges notes SPXPM was later transferred to the Exchange, where
it currently remains listed. See Securities Exchange Act Release No.
68888 (February 8, 2013), 78 FR 10668 (February 14, 2013) (SR-CBOE-
2012-120).
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The economic equivalence of SPX and SPY options was further
acknowledged and cited as a basis for the elimination of position
limits for SPY options across the industry not long after the
Commission's findings above in 2011.\17\ Moreover, other exchanges have
acknowledged that SPY options are considered to be an economic
equivalent to SPX options.\18\
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\17\ See, e.g., Securities Exchange Act Release No. 67936
(September 27, 2012), 77 FR 60491 (October 3, 2012) (SR-BOX-2012-
013). See also Securities Exchange Act Release No. 67999 (October 5,
2012), 77 FR 62295 (October 12, 2012) (SR-Phlx-2012-122).
\18\ NYSE Euronext, on behalf of its subsidiary options
exchanges, NYSE Arca Inc. and NYSE Amex LLC, commented on a Nasdaq
OMX PHLX LLC (``PHLX'') proposal to increase the position limits for
SPY options, noting ``. . . when a contract that is considered by
many to be economically equivalent to SPY options--namely SPX
options . . .'' See (<a href="http://www.sec.gov/comments/sr-phlx-2011-58/phlx201158-1.pdf">http://www.sec.gov/comments/sr-phlx-2011-58/phlx201158-1.pdf</a>).
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Additionally, in connection with a proposed amendment to the
National Market System Plan Governing the Consolidated Audit Trail
(``CAT NMS Plan'') the Commission again discussed the existence of
competition in the marketplace generally, and particularly for
exchanges with unique business models.\19\ Similar to, and consistent
with, its findings in approving SPXPM, the Commission recognized that
while some exchanges may have a unique business model that is not
currently offered by competitors, a competitor could create similar
business models if demand were adequate, and if a competitor did not do
so, the Commission believes it would be likely that new entrants would
do so if the exchange with that unique business model was otherwise
profitable.\20\ Accordingly, although the Exchange may have proprietary
products not offered by other competitors, not unlike unique business
models, a competitor could create similar products to an existing
proprietary product if demand were adequate. As an illustration of this
point, MIAX created its exclusive product SPIKES specifically to
compete against VIX options, another product exclusive to the
Exchange.\21\
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\19\ See Securities Exchange Act Release No. 86901 (September 9,
2019), 84 FR 48458 (September 13, 2019) (File No. S7-13-19).
\20\ Id.
\21\ MIAX has described SPIKES options as ``designed
specifically to compete head-to-head against Cboe's proprietary
VIX[supreg] product.'' See MIAX Press Release, SPIKES Options
Launched on MIAX, February 21, 2019, available at <a href="https://www.miaxoptions.com/sites/default/files/press_release-files/MIAX_Press_Release_02212019.pdf">https://www.miaxoptions.com/sites/default/files/press_release-files/MIAX_Press_Release_02212019.pdf</a>.
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The Commission has also acknowledged competition with respect to
OTC products. For example, in its proposal to eliminate position and
exercise limits for broad-based index options, the Exchange had noted
that ``[i]nvestors who trade listed options on the [Exchange] are
placed at a serious disadvantage in comparison to the OTC market where
index options and other types of index based derivatives (e.g.,
forwards and swaps) are not subject to position and exercise limits.
Member firms continue to express concern to the Exchange that position
limits on [Exchange] products are an impediment to their business and
that they have no choice but to move their business to the OTC market
where position limits are not an issue.'' \22\ In approving the
Exchange's proposal to eliminate position and exercise limits for
certain broad-based index options, including SPX, on a two-year pilot
basis, the Commission stated that ``the index options and other types
of index-based derivatives (e.g., forwards and swaps) are not subject
to position and exercise limits in the OTC market. The Commission
believes that eliminating position and exercise limits for the SPX . .
. options on a two-year pilot basis will better allow [the Exchange] to
compete with the OTC market.'' \23\
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\22\ See Securities Exchange Act Release No. 40158 (July 1,
1998), 63 FR 37153 (July 9, 1998) (SR-CBOE-1998-23).
\23\ See Securities Exchange Act Release No. 40969 (January 22,
1999), 64 FR 4911 (February 1, 1999) (SR-CBOE-1998-23). The pilot
program that was originally allowed for the elimination of position
and exercise limits of SPX was approved on a permanent basis in
2001. See Securities Exchange Act Release No. 44994 (November 2,
2001), 66 FR 55722 (October 26, 2001) (SR-CBOE-2001-22).
