Notice2024-29147
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Auction Response and Execution Price Cap for AIM and SAM Auctions
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Published
December 12, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 239 (Thursday, December 12, 2024)</title>
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[Federal Register Volume 89, Number 239 (Thursday, December 12, 2024)]
[Notices]
[Pages 100564-100567]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-29147]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101834; File No. SR-CBOE-2024-052]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Auction Response and Execution Price Cap for AIM and SAM Auctions
December 6, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on November 22, 2024, 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
[[Page 100565]]
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 Rules 5.37 and 5.39. 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 Rules 5.37 (Automated Price
Improvement Mechanism (``AIM'' or ``AIM Auction'') and 5.39
(``Solicitation Auction Mechanisms (``SAM'' or ``SAM Auction'')) to
modify the agency side execution price cap to allow for further price
improvement.
By way of background, Rule 5.37 contains the requirements
applicable to the execution of certain customer orders (``Agency
Orders'') using AIM. An AIM Auction is an electronic auction intended
to provide an Agency Order with the opportunity to receive price
improvement (over the National Best Bid or Offer (``NBBO'')). Rule 5.39
contains the requirements applicable to the execution of Agency Orders
using SAM. Similarly, a SAM Auction is an electronic auction intended
to provide a larger-sized Agency Order with the opportunity to receive
price improvement over the NBBO. Upon submitting an Agency Order into
an AIM or SAM Auction, the initiating Trading Permit Holder
(``Initiating TPH'') must also submit a contra-side second order
(``Initiating Order'') for the same size as the Agency Order. The
Initiating Order guarantees that the Agency Order will receive an
execution at no worse than the auction price. Upon commencement of an
auction, market participants may submit responses to trade against the
Agency Order.\5\ At the conclusion of an AIM Auction, depending on the
contra-side interest (including auction responses) available, the
Initiating Order may be allocated a certain percentage (or more) of the
Agency Order.\6\ At the conclusion of a SAM Auction, depending on the
contra-side interest (including auction responses) available, the
Initiating Order may be allocated the entire Agency Order or none of
the Agency Order.\7\
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\5\ See Rules 5.37(c)(5) and 5.39(c)(5).
\6\ See Rule 5.37(e).
\7\ See Rule 5.39(e).
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Rules 5.37(c)(5)(B) and 5.39(c)(5)(B) provide that the System may
not execute AIM responses (against Agency Orders) outside of the BBO at
the conclusion of the AIM Auction or the Initial NBBO. Similarly, Rules
5.37(e) and 5.39(e) provide that the execution price of any Agency
Order must be not outside the Exchange best bid or offer (``BBO'') at
the conclusion of the auction or the Initial NBBO.\8\ The Exchange
proposes to amend Rules 5.37(c)(5)(B) and (e) and 5.39(c)(5)(B) and (e)
to eliminate the requirement that the execution price of an AIM
response or Agency Order be at or better than the Initial NBBO.\9\ The
Exchange believes this may provide Agency Orders with further
opportunities for price improvement, including in the event the market
changes during an AIM or SAM Auction.
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\8\ The term ``Initial NBBO'' means the national best bid or
national best offer at the time an auction is initiated. See Rules
5.37 (introductory paragraph) and 5.39 (introductory paragraph). The
Exchange notes that Rules 5.37(b) and 5.39(b) reference the ``then-
current NBBO'' when describing the stop price conditions. The
``then-current NBBO'' is the NBBO at the time the System receives
the Agency Order and contra-order, which (assuming all conditions
are satisfied) becomes the time at which the auction commences, and
thus the then-current NBBO is ultimately the NBBO at the
commencement of the auction, which is also the ``Initial NBBO.''
\9\ The proposed rule change makes nonsubstantive changes to
Rule 5.37(e) to delete the redundant phrase ``as follows,'' and
makes other grammatical changes, which changes have no impact on
these provisions and merely improve readability. The proposed rule
change also makes nonsubstantive changes to Rule 5.37(e) to replace
``better than both sides of'' with ``between,'' as those terms mean
the same thing with respect to the BBO. This makes the language in
Rule 5.37(e) consistent with the analogous language in Rule 5.39(e).
