[Federal Register Volume 83, Number 97 (Friday, May 18, 2018)]
[Notices]
[Pages 23320-23323]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-10601]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83225; File No. SR-C2-2018-009]


Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Rule 6.11., Regarding the Opening Process for Index Options

May 14, 2018.
    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 May 9, 2018, Cboe C2 Exchange, Inc. (the ``Exchange'' or 
``C2'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the opening process with respect to 
index options. The text of the proposed rule change is provided below.
(additions are italicized; deletions are [bracketed])
* * * * *

Cboe C2 Exchange, Inc.

Rules

* * * * *

Rule 6.11. Opening Process

    (a) Opening Process.
    (1) No change.
    (2) Opening Price.
    (A) Equity Options. The System determines a single price at 
which a particular equity option series will be opened (the 
``Opening Price'') within 30 seconds of the First Listing Market 
Transaction[ or 9:30 a.m., as applicable]. If there are no contracts 
in a series that would execute at any price, the System opens the 
series for trading without determining an Opening Price. The Opening 
Price, if valid pursuant to subparagraph (3), of a series will be:
    ([A]i) If there is both an NBB and an NBO, the midpoint of the 
NBBO (if the midpoint is a half increment, the System rounds down to 
the nearest minimum increment) (the ``NBBO Midpoint'');
    ([B]ii) if the NBBO Midpoint is not a valid price, the last 
disseminated transaction price in the series after 9:30 a.m. (the 
``Last Print''); or
    ([C]iii) if the NBBO Midpoint and the Last Print are not valid 
prices, the last disseminated transaction in the series from the 
previous trading day (the ``Previous Close'').
    If the NBBO Midpoint, Last Print, and Previous Close are not 
valid, the Exchange in its discretion may extend the Order Entry 
Period by up to 30 seconds or open the series for trading.

[[Page 23321]]

    (B) Index Options. The System determines the Opening Price 
within 30 seconds of an away options exchange(s) disseminating a 
quote in a series. Following an away options exchange's 
dissemination of a quote in a series, if there are no contracts in a 
series that would execute at any price, the System opens the series 
for trading without determining an Opening Price. The Opening Price, 
if valid pursuant to subparagraph (3), of a series will be the NBBO 
Midpoint. If the NBBO Midpoint is not valid, the Exchange in its 
discretion may extend the Order Entry Period by up to 30 seconds or 
open the series for trading.
    (3) Validating the Opening Price. For purposes of subparagraph 
(a)(2):
    (A) The NBBO Midpoint and, for equity options, the Last Print[,] 
or the Previous Close, is a valid price if it is not outside the 
NBBO, and the price is no more than the following Minimum Amount 
away from the NBB or NBO for the series:

------------------------------------------------------------------------
                           NBB                            Minimum amount
------------------------------------------------------------------------
Below $2.00.............................................           $0.25
$2.00 to $5.00..........................................            0.40
Above $5.00 to $10.00...................................            0.50
Above $10.00 to $20.00..................................            0.80
Above $20.00 to $50.00..................................            1.00
Above $50.00 to $100.00.................................            1.50
Above $100.00...........................................            2.00
------------------------------------------------------------------------

and

    (B) for equity options, the Last Print or Previous Close is a 
valid price if there is no NBB and no NBO, or there is a NBB (NBO) 
and no NBO (NBB) and the price is equal to or greater (less) than 
the NBB (NBO).
    (4)-(5) No change.
    (b)-(d) No change.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The proposed rule change amends the opening process with respect to 
index options. C2 intends to migrate its technology onto the same 
trading platform as one of its affiliated exchanges, Cboe EDGX 
Exchange, Inc. (``EDGX''). C2 recently submitted a proposed rule change 
to, among other things, align certain system functionality with EDGX, 
including the opening process.\5\ Pursuant to the opening process in C2 
Rule 6.11(a)(1), after a time period determined by the Exchange 
following the first transaction in the securities underlying the 
options on the primary market that is disseminated after 9:30 a.m. with 
respect to equity options, or following 9:30 a.m. with respect to index 
options, the related option series open automatically in a random 
order, staggered over regular intervals of time pursuant to 
subparagraphs (a)(2) through (5). Rule 6.11(a)(2) states the System 
determines a price at which a particular option series will be opened 
(the ``Opening Price'') within 30 seconds of the applicable triggering 
event noted above. If there are no contracts in a series that would 
execute at any price, the System opens the series for trading without 
determining an Opening Price. The Opening Price, if valid, of a series 
will be:
---------------------------------------------------------------------------

