Notice2023-21342
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Its Rules Regarding Early Termination of Complex Order Auctions
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Published
September 29, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 188 (Friday, September 29, 2023)</title>
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[Federal Register Volume 88, Number 188 (Friday, September 29, 2023)]
[Notices]
[Pages 67408-67411]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-21342]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98502; File No. SR-CBOE-2023-051]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Its Rules Regarding Early Termination of Complex Order Auctions
September 25, 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 15, 2023, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III, below, which Items have been prepared by the Exchange. The
Exchange filed the proposal as a ``non-controversial'' proposed rule
change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule
19b-4(f)(6) thereunder.\4\ 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.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to amend its rules regarding early termination of complex order
auctions. The text of the proposed rule change is provided in Exhibit
5.
The text of the proposed rule change is also available on the
Exchange's website (<a href="http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx">http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx</a>), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend certain of its rules regarding the
early termination of complex order auctions. The Exchange offers
several auction mechanisms for complex orders, including the Complex
Order Auction (``COA''),\5\ the Complex Automated Improvement Mechanism
(``C-AIM''),\6\ and the Complex Solicitation Auction Mechanism (``C-
SAM'').\7\ The Rules regarding each of these complex order auction
mechanisms contain provisions that describe what events may cause the
applicable auction to terminate prior to the end of the auction
timer.\8\ These provisions generally correspond to the pricing
requirements to begin an auction. This ensures that the auction will
not continue if the market changes in a manner that would create a
situation in which the auction would not have been permitted to begin.
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\5\ See Rule 5.33(d).
\6\ See Rule 5.38.
\7\ See Rule 5.40.
\8\ See Rules 5.33(d)(3), 5.38(d)(1), and 5.40(d)(1).
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[[Page 67409]]
COA
COA is a single-sided auction in which an eligible order will be
exposed for price improvement. Specifically, upon receipt of a COA-
eligible order,\9\ the System sends a COA auction message to
subscribers of data feeds that deliver COA auction messages, which
message identifies certain terms of the COA-eligible order. To be COA-
eligible, a buy (sell) order must, among other things, have a price
equal to or higher (lower) than the synthetic best offer (bid) (``SBO
(SBB)''), provided that if any of the bids or offers on the simple book
that comprise the SBB (SBO) is represented by a Priority Customer
order,\10\ the price must be at least one minimum increment higher
(lower) than the SBB (SBO).\11\ Corresponding to this requirement,
current Rule 5.33(d)(3)(B) and (C) provide that a COA will terminate
prior to the end of the COA auction timer:
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\9\ See Rule 5.33(b)(5) (definition of COA-eligible order).
\10\ A ``Priority Customer'' means a person or entity that is
Public Customer and not a Professional. A ``Public Customer'' means
a person that is not a broker-dealer, and a ``Professional'' means
any person or entity that (a) is not a broker or dealer in
securities, and (b) places more than 390 orders in listed options
per day on average during a calendar month for its own beneficial
account(s). See Rule 1.1 (definitions of Priority Customer, Public
Customer, and Professional).
\11\ See Rule 5.33(b)(5) (definition of COA-eligible order).
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<bullet> when the System receives a non-Priority Customer Order in
a leg of the complex order that would improve the SBBO on the same side
as the COA-eligible order that initiated the COA to a price better than
the COA price, in which case the System terminates the COA and
processes the COA-eligible order pursuant to subparagraph (5) below,
enters the new order in the simple book, and updates the SBBO; or
<bullet> if the System receives a Priority Customer Order in a leg
of the complex order that would join or improve the SBBO on the same
side as the COA-eligible order that initiated the COA to a price equal
to or better than the COA price, in which case the System terminates
the COA and processes the COA-eligible order pursuant to subparagraph
(5) below, enters the new order in the simple book, and updates the
SBBO.
The Exchange proposes to amend Rule 5.33(d)(3)(B) and (C) to
provide that any incoming order may cause the SBBO to change in a
manner that causes a COA auction to terminate early. Specifically, the
proposed rule change amends these Rule provisions to state the
following:
(B) when the System receives an order in a leg of the complex
order that would improve the SBBO on the same side as the COA-
eligible order that initiated the COA to a price better than the COA
price, in which case the System terminates the COA and processes the
COA-eligible order pursuant to [Rule 5.33(d)(5)], enters the new
order in the Simple Book, and updates the SBBO; or
(C) if the System receives an order in a leg of the complex
order that would join or improve the SBBO on the same side as the
COA-eligible order that initiated the COA to a price equal to the
COA price and cause any component of the SBBO to be represented by a
Priority Customer, in which case the System terminates the COA and
processes the COA-eligible order pursuant to [Rule 5.33(d)(5)],
enters the new order in the Simple Book, and updates the SBBO.
Pursuant to the proposed change to subparagraph (B), a COA will
continue to terminate early if the Exchange receives any simple order
(Priority or non-Priority Customer) that would cause the SBBO to be
better than the stop price (as covered by current subparagraphs (B) and
(C)). Pursuant to the proposed change to subparagraph (C), a COA will
terminate early if the Exchange receives any simple order (not just a
Priority Customer order as set forth in current subparagraph (C)) that
would cause the SBBO to be equal to the stop price and have the best
bid or offer (``BBO'') of a leg represented by a Priority Customer
order.
