Notice2025-10285
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Its Automated Price Improvement for Complex Orders Comprised of Flexible Exchange Option Series and Non-FLEX Option Series for S&P 500 Index Options
Primary source
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Published
June 6, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 108 (Friday, June 6, 2025)</title>
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[Federal Register Volume 90, Number 108 (Friday, June 6, 2025)]
[Notices]
[Pages 24168-24171]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-10285]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103167; File No. SR-CBOE-2025-039]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Its Automated Price Improvement for Complex Orders Comprised of
Flexible Exchange Option Series and Non-FLEX Option Series for S&P 500
Index Options
June 2, 2025.
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 May 23, 2025, Cboe Exchange, Inc. (``Exchange'' or ``Cboe Options'')
filed with the Securities and Exchange Commission (``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 automated price improvement (``AIM'') for complex orders
comprised of flexible exchange (``FLEX'') Option series and non-FLEX
Option series (``FLEX v. Non-FLEX Order'') for S&P 500 Index options
(``SPX options''). 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
[[Page 24169]]
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
In 2021, the Exchange amended Rules 5.37 and 5.38 regarding its
Automated Improvement Mechanism (``AIM'') and Complex Automated
Improvement Mechanism (``C-AIM'') to permit the Exchange to determine,
per trading session (e.g., Regular Trading Hours (``RTH'') or Global
Trading Hours (``GTH'')),\5\ that the maximum size for all SPX Agency
Orders, or the maximum size for the smallest leg for all SPX Agency
Orders, respectively, is 10 contracts.\6\ As set forth in the filing to
adopt those maximum size provisions, the Exchange noted that the
maximum size was appropriate given that SPX has a different and more
complicated market model, involves taking on greater risk, has a
significantly higher notional value (e.g., SPX Options are ten times
the notional size of SPY options), tends to have larger size, tends to
have larger volume executed in open outcry, and tends to execute
increasingly more complex strategies compared to other options
classes.\7\ Additionally, the Exchange had observed that smaller size
order flow tends to attract liquidity provider responses, as such
orders are generally easier to hedge than larger orders, which may
encourage market participants to compete to provide price improvement
in an electronic competitive auction process. This, in turn, may
contribute to a deeper, more liquid auction process with additional
price improvement opportunities for market participants that submit
smaller size orders, particularly retail customers. Further, the
Exchange had observed that smaller SPX orders are not commonly executed
on the floor. When the Exchange activated AIM and C-AIM for SPX for the
first time when the trading floor was temporarily closed due to the
Covid-19 pandemic, and then deactivated those auctions for SPX when the
trading floor re-opened, the Exchange observed a significant decline in
the number of smaller SPX orders submitted for execution on the trading
floor compared to smaller SPX orders submitted into AIM and C-AIM.
However, the trading floor is generally better suited for the larger
complex orders typical in SPX. Therefore, the Exchange proposed to
permit it to impose a maximum contract size for SPX Agency Orders as
way to provide smaller orders with price improvement opportunities that
AIM and C-AIM offer while also continuing to incentivize SPX liquidity
on the trading floor to continue to accommodate larger, more
complicated SPX orders.\8\
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\5\ The Exchange notes since the adoption of that proposed rule
change it added another trading session, the Curb trading session,
to its Rules. See Rule 5.1(d). The Exchange has chosen to leave two
trading sessions listed as examples in these current Rules, as well
as the proposed rules, to accommodate for the possibility that other
trading sessions are adopted. However, the current and proposed
rules would permit the Exchange to determine to apply the maximum
contract size to SPX Agency Orders in any available trading session
set forth in Rule 5.1.
\6\ See Rules 5.37(a)(3) (AIM Auctions) and 5.38(a)(3) (C-AIM
Auctions); see also Securities Exchange Act Release No. 91119
(February 12, 2021), 86 FR 10381 (February 19, 2021) (SR-CBOE-2020-
051) (``AIM/C-AIM SPX Max Size Approval'').
\7\ Id. at 10382.
\8\ Id. at 10382-10383.
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The Exchange now proposes to amend Rule 5.73 regarding FLEX AIM
Auctions with respect to FLEX v. Non-FLEX Orders for SPX options.\9\
Current Rule 5.38(a)(3) regarding non-FLEX complex AIM Auctions (``C-
AIM Auctions'') provides the Exchange may determine, per trading
session (e.g., Regular Trading Hours (``RTH'') or Global Trading Hours
(``GTH'')),\10\ that the maximum size for the smallest leg of all
Agency Orders in SPX is 10 contracts. The proposed rule change amends
Rule 5.73(a)(4) to similarly provide that if the Exchange determines to
apply a maximum size for a trading session (e.g., RTH or GTH) for all
Agency Orders in SPX for non-FLEX C-AIM Auctions pursuant to Rule
5.38(a)(3), that maximum size will apply to the smallest leg of all SPX
FLEX v. Non-FLEX Agency Orders submitted into FLEX AIM Auctions. The
Exchange states that it will announce any determination it makes in
connection with the application of the maximum size requirement of ten
contracts for agency orders in SPX to a trading session via Exchange
notice pursuant to Rule 1.5.\11\
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\9\ The Exchange notes it inadvertently did not include the
proposed rule change in the rule filing to adopt FLEX v. Non-FLEX
Order functionality.