    \5\ See SR-C2-2018-005 (April 27, 2018). That proposed rule 
change as filed for immediate effectiveness and a request for a 
waiver of the 30-day operative delay to permit effectiveness on May 
14, 2018, the date on which the proposed C2 technology migration is 
currently expected to occur. The rule text and numbers in this 
filing reference the rule text and numbers in that filing.
---------------------------------------------------------------------------

     If there is both an NBB and an NBO, the midpoint of the 
NBBO (if the midpoint is a half increment, the System rounds down to 
the nearest minimum increment) (the ``NBBO Midpoint'');
     if the NBBO Midpoint is not a valid price, the last 
disseminated transaction price in the series after 9:30 a.m. (the 
``Last Print''); or
     if the NBBO Midpoint and the Last Print are not valid 
prices, the last disseminated transaction in the series from the 
previous trading day (the ``Previous Close'').
    If the NBBO Midpoint, Last Print, and Previous Close are not valid, 
the Exchange in its discretion may extend the order entry period by up 
to 30 seconds or open the series for trading (a ``contingent 
opening'').
    Pursuant to Rule 6.11(a)(3), the NBBO Midpoint, the Last Print, or 
the Previous Close is a valid price if it is no more than a specified 
minimum amount away from the national best bid or offer for the series. 
Additionally, the Last Print or Previous Close is a valid price if 
there is no NBB and no NBO, or if there is a NBB (NBO) and no NBO (NBB) 
and the price is equal to or greater (less) than the NBB (NBO). Under 
this Opening Process, if a series has not opened yet on another 
exchange on a trading (and thus there is no NBBO and no Last Print), if 
there is a Previous Close Price, it will be a valid price and will be 
the Opening Price. Additionally, if there are no crossed contracts in a 
series, the series opens immediately following the time period 
referenced above.
    The Exchange proposes to modify this process with respect to index 
options. Pursuant to the proposed rule change, for index options, the 
System will determine the Opening Price within 30 seconds of an away 
options exchange(s) disseminating a quote in a series. Following an 
away options exchange's dissemination of a quote in a series, if there 
are no contracts in a series that would execute at any price, the 
System opens the series for trading without determining an Opening 
Price. The Opening Price, if valid, of a series will be the NBBO 
Midpoint. If the NBBO Midpoint is not valid, the Exchange in its 
discretion may extend the order entry period by up to 30 seconds or 
open the series for trading. In other words, the proposed rule change 
provides that an index option series will not open (with or without a 
trade) until after the series is open on another exchange. To the 
extent the Exchange receives a quote from another Exchange within the 
time period referenced above, and there are contracts that may trade, 
the Opening Process will essentially be the same, and a series will 
open with the NBBO Midpoint as an Opening Price (if valid). 
Additionally, the Exchange will continue to have the ability to use a 
contingent opening to open a series for trading if there is no valid 
Opening Price. The proposed rule change delays opening of a series on 
C2 in an index option series if there are no crossed contracts, and 
eliminates the possibility to open using the Last Print or Previous 
Close (as those will generally not be necessary if C2 waits for another 
exchange to open).
    Currently, Russell 2000 Index (``RUT'') options is the only index 
option class trading on C2. RUT options also trade on Cboe Exchange, 
Inc. (``Cboe Options''), an affiliated exchange of C2. Under current C2 
Rule 6.11, if a RUT series was open on Cboe Options,

