Notice2025-02084
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of Amendment No. 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 2, Regarding the Types of Complex Orders Available for Flexible Exchange Options (“FLEX”) Trading on the Exchange
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
February 3, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 21 (Monday, February 3, 2025)</title>
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[Federal Register Volume 90, Number 21 (Monday, February 3, 2025)]
[Notices]
[Pages 8822-8829]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-02084]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102297; File No. SR-CBOE-2024-047]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of Amendment No. 2 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 2, Regarding the
Types of Complex Orders Available for Flexible Exchange Options
(``FLEX'') Trading on the Exchange
January 28, 2025.
On October 11, 2024, Cboe Exchange, Inc. (``Exchange'') filed with
the Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or
``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to provide for the trading of complex flexible exchange options
(``FLEX'') orders with both FLEX and non-FLEX components (``FLEX v.
non-FLEX Orders''). The proposed rule change was published for comment
in the Federal Register on October 30, 2024.\3\ On December 10, 2024,
pursuant to Section 19(b)(2) of the Act,\4\ the Commission designated a
longer period within which to approve the proposed rule change,
disapprove the proposed rule change, or institute proceedings to
determine whether to disapprove the proposed rule change.\5\ The
Commission received no comments regarding the proposal. On December 20,
2024, the Exchange filed Amendment No. 1 to the proposal, which
superseded and replaced the original proposal in its entirety. On
January 23, 2024, the Exchange filed Amendment No. 2 to the proposal,
which supersedes and replaces Amendment No. 1 in its entirety.\6\ The
Commission is publishing this notice to solicit comments on Amendment
No. 2 from interested persons and is approving the proposed rule
change, as modified by Amendment No. 2, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 101428 (Oct. 24,
2024), 89 FR 86393.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 101870 (Dec. 10,
2024), 89 FR 101673 (Dec.16, 2024). The Commission designated
January 28, 2025, as the date by which the Commission shall either
approve or disapprove, or institute proceedings to determine whether
to disapprove, the proposed rule change.
\6\ Amendment No. 2 revises the proposal to: clarify and correct
errors in the text of the proposed rules; provide an example of the
application of the Exchange's obvious error rules to complex FLEX v.
non-FLEX Orders; provide additional discussion of the potential uses
of FLEX v. non-FLEX Orders; revise the description of the proposal
to make clear that the Exchange's rules will continue to require
that the component legs of FLEX complex orders, including FLEX v.
Non-FLEX Orders, have the same underlying equity or index; and
include additional information in the examples showing the pricing
of FLEX v. non-FLEX Orders. Amendment No. 2 to the proposal is
available at: <a href="https://www.sec.gov/comments/sr-cboe-2024-047/srcboe2024047.htm">https://www.sec.gov/comments/sr-cboe-2024-047/srcboe2024047.htm</a>.
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I. Description of the Proposed Rule Change, as Modified by Amendment
No. 2
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to amend its Rules regarding the types of complex orders available for
flexible exchange options (``FLEX'') trading at the Exchange. The
Exchange initially submitted this rule filing SR-CBOE-2024-047 to the
Commission on October 11, 2024 (the ``Initial Rule Filing''). The
Exchange submitted Amendment No. 1 to the Initial Rule Filing on
December 20, 2024 (``Amendment No. 1''), which superseded the Initial
Rule Filing and replaced it in its entirety. This Amendment No. 2 to
the initial Rule Filing supersedes Amendment No. 1 and replaces it in
its entirety. The text of the proposed rule change is provided in
Exhibit 5. The text of the proposed rule change is also available on
the
[[Page 8823]]
Exchange's website at <a href="https://www.cboe.com/us/options/regulation/rule_filings/">https://www.cboe.com/us/options/regulation/rule_filings/</a>.
II. The Exchange'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 adopt rules to govern a new type of
complex FLEX Order. Specifically, the Exchange proposes to amend Rules
4.21 (Series of FLEX Options), 5.70 (Availability of Orders), 5.72
(FLEX Trading), and 6.5 (Nullification and Adjustment of Options
Transactions Including Obvious Errors).
FLEX Options are customized equity or index option contracts that
allow investors to tailor contract terms for exchange-listed equity and
index options. The Exchange may make simple FLEX Orders and complex
FLEX Orders (see Rule 5.70(b)), including security future-option orders
and stock-option orders, available for FLEX trading. Currently, the
legs of a complex FLEX Order are limited to FLEX Option series only. An
investor wishing to trade a complex strategy containing both FLEX
Option series and non-FLEX Option series must execute such strategy
using two or more separate orders. The Exchange now proposes to amend
its rules to allow for the legs of a complex FLEX Order to include a
combination of FLEX Option series and non-FLEX Option series (``FLEX v.
Non-FLEX Order'').
The Exchange notes that, with exception of the rules proposed in
this rule filing, FLEX v. Non-FLEX Orders will be subject to the same
trading rules and procedures that currently govern the trading of other
complex FLEX Orders on the Exchange. To permit the trading of FLEX v.
Non-FLEX Orders, the Exchange proposes to amend its rules as follows.