\10\ See supra note 5.
\11\ The Exchange has announced the planned launch date of June
23, 2025 for implementation of FLEX v. Non-FLEX Orders. See Update--
Cboe Options Allows FLEX and Non-FLEX Instruments on Complex FLEX
Orders (May 19, 2025). That notice included the Exchange's plan to
impose a maximum size cap of 10 contracts to SPX FLEX v. Non-FLEX
Agency Orders submitted into FLEX AIM (subject to effectiveness of
this proposed rule change), so Trading Permit Holders are aware the
Exchange has determined to apply the maximum size of 10 contracts to
SPX FLEX v. Non-FLEX Orders.
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The Exchange recently amended its Rules to permit FLEX v. Non-FLEX
Orders.\12\ Currently, as noted above, the Exchange may determine for a
trading session to subject SPX Agency Orders submitted into AIM or C-
AIM Auctions to a maximum size of 10 contracts. The Exchange believes
if it makes such a determination for non-FLEX SPX complex orders, it is
reasonable to apply the same maximum size restriction to SPX non-FLEX
v. FLEX Orders since such orders would contain a non-FLEX SPX leg that
would be subject to the maximum size if submitted into a non-FLEX AIM
Auction. Specifically, the different trading characteristics, market
model, investor basis and conditions presented in SPX as compared to
different option classes described above would apply to SPX FLEX v.
Non-FLEX Orders.\13\ Further, not applying a maximum contract size
applicable to SPX FLEX v. Non-FLEX Agency Orders would provide market
participants with opportunities to attempt to circumvent the size
maximum applicable to non-FLEX SPX orders. For example, without the
proposed rule change, a market participant could circumvent the non-
FLEX AIM maximum size requirement by combining its order for a non-FLEX
SPX leg with a smaller SPX leg and submitting into FLEX AIM. The
Exchange intends to not permit nonconforming SPX FLEX v. Non-FLEX
Orders to be eligible for electronic processing (as is currently the
case for non-FLEX SPX orders), which will prevent market participants
from attaching a one contract FLEX SPX leg to a large non-FLEX SPX leg
that would otherwise not be eligible for submission into AIM due to the
maximum contract
[[Page 24170]]
size. The proposed maximum contract size for SPX FLEX v. Non-FLEX
orders, combined with the Exchange's intent to not permit nonconforming
SPX FLEX v. Non-FLEX Orders to be eligible for electronic processing
(and thus nonconforming SPX FLEX v. Non-FLEX Orders would not be
eligible for FLEX AIM Auctions) pursuant to Rule 5.70(d),\14\ will
align with the current maximum size permissible for non-FLEX SPX
Orders. Specifically, the proposed rule change will impose a maximum
size on all SPX Agency Orders that contain a non-FLEX SPX leg in order
to address the different trading characteristics that exist for those
options and balance the benefits of providing smaller orders with price
improvement opportunities that AIM and C-AIM offer with the need to
maintain SPX liquidity on the trading floor to continue to accommodate
larger, more complicated SPX orders.
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\12\ See Securities Exchange Act Release No. 102297 (January 28,
2025), 90 FR 8822 (February 3, 2025) (SR-CBOE-2024-047). The
Exchange intends to make FLEX v. Non-FLEX Orders available in June
2025.
\13\ The Exchange notes that while these differences also apply
to FLEX SPX options, there are also different characteristics in the
FLEX market that have caused the Exchange to determine for now not
to apply a maximum size to SPX FLEX orders submitted into FLEX AIM.
Further, the Exchange notes that unlike non-FLEX SPX options, there
is minimal retail trading in FLEX options (as many retail brokers do
not even make FLEX option trading available to their customers given
the more complex nature of FLEX options). Therefore, the reasoning
related to making AIM and C-AIM available subject to the maximum
contract size to accommodate more retail order flow is not
applicable to the current proposed rule change. See AIM/C-AIM SPX
Max Size Approval at 10382-10383.
\14\ The Exchange currently does not permit nonconforming non-
FLEX SPX orders to be eligible for electronic processing. See Cboe
Schedule Update (C2022060301), available at Schedule Update--Cboe
Options Introduces New Net, Leg Price Increments and Enhanced
Electronic, Open Outcry Handling for Complex Orders with Non-
Conforming Ratios.