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The Exchange is not aware of any changes in the market that make
the Commission's foregoing findings and assertions relating to
competition for SPX and exclusively listed products generally any less
true today. In fact, competitive forces within the market have resulted
in an expansion of products. For example, in recent years, the
exchange-traded fund (``ETF'') industry has experienced significant
growth and diversification. ETFs that hold options have become
increasingly popular. There are several examples of ETFs that hold SPX
options and others that hold SPY options, as both types of options may
offer investors different benefits. Accordingly, if a market
participant views the Exchange's proprietary products, including SPX
and SPXW, as more or less attractive than the competition they can and
do switch between substantially similar products. Despite having
economic differences, substitute products have significant similarities
and may have characteristics that cause investors to find those
products to beneficial to SPX options (e.g., strike availability,
settlement, liquidity, tax reasons, product size). As such, the
Exchange is subject to competition and does not possess anti-
competitive pricing power,
[[Page 37105]]
even with its offering of proprietary products such as SPX.
The Exchange also believes the proposed fee is reasonable as the
Exchange believes it remains commensurate with the value of operating
as a Market-Maker on the Exchange's trading floor in the SPX pit. For
example, the Exchange recently transitioned from its previous trading
floor, which it had occupied since the 1980s, to a brand new, modern
and upgraded trading floor facility. The Exchange believes customers
continue to find value in open outcry trading and rely on the floor for
price discovery and the deep liquidity provided by floor Market-Makers.
The build out of a new modern trading floor reflects the Exchange's
commitment to open outcry trading and focus on providing the best
possible trading experience for its customers, including Market-Makers.
For example, the new trading floor provides a state-of-the-art
environment and technology and more efficient use of physical space,
which the Exchange believes better reflects and supports the current
trading environment. The Exchange also believes the new infrastructure
provides a cost-effective, streamlined, and modernized approach to
floor connectivity. For example, the new trading floor has more than
330 individual kiosks, equipped with top-of-the-line technology, that
enable floor participants to plug in and use their devices with greater
ease and flexibility. The new trading floor provided by the Exchange
also provides floor Market-Makers with more space and increased
capacity to support additional floor-based traders on the trading
floor. Moreover, the new trading floor is conveniently located across
the street from the LaSalle trading floor, which resulted in minimal
disruption to TPH floor participants, many of whom have office space
nearby, including in the same facility in which the trading floor is
located. The Exchange believes the new location, which was also home to
the Exchange's original trading floor in the 1970s and early 1980s, is
also able to support robust trading floor infrastructure as it
currently hosts several banks, trading firms and even trading floors
(i.e., trading floors for the Chicago Mercantile Exchange and BOX
Options Market). The Exchange also believes the relocation to the new
trading floor resulted in a streamlined and simplified trading floor
and facility fee structure, as further described in the Exchange's
proposal to amend certain facility fees in connection with the new
trading floor.\24\
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\24\ See Securities Exchange Act Release No. 96001 (October 6,
2022), 87 FR 62129 (October 13, 2022) (SR-CBOE-2022-049).
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The Exchange further believes the proposal to increase the fee is
reasonable as the Exchange has provided further value to Market-Makers
by expanding the suite of SPX products available to Market-Makers on
the trading floor since 2010 when the SPX (and SPXW) Floor Market-Maker
Tier Appointment fee was first adopted. For example, in 2013, the
Exchange began listing SPXPM.\25\ In 2016, the Exchange began listing
SPX Weekly options with Monday and Wednesday expirations.\26\ Most
recently in 2022, the Exchange added SPX Weekly options with Tuesday
and Thursday expirations.\27\ The introduction of these products means
SPX options now have an available expiration every trading day of the
week, thereby providing Floor Market-Makers with additional
opportunities to trade SPX and greater trading flexibility as compared
to 2010. Moreover, average daily volume (ADV) in SPX has increased
nearly 30%. Therefore, increasing the price to trade SPX on the trading
floor is consistent with the simple law of supply and demand--demand to
trade SPX options has increased (as evidenced by the ADV increase), and
therefore the Exchange is proposing to increase the price to trade
these options. Additionally, the notional ADV in SPX has increased over
380% on the trading floor since July 2010 when the fee was first
adopted. Given this significant increase in the cost of an SPX option
contract, compared to the SPX Tier Appointment Fee, it is cheaper to
trade SPX options on the trading floor than it was in 2010 when the fee
was first adopted.\28\
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\25\ See Securities Exchange Act Release No. 68888 (February 8,
2013), 78 FR 10668 (February 14, 2013) (SR-CBOE-2012-120).
