[Federal Register Volume 84, Number 140 (Monday, July 22, 2019)]
[Notices]
[Pages 35147-35165]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15475]
[[Page 35147]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86387; File No. SR-CBOE-2019-034]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Amend the Exchange's Opening
Process Including on VIX Settlement Days
July 16, 2019.
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 July 2, 2019, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
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.
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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 opening process. 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.
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.
(formerly named CBOE Holdings, Inc.) (``Cboe Global''), which is also
the parent company of Cboe C2 Exchange, Inc. (``C2''), acquired Cboe
EDGA Exchange, Inc. (``EDGA''), Cboe EDGX Exchange, Inc. (``EDGX'' or
``EDGX Options''), Cboe BZX Exchange, Inc. (``BZX'' or ``BZX
Options''), and Cboe BYX Exchange, Inc. (``BYX'' and, together with
Cboe Options, C2, 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 trading platform to the
same system used by the Cboe Affiliated Exchanges, which the Exchange
expects to complete on October 7, 2019. Cboe Options believes offering
similar functionality to the extent practicable will reduce potential
confusion for market participants.
In connection with this technology migration, the Exchange has a
shell structure for the Exchange's Rulebook that will become effective
upon the migration of the Exchange's trading platform to the same
system used by the Cboe Affiliated Exchanges (``shell Rulebook'') that
resides alongside its currently effective Rulebook (``current
Rulebook''), which shell Rulebook will contain the Rules that will be
in place upon completion of the Cboe Options technology migration.
The proposed rule change amends the Exchange's opening auction
process.\3\ Pursuant to the proposed opening auction process, the
Exchange will have a Queuing Period, during which the System will
accept orders and quotes and disseminate expected opening information
(similar to the pre-opening period described in current Rule 6.2(a));
will initiate an opening rotation upon the occurrence of certain
triggers (similar to the current opening rotation triggers described in
current Rule 6.2(b)); will conduct an opening rotation during which the
System matches and executes orders and quotes against each other in
order to establish an opening Exchange best bid and offer and trade
price, if any, for each series, subject to certain price protections
(similar to the opening rotation period described in current Rule
6.2(c) and the opening conditions in Rule 6.2(d)); and will open series
for trading. This order of events that comprise the proposed opening
auction process corresponds to the Exchange's current opening auction
process described in current Rule 6.2.
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\3\ The Exchange's opening auction process is set forth in Rule
6.2 of the current Rulebook. The proposed rule change deletes Rule
6.2 of the current Rulebook and adopts Rule 5.31 in the shell
Rulebook, which changes are expected to become operative on October
7, 2019.
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Proposed Rule 5.31(a) sets forth the definitions of the following
terms for purposes of the opening auction process in proposed Rule
5.31: \4\
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\4\ A term defined elsewhere in the Rules has the same meaning
with respect to proposed Rule 5.31, unless otherwise defined in
proposed Rule 5.31.
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Composite Market: The term ``Composite Market'' means the
market for a series comprised of (1) the higher of the then-current
best appointed Market-Maker bulk message bid on the Exchange and the
away best bid (``ABB'') (if there is an ABB) and (2) the lower of the
then-current best appointed Market-Maker bulk message offer on the
Exchange and the away best offer (``ABO'') (if there is an ABO). The
term ``Composite Bid (Offer)'' means the bid (offer) used to determine
the Composite Market.
The Exchange currently considers quotes of appointed Market-Makers
on the Exchange \5\ and quotes from any away markets, if it has
activated Hybrid Agency Liaison (``HAL'') at the open, as part of its
current opening conditions.\6\ The Exchange does not intend to activate
HAL at the open upon the technology migration and will thus apply the
same opening conditions to all classes. The Exchange believes it is
appropriate to consider any quotes from away markets in addition to
quotes on its own market when determining whether to open a series in
all classes, because consideration of all then-available pricing
information may provide for more accurate opening prices.
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\5\ The term ``quote'' in the current Rulebook corresponds to
the term ``bulk message'' in the shell Rulebook. Additionally,
currently on Cboe Options, only Market-Makers may submit quotes in
their appointed classes.
\6\ See current Rule 6.2(d).
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Composite Width: The term ``Composite Width'' means the
width of the Composite Market (i.e., the width between the Composite
Bid and the Composite Offer) of a series.
Maximum Composite Width: The term ``Maximum Composite
Width'' means the amount that the Composite Width of a series may
generally not be greater than for the series to open (subject to
certain exceptions, as described below). The Market
[[Page 35148]]
Composite Widths for all classes are as follows (based on the Composite
Bid for a series): \7\
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\7\ The Maximum Composite Widths are consistent with the
Exchange's current authority to determine the OEPW (as defined
below); the Exchange is adding this detail to the Rules. The
proposed widths are similar, but narrower, than the Exchange's
current width settings. See Cboe Options Regulatory Circular RG16-
080.
------------------------------------------------------------------------
Market
Composite bid composite
width
------------------------------------------------------------------------
0-1.99.................................................. 0.50
2.00-5.00............................................... 0.80
5.01-10.00.............................................. 1.00
10.01-20.00............................................. 2.00
20.01-50.00............................................. 3.00
50.01-100.00............................................ 5.00
100.01-200.00........................................... 8.00
>=200.01................................................ 12.00
------------------------------------------------------------------------
The Exchange may modify these amounts during the opening auction
process (which modifications the Exchange disseminates to all
subscribers to the Exchange's data feeds that deliver opening auction
updates).
The Maximum Composite Width corresponds to the opening exchange
prescribed width range (``OEPW'') currently used on Cboe Options.\8\
The Exchange will determine the Maximum Composite Width in a slightly
different manner than it currently determines the OEPW; \9\ however,
both are intended to create a reasonable quote width to protect against
a market opening with an extreme width. Currently, if the opening quote
width is wider than the OEPW, but other conditions exist, the Exchange
will then consider a separate quote width setting used as a price
protection measure after trading opens.\10\ The proposed protection
measure is simplified to only be based on the Maximum Composite Width.
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\8\ See Cboe Options Rule 6.2(d)(i)(A).
\9\ The Exchange will set the Maximum Composite Width on a
Composite Bid basis rather than premium basis.
\10\ See current Rule 6.2(d) (such intraday width is referred to
as the IEPW).
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Opening Auction Updates: The term ``opening auction
updates'' means Exchange-disseminated messages that contain information
regarding the expected opening of a series based on orders and quotes
in the Queuing Book for the applicable trading session and, if
applicable, the Global Trading Hours (``GTH'') Book,\11\ including the
expected opening price, the then-current cumulative size on each side
at or more aggressive than the expected opening price, and whether the
series would open (and any reason why a series would not open).
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\11\ In other words, for the Regular Trading Hours (``RTH'')
opening auction in an All Sessions class, the expected opening
information to be disseminated in opening auction updates prior to
the conclusion of the GTH trading session will be based on orders
and quotes in the RTH Queuing Book (i.e., RTH Only orders) and in
the GTH Book (i.e., All Sessions orders).
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The proposed auction update messages correspond to the expected
opening information messages (``EOIs'') the Exchange currently
disseminates.\12\ The information to be included in auction update
messages will differ slightly from the information the Exchange
currently disseminates in EOIs. For example, the Exchange currently
disseminates the expected size of an opening trade and the size and
side of any imbalance. As proposed, the Exchange will disseminate the
then-current cumulative size on each side at or more aggressive than
the expected opening price, along with information regarding whether a
series will or will not open, which ultimately provides market
participants with equivalent information.
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\12\ See current Rule 6.2(a)(ii).
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Opening Collar: The term ``Opening Collar'' means the
price range that establishes limits at or inside of which the System
determines the Opening Trade Price for a series. The Opening Collar is
determined by determining the midpoint of the Composite Market, and
adding and subtracting half of the applicable width amount above and
below, respectively, that midpoint. The Opening Collar widths for all
classes are as follows (based on the Composite Bid for a series):
------------------------------------------------------------------------
Opening collar
Composite bid width
------------------------------------------------------------------------
0-1.99.................................................. 0.50
2.00-5.00............................................... 0.80
5.01-10.00.............................................. 1.00
10.01-20.00............................................. 2.00
20.01-50.00............................................. 3.00
50.01-100.00............................................ 5.00
100.01-200.00........................................... 8.00
>=200.01................................................ 12.00
------------------------------------------------------------------------
The Exchange may modify these amounts during the opening auction
process (which modifications the Exchange disseminates to all
subscribers to the Exchange's data feeds that deliver opening auction
updates).
The Exchange currently uses the OEPW (or IEPW in certain
circumstances) as the range within which the opening price must be.\13\
While the Exchange proposes to use a different measure to protect
against a market opening at an extreme price than it uses to protect a
market against opening too wide, the new Opening Collar will be based
on appointed Market-Maker quotes and away market quotes, and will be
used in a similar manner to protect against the market opening at an
extreme price.
