Notice2023-20961
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rules 5.87 and 8.21
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
September 27, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 186 (Wednesday, September 27, 2023)</title>
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[Federal Register Volume 88, Number 186 (Wednesday, September 27, 2023)]
[Notices]
[Pages 66526-66533]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-20961]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98474; File No. SR-CBOE-2023-048]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Rules 5.87 and 8.21
September 21, 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 September 14, 2023, Cboe Exchange, Inc. (``Exchange'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change as described in Items I and II 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 Rules 5.87 and 8.21. 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
[[Page 66527]]
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 is proposing to amend certain open outcry trading
procedures, set forth in the Exchange Rulebook.
Rule 8.21 (Multiple Representation Prohibited) generally prohibits
multiple representation in open outcry trading crowds by a Trading
Permit Holder (``TPH'') for any account in which a TPH has an interest
or on behalf of a customer. The rule provides in relevant part that,
except in accordance with procedures established by the Exchange or
with the Exchange's permission in individual cases, no individual
Market-Maker shall enter or be present in a trading crowd while a Floor
Broker present in the trading crowd is holding an order on behalf of
the Market-Maker's individual account or an order initiated by the
Market-Maker for an account in which the Market-Maker has an
interest.\3\ Further, the rule provides that no TPH, for any account in
which the TPH has an interest or on behalf of a customer, shall
maintain with more than one broker orders for the purchase or sale of
the same option contract or other security, or the same combination of
option contracts or other securities, with the knowledge that such
orders are for the account of the same principal.\4\
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\3\ See Rule 8.21(b).
\4\ See Rule 8.21(a).
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Interpretations and Policies .01 and .02 to Rule 8.21 set forth
exception procedures that would permit multiple representation for
individual Market-Makers in certain circumstances, with Interpretation
.01 including exception procedures related to an individual Market-
Maker placing orders with a Floor Broker and Interpretation .02
including exception procedures related to the simultaneous
representation of Market-Maker joint accounts.
Specifically, Interpretation and Policy .02 to Rule 8.21 sets out
various procedures that, if followed, would permit the simultaneous
presence in a trading crowd of participants in and orders for the same
Market-Maker joint account. These procedures are intended to ensure
that Market-Makers who choose to employ a joint account for their
Exchange trading are not disadvantaged in participating in trades
versus those Market-Makers that choose to employ individual
accounts.\5\ These exception procedures apply only to individual
Market-Makers. Currently, the Exchange has interpreted the term
``individual Market-Maker'' to mean a person who is registered with the
Exchange as an individual TPH and holds a Market-Maker Floor Permit,
which entitles the holder to act as a Market-Maker on the floor of the
Exchange.\6\ The current exception procedures and requirements are as
follows:
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\5\ See Securities Exchange Act Release No. 34-61715 (May 16,
2010), 75 FR 13626 (March 22, 2010) (SR-CBOE-2010-028).
\6\ See Cboe Regulatory Circular 23-006, dated July 21, 2023.
<bullet> Joint accounts may be simultaneously represented in a
trading crowd by participants trading in-person for the joint
account. (See Rule 8.21.02(a).)
<bullet> Joint account participants who are not trading in-
person in a trading crowd may enter orders for the joint account
with Floor Brokers even if other participants are trading the same
joint account in-person. (See Rule 8.21.02(b).)
<bullet> When series are simultaneously opened during rotation,
joint account participants trading the joint account in-person may
enter orders for the joint account with Floor Brokers in series
where they are unable to trade the joint account in-person. (See
Rule 8.21.02(c).)
<bullet> There is no restriction on the number of joint account
participants that may participate on behalf of the joint account on
the same trade. (See Rule 8.21.02(d).)
<bullet> When joint account participants are trading in-person
in a trading crowd for their individual account or as a Floor
Broker, another participant of the joint account may trade for the
joint account in-person or enter orders for the joint account with
Floor Brokers. (See Rule 8.21.02(e).)
<bullet> Except as otherwise permitted under this Rule 8.21,
TPHs are prohibited from entering orders for their individual or
joint accounts while they are trading in-person in a trading crowd
even if the orders are for an account they are not then actively
trading. (See Rule 8.21.02(f).)
<bullet> TPHs must ensure that they do not trade in-person or by
orders such that (1) a trade occurs between a joint account
participant's individual market-maker account and the joint account
of which he or she is a participant, or (2) a trade occurs in which
the buyer and seller are representing the same joint account and are
on opposite sides of a transaction. It is the responsibility of a
joint account participant to ascertain whether joint account orders
have been entered in a crowd prior to trading the joint account in-
person. (See Rule 8.21.02(g).)
