[Federal Register Volume 84, Number 26 (Thursday, February 7, 2019)]
[Notices]
[Pages 2598-2605]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-01392]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85038; File No. SR-C2-2018-025]
Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To
Discontinue Bulk Order Functionality and Implement Bulk Message
Functionality
February 1, 2019.
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 December 19, 2018, Cboe C2 Exchange, Inc. (the ``Exchange'' or
``C2'') filed with the Securities and Exchange Commission
(``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
Cboe C2 Exchange, Inc. (the ``Exchange'' or ``C2'') proposes to
discontinue bulk order functionality and implement bulk message
functionality, and make other nonsubstantive changes. 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 (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
[[Page 2599]]
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
In 2016, the Exchange's parent company, Cboe Global Markets, Inc.
(``Cboe Global''), which is also the parent company of Cboe Exchange,
Inc. (``Cboe Options''), acquired Cboe EDGX Exchange, Inc. (``EDGX''),
Cboe EDGA Exchange, Inc. (``EDGA''), Cboe BZX Exchange, Inc. (``BZX or
BZX Options''), and Cboe BYX Exchange, Inc. (``BYX'' and, together with
C2, Cboe Options, EDGX, EDGA, and BZX, the ``Cboe Affiliated
Exchanges''). The Cboe Affiliated Exchanges are working to align
certain system functionality, retaining only intended differences
between the Cboe Affiliated Exchanges, in the context of a technology
migration. Cboe Options intends to migrate its technology to the same
trading platform used by the Exchange, C2, and EDGX Options in the
fourth quarter of 2019. The proposal set forth below is intended to add
certain functionality to the Exchange's System that is more similar to
functionality offered by Cboe Options in order to ultimately provide a
consistent technology offering for market participants who interact
with the Cboe Affiliated Exchanges. Although the Exchange intentionally
offers certain features that differ from those offered by its
affiliates and will continue to do so, the Exchange believes that
offering similar functionality to the extent practicable will reduce
potential confusion for Users.
Cboe Options currently offers quoting functionality to Market-
Makers, which permits Market-Makers to update their electronic quotes
in block quantities.\5\ Quotes on Cboe Options do not route to other
exchanges,\6\ and Market-Makers generally enter new quotes at the
beginning of the trading day based on-then current market
conditions.\7\ The Exchange currently offers bulk order functionality,
which is intended to provide Users, and Market-Makers in particular,
with a way to submit orders that simulate quoting functionality.\8\
However, while bulk order functionality simulates quoting
functionality, bulk order functionality provides Users with a less
efficient way to update multiple bids and offers. To update multiple
bids and offers, a User must submit multiple messages at the same time,
compared to quoting functionality, which generally permits a market
participant to update multiple bids and offers in a single quote
message. Specifically, a bulk order port is a dedicated logical port
that provides Users with the ability to submit single and bulk order
messages to enter, modify, or cancel orders designated as Post Only
Orders \9\ with a Time-in-Force of Day \10\ or Good-til-Date (``GTD'')
\11\ with an expiration time on that trading day.\12\ Like quotes, bulk
order messages do not route to other exchanges because they include a
Post Only instruction.\13\ Use of the Day or GTD Time-in-Force is
consistent with Market-Maker's entry of new quotes at the beginning of
each trading day.\14\ Unlike current Cboe Options quoting
functionality, bulk order ports on the Exchange are available to all
Users, not just Market-Makers. The Exchange makes bulk order ports
available to all Users to encourage them to provide liquidity to the
Exchange's market.
---------------------------------------------------------------------------
\5\ See Cboe Options Rule 1.1(ppp).
\6\ See Cboe Options Rule 6.14B (which describes how the
Exchange routes orders (specifically intermarket sweep orders) but
not quotes route to other exchanges); see also Nyse Arca, LLC
(``Arca'') Rule 6.37-O(a)(3)(D) (which states quotes do not route).
\7\ The Exchange understands this is common practice by Market-
Makers throughout the industry, and is consistent with Cboe Options
functionality, which cancels all unexecuted resting Market-Maker
quotes at the close of each trading day. Additionally, it is
consistent with Market-Makers' obligation to update market
quotations in response to changed market conditions. See Rule
8.5(a)(4); see also Cboe Options Rule 8.7(b)(iii).
\8\ See Securities Exchange Act Release No. 83214 (May 11,
2018), 83 FR 22796 (May 16, 2018) (SR-C2-2018-005). Prior to the
migration of the C2 trading platform to the same technology platform
as EDGX and BZX, C2 quoting functionality (substantially similar to
the quoting functionality being proposed in this rule filing) was
limited to Market-Makers.
\9\ See current Rule 1.1 (definition of Order Instructions) and
proposed Rule 6.10(c) for the definition of ``Post Only.'' The
proposed rule change moves the definitions of order types, Order
Instructions, and Times-in-Force to Rule 6.10(b), (c), and (d),
respectively.
\10\ See current Rule 1.1 and proposed Rule 6.10(d) for the
definition of the Time-in-Force of ``Day.''
\11\ See current Rule 1.1 and proposed Rule 6.10(d) for the
definition of the Time-in-Force of ``GTD.''