\26\ See Securities Exchange Act Release No. 76909 (January 14,
2016), 81 FR 3512 (January 21, 2016) (SR-CBOE-2015-106). See also
Securities Exchange Act Release No. 78531 (August 10, 2016), 81 FR
54643(August 16, 2016) (SR-CBOE-2016-146).
\27\ See Securities Exchange Act Release No. 94682 (April 12,
2022), 87 FR 22993 (April 18, 2022) (CBOE-2022-005).
\28\ On December 31, 2010, the S&P 500 Index closed at 1,257.64,
making the notional value of one SPX contract $125,764 on that date.
On March 20, 2023, the S&P 500 Index closed at 3,951.57, making the
notional value of one SPX contract $395,157 on that date. Therefore,
based on the cost of the SPX Floor Market Maker Tier Appointment fee
of $3,000 in 2010 and $5,000 in 2023, it is cheaper per SPX contract
despite the higher fee ($0.0239 ($3,000/$125,764) v. $0.0127
($5,000/$393,157)). Consistent with basic economic principles, if
the value of a good increases, it is reasonable for the price of
that good to also increase.
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To demonstrate the value the Exchange believes Marker-Makers find
transacting with SPX on the trading floor (notwithstanding the proposed
fee change), Market-Maker presence on the new trading floor in SPX and
SPXW has actually increased. Particularly, as of December 30, 2022,
there are 12 additional Market-Makers trading SPX and SPXW on the
trading floor as compared to May 2022 (which was the month prior to the
proposed fee change being implemented on a permanent basis and
transition to the new trading floor).\29\ Further, in June 2022, the
month in which the proposed fee change took effect on the new trading
floor on a permanent basis, there were 5 additional Market-Makers
trading SPX and SPXW on the trading Floor as compared to May 2022.
Further, as of December 30, 2022, there are 4 additional Market-Makers
trading SPX and SPXW on the trading floor as compared to March 2020,
which was the last month the Exchange assessed $3,000 for the SPX and
SPXW Floor Market Maker Tier Appointment fee. The Exchange believes the
increasing SPX and SPXW Market-Maker presence on the trading floor
since the last time the Exchange assessed $3,000 for the SPX and SPXW
Floor Market Maker Tier Appointment fee (i.e., March 2020) and since
the time the current proposal was submitted (i.e., June 2020) speaks
not only to the value Market-Makers find in participating as a Market-
Maker in SPX and SPXW on the (new and improved) trading floor, but also
to the reasonableness of the fee. Moreover, as established above, if a
Market-Maker viewed trading SPX and SPXW as less attractive than
competitive products, including those described above, they can switch
between such similar products and choose not to remain as a Market-
Maker trading SPX and SPX on the trading floor. As such, the Exchange
is subject to competition and does not possess anti-competitive pricing
power, even with its offering of proprietary products such as SPX.
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\29\ As noted above, the Exchange has been assessing $5,000 for
the SPX and SPXW Floor Market Maker Tier Appointment fee since June
2020 as the Exchange was operating in a modified state until its
transition to the new trading floor in June 2022, at which time the
Exchange submitted this proposal to make such increase permanent.
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Moreover, as noted above, market participants are not obligated to
trade on the Exchange's trading floor and therefore a market
participant, including Market-Makers, can choose to trade a product
electronically instead of on the Exchange's trading floor at any time
and for any reason, including due to an assessment of the
reasonableness of fees
[[Page 37106]]
charged. In particular, as of January 2023, SPX and SPXW open outcry
volume accounted for approximately 26% of total SPX and SPXW volume
(i.e., approximately 74% is traded electronically). Accordingly,
Market-Makers may continue to choose to trade SPX and SPXW
electronically should they deem fees associated with trading on the
trading floor as unreasonable, further demonstrating that the Exchange
is constrained from imposing unreasonable and supracompetitive fees.