<bullet> Joint account participants may not act as a Floor
Broker for the joint account of which they are a participant. (See
Rule 8.21.02(h).)
<bullet> TPHs may alternate trading in-person for their
individual account and their joint account while in a trading crowd.
(See Rule 8.21.02(i) \7\.)
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\7\ Current Rule 8.21.02(j) erroneously refers to Rule 6.1(d);
as part of the proposed rule change, the Exchange proposes to update
the rule to refer to Rule 6.1(e).
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<bullet> When completing a trade ticket for Market-Maker joint
account transactions, it must contain such information as may be
required by the Exchange under Rule 6.1(e).
All procedures and requirements contained in Interpretation and
Policy .02 must be satisfied, and each individual Market-Maker must
also separately satisfy the procedures and requirements of
Interpretation and Policy .01. These joint account requirements also
remain subject to other applicable open outcry trading procedures, such
as open outcry priority and facilitation/solicitation requirements,
including Rule 5.86 (Facilitated and Solicited Transactions) and Rule
5.87 (Crossing Orders), as applicable.
Since the enactment of these rules, changes have occurred in the
trading environment. First, the Exchange migrated from a floor-based
market, where individuals traded in-person as a Floor Broker or a
Market-Maker, to a hybrid environment, whereby individuals can trade
in-person on the floor, or remotely. Further, the capacity in which
individual Market-Makers trade has shifted. Historically, Trading
Permits were most commonly held by individuals. While current Exchange
rules still allow for an individual to be an individual Trading Permit
Holder, it has become far more common for a Trading Permit Holder
organization to become a Trading Permit Holder, purchase Trading
Permits, and, under Rule 3.9(b), designate individual nominees to
represent the organization with respect to each Floor Broker Trading
Permit or Market-Maker Floor Trading Permit or, under Rule 3.9(a),
designate at least one individual as the Responsible Person for that
TPH organization, with respect to the TPH organization's electronic
Trading Permit(s). Thus, it is common practice that a TPH organization
has, at any given time, designated numerous individuals to be nominees
and perform trading functions on behalf of the TPH organization, either
on the floor or electronically, with respect to any Trading Permit
which the organization holds. As a result, instead of participating in
joint accounts, Market-Makers often trade for the accounts of those TPH
organizations.
Under the current exception procedures in Interpretation and Policy
[[Page 66528]]
.02, because an individual Market-Maker only contemplates an individual
with a Market-Maker Floor Permit, an individual Market-Maker trading
in-person on the trading floor may participate on the same trade as a
Floor Broker who holds a solicited order from the same TPH organization
only if initiated by someone who also meets the definition of an
individual Market-Maker (i.e., an individual with a Market-Maker Floor
Permit). As noted above, Market-Makers are currently nominees of TPH
organizations as opposed to individual TPHs and trade for the accounts
of their TPH organizations as opposed to joint accounts. Therefore, few
Market-Makers may take advantage of the current exception procedures
intended to not disadvantage Market-Makers from participating in trades
versus those Market-Makers that choose to employ individual accounts,
because many individuals trading off the floor (who may solicited)
likely no longer have floor permits. Currently, there are no exceptions
to the multiple representation prohibition for TPH organizations'
associated persons who are not registered as individual Market-Makers
(and thus do not have a Market-Maker Floor Trading Permit) and place
solicited orders on behalf of their associated TPH organizations with
Floor Brokers. Therefore, an individual Market-Maker trading in-person
on the trading floor currently may not participate on the same trade as
a Floor Broker who holds a solicited order initiated by an associated
person of the same TPH organization (that is not also an individual
Market-Maker) as the individual Market-Maker.
The Exchange now proposes changes to Rules 8.21 and 5.87.
First, the Exchange proposes to amend Rule 8.21(b) to the
definition of ``individual Market-Maker'' and update this definition in
the Rules. The Exchange proposes to add a parenthetical to the rule to
define explicitly an individual Market-Maker as an individual nominee
\8\ of a TPH organization or an individual Trading Permit Holder,
either of which holds a Market-Maker Floor Trading Permit.\9\ This
change merely updates this definition to reflect current rule
terminology and industry changes, pursuant to which most (if not all)
individual Market-Makers are part of larger TPH organizations.