[[Page 23322]]

and if there are crossed orders on C2, the RUT series on C2 would open 
with an Opening Price equal to the NBBO Midpoint (if valid). If a RUT 
series was not yet open on C2 after 9:30 a.m., and there was a Previous 
Close for the series, the series would open on C2 with the Previous 
Close as the Opening Price. If there are no crossing orders on C2, a 
RUT series would open without an opening price, possibly before the RUT 
series was open on Cboe Options.
    RUT options on Cboe Options generally open within 30 seconds after 
9:30 a.m., and thus the Exchange expects RUT options on C2 following 
the technology migration to open for trading within 30 seconds (as set 
forth in the rule) at an Opening Price equal to the NBBO Midpoint if 
there are orders that can be crossed. However, it will be possible for 
a RUT series to open prior to the opening of that series on Cboe 
Options. The series on C2 would open without an Opening Price (if there 
are no crossed orders) or with an Opening Price equal to the Previous 
Close (if there are crossed orders) prior to the settlement value 
determination being completed on Cboe Options. If this were to occur, 
trading on C2 may then be occurring at very different prices than what 
is ultimately the opening trade price on Cboe Options. This is 
significant because, on certain dates, Cboe Options uses prices of RUT 
options trading on Cboe Options to determine settlement values for 
volatility index derivatives.\6\ While trading in these options on 
volatility index derivative settlement days also generally opens within 
a few seconds after 9:30, there have been times when series being used 
to determine the settlement value took longer to open. Trading on 
another Exchange while Cboe Options is not yet open may impact the 
volatility settlement value determination and disrupt trading of 
volatility index derivatives. The proposed rule change eliminates the 
possibility of RUT options on C2 automatically opening for trading 
prior to those options being open on Cboe Options and thus interfering 
with the calculation of volatility index derivative settlement values.
---------------------------------------------------------------------------

    \6\ See Cboe Options Rule 6.2, Interpretation and Policy .01.
---------------------------------------------------------------------------

    While options exchanges have varying opening processes, the opening 
process on Nasdaq BX, LLC (``BX'') is similar to the proposed rule 
change. Pursuant to BX Rule Section 8(b), if there is a possible trade 
on BX, a series will open with a valid width NBBO.\7\ This is similar 
to the proposed rule change, in that a valid NBBO Midpoint must be 
present for an index option series to open with a trade (which on C2 
would only occur if another exchange was open for trading, because on 
C2, the NBBO that is used to determine the Opening Price is based on 
disseminated quotes of other exchanges and does not include orders and 
quotes on C2 prior to the opening of trading).\8\ Additionally, if no 
trade is possible on BX, then BX will depend on one of the following to 
open: (1) A valid width NBBO, (2) a certain number of other options 
exchanges (as determined by BX) having disseminated a firm quote on 
OPRA, or (3) a certain period of time (as determined by the Exchange) 
has elapsed. As proposed, if no trade is possible, C2 will open an 
index option series after another exchange as [sic] disseminated a 
quote, which is consistent with number (2) above (for example, under 
BX's rule, it could determine to open if one other options exchange was 
open). While the proposed rule change does not explicitly provide for 
additional alternatives in the event no trade is possible, pursuant to 
Rule 6.11(c), C2 may adjust the timing of the Opening Process in a 
class if it believes it is necessary in the interests of a fair and 
orderly market.\9\ Therefore, like BX, C2 could open a series after a 
certain amount of time has passed if the series does not open on 
another exchange.\10\
---------------------------------------------------------------------------

    \7\ On BX, a valid width NBBO is defined as the combination of 
all away option market quotes and orders and quotes received on BX, 
within a specified bid/ask differential. See BX Rule Section 
8(a)(6).
    \8\ See C2 Rule 1.1 (definition of NBBO).
    \9\ Number (1) above would not apply because, as noted above, 
the NBBO on C2 prior to the opening of trading does not include 
orders and quotes on C2.
    \10\ As stated in Rule 6.11(c), C2 makes and maintains records 
to document all determinations to deviate from the standard manner 
of the Opening Process, and periodically reviews these 
determinations for consistency with the interests of a fair and 
orderly market.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ Id.
---------------------------------------------------------------------------