\12\ See current Rule 1.1 for the current definition of ``bulk
order ports.'' Pursuant to current Rule 1.1, Users may submit
auction responses through bulk order ports, and will continue to be
able to submit auction response through bulk ports. The proposed
rule change moves the definition of port to Rule 6.8(c).
\13\ See current Rule 1.1 (definition of Order Instructions) and
proposed Rule 6.10(c), which provides that an order with a Post Only
instruction may not route away to another exchange.
\14\ See supra note 7.
---------------------------------------------------------------------------
The Exchange proposes to replace bulk order message functionality
with bulk message functionality substantially similar to the quoting
functionality available on Cboe Options. The proposed bulk message
functionality is similar to but more efficient than currently available
bulk order functionality.\15\ A ``bulk port'' is a dedicated logical
port that, as proposed, would provide Users with the ability to submit:
---------------------------------------------------------------------------
\15\ See supra note 8 (the Exchange adopted bulk order
functionality to simulate quoting functionality).
---------------------------------------------------------------------------
(1) bulk messages,\16\ subject to the following:
---------------------------------------------------------------------------
\16\ Proposed Rule 1.1 defines a bulk message as a bid or offer
included in a single electronic message a User submits to the
Exchange in which the User may enter, modify, or cancel up to an
Exchange-specified number of bids and offers. Pursuant to Rule 1.2,
the Exchange will announce this number via Exchange notice or
publicly available technical specifications. This is similar to Cboe
Options Rule 1.1(ppp), which provides that electronic quotes may be
updated in block quantities. The limit on bids and offers per
message is a reasonable measure for the Exchange to use to manage
message traffic and activity to protect the integrity of the System.
Proposed Rule 1.1 also states that a User may submit a bulk message
through a bulk port as set forth in proposed Rule 6.8(c)(3), and
that the System handles a bulk messages in the same manner as it
handles an order or quote, unless the Rules specify otherwise. In
other words, a bulk message will be treated as an order (or quote if
submitted by a Market-Maker) pursuant to the Rules, including with
respect to priority and allocation. The proposed rule change
identifies the rule provisions pursuant to which bulk messages will
be handled in a different manner.
---------------------------------------------------------------------------
(a) a bulk message has a Time-in-Force of Day;
(b) a Market-Maker with an appointment in a class may designate a
bulk message for that class as Post Only or Book Only (which Post Only
or Book Only designation, as applicable, applies to all bulk message
bids and offers within a single message), \17\ and other Users must
designate a bulk message for that class as Post Only; and
---------------------------------------------------------------------------
\17\ In other words, a Market-Maker cannot designate one bulk
message bid within a single message as Post Only and designate
another bulk message bid within the same message as Book Only.
---------------------------------------------------------------------------
(c) a User may establish a default Match Trade Prevention (``MTP'')
Modifier of MTP Cancel Newest (``MCN''), MTP Cancel Oldest (``MCO''),
or MTP Cancel Both (``MCB''), and a default value of Attributable or
Non-Attributable, for a bulk port, each of which applies to all bulk
messages submitted to the Exchange through that bulk port;
[[Page 2600]]
(2) single orders in the same manner as Users may submit orders to
the Exchange through any other type of port,\18\ including designated
with any Order Instruction and any Time-in-Force in Rule 6.10(c) and
(d),\19\ respectively, except a Market-Maker with an appointment in a
class may designate an order for that class submitted through a bulk
port as Post Only or Book Only, and other Users must designate a bulk
message for that class submitted through a bulk port as Post Only; and
---------------------------------------------------------------------------
\18\ The proposed rule change also specifies that, subject to
the restrictions in the proposed rule, Users may submit single
orders through bulk ports in the same manner as they may submit
single orders through any other type port, which is consistent with
how Users may submit single orders to the Exchange through bulk
order ports today.
\19\ The proposed rule change moves the definitions of Order
Instructions and Times-in-Force from Rule 1.1 to Rule 6.10.
---------------------------------------------------------------------------
(3) auction responses (using auction response messages) in the same
manner as Users may submit auction responses to the Exchange through
any other type of port.\20\
---------------------------------------------------------------------------
\20\ See proposed Rule 6.8(c)(3)(C). The proposed rule change
has no impact on the ability of Users to submit auction responses
through bulk ports, and clarifies that Users may submit auction
responses through bulk ports in the same manner as they may submit
auction responses through any other type of port.
---------------------------------------------------------------------------
Proposed Rule 6.8(c)(3)(A)(i) states that bulk messages have a
Time-in-Force of Day. As discussed above, this is consistent with
current Cboe Options quoting functionality, which cancels all resting
quotes at the close of the trading day. This is also consistent with a
Market-Maker's obligation to update its quotations in response to
changed market conditions in its appointed classes.\21\ Unlike current
bulk orders, the GTD Time-in-Force with an expiration time on that
trading day will not be available for bulk messages. Users will
continue to have the ability to manually cancel bulk messages at any
time during the trading day, they will just not be able to have bulk
messages automatically cancel at a specific time on that trading day.
Additionally, Users may apply the GTD Order Instruction to orders
submitted through a bulk port (as further discussed below) or other
type of port.
---------------------------------------------------------------------------
\21\ See Rule 8.5(a)(3).