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\8\ The term ``nominee'' means an individual who is authorized
by a TPH organization, in accordance with Rule 3.9, to represent
such TPH organization in all matters relating to the Exchange with
respect to a Floor Broker or Market-Maker Floor Trading Permit. See
Rule 1.1 (definition of ``nominee''). Pursuant to Rule 3.9, each TPH
organization must designate an individual nominee to represent the
organization with respect to each Market-Maker Floor Trading Permit
in all matters relating to the Exchange.
\9\ The Exchange currently maintains five types of Trading
Permits: a Market-Maker Electronic Access Permit, an Electronic
Access Permit, a Clearing TPH Permit, a Market-Maker Floor Trading
Permit and a Floor Broker Trading Permit.
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Similarly, the Exchange proposes to amend Rule 8.21, Interpretation
and Policy .02 to clarify the applicability of the exception
procedures. As noted above, Rule 8.21.02 provides exception procedures
related to the simultaneous representation of Market-Maker joint
accounts. The Exchange proposes to delete reference to ``participants''
from the introduction in Interpretation .02, as well as Interpretation
.02(a), (b), (c), and (d), and proposes to instead refer to an
``individual Market-Maker.'' Likewise, the Exchange proposes to delete
references to ``joint account participants'' from Interpretation
.02(b), (e), and (h), and proposes to instead refer to an ``individual
Market-Maker.'' Finally, the Exchange proposes to delete ``Trading
Permit Holders'' from Interpretation Rule .02(i) and (f) and replace
with ``Individual Market-Makers.'' \10\ The Exchange notes that the
application of the rule is not changing per these proposed
replacements, but rather the Exchange seeks to simplify the multiple
representation rule using clearer and more unified terminology. These
terminology changes are consistent with who may participate in joint
accounts (and thus who may take advantage of the exception procedures
in this rule).
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\10\ There are no changes to Rule 8.21(g) as part of the
proposed rule change, as the provision, and responsibilities
described therein, continue to apply to Trading Permit Holders.
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The Exchange also proposes to add a new Interpretation .03 to Rule
8.21 to provide an additional exception to the prohibition on multiple
representation to incorporate the market changes described above to,
similar to the exception in Interpretation and Policy .02, ensure that
Market-Makers on the floor who choose to be part of a larger TPH
organization and trade for the account of that TPH organization
(similar to the concept of trading for a joint account) are not
disadvantaged in participating in trades versus those Market-Makers
that choose to employ individual accounts. Under the current exception,
as noted above, while a Floor Broker may represent an order initiated
by a nominee of a TPH organization who is not an individual Market-
Maker (and thus has a Trading Permit other than a Market-Maker Floor
Permit), the in-crowd Market-Makers from the same TPH organization are
unable to participate on the trade.\11\ The Exchange proposes to add
Interpretation .03 to provide that, subject to the requirements of Rule
5.87(f), as applicable, an individual Market-Maker trading in-person in
a trading crowd and not through orders placed with a Floor Broker may
participate on the same trade as a Floor Broker who holds a solicited
order on behalf of the same TPH Organization, provided the individual
Market-Maker did not initiate the solicited order. As individual
Market-Makers are generally part of larger TPH organizations and trade
for the accounts of those organizations, which have multiple
individuals functioning as Market-Makers on the trading floor (i.e.,
with Market-Maker Floor Permits) or through electronic trading from off
the trading floor (i.e., with Electronic Access Permits), the Exchange
believes this proposed exception is appropriate to reflect current
organizational structures within the industry. This proposed exception
aligns in purpose with the current exception in Interpretation and
Policy .02 and will further ensure that Market-Makers trading on the
Exchange's floor are not prevented from participating in trades that
include solicited interest merely because the solicited party happens
to be trading for the same account (TPH organization account instead of
joint account).
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\11\ As noted above, the current exception procedures would
permit in-crowd Market-Makers to participate on a trade only if the
Floor Broker was representing an order initiated by another
individual Market-Maker from the same TPH organization.
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The proposed Rule 8.21.03 also provides that the last sentence of
Interpretation .02(g) to this Rule 8.21, which states that it is the
responsibility of a joint account participant to ascertain whether
joint account orders have been entered in a crowd prior to trading the
joint account in-person, does not apply to this new Interpretation
.03.\12\ Under the proposed changes, as further detailed below, there
would be no obligation on behalf of the individual Market-Maker to
ascertain whether someone from his or her firm initiated the solicited
order or had knowledge of the solicited order, prior to trading in-
person in a trading crowd.\13\
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\12\ For the avoidance of doubt, all other procedures and
requirements contained in Interpretation and Policy .02, including
all provisions in Interpretation .02(g) except the last sentence,
must be satisfied and each individual Market-Maker must also
separately satisfy the procedures and requirements of Interpretation
and Policy .01.