First, the Exchange proposes to amend Rule 5.70 (Availability of
Orders) to add FLEX v. Non-FLEX Orders to the types of complex orders
available for FLEX trading.\7\ Specifically, the Exchange proposes to
amend Rule 5.70(b) to state that the legs of a complex FLEX Order may
be for FLEX Option series only or a combination of FLEX Option series
and non-FLEX Option series (``FLEX v. Non-FLEX Order'').\8\ As noted
above, FLEX v. Non-FLEX Orders will be considered complex FLEX
instruments, which will be subject to the same trading rules and
procedures that govern the trading of other FLEX Orders on the Exchange
(unless otherwise noted herein). The Exchange also proposes to amend
Rule 5.70(b) to remove the requirements set forth in subparagraphs (1)
and (2).\9\ Rule 5.70(b)(1) provides that each leg(s) of a complex FLEX
Order must be for a FLEX Option series authorized for FLEX trading with
the same underlying equity security or index. The Exchange proposes to
delete this requirement, as such requirement is already contained
within the definition of complex order set forth in Rule 1.1. Rule
5.70(b)92) [sic] provides that each leg(s) of a complex FLEX Order must
have the same exercise style. The Exchange proposes to delete this
requirement to allow for the trading of the proposed FLEX v. Non-FLEX
Orders and will, in general, provide FLEX Traders with more flexibility
and opportunities for customization via FLEX trading. Further, deletion
of this requirement that each leg of a complex FLEX Order (whether
comprised of all FLEX Option legs or FLEX and non-FLEX Option legs)
must have the same exercise style will expand investors' choices and
flexibility, and provide FLEX Traders with a mechanism by which to
manage the positions and associated risk in their portfolios more
precisely, based on exercise style.
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\7\ As part of the proposed rule change, the Exchange proposes
to amend Rule 5.70(b) to add a cite to the definition of complex
order in Rule 1.1; this is not a substantive change, but rather
merely adds a cross-reference to the defined term for purposes of
clarity. Per Rule 1.1, the term ``complex order'' means an order
involving the concurrent execution of two or more different series
in the same underlying security or index (the ``legs'' or
``components'' of the complex order), for the same account,
occurring at or near the same time and for the purpose of executing
a particular investment strategy with no more than the applicable
number of legs (which number the Exchange determines on a class-by-
class basis).
\8\ Under the proposed rule change, complex FLEX Orders could
include both listed instruments as well as FLEX instruments (if at
least one leg is for a FLEX Option series), with an optional stock
leg. Per the definition of complex order, the legs of all complex
FLEX Orders (including FLEX v. Non-FLEX options) must have the same
underlying security or index. See Rule 1.1 (definition of complex
order).
\9\ See supra note 1. [sic].
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The Exchange also proposes to add Rule 5.70(d), which states that,
in classes determined by the Exchange, a nonconforming FLEX v. Non-FLEX
Order is not eligible for electronic processing, in which case the
nonconforming FLEX v. Non-FLEX Order may only be submitted for manual
handling and open outcry trading. For reference, a ``nonconforming
complex order'' is defined as a complex order with a ratio on the
options legs less than one-to-three (.333) or greater than three-to-one
(3.00).\10\ The proposed language is the same as language currently
included in the definition of ``complex order'' in Rule 5.33(a), the
intent of which is to permit the Exchange to determine in which classes
nonconforming complex orders (including stock-option orders) may be
submitted for electronic processing on the Exchange pursuant to Rule
5.33.
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\10\ See Rule 1.1.
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The Exchange also proposes to add Rule 5.70(e), which states that
the non-FLEX Option leg(s) of a FLEX v. Non-FLEX Order may not Leg into
the Simple Book, to provide for more efficient execution and processing
of FLEX v. Non-FLEX Orders. The series that would comprise a FLEX v.
Non-FLEX Order are parts of different classes and thus are subject to
different trading setting and parameters (e.g., allocation,
entitlements) pursuant to the Rules. Non-FLEX classes also have
separate market data inputs, as the System must read market data for
each class in connection with potential executions in non-FLEX
classes.\11\ If the System receives a FLEX v. Non-FLEX Order, it would
need to trade the Non-FLEX leg against the appropriate leg in the book;
however, there is no book with resting simple FLEX orders against which
the FLEX leg could execute. If this were to occur, execution
opportunities for FLEX v. Non-FLEX Orders may be prevented, as while
the Non-FLEX leg(s) of the FLEX v. Non-FLEX Order would execute against
interest in the book, there would be no execution opportunities for the
FLEX leg(s) of the FLEX v. Non-FLEX Order. As discussed below, the Non-
FLEX legs of FLEX v. Non-FLEX Orders will protect Priority
[[Page 8824]]
Customer orders in the simple book for the Non-FLEX classes.
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\11\ This proposed change is consistent with current Rules that
do not permit legging of complex orders consisting of legs in
different groups of series in a class, as the System handles groups
of series as different classes. See Rule 5.33(g)(6). The proposed
change is also consistent with the Exchange's handling of stock-
option orders. See Rule 5.33(g)(5).
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The Exchange proposes to amend Rule 5.72 (FLEX Trading) to
distinguish criteria for a complex order with only FLEX Option legs and
to add criteria for FLEX and non-FLEX Option legs of a FLEX v. Non-FLEX
Order. First, the Exchange proposes to amend Rule 5.72(b)(2) to specify
that each FLEX Option leg of the FLEX Option complex strategy must
include all terms for a FLEX Option series set forth in Rule 4.21
(including that a non-FLEX Option series with identical terms is not
listed for trading), subject to the order entry requirements set forth
in Rule 5.7.