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In connection with this proposed change, the Exchange proposes to
amend Rule 5.73, Interpretation and Policy .02 to provide that it is
deemed conduct inconsistent with just and equitable principles of trade
and a violation of Rule 8.1 \15\ to engage in a pattern of conduct
where the Initiating FLEX Trader breaks up an Agency Order into
separate orders for the purpose of gaining a higher allocation
percentage than the Initiating FLEX Trader would have otherwise
received in accordance with the allocation procedures contained in
paragraph (e) above or for the purpose of circumventing the maximum
quantity requirement pursuant to proposed Rule 5.73(a)(4) above.\16\
The Exchange notes that its surveillance program will monitor for such
violations in the same manner in which it currently monitors for
allocation-related break up violations, including as it does with
respect to the same provision in Rule 5.38, Interpretation and Policy
.02.
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\15\ The proposed rule change updates this cross-reference to
Rule 8.1 from Rule 10.1, as Rule 8.1 describes the prohibition on
conduct inconsistent with just and equitable principles of trade.
\16\ Rule 5.38, Interpretation and Policy .02 contains the same
provision.
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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.\17\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \18\ 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) \19\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(5).
\19\ Id.
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In particular, the Exchange believes that the proposed rule change
would remove impediments to and perfect the mechanism of a free and
open market and national market system because the Exchange would
handle SPX FLEX v. Non-FLEX Orders submitted into a FLEX AIM Auction in
the same manner as non-FLEX SPX complex orders, which addresses the
different trading characteristics, market model, investor basis and
conditions presented in SPX as compared to different option
classes.\20\ This, combined with the Exchange's intent to not permit
nonconforming SPX FLEX v. Non-FLEX Orders to be eligible for electronic
processing (and thus nonconforming SPX FLEX v. Non-FLEX Orders would
not be eligible for FLEX AIM Auctions) pursuant to Rule 5.70(d),\21\
will prevent market participants from attempting to circumvent any size
maximum applicable to non-FLEX SPX orders.\22\ The Rules will continue
to provide price improvement opportunities for SPX FLEX v. Non-FLEX
Orders in a manner consistent with the opportunities available for SPX
non-FLEX orders--electronically for smaller orders and in open outcry
for larger and more complicated orders.\23\ Therefore, the Exchange
does not believe the proposed rule change is unfairly discriminatory as
it is designed to promote a competitive process for executions of
smaller FLEX v. Non-FLEX SPX Orders in an electronic environment and
executions of larger FLEX v. Non-FLEX SPX Orders via execution on the
trading floor, which is consistent with how non-FLEX SPX orders are
currently handled. In addition, the Exchange believes that the proposed
rule change to amend Rule 5.73, Interpretation and Policy .02 would
protect investors by prohibiting TPHs to break up Agency Orders to
circumvent maximum size requirements.
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\20\ See Securities Exchange Act Release No. 91119 (February 12,
2021), 86 FR 10381 (February 19, 2021) (SR-CBOE-2020-051).
\21\ The Exchange currently does not permit nonconforming non-
FLEX SPX orders to be eligible for electronic processing. See Cboe
Schedule Update (C2022060301), available at Schedule Update--Cboe
Options Introduces New Net, Leg Price Increments and Enhanced
Electronic, Open Outcry Handling for Complex Orders with Non-
Conforming Ratios.
\22\ For example, without the proposed rule change, a market
participant could circumvent the non-FLEX AIM maximum size
requirement if a FLEX v. Non-FLEX Agency Order has a large non-FLEX
leg and a FLEX leg that is of a conforming ratio.
\23\ The trading floor is generally better suited for larger,
more complicated orders, as TPHs on the trading floor tend to
execute such orders given the flexibility to negotiate and fine-tune
the terms of an order.
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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 to all SPX FLEX v. Non-FLEX
Agency Orders submitted into FLEX AIM auctions by all market
participants, and in the same manner it applies to the current maximum
size provision applicable to SPX complex orders submitted into non-FLEX
AIM. This will provide consistency between AIM auction mechanisms into
which complex orders may be submitted that contain non-FLEX SPX legs.
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 an Exchange-specific auction mechanism in a class of options
only listed for trading on the Exchange.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
[[Page 24171]]
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 \24\ and
Rule 19b-4(f)(6) \25\ 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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\24\ 15 U.S.C. 78s(b)(3)(A).
\25\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires the Exchange to give the Commission written notice of its
intent to file the proposed rule change, along with a brief
description and text of the proposed rule change, at least five days
prior to the date of filing of the proposed rule change, or such
shorter time as designated by the Commission. The Exchange has
satisfied this requirement.
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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#bdcfc8d1d890ded2d0d0d8d3c9cefdced8de93dad2cb"><span class="__cf_email__" data-cfemail="097b7c656c246a6664646c677d7a497a6c6a276e667f">[email protected]</span></a>. Please include
file number SR-CBOE-2025-039 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-2025-039. 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-2025-039 and should be
submitted on or before June 27, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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Stephanie Fouse,
Assistant Secretary.
[FR Doc. 2025-10285 Filed 6-5-25; 8:45 am]
BILLING CODE 8011-01-P
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