\13\ If a TPH organization were to enter an order with a Floor
Broker, in addition to the solicited order, then the TPH
organization (not the Floor Broker) would be in violation of the
multiple representation rule.
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[[Page 66529]]
The Exchange proposes to amend Rule 5.87(f), which contains
procedures and requirements related to open outcry crossing entitlement
for solicitations and facilitations.\14\ Under current rules, in the
event a Floor Broker represents an order that is of the eligible order
size or greater (``original order'') and is also holding a facilitation
order or a solicited order, the Floor Broker may proceed under the
provisions of Rule 5.87(f) to obtain a crossing participation
entitlement.\15\ The crossing participation entitlement permits the
Floor Broker to transact either 20% or 40% (currently 40% for all
classes), of the remainder of the original order against the
facilitation or solicited order. Further, if an On-Floor DPM or On-
Floor LMM is granted participation rights under Rule 5.85, Rule
5.87(f)(5) provides that the On-Floor DPM or On-Floor LMM participation
entitlement is applied if the trade occurs at the On-Floor DPM's/LMM's
principal bid or offer, provided that the On-Floor DPM/LMM
participation entitlement will be limited to a percentage of contracts
that, when combined with the percentage the originating firm crossed,
may not exceed 40% of the original order size. After the applicable
public customer orders and participation entitlements have been
satisfied, Rule 5.87(f)(6) provides that the remaining balance of the
order will be allocated among the In-Crowd Market Participants
(``ICMPs'') \16\ who established the market.\17\ Rule 5.87(f)(6)(B)
further provides that priority to trade the remaining portion of the
order shall be afforded to bids (offers) made by ICMPs in the sequence
in which they are made. If bids (offers) were made at the same time, or
in the event that the sequence cannot be reasonably determined,
priority shall be apportioned equally among the ICMPs who established
the market.
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\14\ As part of this proposed rule change, the Exchange proposes
to make a non-substantive change to correct the cross-reference in
Rule 5.87(f)(4), to refer to paragraph (f) of the Rule rather than
paragraph (d).
\15\ Pursuant to Rule 5.87(f)(2), the Floor Broker crossing
entitlement takes effect after all public customer orders that were
on the limit order book and then represented in the trading crowd at
the time the market was established have been satisfied.
\16\ See Rule 1.1 for definition of In-Crowd Market Participant.
\17\ Rule 5.87(f)(6) currently provides in relevant part that
the ``the ICMPs who established the market will have priority over
all other orders that were not represented in the trading crowd at
the time the market was established (but not over Priority Customer
orders on the Book) and will maintain priority over such orders
except for orders that improve upon the market.''
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In light of the proposed changes to Rule 8.21, the Exchange
proposes to update Rule 5.87(f) to modify the priority of members in
the trading crowd after the crossing participation entitlement and
other applicable participation entitlements have been satisfied.
Specifically, the Exchange proposes to update Rule 5.87(f)(6) \18\ to
state that priority to trade the remaining portion of the order shall
be apportioned equally among ICMPs who established the market, as is
the case currently if bid (offers) were made at the same time, or in
the event that the sequence cannot be reasonably determined. As under
the current rule, in the event an ICMP declines to accept any portion
of the available contracts, any remaining contracts shall be
apportioned equally among the other ICMPs who established the market
until all contracts have been apportioned. The Exchange also proposes
to amend Rule 5.87(f)(7). Current Rule 5.87(f)(7) states nothing in
that paragraph is intended to prohibit a Floor Broker, an On-Floor DPM,
or an On-Floor LMM from trading more than his or her percentage
entitlement if the other ICMPs do not choose to trade the remaining
portion of the order. The Exchange proposes to add that it is also not
intended to prohibit these parties from trading more than his or her
percentage entitlement if such trades are permissible under the
proposed Interpretation .03 of Rule 8.21. This is consistent with the
proposed rule change above, which would make it possible for the TPH
organization of which the applicable party is a part to, as a whole,
trade more than 40% participation entitlement).
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\18\ The proposed rule change deletes Rule 5.87(f)(6)(A) and
(B), as they are no longer applicable, and moves language from
current 5.87(f)(6)(C) to be included in 5.87(f)(6).