C-AIM and C-SAM
C-AIM permits a Trading Permit Holder (``TPH'') to submit for
execution a complex order it represents as agent (``Agency Order'')
against principal or solicited interest (an ``Initiating Order'') that
stops the entire Agency Order at a price that satisfies specified
criteria.\12\ Similarly, C-SAM permits a TPH to submit for execution an
Agency Order against an Initiating Order (that, unlike for C-AIM, may
only be solicited) that stops the entire Agency Order at a price that
satisfies specified criteria.\13\ With respect to both C-AIM and C-SAM,
the stop price for the buy (sell) Agency Order must, among other
things:
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\12\ See generally Rule 5.38; see also Rule 5.38(a) (C-AIM
auction eligibility requirements) and (b) (C-AIM stop price
requirements).
\13\ See generally Rule 5.40; see also Rule 5.40(a) (C-SAM
auction eligibility requirements) and (b) (C-SAM stop price
requirements). The primary differences between C-AIM and C-SAM are
that (a) the minimum size (as determined by the Exchange) of an
order submitted into C-SAM cannot be smaller than 500 option
contracts on the smallest leg, while the minimum size of a C-AIM
order may not be smaller than one contract (compare Rules 5.38(a)(3)
and 5.40(a)(3)) and (b) and that execution of orders submitted into
C-SAM are handled as all-or-none orders.
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<bullet> with respect to same-side simple orders, be (a) at least
one minimum increment better than the SBB (SBO) if the applicable side
of the BBO on any component of the complex strategy is represented by a
Priority Customer order on the simple book; or (b) at or better than
the SBB (SBO) if the applicable side of the BBO of each component of
the complex strategy is represented by a non-Priority Customer order or
quote on the simple book; and
<bullet> with respect to opposite-side simple orders, be (a) at
least one minimum increment better than the SBO (SBB) if the BBO of any
component of the complex strategy is represented by a Priority Customer
order on the simple book; or (b) at or better than the SBO (SBB) if the
BBO of each component of the complex strategy represents a non-Priority
Customer quote or order on the simple book.\14\
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\14\ See Rules 5.38(b)(1) and (3) and 5.40(b)(1) and (3).
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Corresponding to these requirements, current Rules 5.38(d)(1)(d),
(e), and (f) and 5.40(d)(1)(d), (e), and (f) \15\ provide that a C-AIM
or C-SAM auction, respectively, will terminate prior to the end of the
C-AIM or C-SAM, as applicable, auction timer:
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\15\ The proposed rule change capitalizes the lettering of the
subparagraphs in Rules 5.38(d)(1) and 5.40(d)(1) to conform to the
lettering used throughout the Rulebook.
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<bullet> upon receipt by the System of an unrelated non-Priority
Customer order or quote that would post to the simple book and cause
the SBBO on the same side as the Agency Order to be better than the
stop price;
<bullet> upon receipt by the System of an unrelated Priority
Customer order in any component of the complex strategy that would post
to the simple book and cause the SBBO on the same side as the Agency
Order to be equal to or better than the stop price; or
<bullet> upon receipt by the System of a simple non-Priority
Customer order that would cause the SBBO on the opposite side of the
Agency Order to be better than the stop price, or a Priority Customer
order that would cause the SBBO on the opposite side of the Agency
Order to be equal to or better than the stop price.
The Exchange proposes to amend Rules 5.38(d)(1)(d), (e), and (f)
((D) and (E) as proposed) and 5.40(d)(1)(d), (e), and (f) ((D) and (E)
as proposed) to provide that any incoming order may cause the SBBO to
change in a manner that causes a C-AIM or C-SAM auction, respectively,
to terminate early. Specifically, the proposed rule change amends these
Rule provisions to state the following:
(D) upon receipt by the System of an unrelated order or quote
that would post to
[[Page 67410]]
the Simple Book and cause the SBBO on the same side as the Agency
Order to be (i) better than the stop price, or (ii) equal to the
stop price if any component of the SBBO is then represented by a
Priority Customer;
(E) upon receipt by the System of an unrelated order that would
post to the Simple Book and cause the SBBO on the opposite side of
the Agency Order to be (i) better than the stop price, or (ii) equal
to the stop price if any component of the SBBO is then represented
by a Priority Customer;
Pursuant to the proposed subparagraph (D) of each of Rules
5.38(d)(1) and 5.40(d)(1), a C-AIM or C-SAM will continue to terminate
early if the Exchange receives any simple order (Priority or non-
Priority Customer) that would cause the SBBO on the same side as the
Agency Order to be better than the stop price (as covered by current
subparagraphs (d) and (e)). Additionally, pursuant to the proposed
subparagraph (D) of each of Rules 5.38(d)(1) and 5.40(d)(1), a C-AIM or
C-SAM will terminate early if the Exchange receives any simple order
(not just a Priority Customer order as set forth in current
subparagraph (e)) that would cause the SBBO on the same side as the
Agency Order to be equal to the stop price if any component of the SBBO
is then represented by a Priority Customer order. Similarly, pursuant
to proposed subparagraph (E) of each of Rules 5.38(d)(1) and
5.40(d)(1), a C-AIM or C-SAM will continue to terminate early if the
Exchange receives any simple order (Priority or non-Priority Customer)
that would cause the SBBO on the opposite side of the Agency Order to
be better than the stop price (as covered by current subparagraph (f)).