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\13\ See current Rule 6.2(d)(i)(C). The proposed Opening Collar
widths are consistent with the Exchange's current authority to
determine the OEPW; the Exchange is adding this detail to the Rules.
The proposed widths are similar, but narrower, than the Exchange's
current width settings. See Cboe Options Regulatory Circular RG16-
080.
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Opening Trade Price: The term ``Opening Trade Price''
means the price at which the System executes opening trades in a series
during the opening rotation.\14\
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\14\ See current Rule 6.2(c)(i)(A).
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Queuing Book: The term ``Queuing Book'' means the book
into which Users may submit orders and quotes (and onto which good-til-
cancelled (``GTC'') and good-til-day (``GTD'') orders \15\ remaining on
the Book from the previous trading session or trading day, as
applicable, are entered) during the Queuing Period for participation in
the applicable opening rotation.\16\ Orders and quotes on the Queuing
Book may not execute until the opening rotation. The Queuing Book for
the GTH opening auction process may be referred to as the ``GTH Queuing
Book,'' and the Queuing Book for the RTH opening auction process may be
referred to as the ``RTH Queuing Book.'' There is no equivalent term to
a Queuing Book in current Rule 6.2. However, the System currently
accepts orders and quotes during the pre-opening period, which orders
and quotes rest on the book and are eligible for execution during the
opening rotation.
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\15\ See Rule 5.6(d) in the shell Rulebook.
\16\ In other words, at 7:30 a.m., All Sessions orders will rest
on the GTH Queuing Book and be eligible to participate in the GTH
opening auction process, and RTH Only orders will rest on the RTH
Queuing Book and be eligible to participate in the RTH opening
auction process. Additionally, unexecuted All Sessions orders
resting on the GTH Book at the end of the GTH trading session will
enter the RTH Queuing Book and be eligible to participate in the RTH
opening auction process. This does not currently occur, because the
GTH and RTH trading sessions currently operate separately and do not
interact. Following the technology migration, these trading sessions
will be able to interact, as they will use the same book and
connectivity. See Rules 1.1 (definition of Book) in the shell
Rulebook.
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Queuing Period: The term ``Queueing Period'' means the
time period prior to the initiation of an opening rotation during which
the System accepts orders and quotes for participation in the opening
rotation for the applicable trading session.\17\ The Queuing Period is
equivalent to the pre-open period described in current Rule 6.2(a).
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\17\ See current Rule 6.2(a).
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Proposed Rule 5.31(b) describes the Queuing Period. The Queuing
Period will begin at 2:00 a.m. Eastern Time for
[[Page 35149]]
All Sessions Classes and at 7:30 a.m. Eastern Time for RTH Only
Classes.\18\ The System currently begins accepting orders in quotes at
5:00 p.m. Eastern Time \19\ the previous trading day for the GTH
trading session and at 7:30 a.m. Eastern Time for the RTH trading
session.\20\ While Users will have less time to submit orders and
quotes prior to the GTH opening, the Exchange believes having one hour
to submit orders and quotes in All Sessions Classes prior to the GTH
opening is sufficient given that the Exchange lists fewer classes for
trading during GTH, and it is the same amount of time they have to
submit orders and quotes in RTH Only classes prior to the RTH trading
session.\21\
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\18\ See proposed Rule 5.31(b)(1).
\19\ The Exchange notes the times in its current Rule are in
Central Time rather than Eastern Time, as is the case in its
proposed Rule.
\20\ See current Rule 6.2(a); see also Cboe Options Regulatory
Circular RG15-103 (July 13, 2015). The Exchange currently begins
accepting orders and quotes at 7:30 a.m. Eastern Time for the RTH
trading session, which time is not changing.
\21\ Pursuant to C2 Options Rule 6.11(a) and EDGX Options Rule
21.7(a), the Queuing Period for the GTH trading session will
similarly begin one hour prior to the beginning of that trading
session on those exchanges. Current Rule 6.2(a) provides the
Exchange with flexibility regarding when to begin the pre-opening
period. The Exchange proposes to eliminate this flexibility from the
Rules, as it does not believe it is necessary any more. If the
Exchange determines to change the time at which the Queuing Period
will begin, it will submit a rule filing.
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Proposed Rule 5.31(b)(2) clarifies that orders and quotes on the
Queuing Book are not eligible for execution until the opening rotation
pursuant to proposed paragraph (e), as described below.\22\ This is
consistent with the current order entry period, pursuant to which
orders and quotes entered for inclusion in the opening process do not
execute until the opening trade pursuant to current Rule 6.2(c). During
the Queueing Period, the System accepts all orders and quotes that are
available for a class and trading session pursuant to Rule 5.30,\23\
which are eligible for execution during the opening rotation, except as
follows:
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\22\ The proposed rule change moves the provision that states
that GTC and GTD orders remaining on the Book from the previous
trading day may participate in the opening process from current Rule
6.2(b) to the definition of Queuing Book in proposed Rule 5.31(a).
\23\ The Exchange intends to add Rule 5.30 to the shell Rulebook
in a separate rule filing, which will set forth the order types,
instructions, and times-in-force the Exchange may make available for
electronic trading.
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The System rejects immediate-or-cancel (``IOC'') and fill-
or-kill (``FOK'') orders during the Queuing Period; \24\
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\24\ See current Rule 6.2(a)(i) and proposed Rule 5.31(a)(2)(A).
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the System accepts orders and quotes with MTP Modifiers
during the Queuing Period, but does not enforce them during the opening
rotation; \25\
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\25\ See proposed Rule 5.31(a)(2)(B). The Exchange currently has
Market-Maker trade prevention orders, which it does not accept prior
to the opening. See Rule 6.2(a)(i).
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the System accepts stop and stop-limit orders\26\ during
the Queuing Period, but they do not participate during the opening
rotation. The System enters any of these orders it receives during the
Queuing Period into the Book following completion of the opening
rotation (in time priority); \27\
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\26\ See proposed Rule 5.31(a)(2)(C). Current Rule 6.2(c)(i)(A)
provides that all-or-none orders and orders with a stop contingency
will not participate in the opening rotation in classes in which the
Exchange has not activated HAL at the open. As noted above, the
Exchange intends to not activate HAL at the open for any classes
following the technology migration, so proposed Rule 5.31(a)(2)(C)
is consistent with that current Rule.
\27\ This is consistent with current functionality, and the
proposed rule change is adding this detail to the Rules. See also
Cboe Options Rule 6.2(c)(i)(B) (which states that order with a stop
contingency do not participate in the opening rotation).
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the System converts all intermarket sweep orders
(``ISOs'') received prior to the completion of the opening rotation
into non-ISOs; \28\ and
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\28\ See proposed Rule 5.31(a)(2)(D); see also current Rule
6.2(a)(i) (which does not permit ISOs to be entered during the pre-
opening period).
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complex orders do not participate in the opening auction
described in proposed Rule 5.31 and instead may participate in the
complex order book (``COB'') opening process pursuant to proposed Rule
5.33(c).\29\
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\29\ See current Rule 6.2(c)(i)(B) and proposed Rule
5.31(a)(2)(E). The Exchange intends to add Rule 5.33 to the shell
Rulebook (equivalent to current Rule 6.53C in the current Rulebook)
in a separate rule filing, which will describe the COB opening
process.
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Proposed Rule 5.31(c) describes the opening auction updates the
Exchange will disseminate as part of the opening auction process. As
noted above, opening auction updates contain information regarding the
expected opening of a series and are similar to the EOIs the Exchange
currently disseminates during the pre-opening period. These messages
provide market participants with information that may contribute to
enhanced liquidity and price discovery during the opening auction
process. Beginning at 2:00 a.m. Eastern Time for the GTH trading
session and at 8:30 a.m. Eastern Time for the RTH trading session, the
Exchange disseminates opening auction updates for the series.\30\ The
Exchange disseminates opening auction updates every five seconds,
unless there are no updates to the opening information since the
previously disseminated update, in which case the Exchange disseminates
updates every minute, to all subscribers to the Exchange's data feeds
that deliver these messages until a series opens.\31\ If there have
been no changes since the previous update, the Exchange does not
believe it is necessary to disseminate duplicate updates to market
participants at the next interval of time.
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\30\ The Exchange only begins disseminating updates for series
with locked or crossed interest or if the series needs Market-Maker
bulk messages. There can only be an expected opening price to
disseminate if these conditions have been met, and thus no updates
will be disseminated if these conditions do not exist. See current
Rule 6.2(a)(ii). Cboe Options currently begins disseminating EOIs at
8:30 a.m. or 9:00 a.m. Eastern Time (depending on the class), which
is consistent with the proposed rule change to begin dissemination
of opening auction messages no earlier than one hour prior to the
expected initiation of the opening rotation for a series. The
Exchange believes market participants generally want to receive this
information closer to the opening of trading.