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Finally, the Exchange proposes to amend Interpretation .06 to Rule
5.87, which currently provides that Rule 5.87(f) supersedes the
priority provision of Rule 5.86(d) in those situations where the Floor
Broker representing an eligible order determines to take advantage of
the crossing provisions of paragraph (f) of this Rule. The Exchange
proposes adding language regarding an order being represented by the
Floor Broker using the crossing provision, to clarify that paragraph
(f) of Rule 5.87 provides the solicited person or order being
represented by the Floor Broker using the crossing provision with
priority over all other parties (other than certain Public Customer
orders) for either 20% or 40% of the contracts remaining in the order,
as determined by the Exchange, after those certain Public Customer
orders have been satisfied. This is merely a clarifying change and has
no impact on what orders may be eligible for the entitlement pursuant
to Rule 5.87(f).
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.\19\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \20\ 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) \21\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\19\ 15 U.S.C. 78f(b).
\20\ 15 U.S.C. 78f(b)(5).
\21\ Id.
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In particular, the Exchange believes the proposed rule change to
add an exception to the multiple representation prohibition will
promote just and equitable principles of trade, remove impediments to
and perfect the mechanism of a free and open market and a national
market system, and, in general, protect investors. The purpose of this
proposed change, similar to the purpose of the current exception to the
multiple representation prohibition in Rule 8.21, Interpretation and
Policy .02, is to ensure that an individual Market-Maker trading in-
person on behalf of the TPH organization is not disadvantaged in
participating in a solicited trade solely because the trade was
initiated off the floor by an individual trading for the same account.
This proposed exception expands the current exception to permit Market-
Makers to participate in trades if they are for TPH organization
accounts (as is current common practice) instead of joint accounts and
if the solicited party is from his or her same TPH organization,
regardless of the type of trading permit the solicited party is using
(as opposed to the current exception that permits this only if the
[[Page 66530]]
solicited party has a Market-Maker Floor Trading Permit, which is
uncommon in current practice).
Specifically, under the current rules, an individual Market-Maker
trading in-person on the trading floor may participate on the same
trade as a Floor Broker who holds a solicited order from the same TPH
organization, but only if initiated by another individual Market-Maker.
However, currently, there are no exceptions to the multiple
representation prohibition for TPH organizations' associated persons
who are not registered as individual Market-Makers (and thus do not
have a Market-Maker Floor Trading Permit) and place solicited orders
for joint accounts with Floor Brokers. Therefore, an individual Market-
Maker trading in-person on the trading floor currently may not
participate on the same trade as a Floor Broker who holds a solicited
order initiated by an associated person of the same TPH organization as
the individual Market-Maker.
As discussed above, since the enactment of these rules, changes
have occurred in the trading environment. As a result of those changes,
it is common practice that a TPH organization has, at any given time,
designated numerous individuals to perform trading functions on behalf
of the TPH organization, either on the floor or electronically, with
respect to any Trading Permit which the organization holds. As a
result, instead of participating in joint accounts, Market-Makers trade
for the accounts of those TPH organizations.
The proposed rule changes incorporate these advancements in the
modern trading environment into the current exceptions to Rule 8.21 by
expanding on the current exception procedures in current Interpretation
and Policy .02 to permit an individual Market-Maker trading in-person
may participate on a solicited trade that is initiated by an individual
from the same TPH organization, regardless of whether the individual
initiating the solicited trade is an individual Market-Maker. The
proposed exception essentially permits Market-Makers trading in person
on the floor on behalf of a TPH organization (as opposed to for a joint
account) to participate on a trade if solicited interest was initiated
by another Market-Maker from that TPH organization (for the same
account). Like the current exception in Interpretation and Policy .02,
the purpose of this exception is to ensure that Market-Makers on the
floor who choose to be part of a larger TPH organization and trade for
an account of that TPH organization (similar to the concept of a joint
account) are not disadvantaged in participating in trades versus those
Market-Makers that choose to employ individual accounts. It is common
practice for off-floor liquidity providers, including Market-Makers
with Electronic Access Permits, to be solicited to provide liquidity to
trade against customer orders that are ultimately crossed on the
Exchange's trading floor. Therefore, given the changes to the market as
described above, the Exchange believes the proposed rule change further
removes impediments to and perfects the mechanism of a free and open
market and a national market system, as the proposed changes ensure
that an individual Market-Maker that trading in-person that chooses to
be part of a larger TPH organization and trade for an account of that
TPH organization (similar to the concept of a joint account) is not
disadvantaged in participating in a solicited trade versus a Market-
Maker that chooses to employ an individual account.