The Exchange notes this applies to all SPX Market-Makers, even a
Market-Maker who may currently not participate electronically and only
trades SPX in open outcry. Should any Market-Maker find the costs for
executing SPX in open outcry unreasonable based on its business model
and needs, such Market-Maker could instead elect to execute SPX solely
electronically (or choose to trade other competing products).
Accordingly, the Exchange believes that SPX Floor Market-Makers that
continue to participate in open outcry trading find value in doing so.
The Exchange finally believes its proposal to increase the SPX (and
SPXW) Floor Market-Maker Tier Appointment fee is reasonable because the
proposed amount is not significantly higher than was previously
assessed (and is the same amount that has been assessed under Footnote
24 for the last two years). Additionally, the Exchange believes its
proposal to increase the fee is reasonable as the fee amount has not
been increased since it was adopted over 12 years ago in July 2010.\30\
Particularly, since its adoption 12 years ago, there has been notable
inflation. Indeed, the dollar has had an average inflation rate of 2.6%
per year between 2010 and today, producing a cumulative price increase
of approximately 37% inflation since 2010, when the SPX and SPXW Floor
Market-Maker Tier Appointment was first adopted.\31\ Additionally, for
nearly ten years, Market-Makers were only subject to the original rate
that was adopted in 2010 (i.e., $3,000) notwithstanding an average
inflation rate of 2.64% per year. The Exchange acknowledges its
proposed fee exceeds 37%. However, the Exchange believes such increase
is reasonable given many Market-Makers for nearly 10 years did not have
to pay increased fees notwithstanding yearly inflation. For example, by
not increasing the fee each year to correspond to the average per year
inflation rate of 2.6%, Market-Makers trading SPX on the trading floor
since 2011 through 2020 (when then Exchange originally increased the
fee due to the COVID-19 pandemic) have saved nearly $10,000. The
Exchange therefore believes that proposing a fee in excess of the
cumulative 37% inflation rate is still reasonable, especially when
considered in conjunction with all of the additional and further
rationale discussed above. The Exchange is also unaware of any standard
that suggests any fee proposal that exceeds a yearly or cumulative
inflation rate is unreasonable.
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\30\ See Securities Exchange Act Release No. 62386 (June 25,
2010), 75 FR 38566 (July 2, 2010) (SR-CBOE-2010-060).
\31\ See <a href="https://www.officialdata.org/us/inflation/2010?amount=1">https://www.officialdata.org/us/inflation/2010?amount=1</a>.
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The proposed change is also equitable and not unfairly
discriminatory as it applies to all Market-Makers that trade SPX on the
trading floor uniformly. The Exchange believes it's reasonable
equitable and not unfairly discriminatory to increase the SPX/SPXW
floor Market-Maker Tier Appointment fee and not the SPX/SPXW electronic
Market-Maker Tier Appointment fee, as Floor Market-Makers are not
subject to other costs that electronic Market-Makers are subject to.
For example, while all Floor Market-Makers automatically have an
appointment to trade open outcry in all classes traded on the Exchange
and at no additional cost per appointment, electronic Market-Makers
must select an appointment in a class (such as SPX) to make markets
electronically and such appointments are subject to fees under the
Market-Maker Electronic Appointments Sliding Scale.\32\
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\32\ See Cboe Options Rules 5.50(a) and (e). See also Cboe
Options Fees Schedule, Market-Maker EAP Appointments Sliding Scale.
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The Exchange lastly notes that it is not required by the Exchange
Act, nor any other rule or regulation, to undertake a cost-of-service
or rate-making approach with respect to fee proposals. Moreover,
Congress's intent in enacting the 1975 Amendments to the Act was to
enable competition--rather than government order--to determine prices.
The principal purpose of the amendments was to facilitate the creation
of a national market system for the trading of securities. Congress
intended that this ``national market system evolve through the
interplay of competitive forces as unnecessary regulatory restrictions
are removed.'' \33\ Other provisions of the Act confirm that intent.
For example, the Act provides that an exchange must design its rules
``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.'' \34\ Likewise, the Act grants the
Commission authority to amend or repeal ``[t]he rules of [an] exchange
[that] impose any burden on competition not necessary or appropriate in
furtherance of the purposes of this chapter.'' \35\ In short, the
promotion of free and open competition was a core congressional
objective in creating the national market system.\36\ Indeed, the
Commission has historically interpreted that mandate to promote
competitive forces to determine prices whenever compatible with a
national market system. Accordingly, the Exchange believes it has met
its burden to demonstrate that its proposed fee change is reasonable
and consistent with the immediate filing process chosen by Congress,
which created a system whereby market forces determine access fees in
the vast majority of cases, subject to oversight only in particular
cases of abuse or market failure. Lastly, and importantly, the Exchange
believes that, even if it were possible as a matter of economic theory,
cost-based pricing for the proposed fee would be so complicated that it
could not be done practically.