\31\ See current Rule 6.2(a)(ii) (the Exchange currently
disseminates EOIs at regular intervals or less frequently if there
are no updates, and will not disseminate EOIs in certain
circumstances, including if there is no locked or crossed interest
(because there would be no expected opening price or size)).
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Proposed Rule 5.31(d) describes the events that will trigger the
opening rotation for a class. Pursuant to current Rule 6.2(b), unless
unusual circumstances exist, the System initiates the opening rotation
procedure on a class-by-class basis for Regular Trading Hours:
With respect to equity and exchange-traded product
options, after the opening trade or the opening quote is disseminated
in the market for the underlying security,\32\ or at 9:30 a.m. Eastern
Time for classes determined by the Exchange (including over-the-counter
equity classes); or
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\32\ The ``market for the underlying security'' is either the
primary listing exchange or the first exchange to open the
underlying security, as determined by the Exchange on a class-by-
class basis.
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with respect to index options, at 9:30 a.m. Eastern Time,
or at the later of 9:30 a.m. and the time the Exchange receives a
disseminated index value for classes determined by the Exchange.
The System currently initiates the opening rotation procedure for
Global Trading Hours at 3:00 a.m. Eastern Time.
The proposed opening rotation triggers are similar to the current
opening rotation triggers, except the Exchange proposes to have the
same trigger for all equity options and the same trigger for all index
options. As proposed for Regular Trading Hours, after a time period
(which the Exchange determines for all classes) following the System's
observation after 9:30 a.m. Eastern Time of the first disseminated (1)
transaction in the security
[[Page 35150]]
underlying an equity option on the primary market or (2) index value
for the index underlying an index option, the System will initiate the
opening rotation for the series in that class, and will disseminate a
message to market participants indicating the initiation of the opening
rotation. For Global Trading Hours, the System will initiate the
opening rotation at 8:30 a.m. Eastern Time. For Regular Trading Hours,
the opening rotation will be triggered in all equity classes by
observation of the first transaction in the underlying security on the
primary market (rather than some classes being triggered by a timer),
and the opening rotation will be triggered in all index classes by
observation of the first index value (rather than some classes being
triggered by a timer), after 9:30 a.m. Eastern Time. The Exchange
believes that it no longer needs the flexibility to open either equity
option classes or index option classes based on a timer, and believes
the proposed opening rotation triggers will simplify the process. Upon
the occurrence of one of these proposed triggers for a class, the
System will initiate the opening rotation for the series in that class,
and will disseminate a message to market participants indicating the
initiation of the opening rotation.\33\
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\33\ See current Rule 6.2(b)(ii) and proposed Rule 5.31(d).
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Proposed Rule 5.31(e) describes the opening rotation process,
during which the System will determine whether the Composite Market for
a series is not wider than a maximum width, will determine the opening
price, and will open series for trading.\34\ The Maximum Composite
Width Check and Opening Collar are intended to facilitate that series
opening in a fair and orderly manner and at prices consistent with the
current market conditions for the series and not at extreme prices,
while taking into consideration prices disseminated from other options
exchanges that may be better than the Exchange's at the open.
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\34\ See current Rule 6.2(d) (pursuant to which the Exchange
will generally not open a series if the width is wider than an
acceptable price range or if the opening trade price is outside of
an acceptable price range). As noted above, the Exchange will
similarly have a maximum quote width and acceptable opening price
range, however, as noted above, the proposed ranges will be
determined in a slightly different manner.
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Proposed Rule 5.31(e)(1) describes the Maximum Composite Width
Check, and the two sets of conditions under which a series will be
eligible to open.
If the Composite Market of a series is not crossed, and
the Composite Width of a series is less than or equal to the Maximum
Composite Width, the series is eligible to open (and the System
determines the Opening Price as described below).
If the Composite Market of a series is not crossed, and
the Composite Width of a series is greater than the Maximum Composite
Width, but there are no non-M Capacity \35\ market orders or buy (sell)
limit orders with prices higher (lower) than the Composite Bid (Offer)
and there are no locked or crossed orders or quotes, the series is
eligible to open (and the System determines the Opening Price as
described below).\36\
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\35\ Capacity M is used for orders for the account of a Market-
Maker (with an appointment in the class). See Rule 1.1 (definition
of Capacity).
\36\ Similarly, pursuant to current Rule 6.2(d)(ii)(B), if the
opening quote is wider than the OEPW range (but not outside another
acceptable price range) and there are no orders or quotes marketable
against each other or that lock or cross the OEPW range, Cboe
Options will open the series.
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If neither of the conditions above are satisfied for a
series, the series is ineligible to open. The Queuing Period for the
series continues (including the dissemination of opening auction
updates) until one of the above conditions for the series is
satisfied.\37\
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\37\ Similarly, pursuant to current Rule 6.2(d)(ii)(B), if the
opening quote is wider than the OEPW range and there are orders or
quotes marketable against each other or that lock or cross the OEPW
range, the System does not open a series. If the opening quote is no
wider than the IEPW range and there are no orders or quotes
marketable against each other or that lock or cross the OEPW range,
the System opens the series. Pursuant to current Rule 6.2(d)(iii),
if the opening conditions are not satisfied, the opening rotation
period continues, including the dissemination of EOIs until the
opening conditions are satisfied.
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The following examples show the application of the Maximum
Composite Width Check:
Example #1
The Maximum Composite Width for a class is 0.50, and the Composite
Market is 2.00 x 1.00, comprised of an appointed Market-Maker bulk
message bid of 2.00 and an appointed Market-Maker bulk message offer of
1.00. There is no other interest in the Queuing Book. The series is not
eligible to open, because the Composite Market is crossed. The Queuing
Period for the series will continue until the series satisfies the
Maximum Composite Width Check.
Example #2
The Maximum Composite Width for a class is 0.50, and the Composite
Market is 1.00 x 2.00, comprised of an appointed Market-Maker bulk
message bid of 1.00 and an appointed Market-Maker bulk message offer of
2.00. There is no other interest in the Queuing Book. The series is
eligible to open, because the width of the Composite Market is greater
than the Maximum Composite Width and there are no locked orders or
quotes in the series or non-M Capacity orders. The System will then
determine the Opening Trade Price.
Example #3
The Maximum Composite Width for a class is 0.50, and the Composite
Market is 1.00 x 2.00, comprised of an appointed Market-Maker bulk
message bid of 1.00 and an appointed Market-Maker bulk message offer of
2.00. There is a non-M Capacity limit order to buy for $1.99 in Queuing
Book. The series is not eligible to open, because the width of the
Composite Market is greater than the Maximum Composite Width, and there
is a non-M Capacity order at a price inside of the Composite Market.
The Queuing Period for the series will continue until the series
satisfies the Maximum Composite Width Check.
Example #4
The Maximum Composite Width for a class is 0.50, and the Composite
Market is 1.00 x 2.00, comprised of an appointed Market-Maker bulk
message bid of 1.00 and an appointed Market-Maker bulk message offer of
2.00. There is a market order to buy in the Queuing Book. The series is
not eligible to open, because the width of the Composite Market is
greater than the Maximum Composite Width and there is a marketable
order. The Queuing Period for the series will continue until the series
satisfies the Maximum Composite Width Check.
Proposed subparagraph (e)(2) describes how the System determines
the Opening Trade Price. After a series satisfies the Maximum Composite
Width Check described above, if there are orders and quotes marketable
against each other at a price not outside the Opening Collar, the
System determines the Opening Trade Price for the series.\38\ The
Opening Trade Price is the volume-maximizing, imbalance-minimizing
price (``VMIM price'') that is not outside the Opening Collar. The VMIM
price is:
---------------------------------------------------------------------------
\38\ If there are no such orders, there is no Opening Trade
Price. See current Rule 6.2(c)(i) (pursuant to which there may or
may not currently be an opening trade price).
---------------------------------------------------------------------------
The price at which the largest number of contracts can
execute (i.e., the volume-maximizing price);
if there are multiple volume-maximizing prices, the price
at which the fewest number of contracts remain unexecuted (i.e., the
imbalance-minimizing price); or
if there are multiple volume-maximizing, imbalance-
minimizing prices, (1) the highest (lowest) price, if there is a buy
(sell) imbalance, or (2) the
[[Page 35151]]
price at or nearest to the midpoint of the Opening Collar, if there is
no imbalance.
The proposed process to determine an opening trade price is
substantially similar to the process the Exchange currently uses.
Pursuant to current Rule 6.2(c)(i)(A), the opening trade price of a
series is the ``market-clearing'' price, which is the single price at
which the largest number of contracts in the Book can execute (i.e.,
the volume-maximizing price), leaving bids and offers that cannot trade
with each other. If there are multiple prices at which the same number
of contracts would clear, the System currently uses (1) the price at or
nearest to the midpoint of the opening best bid or offer, or the widest
offer (bid) point of the OEPW range if the midpoint is higher (lower)
than that price point, in classes in which the Exchange has not
activated HAL at the open, or (2) the price at or nearest to the
midpoint of the range consisting of the higher of the opening national
best bid and widest bid point of the OEPW range, and the lower of the
opening national best offer and widest offer point of the OEPW range,
in classes in which the Exchange has activated HAL at the open. The
proposed ``tiebreakers'' described above will apply to all classes.
