Notice2023-13212
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of Amendment Nos. 1 and 2, and Order Granting Accelerated Approval of Proposed Rule Change as Modified by Amendment Nos. 1 and 2 Relating to the Processing of Auction Responses
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 22, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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[Federal Register Volume 88, Number 119 (Thursday, June 22, 2023)]
[Notices]
[Pages 40878-40883]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-13212]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97738; File No. SR-CBOE-2022-051]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of Amendment Nos. 1 and 2, and Order Granting Accelerated
Approval of Proposed Rule Change as Modified by Amendment Nos. 1 and 2
Relating to the Processing of Auction Responses
June 15, 2023.
I. Introduction
On October 3, 2022, Cboe Exchange, Inc. (``Exchange'' or ``Cboe'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
amend Cboe Rule 5.25 relating to the processing of auction responses.
The proposed rule change was published for comment in the Federal
Register on October 20, 2022.\3\ On November 23, 2022, pursuant to
Section 19(b)(2) of the Act,\4\ the Commission designated a longer
period within which to approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
disapprove the proposed rule change.\5\ On January 18, 2023, the
Commission instituted proceedings under Section 19(b)(2)(B) of the Act
\6\ to determine whether to approve or disapprove the proposed rule
change.\7\ On April 10, 2023, the Exchange submitted Amendment No. 1 to
the proposed rule change, which replaced and superseded the proposed
rule change in its entirety.\8\ On April 14, 2023, pursuant to Section
19(b)(2) of the Act,\9\ the Commission designated a longer period
within which to approve or disapprove the proposed rule change, as
modified by Amendment No. 1.\10\ On May 16, 2023, the Exchange
submitted Amendment No. 2 to the proposed rule change, which replaced
and superseded the proposed rule change as modified by Amendment No. 1
in its entirety.\11\ The Commission is publishing notice of the filing
of Amendment Nos. 1 and 2 to solicit comment from interested persons,
and is approving the proposed rule change, as modified by Amendment
Nos. 1 and 2, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 96081 (October 14,
2020), 87 FR 63830.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 96380, 87 FR 73366
(November 29, 2022). The Commission designated January 18, 2023 as
the date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 96684, 88 FR 4243
(January 24, 2023).
\8\ In Amendment No. 1, the Exchange amended Cboe Rule 5.25 by:
(1) eliminating the Priority Queue functionality; (2) specifying in
the rule text the auctions to which the proposed new auction
response processing functionality would apply; and (3) stating that
the Exchange will announce the length of the proposed additional
auction response processing period via Exchange Notice. The Exchange
also provided additional detail regarding the order and auction
response process and further justification, and support for its
proposal. The full text of Amendment No. 1 is available on the
Commission's website at: <a href="https://www.sec.gov/comments/sr-cboe-2022-051/srcboe2022051-20163989-333985.pdf">https://www.sec.gov/comments/sr-cboe-2022-051/srcboe2022051-20163989-333985.pdf</a>.
\9\ 15 U.S.C. 78s(b)(2).
\10\ See Securities Exchange Act Release No. 97306, 88 FR 24455
(April 20, 2023). The Commission designated June 17, 2023 as the
date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to approve or disapprove
the proposed rule change, as modified by Amendment No. 1.
\11\ In Amendment No. 2, the Exchange amended Cboe Rule 5.25 to
explicitly state that the System will continue to process any
messages in its inbound queue that were received by the System
before the end of such period. The Exchange also amended the text of
Cboe Rule 5.25 to state that the Exchange-determined period of time
for additional processing shall be announced with reasonable advance
notice via Exchange Notice. The full text of Amendment No. 2 is
available on the Commission's website at <a href="https://www.sec.gov/comments/sr-cboe-2022-051/srcboe2022051-190759-376922.pdf">https://www.sec.gov/comments/sr-cboe-2022-051/srcboe2022051-190759-376922.pdf</a>.
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II. Self-Regulatory Organization's Description of the Proposal, as
Modified by Amendment Nos. 1 and 2
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''),\12\ Step Up Mechanism (``SUM''),\13\
Automated Improvement Mechanism (``AIM''),\14\ Complex AIM (``C-
AIM''),\15\ Solicitation Auction Mechanism (``SAM''),\16\ Complex SAM
(``C-SAM''),\17\ FLEX Auction Process,\18\ FLEX AIM \19\ and FLEX
SAM.\20\ The Exchange notes that eligible orders (``auctioned order'')
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. 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.\21\
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\12\ See Rule 5.33(d).
\13\ See Rule 5.35.