Additionally, the Exchange proposes changes to distinguish the
criteria for a complex order with only FLEX Option leg(s) from that
proposed for FLEX v. Non-FLEX Orders, noting that there are no changes
to the criteria to those FLEX Orders containing only FLEX Option leg(s)
as a result of the proposed rule change. The Exchange proposes to amend
Rule 5.72(b)(2)(A) to specifically reference the pricing requirements
for complex FLEX Orders with FLEX Option legs only. As proposed Rule
5.72(b)(2)(A)(i) contains the requirements for a complex FLEX Order
with only FLEX Option legs submitted into the System for an electronic
FLEX Auction pursuant to Rule 5.72(c) or Rules 5.73 or 5.74, which must
include a bid or offer price for each leg, which leg prices must add
together to equal the net price. Proposed Rule 5.72(b)(2)(A)(ii) sets
forth the requirements for a complex FLEX Order with only FLEX Option
legs submitted into the System prior to representation in an open
outcry FLEX Auction pursuant to Rule 5.72(d), namely that the order may
include a bid or offer price on one or more of the legs (subject to a
FLEX Trader's responsibilities pursuant to Rule 5.91 and Chapter 9).
The execution leg prices must be entered or modified, as necessary, via
PAR following execution of the order, which prices must add together to
equal the net execution price.
The Exchange proposes to add Rule 5.72(b)(2)(B) containing certain
requirements for a FLEX v. Non-FLEX Order. Under the proposed rule, a
FLEX v. Non-FLEX Order submitted in the System for an electronic FLEX
Auction pursuant to Rule 5.72(c) must include a bid or offer price for
each FLEX Option leg but no bid or offer price for each non-FLEX Option
leg, and a net price. By allowing the System the ability to adjust the
price of the legs, FLEX Traders may achieve their desired net price for
the order, while ensuring the non-FLEX Option legs fit within pricing
requirements of the non-FLEX markets. A FLEX v. Non-FLEX Order
submitted into the System prior to representation in an open outcry
FLEX Auction pursuant to Rule 5.72(d) below may include a bid or offer
price for any FLEX Option leg but no bid or offer price for each non-
FLEX Option leg, and a net price. By allowing flexibility in open
outcry trading, FLEX Traders may achieve their desired net price for
the order.
To achieve the desired net execution price for a FLEX v. Non-FLEX
Order (1) the execution leg price of each non-FLEX Option leg may not
be worse than the NBBO,\12\ worse than the BBO,\13\ or equal to the BBO
if there is a Priority Customer order(s) on the Simple Book; and (2)
the execution leg price of each FLEX Option leg(s) may be adjusted so
that the prices of the FLEX Option legs combined with the prices of the
non-FLEX Option legs add together to equal the net price. Thus, the
non-FLEX Option legs of a FLEX v. Non-FLEX Order would be able to trade
at the same price as non-Priority Customer interest at the BBO, which
is consistent with complex orders comprised of solely non-FLEX
Options.\14\ In addition, no non-FLEX component of a FLEX v. Non-FLEX
Order would be able to trade at the same price as resting Priority
Customer interest at the BBO.\15\ If a non-FLEX Option leg of a FLEX v.
Non-FLEX Order cannot execute at a price permissible that meets the
requirements set forth in proposed Rule 5.72(b)(2)(B)(i), the entire
FLEX v. Non-FLEX Order will be cancelled.
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\12\ See Rule 1.1. The term ``NBBO'' means the national best bid
or offer the Exchange calculates based on market information it
receives from OPRA.
\13\ See Rule 1.1. The term ``BBO'' means the best bid or offer
disseminated on the Exchange.
\14\ See Rule 5.33(f)(2)(A)(ii).
\15\ See proposed Rule 5.72(b)(2)(B)(i). This is consistent with
nonconforming complex orders comprised of solely non-FLEX Options.
See Rule 5.33(f)(2)(A)(iv)(B).
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The below examples are designed to illustrate the pricing of a FLEX
v. Non-FLEX Order. Assume for each example a FLEX Trader wishes to
execute a complex FLEX Order with two legs (one FLEX Option leg and one
non-FLEX Option leg).
Example 1: Listed (i.e., non-FLEX) legs are adjusted to their NBBO
first, FLEX Option leg is then adjusted residually to meet net
execution price.
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Instrument ID Legs Symbol Side Ratio Expiration Strike Type
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CI0001.......................... Leg 1............. XYZ Buy............... 1 December.......... 10 Call.
Leg 2............. 1XYZ Sell.............. 1 November.......... 10.01 Call.
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Market for Non-FLEX Leg
Away BBO: 2.15 x 2.35
BBO: 2.20 x 2.30
NBBO: 2.20 x 2.30
FLEX Order Auction (``FOA''): Buy 10 CI0001 @ 1.25.
Leg 1 (Non-FLEX Option Leg) Price: N/A
Leg 1 Market: (Exchange Market-Maker) 2.20 x 2.30 (Exchange Market-
Maker)
Leg 2 (FLEX Option Leg) Price: 1.00
Response 1: Sell 5 CI0001 @ 1.19
Response 2: Sell 5 CI0001 @ 1.25
FOA trades 5 CI0001 with Response 1 at 1.19. The legs print at 2.20 and
1.01.
FOA trades 5 CI0001 with Response 2 at 1.25. The legs print at 2.25 and
1.00.
Example 2: Listed (i.e., Non-FLEX) legs are adjusted up/down to
their NBBO first, FLEX Option leg retains specified price, as no
further adjustment is needed to meet net price.
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Instrument ID Legs Symbol Side Ratio Expiration Strike Type
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CI0001.......................... Leg 1............. XYZ Buy............... 1 December.......... 10 Call.
Leg 2............. 1XYZ Sell.............. 1 November.......... 10.01 Call.
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Market for Non-FLEX Leg
Away BBO: 2.10 x 2.35
BBO: 2.15 x 2.30
[[Page 8825]]
NBBO: 2.15 x 2.30
FOA: Buy 10 CI0001 @ 1.25.