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To illustrate the impact of the proposed rule change, suppose the
following market exists when an Initiating TPH submits to AIM Auction
an Agency Order to buy 5 contracts at 1.05 (which is the stop price):
BBO: 0.85-1.20 (no priority customers)
ABBO: 1.00-1.10
Initial NBBO: 1.00-1.10
After the Auction begins, the ABBO moves to 0.90-1.10 and the
Exchange receives on its book a non-priority customer order to sell 1
contract at 0.95. During the Auction, one response to sell one contract
at 0.75 is submitted. Therefore, when the AIM Auction concludes, the
following market exists:
BBO: 0.85-0.95 (no priority customers)
ABBO: 0.90-1.10
NBBO: 0.90-0.95
Under the current rules, the execution price would be capped at the
Initial NBB of 1.00, and thus the Agency Order would execute as
follows:
1 contract against the sell response @ 1.00
1 contract against the sell order @ 1.00
3 contracts against the Initiating Order at 1.05
As proposed, the execution price would be capped at BBO at the
conclusion of the Auction of 0.85, and thus the Agency Order would
execute as follows:
1 contract against the sell response @ 0.85
1 contract against the sell order @ 0.95
3 contracts against the Initiating Order @ 1.05
Therefore, as proposed, the Agency Order is able to buy one
contract at 0.15 less and another contract at 0.05 less than what
occurs under the current Rules, which ultimately results in price
savings for this customer.
To illustrate what would happen if the away market moved the other
direction during an AIM Auction, suppose the following market exists
when an Initiating TPH submits to AIM Auction an Agency Order to buy 5
contracts at 1.05 (which is the stop price):
BBO: 0.85-1.20 (no priority customers)
ABBO: 1.00-1.10
Initial NBBO: 1.00-1.10
After the Auction begins, the ABBO moves to 1.10-1.20 and the
Exchange receives on its book a non-priority customer order to sell 1
contract at 1.15. During the Auction, one response to sell one contract
at 0.95 is submitted. Therefore, when the AIM Auction concludes, the
following market exists:
[[Page 100566]]
BBO: 0.85-1.15 (no priority customers)
ABBO: 1.10-1.20
NBBO: 1.10-1.15
Under the current rules, the execution price would be capped at the
Initial NBB of 1.00, and thus the Agency Order would execute as
follows:
1 contract against the sell response @ 1.00
4 contracts against the Initiating Order at 1.05
As proposed, the execution price would be capped at BBO at the
conclusion of the Auction of 0.85, and thus the Agency Order would
execute as follows:
1 contract against the sell response @ 0.95
4 contracts against the Initiating Order @ 1.05
Therefore, as proposed, the Agency Order is able to buy one
contract at 0.05 less than what occurs under the current Rules, which
ultimately results in price savings for this customer. This example
also demonstrates that if the Agency Order side of the market crosses
the auction/stop price, the Agency Order will still not trade at a
price worse than the auction/stop price.
Another example illustrates what would happen if the Exchange's
market moved during an AIM Auction and the Agency Order side of the
market crossed the auction/stop price, suppose the following market
exists when an Initiating TPH submits to AIM Auction an Agency Order to
buy 5 contracts at 1.05 (which is the stop price):
BBO: 0.85-1.20 (no priority customers)
ABBO: 1.00-1.10
Initial NBBO: 1.00-1.10
After the Auction begins, the Exchange receives on its book a non-
priority customer order to buy 1 contract at 1.15. No responses were
received prior to the receipt of this order. This would cause the
Agency Order's stop price of 1.05 to be outside of the BBO of 1.15-
1.20. As a result, pursuant to Rule 5.37(d)(1)(C), the AIM Auction
would conclude. All five contracts of the Agency Order would execute
against the Initiating Order at 1.05. The proposed rule change would
have no impact on this scenario since the execution price is still
within the Initial NBBO.
The proposed change will continue to protect interest resting on
the Exchange's book (including priority customers) and interest at away
markets in accordance with linkage rules \10\ while providing customers
with additional opportunities for price improvement. Additionally,
customers will continue to never receive an execution at a price worse
than the auction/stop price.
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\10\ See Rule 5.66(b)(9) (which permits transactions that trade
through the NBBO if an order was stopped at a price that did not
constitute a trade-through at the time of the stop).
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\11\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \12\ 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) \13\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
\13\ Id.
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The Exchange believes the proposed rule change will help perfect
the mechanism of a free and open market, promote just and equitable
principles of trade and protect investors. In particular, the Exchange
believes the proposed rule change will provide opportunities for
further price improvement for Agency Orders in the event an away market
fades during an auction. The Exchange believes that the proposed rule
change may permit Agency Orders submitted into AIM and SAM Auctions (or
parts of them) to execute at better prices, including against Auction
responses, than they may execute at today. The Exchange believes the
proposed changes may provide Agency Orders with increased opportunities
for meaningful price improvement without inadvertently penalizing them
if markets happen to move during an auction. The Exchange believes the
proposed rule change will permit customers to take advantage of market
moves that occur during an auction, which may result in these orders
receiving further price improvement compared to what they may receive
under current Rules, which ultimately benefits investors.