---------------------------------------------------------------------------
Unlike Cboe Options quoting functionality, which is only available
to Cboe Options market-makers, the proposed bulk messages will be
available to all Users (as bulk orders are today). While all Users will
be able to use bulk messages (and may currently use bulk orders), the
primary purpose of bulk orders and the proposed bulk messages has
always been to encourage market-maker quoting on exchanges.\22\ The
proposed rule change provides that a Market-Maker with an appointment
in a class may designate a bulk message for that class as ``Post Only''
or ``Book Only.'' This will provide Exchange Market-Makers with
functionality substantially similar to Cboe Options quoting
functionality currently available to Cboe Options market-makers, which
permits Market-Makers' incoming quotes to execute against resting
orders and quotes, except against the resting quote of another Market-
Maker (see discussion below).\23\ The Exchange believes permitting
Market-Makers to use bulk messages to remove liquidity from the Book
(if they so elect) will put Exchange Market-Makers on an even playing
field as market-makers on other exchanges that offer quoting
functionality. Additionally, Market-Makers are subject to various
obligations, including obligations to provide two-sided quotes, to
provide continuous quotes, and to trade at least 75% of its contracts
each quarter in appointed classes. The Exchange believes providing
Market-Makers with flexibility to use the Post Only or Book Only
instruction with respect to bulk messages will provide Market-Makers
with additional tools to meet their obligations in a manner they deem
appropriate. The Exchange further believes this may encourage liquidity
providers to register as Market-Makers. The proposed rule change
provides that other Users (i.e., non-Market-Makers or Market-Makers
without an appointment in a class) must designate a quote for that
class as ``Post Only.'' This is consistent with current bulk orders
available to these Users, and will continue to provide Users with
flexibility to avoid incurring a take fee if their intent is to add
liquidity to the Book. The Exchange notes these Users may apply the
Book Only instruction to orders submitted to the Exchange through other
ports. The proposed rule change also amends Rule 6.15 to make clear
that bulk messages (like current bulk orders) are not eligible for
routing (which is consistent with the Order Instructions of Post Only
and Book Only, which do not route to other options markets).\24\
---------------------------------------------------------------------------
\22\ See supra notes 8 and 15.
\23\ Incoming market-maker quotes on some options exchanges may
execute against interest resting in the book (see, e.g., Arca Rule
6.37A-O(a)(3)), while on other options exchanges they may not (see,
e.g., Box Options Exchange, LLC (``BOX'') Rule 8050, IM-8050-3).
\24\ See also Cboe Options Rule 6.14B; and Arca Rule 6.37A-
O(a)(3)(D).
---------------------------------------------------------------------------
The proposed rule change also permits Users to establish a default
MTP Modifier of MCN, MCO, or MCB that would apply to all bulk messages
submitted through a bulk port. Cboe Options currently offers a Market-
Maker Trade Prevention Order, which would be cancelled if it would
trade against a resting quote or order for the same Market-Maker, and
also cancel the resting order or quote.\25\ This is equivalent to the
MCB Modifier (except the MCB Modifier may be used by all Users rather
than just Market-Makers). The proposed rule change provides Users with
the ability to apply same trade prevention designation that is
available for quotes on Cboe Options to bulk messages (MCB), as well as
two additional MTP options (MCN and MCO) (the Exchange notes there is
currently no trade prevention functionality equivalent to MCN or MCO
available on Cboe Options for quotes). Allowing three MTP designations
for bulk messages will provide Users with additional control over the
circumstances in which their bulk messages (and resting orders
(including bulk messages)) will interact with each other. The Exchange
does not believe there is demand by Users for the MDC and MCS modifies
(which are available on the Exchange for orders) for bulk messages (the
Exchange notes there is currently no trade prevention functionality
equivalent to MDC or MCS available on Cboe Options for quotes). The
Exchange notes all Users may continue to apply all MTP Modifiers to
orders submitted through a bulk port (as further discussed below) or
any other type of port.
---------------------------------------------------------------------------
\25\ See Cboe Options Rule 6.53(v).
---------------------------------------------------------------------------
Generally, the System will handle bulk messages in the same manner
as it handles orders with the same Order Instructions and Times-in-
Force that will be available for bulk messages, including prioritizing,
displaying, and executing them pursuant to Rule 6.12. Proposed Rule
6.12(c)(6) adds detail regarding how the System will handle bulk
messages and orders submitted through bulk ports. Specifically,
proposed subparagraph (c)(6)(A) states the System will cancel or reject
a Post Only bulk message bid (offer) with a price that locks or crosses
the Exchange best offer (bid) or the ABO (ABB).\26\ This is consistent
with how the System would handle a Post Only order not subject to the
Price Adjust process.\27\
[[Page 2601]]
Pursuant to the Post Only instruction, an order (or bulk message as
proposed) may not remove liquidity from the Book or route away to
another Exchange. If a Post Only bulk message locked or crossed the
best contra-side interest on the Exchange, the System would cancel it
to prevent execution of the bulk message against the interest on the
Exchange in accordance with the User's instructions and to prevent the
Exchange from displaying a locked or crossed market.\28\ Similarly, if
a Post Only bulk message locked or crossed an away market, the System
would cancel it since it cannot route in accordance with the User's
instructions and to prevent the Exchange's dissemination of a locked or
crossed market.\29\
---------------------------------------------------------------------------
\26\ The ABBO means the best bid (offer) disseminated by other
exchanges.