\14\ See Rule 5.37.
\15\ See Rule 5.38.
\16\ See Rule 5.39.
\17\ See Rule 5.40.
\18\ See Rule 5.72(c).
\19\ See Rule 5.73.
\20\ See Rule 5.74.
\21\ 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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By way of further background, Trading Permit Holders (``TPHs'') may
submit auction responses via logical port connectivity.\22\ Each
logical port
[[Page 40879]]
corresponds to a single running order handler application.\23\ Each
order handler application processes the messages it receives from the
connected TPH. This processing includes determining whether the message
contains the required information to enter the System and where to send
that message within the System (i.e., to which matching engine).
Messages are sent from an order handler application to a matching
engine via User Datagram Protocol (``UDP''). The Exchange has multiple
matching engines, each of which controls the book for one or more
classes of options listed for trading on the Exchange. The Exchange may
run multiple matching engine applications on a single server. Once at a
matching engine, the message is received at a server Network Interface
Card (``NIC''), which timestamps each message upon arrival and places
it in a queue. Currently, each matching engine processes all messages
it receives from a single queue from the NIC and prioritizes the
processing of all message traffic, including auction responses, in the
order in which the NIC received each message (i.e., in time priority).
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\22\ 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.
\23\ The Exchange has numerous order handlers and uses an
algorithm to determine at random which ports connect to which order
handlers This algorithm attempts to spread out a single TPH's ports
across order handlers as well as balance the number of ports that
connect to a single order handler.
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Auction response messages historically have waited in the same
queue as all other order and quote message traffic. As such, 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).\24\ 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.
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\24\ 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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In 2020, the Exchange submitted a proposed rule change to adopt
``Priority Queue'' functionality under Rule 5.25 to address the issue
of missed auction responses and increase the likelihood that submitted
auction responses would have the opportunity to participate in auctions
notwithstanding any potential deep queue of pending message
traffic.\25\ The Priority Queue functionality provides that auction
response messages are to be processed through one queue (i.e., the
Priority Queue), and all remaining messages are to be processed through
another queue (i.e., the General 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). Although the System would alternate between
the two queues, the Priority Queue would offer reduced latency as the
Priority Queue would consist only of auction responses, as compared to
the General Queue which would consist of all other message traffic,
(i.e., new orders/quote messages, cancel messages (including mass
cancel messages) and modify messages). The Exchange notes however, that
under the Priority Queue functionality auction responses not processed
by the conclusion of the auction response period would still be
canceled. As such, the Exchange ultimately determined to not implement
Priority Queue functionality and pursue alternative functionality that
it believed would provide a more efficient and streamlined approach and
further increase the likelihood that timely submitted auction responses
are able to participate in an applicable auction.
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\25\ See Securities Exchange Act Release No. 90173 (October 14,
2020), 85 FR 66673 (October 20, 2020) (SR-CBOE-2020-072).
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Particularly, the Exchange now proposes to adopt new functionality
under Rule 5.25 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.\26\ 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 by the System 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 which would
apply to all auction mechanisms and which would be announced with
reasonable advanced notice via Exchange Notice). That is, any auction
responses that were in the queue before the conclusion of the auction
(as identified by the NIC timestamp on the message) 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, thereby potentially providing customers with additional
opportunities for price improvement, while still providing a processing
cut off time to ensure auction executions aren't unduly delayed.
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\26\ Particularly, the proposed functionality would apply to the
following Exchange auction mechanisms: COA, SUM, AIM, C-AIM, SAM, C-
SAM, Flex Auction Process, FLEX AIM and FLEX SAM.
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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
[[Page 40880]]
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 and announced to market participants with reasonable advance
notice via Exchange Notice for that class in this example. Once that
auction response is up for 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.\27\ 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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\27\ 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 (i.e., 100 milliseconds) 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. The
Exchange also notes that it discussed the proposed maximum amount with
market participants who indicated that 100 milliseconds was acceptable
to them. 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. To the extent the Exchange
determines a lesser amount of time would be sufficient, the Exchange
could implement an additional amount of time for processing auction
responses that is less than 100 milliseconds, which time would be
announced with reasonable advance notice to market participants via
Exchange Notice. Additionally, 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 submitting responses with sufficient time to respond to,
compete for, and provide price improvement for orders, but also
continues to provide auctioned orders with quick executions that may
reduce market and execution risk. Further, the Exchange believes some
market participants choose to submit auction responses towards the end
of an auction response period to better ensure the response is at a
price that the market participant is willing to trade given the market
at the time the auction response period concludes. As such, merely
extending the auction response period in each auction would not itself
prevent auction responses from continuing to miss the auction
notwithstanding being timely submitted.