Leg 1 (Non-FLEX Option Leg) Price: N/A
Leg 1 Market: (Exchange Market-Maker) 2.15 x 2.30 (Exchange Market-
Maker)
Leg 2 (FLEX Option Leg) Price: 1.00
Response 1: Sell 5 CI0001 @ 1.19
Response 2: Sell 5 CI0001 @ 1.25
FOA trades 5 CI0001 with Response 1 at 1.19. The legs print at 2.19 and
1.00.
FOA trades 5 CI0001 with Response 2 at 1.25. The legs print at 2.25 and
1.00.
While the System followed the same process in both examples to
price the non-FLEX legs first, because the leg market was wider in the
second example, the System was able to execute the non-FLEX leg in that
example at a price within that market without the need to adjust the
entered price of the FLEX leg.
The Exchange proposes to amend Rule 4.21 (Series of FLEX
Options).\16\ The Exchange proposes to add Rule 4.21(a)(4) to state
that the Exchange may halt trading in a FLEX complex strategy (whether
comprised of all FLEX Option legs or FLEX and non-FLEX Option legs) if
any leg of the strategy is halted. The System does not accept a FLEX
complex order for a series while trading in the class is halted. A FLEX
complex strategy may not execute until all legs are no longer halted.
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\16\ As part of the proposed changes, the Exchange proposes to
add a ``FLEX Option series'' as a defined term in Rule 4.21(a).
Further, to enhance comprehension, the Exchange proposes to amend
Rule 4.21(a)(2) to add a missing word (``be''), as well as clarify
that a FLEX Order for a new FLEX Option series may be submitted on
any trading day prior to the expiration date. Such changes are non-
substantive, clarifying changes.
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Finally, the Exchange proposes to amend Rule 6.5 (Nullification and
Adjustment of Option Transactions Including Obvious Errors),
Interpretation and Policy .07. Specifically, the Exchange proposes to
add Rule 6.5, Interpretation and Policy. 07(d), to state that if a non-
FLEX Option leg of a FLEX v. Non-FLEX Order qualifies as an Obvious
Error under Rule 6.5(c)(1) or a Catastrophic Error under Rule
6.5(d)(1), then the non-FLEX Option leg that is an Obvious or
Catastrophic Error will be adjusted in accordance with Rules
6.5(c)(4)(A) or (d)(3), respectively, regardless of whether one of the
parties is a Customer. However, the non-FLEX Option leg of any Customer
order subject to proposed Rule 6.5, Interpretation and Policy. 07(d)
will be nullified if the adjustment would result in an execution price
higher (for buy transactions) or lower (for sell transactions) than the
Customer's net execution price for the non-FLEX Option leg. If any leg
of a FLEX v. Non-FLEX Order is nullified, the entire transaction is
nullified. This is consistent with the Exchange's handling of other
complex orders, including stock-option orders, and ensures protections
in the event of an Obvious or Catastrophic error. The below example is
designed to illustrate how a FLEX v. Non-FLEX Order will be processed
in the event of an Obvious Error. Assume for the example a FLEX Trader
wishes to execute a complex FLEX Order with three legs (one FLEX Option
leg and two non-FLEX Option leg).
Example 3: Listed Leg 1 qualifies as Obvious Error.
Leg 1: Buy 1 Call 1.00 x 1.20
Leg 2: Buy 1 Call 2.00 x 2.25
Leg 3: Buy 1 FLEX Call (Note: the FLEX leg is not considered in
determining obvious error adjustments)
SNBBO of listed legs: 3.00 x 3.45
Assume Leg 1 updates to 1.00 x 4.00; Listed Leg SNBBO updates to 3.00 x
6.25
1 millisecond later
Complex Order trades at 5.45
Leg 1 trades @ 2.25
Leg 2 trades @ 2.20
FLEX leg trades @ 1.00
This order, specifically the execution on Leg 1, qualifies as
Obvious Error, based on prices prior to Leg 1 market going wide.\17\
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\17\ See proposed Rule 6.5, Interpretation and Policy .07(d).
See also Rule 6.5(c)(1).
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Obvious error adjustment: Leg 1 is adjusted to trade at 1.60
Theoretical price (``TP'') = 1.10
Theoretical offer = 1.45
Theoretical Offer + 0.15 adjustment \18\ = 1.60.
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\18\ See proposed Rule 6.5, Interpretation and Policy .07(d).
See also Rule 6.5(c)(4)(A).
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The Exchanges notes that the counterparties to an execution of a
FLEX v. Non-FLEX Order trade all of the component legs of the order.
The Exchange believes that its existing surveillance and reporting
safeguards in place are adequate to deter and detect possible
manipulative behavior which might arise from trading FLEX v. Non-FLEX
Orders and will support the protection of investors and the public
interest. The Exchange also represents that it has the necessary system
capacity to support the new complex FLEX Order type. Finally, the
Exchange does not believe that any market disruptions will be
encountered with the introduction of this complex FLEX Order type. The
Exchange currently allows for trading of several types of complex
orders, including stock-option orders, and has not experienced any
market disruptions or issues with capacity. Rather, the Exchange
believes the introduction of this complex FLEX Order type may promote
more efficient trading, as investors wishing to trade a complex
strategy containing both FLEX Option series and non-FLEX Option series
would no longer be required to execute such strategy using two or more
separate orders.
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. Specifically, the Exchange
believes the proposed rule change is consistent with the Section
6(b)(5) 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) requirement that the rules of an exchange not be designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers.