\27\ See Rule 6.12(b). Pursuant to the Price Adjust process, the
System ranks and displays a buy (sell) order that, at the time of
entry, would lock a Protected Quotation of the Exchange or another
Exchange at one minimum price increment below (above) the current
NBO (NBB). The System executes a Book Only order against orders and
quotes and cancels any unexecuted portion if displaying the order on
the Book would create a violation of Rule 6.82, and the System
rejects a Post Only order that locks or crosses the opposite side
Exchange best bid or offer (``BBO'') or if displaying the order on
the Book would create a violation of Rule 6.82). Bulk messages will
not be eligible for the Price Adjust process, and thus will be
handled similar to an order not subject to the Price Adjust process.
See proposed Rules 6.10(c) and 6.12(b) (which clarify that the Price
Adjust Process will not apply to bulk messages).
\28\ See Chapter XXVII of the Rules; see also Options Order
Protection and Locked/Crossed Market Plan (the ``Linkage Plan'').
\29\ See id.
---------------------------------------------------------------------------
Similarly, proposed subparagraph (c)(6)(B) states the System will
execute a Book Only bulk message bid (offer) that locks or crosses the
ABO (ABB) against offers (bids) resting in the Book at prices the same
as or better than the ABO (ABB) and then cancels the unexecuted
portion. This is consistent with how the System would handle a Book
Only order not subject to the Price Adjust process. Pursuant to the
Book Only instruction, an order (or bulk message as proposed) may not
route away to another Exchange. If a Book Only bulk message locked or
crossed an away market, the System would execute it to the extent it
could against contra-side interest on the Exchange and then cancel it
since it cannot route in accordance with the User's instructions and to
prevent the Exchange's dissemination of a locked or crossed market.\30\
In addition to being similar to current Exchange Rules regarding the
handling of Post Only and Book Only Orders not subject to the Price
Adjust process, the Exchange notes that proposed subparagraphs
(c)(6)(A) and (B) are substantially the same as another exchange's
handling rules applicable to quotes.\31\
---------------------------------------------------------------------------
\30\ See id.
\31\ See Cboe Options Rule 6.14(b) (if Cboe Options is not at
the NBBO, the System rejects a quote back to a Market-Maker if the
quote locks or crosses the NBBO, which is the ABBO) and (c) (if the
Cboe Options System accepts a quote that locks or crosses the NBBO,
it executes the quote against quotes and orders in the Cboe Options
Book at the price(s) that is the same or better than the best price
disseminated by an away exchange(s) up to the size available on the
Exchange and cancels the remaining size if the quote's price locks
or crosses the ABBO or books any remaining size); see also Rule
6.37A-O(a)(3).
---------------------------------------------------------------------------
Proposed subparagraph (c)(6)(C) states the System will cancel or
reject a Book Only bulk message bid (offer) or order bid (offer) (or
unexecuted portion) submitted by a Market-Maker with an appointment in
the class through a bulk port if it would execute against a resting
offer (bid) with a Capacity of M (Market-Maker). The options market is
driven by Market-Maker quotes, and thus Market-Maker quotes are
critical to provide liquidity to the market and contribute to price
discovery for investors. The Exchange expects Market-Makers regularly
to use bulk messages to input and update prices on multiple series of
options at the same time. Market-Maker quotes are generally based on
pricing models that rely on various factors, including the price of the
underlying security and that security's volatility. As these variables
change, a Market-Maker's pricing model automatically will enter updates
to its bids and offers with bulk messages for some or all of an
option's series. Because Market-Makers may update bids and offers using
bulk messages in multiple series at the same time, there can be a
multitude of instances in which their bids and offers inadvertently
interact with each other, which can lead to significant risk and
exposure. This may occur, for example, when one Market-Maker's price
update system is faster than systems used by other Market-Makers. In
this respect, a Market-Maker's system that updates options prices
microseconds faster than another Market-Maker's system may lock or
cross its bids (offers) against the other Market-Maker's offers (bids)
every time its bid (offer) adjusts to the offer (bid) of the second
Market-Maker even if the second Market-Maker's system was also in the
process of updating that offer (bid). For example, assume Market-Makers
A and B are both quoting $1.10-1.20 when the underlying moves, causing
both each Market-Maker's system to update its quotes to $1.20-1.30. By
being microseconds faster, Market-Maker A's system will send a bid of
$1.20, which locks Market-Maker B's offer prior to Market-Maker B's
offer updating, even though its system was also in the process of
updating its offer. This could happen contemporaneously in a large
number of series within the class, such that instead of locking one
quote, Market-Maker A may lock 20 of Market-Maker B's quotes. This may
expose each Market-Maker to significant risk due to these unintended
executions.
The proposed rule change will protect Market-Makers from executions
that occur due to technology disparities rather than the intention of
Market-Makers to trade with one another at a particular price. As a
result, Market-Maker quotes will continue to provide liquidity on the
Book. This proposed functionality is similar to the quote-lock
functionality available on Cboe Options.\32\ While that functionality
permits locked quotes to execute against each other after a specified
amount of time, it also provides market-makers with an opportunity to
update their resting quotes, which would prevent execution of an
incoming market-maker quote against a resting market-maker quote. As
proposed, a Market-Maker bulk message (or order) will be rejected if it
would execute against resting Market-Maker interest. The Market-Maker
may resubmit its bulk message (or order) after being rejected, which
would be able to rest in the Book if the Market-Maker repriced its
resting bid or offer in the interim. Additionally, a Market-Maker may
interact with resting Market-Maker interest by submitting an order to
the Exchange through a different type of port.