Finally, in light of the proposed change, the Exchange proposes to
modify Rule 5.25 to eliminate the Priority Queue functionality under
current subparagraph (c) as the Exchange proposes to implement the
proposed functionality in lieu of the Priority Queue functionality. As
discussed above, the Exchange adopted the Priority Queue 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. As noted
above, the Exchange never implemented the Priority Queue (nor did it
ever make any announcement to market participants as to if and when it
would be implemented) because it believed the functionality being
proposed herein would be a better approach in addressing missed auction
responses. Accordingly, the Exchange proposes to eliminate the now
obsolete language in order to avoid potential confusion as to how the
Exchange is processing auction responses.
Implementation Date
The Exchange proposes to announce the implementation date of the
proposed rule change in an Exchange Notice, to be published no later
than thirty (30) days following the approval date. The implementation
date will be no later than sixty (60) days following the approval date.
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.\28\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \29\ 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) \30\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\28\ 15 U.S.C. 78f(b).
\29\ 15 U.S.C. 78f(b)(5).
\30\ 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
[[Page 40881]]
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 orders with additional auction liquidity.
Indeed, the proposed rule change may allow more investors additional
opportunities to receive price improvement through an auction
mechanism. Additionally, because the proposed functionality may provide
liquidity providers that submit auction responses with additional
execution opportunities in auctions, the Exchange believes they may be
further encouraged to submit more auction responses, which may
contribute to a deeper, more liquid auction process that provides
investors with additional price improvement opportunities.
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. As described above, 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 (i.e., 100 milliseconds) 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. The
Exchange also discussed the proposed maximum amount of time with market
participants who indicated that 100 milliseconds was acceptable to
them. As represented above, 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. To the
extent the Exchange determines a lesser amount of time would be
sufficient, the Exchange could implement an additional amount of time
for processing auction responses that is less than 100 milliseconds,
which time would be announced with reasonable advance notice to market
participants via Exchange Notice. Additionally, all message traffic
(including auction responses) will continue to be processed in time-
priority.
While the Exchange may increase the length of auction response
periods to accommodate more auction responses, the Exchange believes
the proposed functionality better addresses the issue of missed auction
responses. Particularly, the Exchange believes the proposed rule change
will accommodate more auction responses while also mitigating market
risk that may accompany a longer auction period 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 provides
the auctioned order with fast executions. Additionally, the Exchange
believes TPHs may wait until the end of an auction response period
regardless of how long the Exchange sets it to in order to ensure they
are comfortable with the price the response may execute at the
conclusion of such auction. As such, extending the auction response
period in each auction would not itself prevent auction responses from
continuing to miss the auction notwithstanding being timely submitted.
The Exchange believes adopting the proposed functionality for
auction responses would also 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 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 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 eliminating the Priority Queue
functionality provision in Rule 5.25 avoids potential confusion and
maintains clarity in the rules as to how the Exchange processes auction
responses. As discussed, the Exchange has not implemented such
functionality and does not have any foreseeable plans to do so. The
Exchange also has never announced any implementation date for Priority
Queue functionality to market participants. Further, for the reasons
described above, the Exchange believes the proposed functionality is 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 the Priority Queue at the
conclusion of the auction
[[Page 40882]]
response period in the auction, even if they were submitted in a timely
manner. Under the proposed functionality, 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.
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. Discussion and Commission Findings
After careful review of the proposal, the Commission finds that the
proposed rule change, as modified by Amendment Nos. 1 and 2, is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\31\ In particular, the Commission finds that the proposed
rule change, as modified by Amendment Nos. 1 and 2, is consistent with
Section 6(b)(5) of the Act,\32\ which requires, among other things,
that the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, 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. The
Commission also finds that the proposed rule change, as modified by
Amendment Nos. 1 and 2, is consistent with Section 6(b)(8) of the
Act,\33\ which requires that the rules of a national securities
exchange do not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.
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\31\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\32\ 15 U.S.C. 78f(b)(5).
\33\ 15 U.S.C. 78f(b)(8).
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In particular, the Commission finds that the proposed auction
response processing functionality is reasonably designed to remove
impediments to and perfect the mechanism of a free and open market and
a national market system. The Commission believes that the proposed
rule change could incentivize competition in the Exchange's auctions by
increasing the likelihood of all timely submitted responses
participating in an execution at the end of an auction, especially
during periods of high message traffic. Increasing the number of
competitive responses in an auction could also increase price
improvement opportunities for any order submitted into an auction. As
noted earlier, the Exchange discussed the proposed maximum amount of
time with market participants who indicated that 100 milliseconds was
acceptable to them. The time period would be announced with reasonable
advance notice to market participants via Exchange Notice.