Specifically, the Exchange believes the proposed rule change will
benefit investors by expanding investors' choices and flexibility with
respect to the trading of FLEX Options. The Exchange believes that
introducing FLEX v. Non-FLEX Orders will increase order flow to the
Exchange, increase the variety of options products available for
trading, and provide a valuable tool for investors to manage risk.
The Exchange believes that the proposed rule change would remove
impediments to and perfect the mechanism of a free and open market as
FLEX v. Non-FLEX Orders would enable market participants to execute a
complex strategy including a combination of FLEX Option series and non-
FLEX Option series, which would, in turn, provide greater opportunities
for market participants to manage risk through the use of a complex
FLEX Order to the benefit of investors and the
[[Page 8826]]
public interest. The proposed rule change will benefit TPHs by
providing a more efficient mechanism for TPHs to provide and seek
liquidity for customized or complex FLEX strategies which include a
non-FLEX Option leg(s).
Further, trading FLEX Options, including FLEX v. Non-FLEX Orders,
on an exchange is an alternative to trading customized options in OTC
markets and carries with it the advantages of exchange markets such as
transparency, parameters and procedures for clearance and settlement,
and a centralized counterparty clearing agency. Therefore, the Exchange
believes the proposed rule change will promote these same benefits for
the market as a whole by providing an additional venue for market
participants to seek liquidity for customized, large-sized, or complex
FLEX option orders, including those with a non-FLEX Option leg(s). The
Exchange believes that providing an additional venue for these FLEX
orders, rather than potentially splitting the orders across OTC and
exchange markets, will benefit investors by increasing competition for
order flow and executions, and thereby potentially result in more
competitive pricing related to FLEX Options.
The Exchange believes that the proposed changes to Rule 5.70(b), to
add FLEX v. Non-FLEX Orders to the list of complex orders available for
FLEX trading, are consistent with the Act and remove impediments to and
perfect the mechanism of a free and open market and a national market
system because the changes will allow investors to trade in a more
efficient manner, allowing investors to better customize their trading
strategies and implement more precise trading strategies which are not
available under current rules. Currently, a market participant is
unable to trade a FLEX Option and a listed option as part of the same
complex strategy; such user must submit an order containing the FLEX
Option(s) and an order containing the listed option. This may introduce
additional complexities such as price and legging risk, which would be
eliminated under the proposed rule change. These complexities may
unnecessarily limit market participants' ability to trade in an
exchange environment that offers the added benefits of transparency,
price discovery, liquidity, and financial stability. These investors
may have improved capability under the proposed rule change to execute
strategies to meet their specific investment objectives by using a
single order with customized FLEX Option legs with non-FLEX Option
legs.
Similarly, the Exchange also believes the proposed changes to Rule
5.70(b), to remove the requirement that each leg of a complex FLEX
Order must have the same exercise style, will remove impediments to and
perfect the mechanism of a free and open market and benefit investors,
because it will provide TPHs with additional flexibility and precision
in their investment strategies, by allowing TPHs to trade complex
strategies that would otherwise be required to split into multiple,
separate orders.
The proposed changes to Rule 5.70(b) to add a cite to Rule 1.1 for
the definition of complex orders and delete Rule 5.70(b)(1) provides
further clarity within the Rules, to the benefit of investors.
The Exchange believes the proposed changes to Rule 4.21(a), which
address when the Exchange may halt trading in a FLEX complex strategy
(whether comprised of all FLEX Option legs or FLEX and non-FLEX Option
legs), are consistent with the Act and promotes the public interest and
the protection of investors by clarifying the Exchange's authority with
respect to FLEX complex strategies comprised of all FLEX Option legs
and providing a consistent and transparent procedure with respect to
FLEX complex strategies comprised of FLEX and non-FLEX Option legs,
that would be applied by the Exchange, similar to trading halt
authority under current rules. Further, the proposed change to add the
defined term ``FLEX Option series'' provides further clarity within the
Rules and eliminates potential confusion by providing a definition of
``FLEX Option series'' to the benefit of investors.
The Exchange believes the proposed changes to Rule 5.72(b)(2)(A),
which provide clarity with respect to the criteria required for complex
FLEX Orders with FLEX Option legs only, helps will help promote a fair
and orderly national options market system. As such, the changes
proposed under Rule 5.72(b)(2)(A), to separate out the requirements for
complex FLEX Orders with FLEX Option legs only, provide clarity
regarding the requirements for complex FLEX Orders with FLEX Option
legs only, as compared to the proposed requirements for complex FLEX
Orders with FLEX and non-FLEX Option legs.
Additionally, the Exchange believes the proposed rule change to add
Rule 5.70(d) will 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, because it will provide
market participants with the same flexibility with respect to all their
complex trading strategies. The proposed rule change eliminates
confusion regarding what types of FLEX v. Non-FLEX Orders are
permissible for electronic processing. As noted above, the proposed
rule changes regarding execution of nonconforming FLEX v. Non-FLEX
Orders are consistent with the Exchange's previously adopted rules
regarding execution of other nonconforming complex orders.
The Exchange believes the proposed pricing requirements for FLEX v.
Non-FLEX Orders, set forth in proposed Rule 5.72(b)(2)(B), would remove
impediments to and perfect the mechanism of a free and open market, as
the proposed trading process for FLEX v. Non-FLEX Orders will provide
the ability for investors to achieve the desired net package price for
those orders while protecting customers with resting interest in the
non-FLEX Simple Book. By requiring a FLEX v. Non-FLEX Order submitted
into a FLEX Auction (whether electronically or in open outcry) to
include a bid or offer price for each FLEX Option leg, but no bid or
offer for each non-FLEX Option leg, and a net price, the requirements
ensure that the non-FLEX Option leg will be subject to the same pricing
requirements as they would if not part of a FLEX v. Non-FLEX Order.