The Exchange further believes the proposed rule change will not
permit unfair discrimination between customers, issuers, brokers, or
dealers, because it will eliminate a disparity that exists under
current Rules. As noted above, because it is common for Market-Makers
to trade on behalf of TPH organizations as opposed to trade as
individual TPHs, and thus trade for TPH organization accounts as
opposed to for joint accounts, there are few Market-Makers on the
trading floor that can take advantage of the current exception to the
multiple representation prohibition in current Rule 8.21,
Interpretation and Policy .02. The Exchange believes this may
disadvantage Market-Makers from participating in trades versus those
that choose to employ individual accounts, because Market-Makers
trading on behalf of TPH organizations (as most do) are not permitted
to take advantage of the current exception if the solicited interested
was initiated off the floor by an individual who does not hold a
Market-Maker Floor Trading Permit, but rather another eligible trading
permit offered by the Exchange (for example, acting as a Market-Maker
with an Electronic Access Permit), thus removing a potential disparity
that exists under current Rules. Therefore, these Market-Makers are
losing trading opportunities because of the type of permit held by the
solicited party.
Additionally, the Exchange believes the proposed rule change is
consistent with the requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers, as the Exchange believes the proposed rule change
may reduce any inadvertent unfair discrimination to which current
individual Market-Makers are subject. As discussed above, the Exchange
believes many individual Market-Makers on the trading floor that trade
for the account of the TPH organizations on behalf of which they trade
may be at a disadvantage compared to individual Market-Makers that
trade for an individual account. This is due to the fact that currently
Market-Makers act as nominees of TPH organizations, trading for the
accounts of those TPH organizations, and trade upstairs with EAPs
rather than Market-Maker Floor Permits, as opposed to being and
individual TPH as was the case historically. Under the proposed rule
change, a Market-Maker acting as nominee of a TPH organization would
have the opportunity to participate in trades for which members of
their TPH organizations provide solicited liquidity, regardless of the
type of trading permit those members have. Currently, individual
Market-Makers have this opportunity only if that other member of the
same TPH organization happens to have a Market-Maker Floor Trading
Permit. As proposed, no ICMP would be prohibited from participating on
a trade solely because he or she is from the same TPH organization as
the individual that initiated the solicited order. The Exchange
believes that the changes will create an opportunity for increased
participation on such open outcry trades, which could potentially lead
to increased execution opportunities. The Exchange believes that this
in turn may lead to greater competition and price improvement for
orders, thus creating a more robust open outcry market, which may
ultimately benefit investors who choose to send orders to the Exchange.
Further, the Exchange believes the proposed rule changes promote
just and equitable principles of trade, as the amended rule preserves
the intended prohibitions around multiple representation,\22\ while
ensuring that Market-Makers who are employed by TPH organizations
represented by multiple individuals (as is generally the case in
today's trading environment) trading on and off the floor under a
variety of eligible trading permits are not unfairly disadvantaged from
participating in trades. As noted above, there is a current exception
to the multiple representation prohibition that permits a Market-Maker
on the trading floor to participate on a trade for which
[[Page 66531]]
another Market-Maker with a Market-Maker Floor Trading Permit from the
same TPH organization was solicited. The proposed exception essentially
just expands this exception to permit Market-Makers on the trading
floor to participate in trades for which any other individual trading
on behalf of the same TPH organization provided liquidity in the form
of a solicited order, regardless of the type of permit such individual
holds. Like the current exceptions, the proposed Rule 8.21,
Interpretation .03 requires an individual Market-Maker participating on
a trade for which the solicited order was initiated by another
individual from the same TPH organization to be trading in-person in a
trading crowd and not through orders placed with a Floor Broker.
Additionally, the proposed exception would not apply if the individual
Market-Maker trading in-person initiated the solicited order. Finally,
all requirements set forth in Rule 8.21 and its Interpretations and
Policies, with the exception of the last sentence of Interpretation
.02(g) (as discussed below), continue to apply with respect to multiple
representation prohibitions and solicited orders. Thus, the proposed
changes continue to preserve the intent of the multiple representation
rule to ensure that a Market-Maker present in the trading crowd is not
disproportionately represented, and just expands exceptions under the
current rule to permit Market-Makers on the trading floor to
participate in trades for which any other individual trading on behalf
of the same TPH organization provided liquidity in the form of a
solicited order, regardless of the type of permit such individual
holds.