While the proposed tiebreakers are different than the current
tiebreakers, the Exchange believes the proposed volume-maximizing,
imbalance-minimizing procedure is reasonable, as it will provide for
the largest number of contracts in the Queuing Book that can execute at
a price not outside the Opening Collar range, leaving as few as
possible bids and offers in the Book that cannot execute, and will
consider all pricing information available on the Exchange and from
away markets.
The Exchange currently applies different opening conditions to
classes in which the Exchange has activated HAL at the open and to
classes in which the Exchange has not activated HAL at the open.\39\
The proposed opening conditions are similar to the opening conditions
the Exchange currently applies pursuant to current Rule 6.2(d)(ii),
which are the opening conditions that apply to classes in which HAL is
activated at the open. As noted above, the Exchange does not intend to
activate HAL at the open in any classes following the technology
migration, and will apply the same opening conditions to all classes.
The Exchange has currently activated HAL at the open in the majority of
classes that trade on the Exchange, and therefore the Exchange believes
it is appropriate that the proposed opening conditions correspond to
the opening conditions in Rule 6.2(d)(ii). Additionally, those opening
conditions consider price information from away markets, as the
proposed opening conditions do. The Exchange believes considering all
available information will provide for more accurate pricing at the
open.
---------------------------------------------------------------------------
\39\ The proposed rule change deletes all the references in
current Rule 6.2(d) to the exposure of orders via HAL, and excludes
those references in the description of the current opening
conditions below.
---------------------------------------------------------------------------
Pursuant to current Rule 6.2(d)(ii):
If there are no quotes on the Exchange or disseminated
from at least one away exchange present in the series, the System does
not open the series.\40\
---------------------------------------------------------------------------
\40\ Pursuant to the proposed rule change, a series will
similarly not open in this case. The proposed opening conditions
require a Composite Market. Therefore, the System will not open a
series (as it will not today) without bulk message bids and offers
from appointed Market-Makers or bids and offers from at least one
away exchange.
---------------------------------------------------------------------------
If the width between the best quote bid and best quote
offer, which quotes may consist of Market-Maker quotes or bids and
offers disseminated from an away exchange(s) (for purposes of this
subparagraph (d)(ii), the ``opening quote'') is wider than the OEPW
range and there are orders or quotes marketable against each other or
that lock or cross the OEPW range, the System does not open the series.
However, if the opening quote width is no wider than the IEPW range and
there are no orders or quotes marketable against each other or that
lock or cross the OEPW range, the System opens the series. If the
opening quote width is wider than the IEPW range, the System does not
open the series.
If the opening trade price would be outside of the OEPW
range or NBBO, the System opens the series by matching orders and
quotes to the extent they can trade and reports the opening trade, if
any, at an opening trade price not outside either the OEPW range or
NBBO.
If the opening trade would leave a market order imbalance
(i.e., there are more market orders to buy or to sell for the
particular series than can be satisfied by the orders and quotes on the
opposite side), the System opens the series by matching orders and
quotes to the extent they can trade and reports the opening trade, if
any, at the opening trade price.
If the opening quote bid (offer) or NBB (NBO) crosses the
opening quote offer (bid) or NBO (NBB) by more than a specified amount
determined by the Exchange on a class- by-class and premium basis, the
System does not open the series. If the opening quote bid (offer) or
NBB (NBO) crosses the opening quote offer (bid) or NBO (NBB) by no more
than the specified amount, the System opens the series by matching
orders and quotes to the extent they can trade and reports the opening
trade, if any, at the opening trade price.
The Exchange will use the Maximum Composite Width Check as a price
protection measure to prevent orders from executing at extreme prices
at the open, as it currently uses the OEPW range pursuant to the second
bullet above.\41\ If the width of the Composite Market (which
represents the best market, as it is comprised of the better of Market-
Maker bulk messages on the Exchange or any away market quotes) is no
greater than the Maximum Composite Width, the Exchange believes it is
appropriate to open a series under these circumstances and provide
marketable orders with an opportunity to execute at a reasonable
opening price (as discussed below), because there is minimal risk of
execution at an extreme price.\42\ However, if the Composite Width is
greater than the Maximum Composite Width but there are no non-M
Capacity orders \43\ that lock or cross the opposite-side widest point
of the Composite Market (and thus not marketable at a price at which
the Exchange would open, as described below), there is similarly no
risk of an order executing at an extreme price on the open. Because the
risk that the Maximum Composite Width Check is intended to address is
not present in this situation, the Exchange believes it is appropriate
to open a series in either of these conditions. However, if neither of
these conditions is satisfied, the Exchange believes there may be risk
that orders would execute at an extreme price if the series open, and
therefore the Exchange will not open a series.\44\
---------------------------------------------------------------------------
\41\ See current Rule 6.2(d)(ii)(B), pursuant to which the
Exchange will open a series if the opening quote is not outside the
OEPW.
\42\ This corresponds to current Rule 6.2(d)(ii)(B), pursuant to
which the Exchange will open even if the opening quote is too wide
but there are no marketable orders or quotes.
\43\ Market-Maker bulk messages are considered when determining
the Composite Market. The Exchange believes it is appropriate to
consider Market-Maker bulk messages when determining an opening
quote to ensure there will be liquidity in a series when it opens.
Additionally, while it is possible for Market-Makers to submit M
orders, the Exchange believes there is less risk of a Market-Maker
inputting an order at an extreme price given that Market-Makers are
the primary liquidity providers in the options market, and thus
generally responsible for pricing the market.
\44\ Pursuant to current Rule 6.2(d)(ii), the Exchange will not
open a series if similar conditions exist that could create risk
that orders would execute at an extreme price if the series open.
---------------------------------------------------------------------------
[[Page 35152]]
The Exchange will use the Opening Collar as a further price
protection measure to prevent orders from executing at extreme prices
at the open, as it currently uses the OEPW range pursuant to the third
bullet above. If the Opening Trade Price is not outside the Opening
Collar (which will be based on the best then-current market), the
Exchange believes it is appropriate to open a series at that price,
because there is minimal risk of execution at an extreme price. The
Exchange believes there may be risk that orders would execute at an
extreme price if the Opening Trade Price were outside of the Opening
Collar.
As set forth above in the fifth bullet, the Exchange will similarly
not open a series today if the opening quote is crossed by more than a
specified amount. However, as proposed, a series will not be eligible
to open if the Composite Market is crossed. The Exchange believes this
slight change is appropriate given that the existence of a crossed
market may indicate pricing uncertainty within the market. The Exchange
believes this proposed rule change will reduce price risk for any
executions that may occur during the opening rotation due to the
existence of a crossed market.
The Exchange may also open a series pursuant to current Rule 6.2(e)
(proposed Rule 5.31(h)), which permits the Exchange to deviate from the
standard manner of the opening auction process, including by adjusting
the timing of the opening rotation in any class, modifying any time
periods described in proposed Rule 5.31, and delaying or compelling the
opening of a series if the opening width is wider than Maximum
Composite Width, when it believes it is necessary in the interests of a
fair and orderly market. The Exchange will continue to make and
maintain records to document all determinations to deviate from the
standard manner of the opening auction process, and will periodically
review these determinations for consistency with the interests of a
fair and orderly market.\45\
---------------------------------------------------------------------------
\45\ See proposed Rule 5.31(h).
---------------------------------------------------------------------------
Pursuant to proposed Rule 5.31(e)(3), if the System establishes an
Opening Trade Price, the System will execute orders and quotes in the
Queuing Book at the Opening Trade Price. The System will prioritize
orders and quotes in the following order: market orders, limit orders
and quotes with prices better than the Opening Trade Price, and orders
and quotes at the Opening Trade Price.\46\ The System allocates orders
and quotes on a pro-rata basis pursuant to Rule 5.32). The System
applies a Priority Customer overlay to all classes, except for SPX
(including SPXW) and VIX (excluding VIXW).\47\ If there is no Opening
Trade Price, the System opens a series without a trade.
---------------------------------------------------------------------------
\46\ See current Rule 6.2(c)(i)(C). The Exchange believes it is
appropriate to prioritize orders with the most aggressive prices, as
it provides market participants with incentive to submit their best-
priced orders.
\47\ See current Rule 6.2, Interpretation and Policy .04. The
proposed allocation during the opening rotation is consistent with
the Exchange's current authority to determine the allocation
algorithm used at the open, and is the same one applied to classes
(and groups) today. The Exchange applies different algorithm to
different classes (and groups) based on the market model and
characteristics of different products. The proposed rule change
merely codifies this in the Rules.