---------------------------------------------------------------------------
\32\ See Cboe Options Rule 6.45(c).
---------------------------------------------------------------------------
Proposed Rule 6.9(a) provides that a User may only enter one bid
and one offer for a series per EFID \33\ per bulk port. The Exchange
believes this will encourage Users to submit their best bids and offers
in series, and thus provide displayed liquidity to the market and
contribute to public price discovery. Note firms may have multiple
EFIDs and multiple bulk ports, and thus will have the ability through
separate ports or EFIDs to submit additional bids and offers using bulk
messages in the same series if they choose. This provision is
consistent with the rule interpretation of another exchange.\34\
---------------------------------------------------------------------------
\33\ An ``EFID'' is an Executing Firm ID. See Rule 1.1.
\34\ See Cboe Options Regulatory Circular RG18-008 (March 6,
2018), which provides that each market-maker acronym may only have
one quote (which is considered to be a two-sided quote) in each
series at a time. An EFID is comparable to an acronym. Under Cboe
Options rules, the term Market-Maker generally refers to an
individual (and thus a person with a specific acronym), except as
otherwise provided in the Rules. See, e.g., Cboe Options Rule
8.7(d)(ii)(B) (which provides that market-maker continuous
electronic quoting obligations may be satisfied by market-makers
either individually or collectively with market-makers of the same
TPH organization). The interpretation in the circular referenced
above is consistent with this term and a Market-Maker's obligations
set forth in Rule 8.7 (e.g. market-Makers must contribute to the
maintenance of a fair and orderly market, including by competing to
improve markets, update quotes in response to changed market
conditions, and price options contracts fairly).
---------------------------------------------------------------------------
[[Page 2602]]
In addition to permitting Users to submit bulk orders (which
functionality the Exchange will discontinue and replace with bulk
message functionality), current bulk order ports permit Users to submit
single orders to the Exchange. To encourage Users that may not have
quoting systems to provide liquidity to the Exchange, the proposed rule
change will permit Users to continue to submit single orders to the
Exchange through these ports, which are proposed to be renamed as bulk
ports. Proposed Rule 6.8(c)(3)(B) will permit Users to designate these
orders with any Order Instruction and any Time-in-Force in proposed
Rule 6.10(c) and (d), respectively, subject to the Book Only and Post
Only restrictions described above for Market-Makers with appointments
in a class and other Users. This will provide Users with additional
functionality that is available for single orders submitted through
bulk ports today, and allow their liquidity to rest on the Exchange for
multiple trading days, if Users so choose. This will also provide Users
with additional control over the orders they use to provide liquidity
to the Exchange through bulk ports. Additionally, proposed Rule
6.12(c)(6)(A) imposes the same prohibition on Market-Maker orders
submitted through bulk ports from removing resting Market-Maker
interest that applies to bulk messages, as described above. The
Exchange believes it is appropriate for orders submitted through bulk
ports be subject to the same restrictions on adding and removing
liquidity as bulk messages submitted through bulk ports, so that orders
submitted through bulk ports do not have an advantage over bulk
messages, and vice versa.
While liquidity providers are most commonly registered market-
makers, other professional traders also provide liquidity to the
options market, which contributes to price discovery. As a result,
unlike other exchanges that restrict quoting functionality to market-
makers, the Exchange believes it is appropriate to make bulk messages
available to all Users to encourage them to provide liquidity, which is
critical to the Exchange's market. Additionally, permitting orders to
be submitted through bulk ports will continue to provide all liquidity
providers with this functionality that is available today, as well as
additional flexibility with respect to this functionality they may use
to provide liquidity to the Exchange.
The proposed rule change adds a price protection mechanism for bulk
messages that is similar to the fat finger check the Exchange currently
provides for orders.\35\ Proposed Rule 6.14(a)(5) states the System
cancels or rejects any bulk message bid (offer) above (below) the NBO
(NBB) by more than a specified amount determined by the Exchange. This
is similar to the fat finger check currently applicable to limit
orders.\36\ Quotes that cross the NBBO by more than a specified amount
are rejected as presumptively erroneous. This proposed check will not
apply to bulk messages submitted prior to the conclusion of the Opening
Process or when no NBBO is available. The Exchange believes it is
appropriate to have the ability to not apply this check during the pre-
open or opening rotation so that the check does not impact the
determination of the opening price. The Exchange also believes it is
appropriate to not apply this check when there is no NBBO, as the
Exchange believes that is the most reliable measure against which to
compare the price of the bulk message to determine its reasonability.
The proposed change is similar to a quote price protection mechanism
available at other options exchanges.\37\
---------------------------------------------------------------------------
\35\ The proposed rule change also amends Rule 6.14(a) and (c)
(and the introductory language to that rule) to make clear which
price protections and risk controls in those paragraphs will not
apply to bulk messages.
\36\ See Rule 6.14(c)(1). Orders submitted through bulk ports
will be subject to the current order price protection mechanisms,
such as limit fat finger check in Rule 6.14.