    In particular, the proposed rule change eliminates the possibility 
of RUT options on C2 automatically opening for trading prior to those 
options being open on Cboe Options and thus interfering with the 
calculation of volatility index derivative settlement values, which 
promotes just and equitable principles of trade and perfects the 
mechanism of a free and open market and national market system. As 
discussed above, under certain circumstances, the proposed rule change 
is expected to have a de minimis impact on the opening of index option 
series on C2 because, to the extent the Exchange receives a quote from 
another Exchange within the time period following 9:30 a.m., and there 
are contracts that may trade, the Opening Process will essentially be 
the same, and a series will open with the NBBO Midpoint as an Opening 
Price (if valid). Additionally, the Exchange will continue to have the 
ability to use a contingent opening to open a series for trading if 
there is no valid Opening Price. Therefore, if an index option series 
is not yet open on another exchange, C2 will still have the ability to 
open the series for trading. As discussed above, the proposed rule 
change is similar to the opening process of another options exchange, 
which also provides that opening for trading may be dependent on 
whether another options exchange is open.\14\
---------------------------------------------------------------------------

    \14\ See BX Rule Section 8(b).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    C2 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 proposed rule change will 
apply in the same manner to all market participants that participate in 
the C2 Opening Process for index options. The Exchange believes it is 
appropriate to limit the proposed change to index options,

[[Page 23323]]

because some, such as RUT, are used to determine the settlement value 
for volatility index derivatives. A similar process does not occur for 
equity options, and thus, the risk of opening trading in an equity 
option interfering with a settlement process on another exchange is not 
present. As discussed above, the proposed rule change is similar to the 
opening process of another options exchange, which also provides that 
opening for trading may be dependent on whether another options 
exchange is open.\15\
---------------------------------------------------------------------------

    \15\ See BX Rule Section 8(b).
---------------------------------------------------------------------------

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) \16\ of the Act and Rule 19b-
4(f)(6) thereunder.\17\
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and the text of the proposed rule change, 
at least five business days prior to the date of filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. The Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \18\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \19\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the proposal is operative on May 14, 2018, which is also the date the 
C2 technology migration is to occur.\20\ The Exchange states that on 
May 16, 2018 Cboe Options will determine settlement values for certain 
volatility index derivatives by using the prices of RUT options trading 
on Cboe Options. According to the Exchange, waiver of the 30-day 
operative delay would avoid trading on C2 potentially interfering with 
the calculation of volatility index derivative settlement values by 
ensuring that on May 16, trading in RUT options on C2 will not begin 
before those options are open on Cboe Options. Accordingly, the 
Commission believes the waiver of the operative delay is consistent 
with the protection of investors and the public interest because it 
will avoid investor confusion that could result from C2 opening a 
dually and exclusively listed index option concurrently with, or prior 
to, Cboe Options, which could lead the two exchanges potentially to 
open at different prices given the material differences in their 
opening processes. The possibility for such divergence could be 
particularly confusing to investors on a volatility index settlement 
day, which will next occur on May 16. Therefore, the Commission hereby 
waives the operative delay and designates the proposal operative on May 
14, 2018.\21\
---------------------------------------------------------------------------

    \18\ 17 CFR 240.19b-4(f)(6).
    \19\ 17 CFR 240.19b-4(f)(6)(iii).
    \20\ See supra note 5.
    \21\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-C2-2018-009 on the subject line.

Paper Comments

     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-C2-2018-009. 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 (http://www.sec.gov/rules/sro.shtml). 
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 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-C2-2018-009, and should be submitted on 
or before June 8, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-10601 Filed 5-17-18; 8:45 am]
 BILLING CODE 8011-01-P