The Exchange further notes that the proposed rule change remains
consistent with the Options Order Protection and Locked/Crossed Market
Plan (``Linkage Plan'') approved by the Securities and Exchange
Commission (the ``Commission'') pursuant to Regulation NMS \14\ and the
Exchange's Rules adopted in accordance with the Linkage Plan.\15\ In
particular, the proposed rule change is consistent with the trade-
through exception that permits an order to trade at a price outside of
the NBBO at the time of execution (i.e., the conclusion of an AIM or
SAM Auction) if the order was stopped at a price that did not
constitute a trade-through at the time of the stop (i.e., the Initial
NBBO).\16\ This stop price is required for AIM and SAM auctions.\17\
While this trade-through exception requires a stop price to be at or
between the Initial NBBO, it does not require an execution price to be
at or between the Initial NBBO.\18\ When the Commission discussed this
trade through exception when approving the Linkage Plan, it noted the
purpose of this exception was to allow for ``price improvement for an
order, even if the market moves in the interim, and the transaction is
effected at a price that would trade through the then currently-
displayed market,'' as occurs in price improvement auctions of several
exchanges.\19\ As proposed, executions will always occur at prices at
[[Page 100567]]
or between the BBO at the conclusion of the Auction, thus respecting
prices from away markets while providing an Agency Order with the
opportunity to benefit from any market changes that occur during an
auction. Additionally, customers will continue to never receive an
execution at a price worse than the auction/stop price.
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\14\ See Securities Exchange Act Release No. 60405 (July 30,
2009), 74 FR 39362 (August 6, 2009) (Order Approving the National
Market System Plan Relating to Options Order Protection and Locked/
Crossed Markets Submitted by the Chicago Board Options Exchange,
Incorporated, International Securities Exchange, LLC, The NASDAQ
Stock Market LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX, Inc., NYSE
Amex LLC, and NYSE Arca, Inc.) (``Linkage Approval Order'')
\15\ See Rules 5.65 through 5.67.
\16\ See Rule 5.66(b)(9).
\17\ See Rules 5.37(b) and 5.39(b).
\18\ The Exchange notes at least one other options exchange with
similar auction mechanisms does not limit executions prices to being
at or better than the Initial NBBO. See, e.g., Nasdaq ISE, LLC
(``ISE'') Rulebook Options 3, Section 11(d) (permissible execution
prices for orders submitted into the solicited order mechanism
(comparable to SAM) do not take into account prices of away
markets); and Section 13 (permissible execution prices for orders
submitted into the price improvement mechanism (comparable to AIM)
do not take into account prices of away markets).
\19\ See Linkage Approval Order at 39368. The Commission
continued by stating that ``[d]uring [an] auction period, the NBBO
could move from where it was when the order was received. However,
the Exchange is only required to guarantee a price no worse than the
NBBO at the time the order was received.'' The Commission found this
exception to be ``in the public interest, appropriate for the
protection of investors and the maintenance of fair and orderly
markets.'' Id.
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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 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 uniformly to AIM and SAM
orders and responses of all TPHs. Additionally, the Exchange notes that
participation in the AIM and SAM Auctions is completely voluntary. The
Exchange believes all market participants may benefit from any
additional price improvement in the AIM and SAM Auctions that may
result from the proposed rule change. The Exchange does not believe the
proposed rule change will impose any burden on intermarket competition
that is not necessary or appropriate in furtherance of the purposes of
the Act, as the proposed rule change relates to Exchange-specific
auction mechanisms and, as noted above, will continue to ensure that
execution prices occur in a manner consistent with linkage rules and
protect customers on the book. As noted above, at least one other
options exchange with similar auction mechanisms does not limit
executions prices to being at or better than the Initial NBBO.\20\
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\20\ See, e.g., ISE Rulebook Options 3, Section 11(d)(3)
(permissible execution prices for orders submitted into the
solicited order mechanism (comparable to SAM) do not take into
account prices of away markets); and Section 13(d) (permissible
execution prices for orders submitted into the price improvement
mechanism (comparable to AIM) do not take into account prices of
away markets).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
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 \21\ and
Rule 19b-4(f)(6) \22\ 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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\21\ 15 U.S.C. 78s(b)(3)(A).
\22\ 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="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#b4c6c1d8d199d7dbd9d9d1dac0c7f4c7d1d79ad3dbc2"><span class="__cf_email__" data-cfemail="81f3f4ede4ace2eeecece4eff5f2c1f2e4e2afe6eef7">[email protected]</span></a>. Please include
file number SR-CBOE-2024-052 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-2024-052. 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-2024-052 and should be
submitted on or before January 2, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-29147 Filed 12-11-24; 8:45 am]
BILLING CODE 8011-01-P
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