\37\ See, e.g., Cboe Options Rule 6.14(a) and (b); Arca Rule
6.37A-O(a)(3).
---------------------------------------------------------------------------
Proposed Rule 6.14(c)(6)(B) states if, pursuant to the Rules, the
System cancels or rejects a bulk message bid (offer) to update a
resting bulk message bid (offer) submitted for the same EFID and bulk
port, the System also cancels the resting bulk message bid (offer). The
Exchange currently offers Users similar functionality for orders and
quotes (as currently defined as bids and offers from Market-Makers),
which is optional.\38\ Pursuant to the proposed rule change, the System
will always apply this protection to bulk messages. The Exchange
believes this will operate as an additional safeguard that causes
liquidity providers to re-evaluate their bids and offers in a series
before attempting to update them again. Additionally, when a User
submits a new bulk message, it is implicitly instructing the Exchange
to cancel any resting bulk message in the same series. Thus, even if
the new bulk message is rejected as a result of this proposed check,
the implicit instruction to cancel the resting bulk message remains
valid nonetheless. The proposed rule change is substantially similar to
a risk control applicable to quotes available at another options
exchange.\39\
---------------------------------------------------------------------------
\38\ See current Rule 6.14(c)(6) and proposed Rule
6.14(c)(6)(A).
\39\ See, e.g., Cboe Options Rule 6.14(b); Arca Rule 6.37A-
O(a)(3)(C).
---------------------------------------------------------------------------
The proposed rule change amends proposed Rules 6.10(c) and (d) to
provide that eligible Order Instructions and Times-in-Force,
respectively, are subject to the proposed restrictions in Rule 6.8(c)
with respect to orders and bulk messages submitted through bulk ports,
and clarify which Order Instructions, and Times-in-Force are available
and not available for bulk messages, as described above. The proposed
rule change also amends the definitions of order types, Order
Instructions, and Times-in-Force in Rule 6.10(b), (c), and (d),
respectively, in accordance with proposed Rule 6.8(c)(3). Additionally,
Rule 6.13 to make clear that Users may not submit complex orders
through bulk ports.\40\
---------------------------------------------------------------------------
\40\ The Exchange notes that Market-Makers are not required to
quote on the COB, and that complex quoting functionality is not
currently available on Cboe Options.
---------------------------------------------------------------------------
The proposed rule change also makes nonsubstantive changes to move
the definitions of order types, Order Instructions, and Times-in-Force
(as amended to accommodate bulk messages as discussed above) to Rule
6.10 and add cross-references to that Rule in the definitions of those
terms in Rule 1.1. The proposed rule change also moves the definitions
of physical port and logical port (and the proposed definition of bulk
port) to Rule 6.8(c).
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.\41\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \42\ 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
[[Page 2603]]
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) \43\ requirement that the rules
of an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\41\ 15 U.S.C. 78f(b).
\42\ 15 U.S.C. 78f(b)(5).
\43\ Id.
---------------------------------------------------------------------------
In particular, the proposed rule change will remove impediments to
and perfect the mechanism of a free and open market because it provides
Users, including Market-Makers and other liquidity providers, with
enhanced functionality to allow them to provide liquidity to the market
and update bids and offers in response to changed market conditions.
While current bulk orders simulate quotes, Users must submit multiple
messages in bulk to update bids and offers in multiple series. The
proposed bulk messages will permit Users to update multiple bids and
offers in block quantities in a single message, which will permit them
to update bids and offers (for example, in response to changing market
conditions) in a more efficient manner. The proposed ability to update
bids and offers in block quantities is similar to that available on
another options exchange.\44\
---------------------------------------------------------------------------
\44\ See Cboe Options Rule 1.1(ppp), which provides that
electronic quotes may be updated in block quantities.
---------------------------------------------------------------------------
With respect to all Users, the proposed bulk messages are
substantially similar to the current bulk orders available through bulk
order ports--Users will be able to submit bulk messages that are Day
and Post Only. However, the proposed rule change will permit them to do
so in a single bulk message rather than in multiple messages. While the
use of the GTD Time-in-Force will not be permitted for bulk messages as
it currently is for bulk orders, Users may achieve the same result as
GTD for their bulk messages by manually cancelling a bulk message at a
specified time during the trading day--the proposed rule change merely
does not provide a means for automatic cancellation of bulk messages at
a specific time during the trading day. Additionally, Users may
continue to apply GTD to orders submitted to the Exchange through bulk
ports and other ports.
The Exchange believes the proposed rule change will permit
liquidity providers to more efficiently update their resting bids and
offers, which may help them manage their risk exposure when, for
example, updating their bids and offers in response to changing market
conditions. The Exchange believes this will continue to encourage all
Users to provide liquidity on the Exchange and avoid incurring a taker
fee if their intent is to submit bids and offers to add liquidity to
the Book. As a result, this may increase liquidity, resulting in more
trading opportunities and tighter spreads, which benefits all
investors. The Exchange notes the proposed rule change provides Users
with additional flexibility by permitting certain MTP Modifiers to be
applied to bulk messages to prevent their orders and bulk messages from
trading against each other. The MTP Modifiers not available for bulk
messages will continue to be available for Users on orders submitted
through bulk ports and other ports. Unlike other options exchanges that
limit the use of quoting functionality to market-makers, the proposed
rule change will permit all Users to submit bulk messages.