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\33\ See H.R. Rep. No. 94-229, at 92 (1975) (Conf. Rep.)
(emphasis added)
\34\ 15 U.S.C. 78f(b)(5).
\35\ 15 U.S.C. 78f(8).
\36\ See also 15 U.S.C. 78k-l(a)(1)(C)(ii) (purposes of Exchange
Act include to promote ``fair competition among brokers and dealers,
among exchange markets, and between exchange markets and markets
other than exchange markets''); Order, 73 FR at 74781 (``The
Exchange Act and its legislative history strongly support the
Commission's reliance on competition, whenever possible, in meeting
its regulatory responsibilities for overseeing the SROs and the
national market system.'').
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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 changes will impose any burden on
intramarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act because the proposed changes
would be applied in the same manner to all Floor Market-Makers that
trade SPX (and/or SPXW). As noted above, the Exchange believes it's
reasonable to increase the SPX/SPWX Tier Appointment Fee for only Floor
Market-Makers only as opposed to electronic Market-Makers, because
electronic Market-Makers are subject to costs Floor Market-Makers are
not, such as the fees under Market-Maker EAP Appointments Sliding
Scale.
[[Page 37107]]
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 changes apply only to a fee relating to a product
exclusively listed on the Exchange. Additionally, the Exchange operates
in a highly competitive market. In addition to Cboe Options, TPHs have
numerous alternative venues that they may participate on (which, as
described above, list products that compete with SPX options) and
direct their order flow, including 15 other options exchanges (four of
which also maintain physical trading floors), as well as off-exchange
venues, where competitive products are available for trading. Based on
publicly available information, no single options exchange has more
than 15% of the market share of executed volume of options trades.\37\
Therefore, no exchange possesses significant pricing power in the
execution of option order flow. Moreover, as discussed above, the
Commission has repeatedly expressed its preference for competition over
regulatory intervention in determining prices, products, and services
in the securities markets. Specifically, in Regulation NMS, the
Commission highlighted the importance of market forces in determining
prices and SRO revenues and, also, recognized that current regulation
of the market system ``has been remarkably successful in promoting
market competition in its broader forms that are most important to
investors and listed companies.'' \38\ The fact that this market is
competitive has also long been recognized by the courts. In
NetCoalition v. Securities and Exchange Commission, the D.C. Circuit
stated as follows: ``[n]o one disputes that competition for order flow
is `fierce.' . . . As the SEC explained, `[i]n the U.S. national market
system, buyers and sellers of securities, and the broker-dealers that
act as their order-routing agents, have a wide range of choices of
where to route orders for execution'; [and] `no exchange can afford to
take its market share percentages for granted' because `no exchange
possesses a monopoly, regulatory or otherwise, in the execution of
order flow from broker dealers'. . . .''.\39\ Accordingly, the Exchange
does not believe its proposed changes to the incentive programs impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
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\37\ See Cboe Global Markets, U.S. Options Market Volume Summary
by Month (January 19, 2023), available at <a href="http://markets.cboe.com/us/options/market_share/">http://markets.cboe.com/us/options/market_share/</a>.
\38\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37499 (June 29, 2005).
\39\ NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010)
(quoting Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to section
19(b)(3)(A) of the Act \40\ and paragraph (f) of Rule 19b-4 \41\
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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\40\ 15 U.S.C. 78s(b)(3)(A).
\41\ 17 CFR 240.19b-4(f).
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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<ls-thn-eq> Send an email to <a href="/cdn-cgi/l/email-protection#dfadaab3baf2bcb0b2b2bab1abac9facbabcf1b8b0a9"><span class="__cf_email__" data-cfemail="cab8bfa6afe7a9a5a7a7afa4beb98ab9afa9e4ada5bc">[email protected]</span></a>.--Please
include File Number SR-CBOE-2023-028 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-2023-028. 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-2023-028 and should be submitted on
or before June 27, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
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\42\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-11925 Filed 6-5-23; 8:45 am]
BILLING CODE 8011-01-P
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