---------------------------------------------------------------------------
The Exchange proposes to delete current Rule 6.2(c)(iii) regarding
the order in which the System will open series. The order in which the
System opens series for trading is generally immaterial. The Exchange
currently opens series in the order set forth in Rule 6.2(c)(iii),
because it believes opening series in this order on exercise settlement
value determination days enhances liquidity during the modified opening
auction process set forth in current Rule 6.2, Interpretation and
Policy .01. As discussed below, the Exchange proposes other
enhancements to the modified opening auction process, and thus no
longer believes it will be necessary to open series in this specific
order. Therefore, the System will open series as the opening conditions
in those series are satisfied, in no particular order.
Pursuant to proposed subparagraph (f), as is the case today,
following the conclusion of the opening rotation, the System enters any
unexecuted orders and quotes (or remaining portions) from the Queuing
Book into the Book in time sequence (subject to a User's instructions--
for example, a User may cancel an order), where they may be processed
in accordance with Rule 5.32. Consistent with the OPG contingency (and
current functionality), the System cancels any unexecuted OPG orders
(or remaining portions) following the conclusion of the opening
rotation.
Proposed Rule 5.31(g) \48\ states the Exchange will open series
using the same opening auction process described above following a
trading halt in the class declared by the Exchange pursuant to Rule
5.20,\49\ except:
---------------------------------------------------------------------------
\48\ See current Rule 6.2(f). The proposed rule regarding the
opening auction process to be used following a trading halt
eliminates the flexibility regarding whether there may or may not be
a Queuing Period during a trading halt. The proposed rule change
also provides Users with the ability to decide how their resting
orders and quotes should be handled in the event of a trading halt.
\49\ The Exchange intends to adopt Rule 5.20 in the shell
Rulebook in a separate rule filing, which rule will correspond to
Rules 6.3 and 24.7 in the current Rulebook.
---------------------------------------------------------------------------
The Queuing Period will begin immediately when the
Exchange halts trading in the class.
If a User has orders or quotes resting on the Book at the
time of a trading halt, the System queues those orders and quotes in
the Queueing Book for participation in the opening rotation following
the trading halt, unless the User entered instructions to cancel its
resting orders and quotes.
The System initiates the opening rotation for a class upon
the Exchange's determination to resume trading pursuant to Rule 5.20.
The proposed rule change deletes current Rule 6.2(g) regarding the
use of the opening auction process to conduct a closing rotation upon
determination by the Exchange. The Exchange does not currently use the
opening auction process to conduct a closing rotation, and does not
intend to use the proposed opening auction process to conduct a closing
rotation following the technology migration.
Proposed Rule 5.31(j) describes the modified opening auction
process \50\ the Exchange will use to calculate the exercise or final
settlement value of expiring volatility index derivatives. As described
below, the Exchange proposes to make certain enhancements to the
current process, which is described in current Rule 6.2, Interpretation
and Policy .01. Cboe Options and Cboe Futures Exchange, LLC (``CFE'')
list options and futures, respectively, on the Cboe Volatility Index
(``VIX'').\51\ The exercise settlement value for VIX derivatives is
determined on the morning of their expiration date through a special
opening quotation (``SOQ'') of the VIX using the opening prices of a
portfolio of SPX options that expire approximately 30 days later, which
opening prices are determined through a modified version of the
Exchange's standard opening auction process.
---------------------------------------------------------------------------
\50\ Current Rule 6.2, Interpretation and Policy .01 currently
refers to this process as the Modified HOSS (Hybrid Opening System)
Procedure.
\51\ Cboe Options and CFE previously listed options and futures
on other volatility indexes; however, currently, they only list VIX
options and VIX futures, respectively. Options expire on an
expiration date and settle to an exercise settlement value, and
futures settle on a final settlement date to a final settlement
value. For ease of reference, the Exchange will use the options
terminology throughout the filing when referring to the final
settlement date and final settlement value for VIX derivatives.
---------------------------------------------------------------------------
By providing market participants with a mechanism to buy and sell
options
[[Page 35153]]
that will be used to calculate the exercise settlement value at the
prices that will be used to calculate the exercise settlement value of
VIX derivatives, the VIX settlement process is ``tradable.'' A tradable
settlement creates the opportunity to convert the exposure of an
expiring VIX derivative into a portfolio of SPX options that will be
used to calculate the exercise settlement value of the expiring
contract. Specifically, some market participants may desire to maintain
the vega, or volatility, risk exposure of expiring VIX derivatives.
Since VIX derivatives expire 30 days prior to the SPX options used to
calculate their settlement value, a market participant may have a vega
risk from its portfolio of index positions that the participant wants
to continue to hedge after the participant's VIX derivatives
expire.\52\ To continue that vega coverage following expiration of a
VIX derivative, a market participant may determine to trade the
portfolio of SPX options used to calculate the exercise settlement
value of an expiring VIX derivative, since those SPX options still have
30 more days to expiration. This trade essentially replaces the
uncovered vega exposure ``hole'' created by an expiring VIX derivative.
---------------------------------------------------------------------------
\52\ The orders for an SPX option portfolio a market participant
submits to the modified opening auction process to replicate the
vega risk exposure of its expiring VIX derivatives may be referred
to as a ``vega replicating order'' in this rule filing.
---------------------------------------------------------------------------
Since the VIX settlement value converges with the value of the
portfolio of SPX options used to calculate the VIX settlement value,
trading this SPX option portfolio mitigates settlement risk.\53\ This
is because, if the SPX options that will be used to calculate the VIX
settlement value execute at the open in the proportions that those
options will be used in that calculation, the vega exposure obtained in
the SPX option portfolio will replicate the vega exposure of the
expiring VIX derivative. Because a market participant is converting
vega exposure from one instrument (an expiring VIX derivative) to
another (a portfolio of SPX options expiring in 30 days), the market
participant is likely to be indifferent to the settlement price
received for the expiring VIX derivative. Importantly, trading the next
VIX derivative expiration (i.e., rolling) will not accomplish the
conversion of vega exposure since that VIX derivative contract would
necessarily cover a different period of expected volatility and would
be based on an entirely different portfolio of SPX options.
---------------------------------------------------------------------------
\53\ In the absence of a tradable settlement, settlement risk
refers to the difference between the exercise settlement value of
the expiring VIX derivatives and the value of the portfolio of the
option series used to calculate the exercise settlement value. The
potential disparity between the exercise settlement value for
expiring VIX derivatives and the value of the replicating portfolio
of option series that will be used to calculate the exercise
settlement value is referred to as ``slippage.'' A tradable
settlement provides convergence between the exercise settlement
value and the value of the portfolio of option series used to
calculate the exercise settlement value (i.e., eliminates slippage).
While it is possible to construct a replicating portfolio of SPX
options, it is highly unlikely that, absent a tradable settlement,
traders would be able to trade SPX options that will be used to
calculate the exercise settlement value at prices that would match
the final settlement price.
---------------------------------------------------------------------------
The VIX settlement process is patterned after the process used to
calculate the exercise settlement value of SPX options. On the days SPX
options expire, S&P calculates an SOQ of the S&P 500 Index using the
opening prices of the component stocks in their primary markets. Market
participants can seek to replicate the exposure of their expiring SPX
options by entering orders to buy and sell the component stocks of the
S&P 500 Index at their opening prices. If they are successful, market
participants can effectively construct a portfolio that matches the
value of the SOQ of the S&P 500 Index. At this point, the values of the
derivatives and cash markets converge. In a similar way, the VIX
exercise settlement value is calculated using the opening prices of SPX
options that expire approximately 30 days later. Analogous to the
settlement process for SPX options, market participants can replicate
the exposure of their expiring VIX derivatives by entering buy and sell
orders in SPX options that will be used to calculate the VIX settlement
value in the proportions the Exchange will use when calculating the VIX
settlement value. If they are successful, market participants can
effectively construct a portfolio of SPX option positions whose value
matches the exercise settlement value of the participants' VIX
derivatives.
The primary feature of the modified opening auction process that
currently distinguishes it from the standard opening auction process is
a cut-off time for the entry of strategy orders,\54\ which market
participants currently submit for participation in the modified opening
auction process to replicate the vega exposure of their expiring VIX
derivatives. The Exchange understands that the entry of strategy orders
may lead to order imbalances in the series in the settlement strip. To
the extent (1) market participants seeking to replicate the vega
exposure of an expiring VIX derivative position are on one side of the
market (e.g., strategy orders to buy SPX options) and (2) those market
participants' orders predominate over other orders during the modified
opening auction process, those trades may contribute to an order
imbalance prior to the open. The Exchange established the strategy
order cut-off time to provide market participants with time to enter
additional orders and quotes to offset any such imbalances prior to the
opening of these series.\55\ Market participants may also, among other
things, submit competitively priced non-strategy orders and quotes in
response to changing market conditions following the strategy order
cut-off time until the open of trading to contribute to a fair and
orderly opening process.\56\
---------------------------------------------------------------------------
\54\ The Exchange deems individual orders (considered
collectively) that a market participant submits for participation in
the modified opening auction process to be a ``strategy'' order,
based on related facts and circumstances considered by the Exchange,
only if the orders: (1) Relate to the market participant's positions
in expiring VIX derivatives; (2) are for option series with the
expiration that the Exchange will use to calculate the exercise or
final settlement value, as applicable, of the applicable VIX
derivative; (3) are for option series with strike prices
approximating the range of series that are later determined to
constitute the constituent option series for the applicable
expiration; (4) are for put (call) options with strike prices equal
to or less (greater) than the ``at-the-money'' strike price; and (5)
have quantities approximating the weighting formula used to
determine the exercise or final settlement value, as applicable, in
accordance with the VIX methodology. See current Rule 6.2,
Interpretation and Policy .01(a) (definition of ``strategy order'').