Specifically, the price of any non-FLEX Option leg that is part of a
FLEX v. Non-FLEX Order may not be outside of the BBO or NBBO. The
Exchange's proposal will continue to protect Priority Customer interest
on the Exchange, as the non-FLEX Option legs of a FLEX v. Non-FLEX
Order will always trade at a price better than BBO if there is a
customer on a leg. Further, the price of a FLEX Option leg(s) that is
part of a FLEX v. Non-FLEX Order must, following execution of the Non-
FLEX Option leg(s), serve to achieve the net execution price (which may
not be worse than the desired net price included at order submission),
which the Exchange believes will protect investors by ensuring the
price of the FLEX Option leg(s) adhere to the agreed upon execution
prices and the order's limit price.
The Exchange believes this proposed trading process will ensure
that a user who chooses to submit a listed (i.e., Non-FLEX) leg as part
of a FLEX v. Non-FLEX Order is subject to the same pricing requirements
as they would be if the listed leg was not submitted with FLEX Option
legs for execution. Ultimately, FLEX v. Non-FLEX Orders will trade in
the same manner as FLEX complex orders do today, and execution of the
non-FLEX Option legs of these
[[Page 8827]]
orders will continue to comply with linkage requirements (by not
permitting trade-throughs of the NBBO) and protect resting customer
interest in the Simple Book. Further, the Exchange believes that the
proposal to not permit the non-FLEX Option legs of a FLEX v. Non-FLEX
Order to leg into the Simple Book is consistent with the Act and
promotes the public interest and the protection of investors, because
it will provide for more efficient execution and processing of FLEX v.
Non-FLEX Orders, as legging would prevent execution opportunities for
these orders (as discussed above).
Finally, the Exchange believes that the proposed rule change is
designed to not permit unfair discrimination among market participants
as all TPHs may, but are not required to, trade FLEX v. Non-FLEX
Orders.
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 all TPHs that are registered
as FLEX Traders in accordance with the Exchange's Rules will be able to
trade FLEX v. Non-FLEX Orders 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 furtherance of the purposes of the Act, as the proposal
is designed to increase competition for order flow on the Exchange in a
manner that is beneficial to investors because it is designed to
provide investors seeking to execute both a FLEX Option(s) and a listed
option(s) with a more effective method of executing the trades, which
may result in trade efficiencies (i.e., pricing or reporting (e.g.,
position limits) efficiencies) \19\ and reduced risk (i.e., pricing and
legging risk). The Exchange believes the proposed rule change will
encourage competition, as it may broaden the base of investors that use
FLEX Options to manage their trading and investment risk, including
investors that currently trade in the OTC market for customized
options. The Exchange believes the proposed rule change may increase
competition as it may lead to the migration of options currently
trading in the OTC market to trading on the Exchange. Also, any
migration to the Exchange from the OTC market would result in increased
market transparency and thus increased price competition.
---------------------------------------------------------------------------
\19\ See, e.g., Rule 8.35.
---------------------------------------------------------------------------
The Exchange further notes that it operates in a highly competitive
market in which market participants can readily direct order flow to
competing venues who offer similar functionality. All TPHs may, but are
not required to, trade FLEX v. Non-FLEX Orders at the Exchange. 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 other exchanges could
adopt this order type if so desired.
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 written comments on the
proposed rule change.
III. Discussion and Commission Findings
After careful consideration, the Commission finds that the proposed
rule change, as modified by Amendment No. 2, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange,\20\ and, in particular,
the requirements of Section 6 of the Act.\21\ Specifically, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\22\ which requires that an exchange have
rules designed to prevent fraudulent and manipulative acts and
practices, to remove impediments to and perfect the mechanism of a free
and open market, and to protect investors and the public interest.
---------------------------------------------------------------------------
\20\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\21\ 15 U.S.C. 78f.
\22\ 15 U.S.C. 78f(b)(5).
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The proposal amends Exchange Rules 4.21, 5.70, 5.72, and 6.5 to
provide for the trading of complex FLEX v. Non-FLEX Orders, which are
comprised of a combination of FLEX Option series and non-FLEX option
series.\23\ Currently, market participants are unable to trade a FLEX
Option and a listed option as part of the same complex strategy and,
instead, must submit separate orders for the FLEX Option(s) and the
listed option components, which may introduce price and legging
risk.\24\ The Exchange states that the proposal will eliminate these
risks and allow market participants to execute strategies to meet their
investment objectives by using a single order with customized FLEX
Option legs and non-FLEX Option legs.\25\ The Commission finds that the
proposal could help investors achieve their investment objectives more
efficiently by allowing them to trade complex FLEX Orders with FLEX and
non-FLEX components as part of a single complex FLEX v. Non-FLEX Order.
As discussed below, the proposal also adopts rules governing the
trading of complex FLEX v. Non-FLEX Orders that are consistent with the
Exchange's existing rules.
---------------------------------------------------------------------------
\23\ Complex FLEX Orders also may be comprised solely of FLEX
Option series. See proposed Exchange Rule 5.70(b).
\24\ See Amendment No. 2 at 15.
\25\ See id.