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\22\ Rule 8.21 is designed to ensure that a Market-Maker present
in the trading crowd is not disproportionately represented.
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Similarly, the Exchange believes the proposed changes to exclude
the last sentence of Rule 8.21.02(g) from the proposed exception and to
Rule 5.87(f) to revise the priority afforded to in-crowd participants
with respect to facilitated and solicited orders in open outcry
trading, after the crossing participation entitlement and other
applicable participation entitlements have been satisfied, are
consistent with the Act and promote just and equitable principles of
trade. In today's hybrid trading environment, it may be difficult and
unduly onerous for individuals on the trading floor to ascertain (at
all or in a timely manner) which TPH organization has been solicited on
an initiating trade, and thus, difficult, under current rules, to
determine which ICMP(s) would have priority. Further, the Exchange
believes the current rules may discourage a TPH organization from
submitting solicited orders to trade against customer orders in open
outcry, as the TPH that submitted a solicited order may ultimately end
up trading against a lesser portion of the initiating order if there
are a small number of ICMPs who want to trade against the order, as
such ICMPs would have priority over any ICMP from the same TPH
organization that submitted the solicited order. This may reduce
execution opportunities or competition for customer orders. Under the
proposed changes, priority to trade the remaining portion of the
solicited order shall be apportioned equally among ICMPs who
established the market; this would include ICMPs from all TPH
organizations, including the one on behalf of which the solicited order
was submitted. The Exchange notes that the proposed changes align with
current floor behavior, since, as stated above, in today's trading
environment it is difficult to reasonably determine which ICMP(s) have
priority. The Exchange further notes that priority is not always time
determinative (e.g., pro rata),\23\ and believes the proposed rules
will streamline the open outcry execution process for crossing
transactions, while continuing to provide such solicited orders with
meaningful execution and price improvement opportunities.
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\23\ See, e.g., Rule 5.32(a)(1)(B).
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Further, under the proposed rules, an individual Market-Maker would
not be required to ascertain whether the solicited order was initiated
on behalf of the same TPH organization, nor would the TPH organization
firm be required to inform their Market-Makers trading in person if a
solicited order had been initiated. The Exchange believes the proposed
changes will reduce unnecessary complexity and confusion in its open
outcry procedures, and simplify handling of solicited orders on the
Exchange's trading floor, to the benefit and protection of investors.
Finally, the Exchange believes the proposed changes to clarify
certain Rules will remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general,
will protect investors and the public interest. Specifically, by
amending Rule 8.21(b) and Interpretation and Policies .02 to clarify
the definition of ``individual Market-Maker'' and the applicability of
the current exception procedures, the proposed rule change may mitigate
any potential confusion for TPHs. Further, the Exchange believes the
proposed change to Interpretation .06 to Rule 5.87 to add language to
clarify that paragraph (f) of Rule 5.87 provides the solicited person
or order being represented by the Floor Broker using the crossing
provision with priority over all other parties (other than certain
Public Customer orders) for either 20% or 40% of the contracts
remaining in the order, as determined by the Exchange, after those
certain Public Customer orders have been satisfied may mitigate any
potential confusion as a result of the proposed rule changes, which
protects investors and perfects the mechanism of a free and open
market. Such changes are not unfairly discriminatory as they are not
instituting a new policy, but rather providing clarification as to a
current rule, which provides for participation entitlement consistent
with other exchanges.\24\
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\24\ See, e.g., NYSE American Rule 934.1NY (Facilitation Cross
Transactions).
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Additionally, the Exchange believes the proposed change to Rule
5.87(f) to state that nothing in the rule paragraph is intended to
prohibit an Floor Broker, an On-Floor DPM, or an On-Floor LMM from
trading more than his or her percentage entitlement if such trades are
permissible under proposed Interpretation .03 of Rule 8.21 (as under
proposed rule a TPH organization as a whole may trade more than 40%
participation entitlement) provides further transparency into the
potential allocations as related to solicited orders, which protects
investors and perfects the mechanism of a free and open market by
eliminating any potential confusion as a result of the proposed rule
changes.