As proposed, there will continue to be a cut-off time during the
modified opening auction process; however, the Exchange is
eliminating the concept of a strategy order.
\55\ See Securities Exchange Act Release Nos. 52367 (August 31,
2005), 70 FR 53401 (September 8, 2005) (SR-CBOE-2004-86)
(established for the rapid opening system procedure, which his no
longer used). The Commission stated it believed that the proposed
rule change may serve the intended benefits of the strategy order
cut-off time without imposing an undue burden on market
participants. Id. at 53402. Pursuant to current Rule 6.2,
Interpretation and Policy .01(b), the Exchange may determine a
strategy order cut-off time, which may be no earlier than 9:00 a.m.
Eastern Time and no later than the opening of trading. The current
strategy order cut-off time is 9:20 a.m. Eastern Time.
\56\ Pursuant to current Rule 6.2, Interpretation and Policy
.01(b), the Exchange may determine a non-strategy order cut-off
time, which may be no earlier than 9:25 a.m. Eastern Time and no
later than the opening of trading. The current non-strategy order
cut-off time is the opening of trading.
---------------------------------------------------------------------------
When the Exchange initially adopted the concept of a strategy order
and strategy order cut-off time, VIX derivatives had only just begun
trading. The Exchange believed some flexibility within the rules
regarding what constituted a strategy order was appropriate in applying
the strategy order cut-off time. Additionally, the flexibility
permitted market participants to submit strategy orders in a manner
consistent with their businesses. The
[[Page 35154]]
flexibility within the rule provided the Exchange with the ability to
gain experience in monitoring trading in these products and evaluating
the use of strategy orders.\57\ The Exchange understands this
flexibility has created some uncertainty among market participants
regarding what constitutes a strategy order. As a result of this
uncertainty, the Exchange understands certain market participants have
hesitated to submit orders in the modified opening auction process out
of concern that such orders could be deemed either a new strategy order
or a modification to or cancellation of an existing strategy order.
---------------------------------------------------------------------------
\57\ See supra note 55.
---------------------------------------------------------------------------
The Exchange recently amended the rule that sets forth the
characteristics of a strategy order to attempt to reduce some of this
uncertainty by eliminating some of the flexibility within the rule
regarding the characteristics of a strategy order, and to provide
additional clarity to market participants regarding what orders they
may submit following the strategy order cut-off time. The Exchange
believed this clarity would reduce uncertainty among market
participants and promote increased liquidity in series in the
settlement strip on exercise settlement value determination days.\58\
---------------------------------------------------------------------------
\58\ See Securities Exchange Act Release No. 84436 (October 16,
2018), 83 FR 53337 (October 22, 2018) (SR-CBOE-2018-062).
---------------------------------------------------------------------------
The Exchange believes recent enhancements have eliminated some
uncertainty and alleviated certain perceived risk; however, the current
characteristics of a strategy order retain some level of flexibility.
The Exchange understands that, due to this retained flexibility, some
market participants continue to believe there is risk regarding what
orders submitted after the strategy order cut-off time will be deemed
either a new strategy order or a modification to or cancellation of an
existing strategy order. This perceived risk may lead to reduced
liquidity and may increase the time it takes to open a series at a
competitive price. Therefore, the Exchange proposes to eliminate the
concept of a strategy order from the modified opening auction process.
There will continue to be a cut-off time (the time of which will be the
same time as the current strategy order cut-off time) to provide the
market with time to resolve any imbalances created by the submission of
vega replicating orders. However, to further reduce any perceived risk
described above, the Exchange proposes a more define [sic] approach
regarding the types of orders market participants may submit following
the cut-off time. The Exchange believes providing market participants
with a definitive order type they may submit following the cut-off time
that cannot be deemed an improper modification of an earlier submitted
order will promote additional liquidity in the modified opening auction
process.
All provisions of proposed Rule 5.31 will apply to the opening of
constituent option series for Regular Trading Hours on exercise
settlement value determination days, except as provided in proposed
Rule 5.31(j).\59\ The opening auction process used on those days as
modified by proposed paragraph (j) is referred to as the ``modified
opening auction process.'' \60\
---------------------------------------------------------------------------
\59\ See current Rule 6.2, Interpretation and Policy .01(b).
\60\ The Exchange uses the opening trade prices of series in the
settlement strip (or the average of the opening bid and offer prices
of a series in the settlement strip if there is no opening trade in
that series) established by the modified opening auction process to
calculate the exercise or final settlement value, as applicable, of
expiring volatility index derivatives. See current Rule
24.9(a)(5)(B) (the proposed rule change moves this language to
proposed Rule 5.31(j), so that all provisions in the Rules regarding
the modified opening auction process are included in a single
place).
---------------------------------------------------------------------------
Proposed Rule 5.31(j)(1) defines the following terms for purposes
of the modified opening auction process: \61\
---------------------------------------------------------------------------
\61\ See current Rule 6.2, Interpretation and Policy .01(a).
Except for the definition of settlement strip (which corresponds to
the definition of constituent option series in current Rule 6.2,
Interpretation and Policy .01), as discussed below, the proposed
rule change makes no changes to the definitions that are in current
Rule 6.2, Interpretation and Policy .01(a) and proposed to be moved
to Rule 5.31(j)(1), except: (a) The proposed rule refers to
volatility index derivatives as VIX derivatives, because, as noted
above, those are currently the only volatility index derivatives for
which the Exchange uses the modified opening auction process to
determine the exercise settlement value, and to update cross-
references as necessary; (b) the Exchange proposes to use the term
``constituent option series'' to refer to all SPX series with the
expiration the Exchange uses to calculate the exercise or final
settlement value, as that corresponds to the terminology used in the
Exchange's technical specifications and documentation to which Users
often refer; and (c) the Exchange proposes to use the term
``settlement strip'' instead of ``constituent option series'' to
refer to the series that the Exchange will use to determine the
exercise settlement value, as that corresponds to terminology
regularly used by market participants.
---------------------------------------------------------------------------
VIX Derivatives: The term ``VIX derivatives'' means VIX
options listed for trading on the Exchange (as determined under Rule
4.11), VIX futures listed for trading on an affiliated designated
contract market, or over-the-counter derivatives overlying VIX whose
exercise or final settlement values, as applicable, are calculated
pursuant to, or by reference to, as applicable, the modified opening
auction process.
Exercise Settlement Value Determination Day: The term
``exercise settlement value determination day'' means a day on which
the Exchange determines the exercise or final settlement value, as
applicable, of expiring VIX derivatives.
Constituent Option Series: The term ``constituent option
series'' means all SPX (including SPXW) option series listed on the
Exchange with the expirations the Exchange uses to calculate the
exercise or final settlement value of the expiring VIX derivative on
exercise settlement value determination days.
Maximum Composite Width: The term ``Maximum Composite
Width'' has the meaning set forth in proposed Rule 5.31(a) (as
described above), except the following Maximum Composite Widths apply
to constituent option series on exercise settlement value determination
days: \62\
---------------------------------------------------------------------------
\62\ The proposed Maximum Composite Widths on exercise
settlement value determination days are consistent with the
Exchange's current authority to determine the OEPW; the Exchange is
adding this detail to the Rules. The proposed widths on these are
the same as the Exchange's current width settings. See Cboe Options
Notice, Operational Setting Changes for Cboe Options Acceptable
Price Range (APR) and Opening Exchange Prescribed Width (OEPW) (May
4, 2018).