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The proposal deletes Exchange Rule 5.70(b)(1), which provides that
each leg(s) of a complex FLEX Order must be for a FLEX Option series
authorized for FLEX trading with the same underlying equity security or
index. However, complex FLEX v. Non-FLEX Orders are complex orders, as
defined in Exchange Rule 1.1, and the definition of complex order
requires, among other things, that the component legs of a complex
order have the same underlying security or index.\26\ Accordingly, the
deletion of Exchange Rule 5.70(b)(1) is a non-substantive change,\27\
and Exchange Rule 5.70(b), as amended, will continue to require that
the component legs of a complex FLEX Order, including a complex FLEX v.
Non-FLEX Order, have the same underlying security or index.\28\ The
proposal also amends Exchange Rule 5.70(b) to allow the component legs
of complex FLEX Orders to have different exercise styles. The Exchange
states that removing the requirement that all component legs of a
complex FLEX Order have the same exercise style will expand investors'
choices and flexibility and provide them with a mechanism to more
precisely manage
[[Page 8828]]
the positions and associated risk in their portfolios.\29\
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\26\ See proposed Exchange Rule 5.70(b). Exchange Rule 1.1
defines a complex order as ``an order involving the concurrent
execution of two or more different series in the same underlying
security or index (the ``legs'' or ``components'' of the complex
order), for the same account, occurring at or near the same time and
for the purpose of executing a particular investment strategy with
no more than the applicable number of legs (which number the
Exchange determines on a class-by-class basis). The Exchange
determines in which classes complex orders are eligible for
processing. The Exchange determines on a class-by-class basis
whether non-conforming complex orders are eligible for electronic
processing. Unless the context otherwise requires, the term complex
order includes Index Combo orders, stock-option orders and security
future-option orders.''
\27\ See Amendment No. 2 at footnote 1.
\28\ See id. at 5.
\29\ See id. ``
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The proposal adopts Exchange Rule 5.70(d) to provide that, in
classes determined by the Exchange, a nonconforming FLEX v. Non-FLEX
Order is not eligible for electronic processing.\30\ The Exchange
states that this provision is consistent the flexibility provided in
the definition of ``complex order'' in Exchange Rule 5.33(a), which
provides, in part, that ``In classes determined by the Exchange, a
nonconforming complex order is not eligible for electronic processing,
including COA, COB, C-AIM, and C-SAM.'' Thus, Exchange Rule 5.33(a)
allows the Exchange to determine in which classes nonconforming complex
orders (including stock-option orders) may be submitted for electronic
processing on the Exchange pursuant to Exchange Rule 5.33.\31\ The
proposal also adopts new Exchange Rule 5.70(e), which provides that the
non-FLEX Option leg(s) of a FLEX v. Non-FLEX Order may not leg into the
Simple Book. The Exchange states that not allowing the non-FLEX Option
leg(s) to leg into the Simple Book will provide for more efficient
execution and processing of FLEX v. Non-FLEX Orders and is consistent
with the Exchange's handling of stock-option orders, which also do not
leg into the Simple Book.\32\ Accordingly, proposed Exchange Rules
5.70(d) and (e) are consistent with existing Exchange rules applicable
to the trading of complex orders.
---------------------------------------------------------------------------
\30\ Exchange Rule 1.1 defines a non-conforming complex order as
``s (a) a complex order with a ratio on the options legs less than
one-to-three (.333) or greater than three-to-one (3.00) (except for
Index Combo orders) and (b) a stock-option order with a ratio
greater than eight-to-one (8.00), where the ratio represents the
total number of units of the underlying stock or convertible
security in the option leg(s) to the total number of units of the
underlying stock or convertible security in the stock leg. For the
purpose of applying these ratios to complex orders comprised of legs
for both mini-options and standard options, ten mini-option
contracts represent one standard option contract. For the purpose of
applying these ratios to complex orders comprised of legs for both
micro-options and standard options, 100 micro-option contracts
represent one standard option contract.''
\31\ See Amendment No. 2 at 6.
\32\ See Amendment No. 2 at 6-7 and footnote 5. See also
Exchange Rule 5.33(g)(5). The Exchange states that not legging
complex FLEX v. Non-FLEX Orders will provide for more efficient
execution and processing of FLEX v. Non-FLEX Orders. The Exchange
states that if the System receives a FLEX v. Non-FLEX Order, it
would need to trade the Non-FLEX leg against the appropriate leg in
the book; however, there is no book with resting simple FLEX orders
against which the FLEX leg could execute. The Exchange states that
if this were to occur, execution opportunities for FLEX v. Non-FLEX
Orders could be prevented, because although the non-FLEX leg(s) of
the FLEX v. Non-FLEX Order would execute against interest in the
book, there would be no execution opportunities for the FLEX leg(s)
of the FLEX v. Non-FLEX Order. See Amendment No. 2 at 6-7.
---------------------------------------------------------------------------
The proposal amends Exchange Rule 5.72(b) to establish pricing
requirements for complex FLEX v. Non-FLEX Orders that are designed to
protect interest on the Exchange's Simple Order Book and ensure that
the non-FLEX components do not trade through the NBBO.\33\ Proposed
Exchange Rule 5.72(b)(2)(B)(i) protects the priority of Priority
Customer orders on the Simple Book by requiring each non-FLEX leg of a
complex FLEX v. Non-FLEX Order to trade at a price that is better than
the price of resting Priority Customer orders on the Simple Book. This
requirement is consistent with the Exchange's pricing requirements for
the component legs of nonconforming complex orders.\34\ The proposed
rules also prohibit the non-FLEX component legs of a complex FLEX v.