The Exchange also believes the proposed changes to clarify certain
Rules is consistent with Section 6(b)(1) of the Act,\25\ which provides
that the Exchange be organized and have the capacity to be able to
carry out the purposes of the Act and to enforce compliance by the
Exchange's Trading Permit Holders and persons associated with its
Trading Permit Holders with the Act, the rules and regulations
thereunder, and the rules of the Exchange. As noted above, the Exchange
believes the proposed changes to Rule 8.21(b) and Interpretation and
Policies .02 to clarify the definition of ``individual Market-Maker''
and the applicability of the current exception procedures, as well as
the proposed change to Interpretation .06 to Rule 5.87, may mitigate
any potential confusion for TPHs and thus facilitate compliance with
Exchange rules. Similarly, the proposed change to Rule 5.87(f) provides
further transparency into the potential allocations as related to
solicited orders. The Exchange believes these changes and transparency
[[Page 66532]]
will protect investors and assist TPHs in complying with Exchange
rules, as they provide more clarity and reduce complexity within the
rules.
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\25\ 15 U.S.C. 78f(b)(1).
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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 change will impose any burden on
intramarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act because it will apply in the
same manner to all TPH organizations. The proposed exception to the
multiple representation prohibition is similar to exceptions currently
in place today. The Exchange believes the proposed rule change will put
all individual Market-Makers on equal footing with respect to the
ability to participate on crossing transactions. As discussed, above,
the Exchange believes the proposed exception removes a potential
disparity under current Rules that may disadvantage an individual
Market-Maker trading in-person from participating in trades solely
because the trade was initiated off the floor by an individual from his
or her same TPH organization who holds a permit other than a Market-
Maker Floor Trading Permit. Further, the proposed changes to the
priority afforded to ICMPs with respect to facilitated and solicited
orders in open outcry trading, after the crossing participation
entitlement and other applicable participation entitlements have been
satisfied, will apply equally to all ICMPs.
The Exchange does not believe that the proposed change will impose
an unnecessary or inappropriate burden on intermarket competition
because it only applies to the execution of orders on the Exchange's
trading floor. As discussed above, the proposed rule change is intended
to modernize and streamline the Exchange's open outcry procedures
regarding crossing transactions, which changes the Exchange believes
may lead to greater competition and price improvement for orders, thus
creating a more robust open outcry market.
Finally, the proposed clarifying changes are not intended to have
any impact on competition, but rather add transparency to the Rules and
eliminate potential confusion of investors.
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: (i)
significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
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 \26\ and Rule 19b-
4(f)(6) thereunder.\27\
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\26\ 15 U.S.C. 78s(b)(3)(A).
\27\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) \28\ normally
does not become operative prior to 30 days after the date of the
filing. However, Rule 19b-4(f)(6)(iii) \29\ permits the Commission to
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the Exchange
may implement the proposed change as soon as possible. The Exchange
states that waiver of the operative delay will protect investors by
ensuring that an individual Market-Maker trading in-person is not
disadvantaged in participating in a solicited trade solely because the
trade was initiated off the floor by an individual from his or her same
TPH organization who does not hold a Market-Maker Floor Trading Permit,
thus removing a potential disparity that exists under current Rules.
With respect to the proposed changes to exclude the last sentence of
Rule 8.21.02(g) from the proposed exception and to revise the priority
described in Rule 5.87(f), the Exchange states that waiver of the
operative delay will promptly reduce unnecessary complexity and
confusion regarding open outcry procedures, and simplify handling of
solicited orders on the trading floor. Additionally, the Exchange
states that, with respect to proposed changes to clarify definitions
and the applicability of current exception procedures, waiver of the
operative delay will allow the Exchange to provide further transparency
as soon as possible. The Commission believes that waiver of the 30-day
operative delay is consistent with the protection of investors and the
public interest because the proposed rule change does not raise any new
or novel issues. Accordingly, the Commission hereby waives the 30-day
operative delay and designates the proposed rule change as operative
upon filing.\30\
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\28\ 17 CFR 240.19b-4(f)(6).
\29\ 17 CFR 240.19b-4(f)(6)(iii).
\30\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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 shall institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="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#c7b5b2aba2eaa4a8aaaaa2a9b3b487b4a2a4e9a0a8b1"><span class="__cf_email__" data-cfemail="1163647d743c727e7c7c747f6562516274723f767e67">[email protected]</span></a>. Please include
file number SR-CBOE-2023-048 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-2023-048. 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
[[Page 66533]]
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-2023-048 and should be submitted on or before October 18, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
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\31\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-20961 Filed 9-26-23; 8:45 am]
BILLING CODE 8011-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.