Additionally, pursuant to proposed subparagraph (E) of each of Rules
5.38(d)(1) and 5.40(d)(1), a C-AIM or C-SAM will terminate early if the
Exchange receives any simple order (not just a Priority Customer order
as set forth in current subparagraph (f)) that would cause the SBBO on
the opposite side of the Agency Order to be equal to the stop price if
any component of the SBBO is then represented by a Priority Customer
order.
Purpose of Proposed Rule Changes
One purpose of the COA, C-AIM, and C-SAM auction price requirements
is to protect interest on the simple book, including Priority Customer
interest, as execution of the auction or Agency order, as applicable,
could not occur at a price outside the SBBO or at the same price as the
SBBO if it includes simple Priority Customer interest on any leg. The
purpose of early termination provisions corresponding to those auction
price requirements is to terminate an auction if the market changes in
a manner that would create a situation in which the auction would not
have been permitted to begin. The proposed changes to each of the COA,
C-AIM, and C-SAM early termination provisions add the scenario in which
the applicable auction will terminate early if the Exchange receives a
Non-Priority Customer order that would cause the SBBO to be equal to
the stop price and have the BBO of a leg represented by a Priority
Customer order (as current rules contemplate only that an incoming
Priority Customer order could cause the SBBO to improve to a price
equal to the auction price). This situation could occur, for example,
if there was a Priority Customer order representing the BBO of one leg
of the component strategy at the beginning of the auction but the stop
price was better than the SBBO, and an incoming order (Priority or Non-
Priority Customer) during the auction caused the SBBO to change such
that it then equals the stop price with a Priority Customer order
representing one of the legs. The Exchange believes these proposed
changes will further protect Priority Customer orders on the simple
book by ensuring that no execution within COA, C-AIM, or C-SAM will
occur at a price that equals the SBBO (and the applicable side) if the
BBO of any component of the applicable complex strategy is represented
by a Priority Customer, regardless of what type of incoming order
caused the change in the SBBO.
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.\16\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \17\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \18\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
\18\ Id.
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In particular, the Exchange believes the proposed rule change will
remove impediments to and perfect the mechanism of a free and open
market and protect investors, because it will update scenarios that
will cause complex auctions to terminate early in a manner that
protects interest resting on the simple book, including Priority
Customer interest. The proposed changes to each of the COA, C-AIM, and
C-SAM early termination provisions add the scenario in which the
applicable auction will terminate early if the Exchange receives a Non-
Priority Customer order that would cause the SBBO to be equal to the
stop price and have the BBO of a leg represented by a Priority Customer
order. These proposed changes will eliminate a current gap in current
Rules, which contemplate only that an incoming Priority Customer order
could cause the SBBO to improve to a price equal to the auction price).
These proposed rule changes increase consistency among the auction
price requirement and early termination provisions, thus removing
impediments to a free and open market. As a result, the Exchange
believes the proposed rule change will further protect Priority
Customer orders on the simple book by ensuring that no execution within
a COA, C-AIM, or C-SAM auction will occur at a price that equals the
SBBO (and the applicable side) if the BBO of any component of the
applicable complex strategy is represented by a Priority Customer,
regardless of what type of incoming order caused the change in the
SBBO, which ultimately protects investors and the public interest.
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, as the proposed changes will
apply to all TPHs in the same manner. The Exchange does not believe
that the proposed rule change will impose any burden on intermarket
competition that is not necessary or appropriate in
[[Page 67411]]
furtherance of the purposes of the Act, as it relates solely to
provisions regarding when complex auctions occurring on the Exchange
may terminate early. The proposed rule changes are not intended to be
competitive.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not:
A. significantly affect the protection of investors or the public
interest;
B. impose any significant burden on competition; and
C. become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act \19\ and
Rule 19b-4(f)(6) \20\ thereunder. At any time within 60 days of the
filing of the proposed rule change, the Commission summarily may
temporarily suspend such rule change if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission will institute proceedings to determine whether the proposed
rule change should be approved or disapproved.
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\19\ 15 U.S.C. 78s(b)(3)(A).
\20\ 17 CFR 240.19b-4(f)(6).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#4d3f382128602e2220202823393e0d3e282e632a223b"><span class="__cf_email__" data-cfemail="2f5d5a434a024c4042424a415b5c6f5c4a4c01484059">[email protected]</span></a>. Please include
file number SR-CBOE-2023-051 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-2023-051. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10 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-2023-051 and should be submitted on or
before October 20, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21342 Filed 9-28-23; 8:45 am]
BILLING CODE 8011-01-P
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