Non-FLEX Order from trading at a price that is worse than the BBO,
which consistent with the Exchange's pricing requirements for the
component legs of complex orders.\35\ In addition, proposed rules
prohibit the non-FLEX component legs of a complex FLEX v. Non-FLEX
Order from trading at a price that is worse than the NBBO, which is
consistent with the pricing requirements for nonconforming complex
orders.\36\
---------------------------------------------------------------------------
\33\ See proposed Exchange Rule 5.72(b)(2)(B). The proposal
makes no substantive changes to the pricing requirements for complex
FLEX Orders with only FLEX Option legs.
\34\ See Exchange Rule 5.33(f)(2)(A)(iv)(b). If a complex FLEX
v. Non-FLEX Order cannot execute at a price that satisfies this
requirement, the complex FLEX v. Non-FLEX Order is cancelled. See
proposed Exchange Rule 5.72(b)(2)(B).
\35\ See proposed Exchange Rule 5.72(b)(2)(B)(i) and Exchange
Rule 5.33(f)(2)(A)(ii). The BBO is the best bid or offer
disseminated on the Exchange. See Exchange Rule 1.1.
\36\ See proposed Exchange Rule 5.72(b)(2)(B)(i). See also
Exchange Rule 5.66(b)(7) (permitting the component legs of a Complex
Trade, as defined in Exchange Rule 5.65(d), to trade through a
Protected Bid or Protected Offer). The NBBO is the national best bid
or offer the Exchange calculates based on market information it
receives from the Options Price Reporting Authority. See Exchange
Rule 1.1.
---------------------------------------------------------------------------
Proposed Exchange Rule 6.5, Interpretation and Policy .07(d), which
applies the Exchange's Obvious Error and Catastrophic Error provisions
to the non-FLEX leg(s) of a complex FLEX v. Non-FLEX Order, is
consistent with Exchange Rules 6.5, Interpretation and Policy .07(a)
and (c), which apply the Exchange's Obvious Error and Catastrophic
Error provisions to, respectively, complex orders that executes against
leg market interest and stock-option orders. Proposed Exchange Rule
4.21(a)(4) regarding the Exchange's authority to halt trading in a FLEX
complex strategy, whether comprised solely of FLEX Options or FLEX and
non-FLEX Options, when any leg of the strategy is halted, is similar to
the Exchange's authority under Exchange Rule 4.21(a)(3) and will
provide clarity with respect to the Exchange's handling of FLEX complex
strategies when trading in any leg of the strategy is halted.\37\
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\37\ Exchange Rule 4.21(a)(3) provides that ``The Exchange may
halt trading in a FLEX Option class pursuant to Rule 5.20, and
always halts trading in a FLEX Option class when trading in a non-
FLEX Option class with the same underlying equity security or index
is halted on the Exchange. The System does not accept a FLEX Order
for a FLEX Option series while trading in a FLEX Option class is
halted.''
---------------------------------------------------------------------------
IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 2 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#c3b1b6afa6eea0acaeaea6adb7b083b0a6a0eda4acb5"><span class="__cf_email__" data-cfemail="8af8ffe6efa7e9e5e7e7efe4fef9caf9efe9a4ede5fc">[email protected]</span></a>. Please include
file number SR-CBOE-2024-047 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-2024-04 7. 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
[[Page 8829]]
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-2024-047 and should be submitted on
or before February 24, 2025.
V. Accelerated Approval of Amendment No. 2
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act, for approving Amendment No. 2 prior to the 30th day after the
date of publication of notice of Amendment No. 1 in the Federal
Register. Amendment No. 2 revises the proposal to: clarify and correct
errors in the text of the proposed rules; provide an example of the
application of the Exchange's obvious error rules to complex FLEX v.
non-FLEX Orders; provide additional discussion of the potential uses of
FLEX v. non-FLEX Orders; revise the description of the proposal to make
clear that the Exchange's rules will continue to require that the
component legs of FLEX complex orders, including FLEX v. Non-FLEX
Orders, have the same underlying equity or index; and include
additional information in the examples showing the pricing of FLEX v.
non-FLEX Orders. The proposed changes to clarify and correct errors in
the text of the proposed rules will help to ensure the accuracy of the
Exchange's rules. The proposed change in the description of the
proposal to make clear that the Exchange's rules will continue to
require that the component legs of FLEX complex orders have the same
underlying equity or index will help to ensure that the proposal
accurately describes the rules being adopted. The example showing the
application of the obvious error rules to complex FLEX v. Non-FLEX
Order demonstrates the operation of these rules in the context of
complex FLEX v. Non-FLEX orders, and the additions to the pricing
examples help to clarify those examples. The changes in Amendment No. 2
assist the Commission in evaluating the proposal and determining that
the proposal is consistent with the Act and the rules and regulations
thereunder applicable to a national securities exchange, as discussed
above. Accordingly, the Commission finds good cause, pursuant to
Section 19(b)(2) of the Act,\38\ to approve the proposed rule change,
as modified by Amendment No. 2, on an accelerated basis.
---------------------------------------------------------------------------
\38\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
VI. Conclusion
For the reasons set forth above, the Commission finds that the
proposed rule change, as modified by Amendment No. 2, is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange and, in
particular, the requirements of Section 6(b)(5) of the Act.\39\
---------------------------------------------------------------------------
\39\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\40\ that the proposed rule change (SR-CBOE-2024-047), as modified
by Amendment No. 2, is approved.
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\40\ 15 U.S.C. 78s(b)(2)
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\41\
---------------------------------------------------------------------------
\41\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-02084 Filed 1-31-25; 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.