------------------------------------------------------------------------
Market
Composite bid composite
width
------------------------------------------------------------------------
0-0.25.................................................. 0.25
0.25-0.50............................................... 0.30
0.51-1.00............................................... 0.35
1.01-2.00............................................... 0.40
2.01-5.00............................................... 0.60
5.01-10.00.............................................. 0.70
10.01-20.00............................................. 1.00
20.01-30.00............................................. 1.80
30.01-40.00............................................. 2.40
40.01-50.00............................................. 3.00
50.01-100.00............................................ 6.00
100.01-200.00........................................... 9.00
>=200.01................................................ 14.00
------------------------------------------------------------------------
Opening Collar: The term ``Opening Collar'' has the
meaning set forth in proposed Rule 5.31(a) (as described above), except
the following Opening Collar widths apply to constituent option series
on exercise settlement value determination days: \63\
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\63\ The proposed Opening Collar widths on exercise settlement
value determination days are consistent with the Exchange's current
authority to determine the OEPW; the Exchange is adding this detail
to the Rules. The proposed widths on these days are the same as the
Exchange's current width settings. See Cboe Options Notice,
Operational Setting Changes for Cboe Options Acceptable Price Range
(APR) and Opening Exchange Prescribed Width (OEPW) (May 4, 2018).
[[Page 35155]]
------------------------------------------------------------------------
Opening collar
Composite bid width
------------------------------------------------------------------------
0-0.25.................................................. 0.25
0.25-0.50............................................... 0.30
0.51-1.00............................................... 0.35
1.01-2.00............................................... 0.40
2.01-5.00............................................... 0.60
5.01-10.00.............................................. 0.70
10.01-20.00............................................. 1.00
20.01-30.00............................................. 1.80
30.01-40.00............................................. 2.40
40.01-50.00............................................. 3.00
50.01-100.00............................................ 6.00
100.01-200.00........................................... 9.00
>=200.01................................................ 14.00
------------------------------------------------------------------------
Settlement Strip: The term ``settlement strip'' means the
constituent option series with strike prices within a specified strike
range used to calculate the exercise or final settlement value, as
applicable, of expiring VIX derivatives. As further discussed below,
the proposed rule change provides that the Exchange will determine this
strike range pursuant to an algorithm. The Exchange will disseminate
the highest call strike and the lowest put strike that establish the
strike range to all subscribers to the Exchange's data feeds that
deliver opening auction update messages, no later than 8:45 a.m.
Eastern Time on exercise settlement value determination days. The
Exchange may update the strike range until 9:15 a.m. Eastern Time
pursuant to an algorithm due to changes to the value of the VIX Index,
prices of related futures, or other algorithmic inputs. The Exchange
disseminates any such updates as soon as reasonably possible.
Settlement Liquidity Opening Order and SLOO: The terms
``settlement liquidity opening order'' and ``SLOO'' mean a limit order
in a constituent option series designated with an OPG Time-in-Force
that Users may submit to the Exchange only on exercise settlement value
determination days following the cut-off time described below. The
System cancels a SLOO (or remaining portion) that does not execute
during the modified opening auction process.\64\
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\64\ Users may not designate bulk messages as SLOOs.
---------------------------------------------------------------------------
[cir] If the limit price of a buy (sell) SLOO crosses the midpoint
of the then-current Opening Collar upon entry, the System adjusts the
SLOO's price to equal the midpoint of the Opening Collar (rounded up
(down) to the nearest minimum increment), except for a sell SLOO when
the midpoint is less than or equal to 0.175. If the midpoint of the
Opening Collar changes during the Queuing Period, the System re-adjusts
the SLOO's price to equal the new Opening Collar midpoint (rounded as
provided above), up to its limit price.
[cir] The prices of SLOOs in the Queuing Book are not disseminated
in the Exchange's Multicast PITCH and Multicast TOP data feeds.
As discussed above, the Exchange proposes to eliminate the concept
of a strategy order, and thus the proposed rule change deletes the
portions of the current rule describing the characteristics of strategy
orders and non-strategy orders.
Proposed Rule 5.31(j)(3) states that during the Queuing Period, the
System accepts orders and quotes in constituent option series as
follows, subject to proposed Rule 5.31(b)(2): \65\
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\65\ In other words, the conditions regarding order and quote
entry set forth in proposed Rule 5.31(b)(2) apply to the submission
of orders and quotes to the modified opening auction process.
---------------------------------------------------------------------------
The System accepts all orders and quotes (except SLOOs,
which the System rejects), and any changes to or cancellations of those
orders and quotes, prior to 9:20 a.m. (Eastern Time).\66\
---------------------------------------------------------------------------
\66\ As noted above, this is the same time as the current
strategy order cut-off time. The proposed rule change eliminates the
Exchange's current flexibility regarding the cut-off time. There is
currently only one class to which the modified opening auction
process applies, so there is no need for class-by-class flexibility.
The Exchange will submit a rule filing if it determines to change
the cut-off time.
---------------------------------------------------------------------------
After 9:20 a.m. (Eastern Time) (until the opening of
trading in a series), the System only accepts (1) SLOOs (including
changes to and cancellations of SLOOs); and (2) bulk message bids and
offers (including changes to and cancellations of bulk message bids and
offers submitted before and after the cut-off time) from Market-Makers
with an SPX appointment. The System rejects all other orders and quotes
(and changes to and cancellations of orders and quotes submitted prior
to the cut-off time).
While the proposed rule change eliminates the concept of strategy
orders, the proposed modified opening auction process is similar to the
current process. The proposed rule change will have no impact on orders
that may be submitted prior to the cut-off time. All market
participants may currently submit all orders and quotes, including vega
replicating orders (i.e., strategy orders), in constituent option
series (subject to restrictions set forth in current Rule 6.2, which
are similar to the restrictions in proposed Rule 5.31(b) and, as noted
above, will apply to the modified opening auction process). The
proposed rule change will permit this same order and quote entry
activity prior to the cut-off time, including the submission of orders
to replicate the vega exposure of expiring VIX derivatives (i.e., the
equivalent of current strategy orders).
The Exchange expects market participants to continue to use the
modified opening auction process to replicate the vega exposure of
their expiring VIX derivatives. To continue to provide market
participants with sufficient time to submit additional interest to
offset any imbalances that may be created by the submission of these
orders, the Exchange will retain an order entry cut-off time.
Currently, only non-strategy orders may be submitted following the
strategy order cut-off time. While a non-strategy order is defined as
any order that is not, or that does not modify or cancel, a strategy
order, the current rule identifies two specific types of interest that
are not strategy orders, and they are therefore permissible following
the cut-off time:
A buy (sell) order in a settlement strip series if an EOI
disseminated no more than two minutes prior to the time a market
participant submitted the order included a sell (buy) imbalance and the
size of the order is not larger than the size of the imbalance in the
EOI, regardless of whether the market participant previously submitted
a strategy order or has positions in expiring volatility index
derivatives; or
a bid or offer in a settlement strip series submitted by a
Market-Maker with an appointment in a class with settlement strip
series, for bona fide market-making purposes in accordance with current
Rule 8.7 and the Exchange Act for its market-maker account prior to the
open of trading for participation in the modified opening auction
process.
The explicit permission to submit these orders and quotes following
the strategy order cut-off time is consistent with the operational
purpose of establishing a strategy order cut-off time, which was to
provide sufficient time for market participants to submit liquidity to
offset the size of any imbalances created by the submission of
volatility replicating orders and to contribute to a competitively
priced opening process. The orders and quotes that may be submitted
after the cut-off time will continue to be limited in a manner
consistent with this purpose. The System, however, will automatically
enforce these order entry limitations, which will eliminate any
responsibility currently placed on market participants to determine
whether the orders and quotes they submit following the strategy order
cut-off time would be permissible under current Rules.
[[Page 35156]]
By eliminating the concept of a strategy order and only permitting
two specific types of market activity following the cut-off time, the
Exchange believes the proposed rule change will eliminate any existing
uncertainty among market participants with respect to what orders they
may submit following the cut-off time. All market participants may
submit SLOOs following the cut-off time, which will serve a similar
purpose as the non-strategy orders that market participants may
currently submit. The proposed SLOO repricing functionality will
prevent the entry of a SLOO from creating or adding to an imbalance
that would prevent a constituent option series from opening.
The Exchange believes permitting sell SLOOs to cross the midpoint
of the Opening Collar in any series with a midpoint of 0.175 or less
will provide market participants with opportunities to execute against
bids in lower-valued series. If there is a low bid in a series, a
market participant may be willing to sell at that price, and the
Exchange believes that not adjusting the price of a sell SLOO in that
situation will encourage liquidity and price improvement over Market-
Maker quotes in these lower-valued series.\67\ For example, assume the
Composite Market (and the Opening Collar) for a series is 0 to 0.30,
and thus the midpoint of the Opening Collar is $0.15. An order to buy
at $0.05 rests in the Queuing Book. If a market participant submits a
SLOO to sell at $0.05, it would be able to execute against the resting
order during the opening rotation, rather than be slid to a price of
$0.15. The Exchange believes this is reasonable, because it would allow
for the potential execution of sell orders in series with no Market-
Maker bid and Market-Maker offers less than or equal to $0.35 (which is
the maximum possible Opening Collar offer for the midpoint to be
$0.175). The maximum midpoint of $0.175 is reasonable because, with a
higher maximum midpoint, there may be an increased risk of having a
sell order execute at a potentially erroneous low price in a series
that is not truly no-bid.