Additionally, all message traffic (including auction responses) will
continue to be processed in time-priority. The Commission emphasizes
that the extension of processing time is only available to TPH Holders
that have submitted an auction response within the currently
established response period for each auction.
Finally, the Commission believes that the Exchange's proposal to
eliminate the Priority Queue is consistent with the Act. The proposed
auction response processing functionality is designed to achieve the
same goal as the former Priority Queue of increasing the number of
submitted auction responses that participate in auctions where there is
a deep queue of message traffic. Moreover, the Exchange stated that
under the Priority Queue functionality, auction responses not processed
by the conclusion of the auction response period would be
cancelled.\34\ The Commission believes that the proposed auction
response processing functionality may be a preferable alternative to
the Priority Queue, because providing additional processing time for
timely submitted auction responses offers them a greater likelihood of
participating in an applicable auction.\35\
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\34\ See id.
\35\ The Exchanges notes that instead of the instant proposal,
it could have proposed to increase the length of established auction
response periods to accommodate more auction responses. However, the
Exchange believes that TPHs may wait until the end of an auction
response period to submit an auction response, regardless of how
long the Exchange sets it, in order to ensure they are comfortable
with the price the response may execute at the conclusion of such
auction. See Amendment No. 1, supra note 8. The Commission agrees
that under such circumstances, extending the auction response period
in each auction may not prevent timely submitted auction responses
from continuing to miss the auction.
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Accordingly, the Commission finds that the proposed rule change, as
modified by Amendment Nos. 1 and 2, is consistent with the requirements
of the Act.
IV. Solicitation of Comments on Amendment Nos. 1 and 2 to the Proposed
Rule Change
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment Nos. 1
and 2, are consistent with the Act. Comments may be submitted by any of
the following methods:
[[Page 40883]]
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#344641585119575b5959515a4047744751571a535b42"><span class="__cf_email__" data-cfemail="3d4f485158105e5250505853494e7d4e585e135a524b">[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="https://www.sec.gov/rules/sro.shtml">https://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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office 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-CBOE-2022-051 and should be
submitted on or before July 13, 2023.
V. Accelerated Approval of Amendment Nos. 1 and 2
As discussed above, in Amendment Nos. 1 and 2, the Exchange amended
the proposed rule change by eliminating the Priority Queue
functionality. The Exchange also amended Cboe Rule 5.25 by specifying
in the rule text the auctions to which the proposed auction response
processing functionality would apply and stating that the Exchange will
announce the length of the proposed additional auction response
processing period with reasonable advance notice via Exchange Notice.
The Exchange also provided additional detail regarding the order and
auction response process and further justification and support for its
modified proposal. Finally, the Exchange made a grammatical change to
the proposed rule text to make clear that at the conclusion of an
auction response or exposure period, the System will continue to
process any messages in its inbound queue that were received by the
system before the end of such period.
The Commission believes that the Exchange's proposal to eliminate
the Priority Queue, which the Exchange has never implemented, is
reasonable because the proposed auction response processing
functionality is designed to achieve the same goal of increasing the
number of submitted auction responses that participate in auctions
where there is a deep queue of message traffic. The Commission also
believes that stating in the text of Rule 5.25 (1) the auctions to
which the proposed auction response processing functionality would
apply; (2) that at the end of an auction response or exposure period,
the System will continue to process any messages in its inbound queue
that were received before the end of such period; and (3) that the
Exchange will provide reasonable advance notice of the Exchange-
determined period of time of additional processing via Exchange Notice
should provide additional clarity to the proposed rule text and
additional transparency to TPHs. The Commission therefore believes that
Amendment Nos. 1 and 2 provide useful specificity to the proposal
regarding its application and notice to TPH Holders. Accordingly, the
Commission finds good cause, pursuant to Section 19(b)(2) of the
Act,\36\ to approve the proposed rule change, as modified by Amendment
Nos. 1 and 2, on an accelerated basis.
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\36\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\37\ that the proposed rule change (SR-CBOE-2022-051), as modified
by Amendment Nos. 1 and 2, be, and hereby is, approved on an
accelerated basis.
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\37\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
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\38\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-13212 Filed 6-21-23; 8:45 am]
BILLING CODE 8011-01-P
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