Additionally, the proposed rule change to permit Users to continue to
submit orders (subject to restrictions on the Post Only and Book Only
instructions, as discussed above) through bulk ports will encourage
Users that may not have quoting systems to provide liquidity to the
Exchange by submitting single orders through bulk ports. This is also
consistent with current bulk orders, which permits Users to submit both
single and bulk orders through bulk order ports.
The proposed rule change further removes impediments to and
perfects the mechanism of a free and open market and a national market
system by providing appointed Market-Makers with the ability to submit
Book Only bulk messages, because it will align functionality available
to appointed Market-Makers on the Exchange with the quoting
functionality available to market-makers on other options exchanges,
including Cboe Options, which permit quotes to both add and remove
liquidity.\45\ Market-Makers are critical to providing liquidity and
price discovery on the Exchange, and are subject to various
obligations, as discussed above. The Exchange notes all other Users may
continue to use the Book Only instruction (or other instructions that
permit execution against resting orders on the Book) on orders
submitted through other ports, as they may do today. The Exchange
believes providing Market-Makers with flexibility to use the Post Only
or Book Only instruction with respect to bulk messages will provide
them with additional tools to meet their obligations in a manner they
deem appropriate and is reasonable given the critical role Market-
Makers plan in the options market. The Exchange believes this may also
encourage liquidity providers to register as Market-Makers.
---------------------------------------------------------------------------
\45\ Other options exchanges only permit market-makers to submit
quotes. See, e.g., Cboe Options Rules 1.1(ppp) and 8.3(c); Arca Rule
6.37A-O(a)(1).
---------------------------------------------------------------------------
The proposed rule change provides Market-Makers with a combination
of functionality available to market-makers on other exchanges, as some
exchanges permit market-makers to remove liquidity and others only
permit market-makers to post liquidity using quotes.\46\ As a result,
the Exchange believes the proposed rule change will provide Market-
Makers with greater control over their interactions with contra-side
liquidity and would increase opportunities for such interaction. The
Exchange believes this will provide Market-Makers with a greater level
of determinism, in terms of managing their exposure, which may
encourage them to be more aggressive when providing liquidity. The
Exchange believes this may result in more trading opportunities and
tighter spreads, which contributes to price discovery. Ultimately, this
may improve overall market quality and enhance competition on the
Exchange, which benefits all investors.
---------------------------------------------------------------------------
\46\ See id. and Box Options Exchange, LLC (``BOX'') Rule 8050,
IM-8050-3.
---------------------------------------------------------------------------
Similarly, the proposed rule change to prevent Market-Maker bulk
messages from removing Market-Maker orders or bulk messages resting on
the Book removes impediments to and perfects the mechanism of a
national market system by eliminating trades that may be unintended
(potentially the result of technological disparities between Market-
Makers) and thus not beneficial to customers, and that may impede
certain liquidity providers' ability to competitively price their bids
and offers. The Exchange believes the proposed rule change will
increase availability of liquidity in the market and will enhance
competition, because Market-Makers will be better able to quote
aggressively with fewer concerns over technological disparities in
their quoting systems, which ultimately benefits all investors. The
Exchange notes this proposed rule change is similar to functionality
available on another options exchange.\47\
---------------------------------------------------------------------------
\47\ See Cboe Options Rule 6.45(c).
---------------------------------------------------------------------------
The proposed handling of bulk messages to prevent the display of a
locked or crossed market will perfect the mechanism of a free and open
market and national market system, as it is consistent with the Linkage
Plan
[[Page 2604]]
and the Exchange's handling of orders with similar instructions. This
proposed handling of bulk messages is also consistent with handling of
quotes on other options exchanges.\48\ The proposed risk controls and
price protection mechanisms that will apply to bulk messages promote
just and equitable principles of trade and will protect investors by
mitigating potential risks associated with Users submitting bulk
messages at clearly unintended prices and trading at extreme and
potentially erroneous prices. Additionally, the proposed rule change to
cancel a User's resting bulk message when the System rejects a bulk
message intended to update that resting bulk message provides Users
with an additional safeguard that causes Users to reevaluate their bids
and offers in the series before attempting to update them again.
Additionally, when a User submits a new bulk message, it is implicitly
instructing the Exchange to cancel any resting bulk message. Thus, even
if the new bulk message is rejected, the Market-Maker's implicit
instruction to cancel the resting bulk message remains valid
nonetheless.
---------------------------------------------------------------------------
\48\ See Cboe Options Rule 6.14(b) and (c); see also Rule 6.37A-
O(a)(3).
---------------------------------------------------------------------------
The options markets are quote driven markets and thus dependent on
liquidity providers, which are most commonly registered market-makers
but also other professional traders, for liquidity and price discovery.
The Exchange believes the proposed enhanced functionality, including
the additional flexibility for Market-Makers to manage their risk
exposure and provide additional control over interactions with contra-
side liquidity, for these liquidity providers to more efficiently enter
and update bids and offers. This may encourage the provision of more
aggressive liquidity, which may result in more trading opportunities
and tighter spreads, which contributes to price discovery. This may
improve overall market quality and enhance competition on the Exchange,
which benefits all investors.
The proposed rule change is generally intended to align system
functionality currently offered by the Exchange with Cboe Options
functionality in order to provide a consistent technology offering for
the Cboe Affiliated Exchanges. A consistent technology offering, in
turn, will simplify the technology implementation, changes, and
maintenance by Users of the Exchange that are also participants on Cboe
Affiliated Exchanges. The proposed rule change would also provide Users
with access to functionality that is generally available on markets
other than the Cboe Affiliated Exchanges, which may result in the
efficient execution of quotes and orders and provide Users with
additional flexibility and increased functionality on the Exchange's
System.
When Cboe Options migrates to the same technology as that of the
Exchange and other Cboe Affiliated Exchanges, Users of the Exchange and
other Cboe Affiliated Exchanges will have access to similar
functionality on all Cboe Affiliated Exchanges. As such, the proposed
rule change would foster cooperation and coordination with persons
engaged in facilitating transactions in securities and would remove
impediments to and perfect the mechanism of a free and open market and
a national market system.
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, as the proposed bulk messages, like the current
bulk orders, are optional for all Users. While only Market-Makers may
submit Book Only bulk messages, the Exchange believes this is
appropriate given the various obligations Market-Makers must satisfy
under the Rules and the unique and critical role Market-Makers play in
the options market, as discussed above. The Exchange believes providing
Market-Makers with flexibility to use the Post Only or Book Only
instruction with respect to bulk messages will provide Market-Makers
with additional tools to meet their obligations in a manner they deem
appropriate. The Exchange believes the proposed functionality for
Market-Makers adds value to market-making on the Exchange and provides
them with greater control over how their quotes interact with contra-
side liquidity both on the Exchange. The Exchange notes all other Users
may continue to use the Book Only instruction on orders submitted to
the Exchange through other types of ports. The Post Only instruction
for bulk messages will be available to all Users, and is substantially
similar to the bulk orders currently available to all Users.
Additionally, all Users may submit single orders with all other Times-
in-Force and Order Instructions (subject to the same Post Only and Book
Only restrictions applicable to bulk messages) not available for bulk
messages through bulk ports, which may encourage Users that may not
have quoting systems to provide liquidity to the Exchange.
The proposed rule change to prevent Market-Maker bulk message
executions against other resting Market-Maker interest is intended to
protect Market-Makers from executions due to technology disparities
rather than the intention of Market-Makers to trade with one another at
that price. The Exchange believes this functionality and protection for
Market-Makers may encourage Market-Makers to quote tighter and deeper
markets, which will increase liquidity and enhance competition. The
proposed price protection mechanisms and risk controls applicable to
bulk messages will apply in the same manner to all bulk messages
submitted by market participants. The Exchange believes this protection
for bulk messages provides liquidity providers with additional
protection from anomalous or erroneous executions. Generally, once bulk
messages are resting on the Book, the System will handle them no
differently than resting orders--this includes how the System
prioritizes orders and quotes when executing them against incoming
orders or quotes. Bulk messages that are available to all Users will
work in the same manner for all Users, and the additional bulk message
functionality available to appointed Market-Makers will work in the
same manner for all such Market-Makers. The Exchange believes it is
reasonable to provide additional functionality to Market-Makers given
their unique and critical role in the options market and the various
obligations that Market-Makers must satisfy.
The Exchange does not believe the propose rule change will impose
any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act, because it will
provide Market-Makers with bulk message functionality that is similar
to that quoting available to market-makers on other options exchanges.
The Exchange believes the proposed functionality will permit the
Exchange to operate on an even playing field relative to other
exchanges that have similar functionality. As discussed above, the
options markets are quote driven markets and thus dependent on
liquidity providers, which are most commonly registered market-makers
but also other professional traders, for liquidity and price discovery.
The Exchange believes the proposed enhanced functionality, including
the additional flexibility for Market-Makers to manage their risk
exposure and
[[Page 2605]]
provide additional control over interactions with contra-side
liquidity, for these liquidity providers to more efficiently enter and
update bids and offers. This may encourage the provision of more
aggressive liquidity, which may result in more trading opportunities
and tighter spreads, which contributes to price discovery. This may
improve overall market quality and enhance competition on the Exchange,
which benefits all investors.
The Exchange reiterates that the proposed rule change is being
proposed in the context of the technology integration of the Cboe
Affiliated Exchanges. Thus, the Exchange believes this proposed rule
change permits fair competition among national securities exchanges. In
addition, the Exchange believes the proposed rule change will benefit
Exchange participants in that it will provide a consistent technology
offering for Users by the Cboe Affiliated Exchanges.
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 after the date of the filing, or such
shorter time as the Commission may designate, it has become effective
pursuant to 19(b)(3)(A) of the Act \49\ and Rule 19b-4(f)(6) \50\
thereunder.
---------------------------------------------------------------------------
\49\ 15 U.S.C. 78s(b)(3)(A).
\50\ 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 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.
---------------------------------------------------------------------------
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 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-C2-2018-025 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-C2-2018-025. 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-C2-2018-025 and should be submitted on
or before February 22, 2019.
---------------------------------------------------------------------------
\51\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\51\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-01392 Filed 2-6-19; 8:45 am]
BILLING CODE 8011-01-P