---------------------------------------------------------------------------
\67\ For similar reasons, the Exchange will convert a market
order to sell in a no-bid series into a limit order to sell at the
minimum increment of the series. See Rule 6.13(b)(vi).
---------------------------------------------------------------------------
Additionally, permitting SLOOs to cross the midpoint of the Opening
Collar in these series will also not create or increase an imbalance
that would prevent a series from opening. For example, assume the
Composite Market is 0-0.25, as is the Opening Collar. The midpoint of
the Opening Collar is 0.125. If there is a buy order for one contract
at $0.05, and a market participant enters a SLOO to sell 10,000
contracts at $0.05, the VMIM price ($0.05) is within the Opening
Collar, and therefore series would be eligible to open. Instead, assume
the Composite Market is 0.25-0.50, as is the Opening Collar. The
midpoint of the Composite Market is 0.375. If there is a buy order for
one contract at $0.05, and a market participant enters a SLOO to sell
10,000 contracts at $0.05, the VMIM price is $0.05, which is outside of
the Opening Collar, and thus the series would not open.
Pursuant to the proposed rule change, market participants will no
longer need to manually review opening auction updates to determine if
it is permissible to submit orders to offset any imbalances. The
proposed rule change reduces the types of orders market participants
may submit following the cut-off time; however, the Exchange believes
it may attract greater liquidity than the current system, because it
will reduce uncertainty for market participants regarding the
submission of orders following the cut-off time, which may encourage
them to submit SLOOs to offset order imbalances. SLOOs will also
provide market participants with a definitive order type they may use
to contribute to the competitive pricing within constituent option
series following the cut-off time, without creating an imbalance
condition that would prevent a series from opening. The Exchange
believes elimination of the perceived risk described above will enhance
liquidity in the modified opening auction process, which would
contribute to a fair and orderly opening in constituent option series.
Market-Makers with an SPX appointment will continue to be able to
submit bulk message bids and offers (including changes to and
cancellations of bulk message bids and offers submitted before and
after the cut-off time) following the cut-off time, as they may
currently do today.\68\ In the options market, it is important for
Market-Makers to be able to provide liquidity to execute against
interest submitted by other market participants. Pursuant to current
Rule 8.7 (which the Exchange expects to move to Rule 5.51 in the shell
Rulebook), a Market-Maker has general obligations to, among other
things, engage (to a reasonable degree under existing circumstances) in
dealings for the Market-Maker's own account when there exists a lack of
price continuity, a temporary disparity between the supply of and
demand for an option (i.e., an imbalance), to compete with other
Market-Makers to improve markets in its appointed classes, and to
update market quotations in response to changed market conditions in
its appointed classes. As described above, the submission of strategy
orders (or any orders, including orders intended to replicate vega
exposure of expiring VIX derivatives) may lead to order imbalances in
constituent option series. As noted above, Market-Maker quotes also
play a significant role in the price protection measures the Exchange
uses to protect against opening executions occurring at extreme prices.
In order for the System to open settlement strip series for trading and
to achieve the most competitive prices, the Exchange believes Market-
Market participation throughout the entire modified opening auction
process may add liquidity to the process and promote a fair and orderly
opening and settlement process. Therefore, the Exchange believes it is
important to continue to permit Market-Makers to submit quotes (and
updates to their quotes) following the cut-off time.
---------------------------------------------------------------------------
\68\ The term ``bulk message'' in the proposed rule is
equivalent to the term ``quote'' in the current rule. The current
rule requires a Trading Permit Holder with which the Market-Maker is
affiliated to establish, maintain, and enforce reasonably designed
written policies and procedure (including information barriers, as
applicable), taking into consideration the nature of the Trading
Permit Holder's business and other facts and circumstances, to
prevent the misuse of material nonpublic information (including the
submission of strategy orders); and that a Market-Maker have no
actual knowledge of any previously submitted strategy orders.
Because the proposed rule change eliminates the concept of a
strategy order and the ability for any orders submitted prior to the
cut-off time to be modified after the cut-off time, the proposed
rule change eliminates these requirements.
---------------------------------------------------------------------------
Market-Maker quoting activity on exercise settlement value
determination days will continue to be subject to all applicable Rules,
including:
Current Rule 4.1 (which the Exchange intends to move to
Rule 8.1 in the shell Rulebook), which prohibits a Trading Permit
Holder from engaging in acts or practices inconsistent with just and
equitable principles of trade.
Current Rule 4.6 (which the Exchange intends to move to
Rule 8.6 in the shell Rulebook), which prohibits (among other things) a
Trading Permit Holder from effecting or inducing the purchase, sale, or
exercise of any security for the purpose of creating or inducing a
false, misleading, or artificial appearance of activity in such
security or in the underlying security, or for the purpose of unduly or
improperly influencing the market price of such security or of the
underlying security or for the purpose of making a price that
[[Page 35157]]
does not reflect the true state of the market in such security or in
the underlying security.
Current Rule 4.17 (which the Exchange intends to move to
Rule 8.17 in the shell Rulebook), which requires a Trading Permit
Holder to establish, maintain, and enforce written policies and
procedures reasonably designed, taking into consideration the nature of
such Trading Permit Holder's business, to prevent the misuse, in
violation of the Exchange Act and the Rules, of material, nonpublic
information by the Trading Permit Holder or persons associated with the
Trading Permit Holder.
Current Rule 8.7 (which the Exchange intends to move to
Rule 5.51 in the shell Rulebook), which requires Market-Makers to,
among other things, enter into transactions in their market-making
capacity that constitute a course of dealings reasonably calculated to
contribute to the maintenance of a fair and orderly market, and not to
make bids or offers or enter into transactions that are inconsistent
with such course of dealings.
The Exchange believes the proposed rule changes regarding
permissible market activity following the cut-off time will encourage
all market participants to participate and quote competitively in the
modified opening auction process, including to offset imbalances and
contribute to price transparency and liquidity in constituent option
series at the open, which will promote a fair and orderly opening on
exercise settlement value determination days. All Trading Permit Holder
activity following the cut-off time will continue to be subject to all
applicable Rules, including 8.1, 8.6, and 8.17 (each as described
above). The Exchange will continue to review all Trading Permit Holder
activity in constituent series on exercise settlement value
determination days for compliance with these and all other applicable
Rules.
As noted above, the proposed rule change adds to the definition of
settlement strip (currently referred to as ``constituent option
series'' in the current rules) that the Exchange will determine the
strike range of the settlement strip and will disseminate it to all
subscribers to the Exchange's data feeds that deliver opening auction
update messages, no later than 8:45 a.m. Eastern Time on exercise
settlement value determination days. The Exchange may update this
strike range until 9:15 a.m. Eastern Time, and will disseminate any
updates during that time period as soon as reasonably possible.
Therefore, the final strike range of the settlement strip that the
Exchange disseminates at 9:15 a.m. Eastern Time to market participants
will be identical to that which the Exchange will use to calculate the
VIX settlement value itself.
Currently, to select the settlement strip, the VIX methodology
excludes from the universe of out-of-the-money SPX put and call options
in any SPX series that have a zero bid price. The methodology then
truncates the SPX series used to calculate the VIX settlement value
after encountering two consecutive series having ``zero-bid'' prices,
even if further out-of-the-money series have an opening trade price and
are ``non-zero'' bid. The current VIX settlement methodology selects
these series based on the opening trade prices, and then posts the
actual series used to calculate the SOQ after the settlement. In other
words, the settlement strip is set after the opening rotation in those
series is complete, because only those series that have a bid remaining
immediately after the open are eligible for inclusion in the settlement
calculation.
As proposed, the Exchange will determine the strike range of the
settlement strip prior to the settlement pursuant to an algorithm
designed to approximate the same settlement strip as would be used
pursuant to the current methodology based on various market inputs
available on expiration settlement value determination days. As
discussed above, one of the reasons the Exchange uses a tradable
settlement is to provide market participants with the opportunity to
convert the exposure of an expiring VIX derivative into a portfolio of
series that comprise the settlement strip to maintain their vega risk
exposure of expiring VIX derivatives. Market participants currently
submit these vega replicating orders in the series they believe (but do
not know when submitting them) will ultimately comprise the settlement
strip. However, if their estimation is incorrect, their resulting vega
risk exposure may not be perfectly replicated (i.e., is subject to
slippage). By setting the strike range of the final settlement strip no
later than 9:15 a.m. Eastern Time, market participants will have
sufficient time prior to the cut-off time to enter or modify their vega
replicating orders to match the actual settlement strip. The Exchange
believes determination of the strike range of the settlement strip
prior to the cut-off time, and disseminating to market participants the
high call strike and low call put of this strike range, is consistent
with the purpose of the tradable settlement, as it will provide market
participants with an opportunity to achieve accurate replication of the
vega risk exposure of their expiring VIX derivatives.
The following charts contrast the strikes ranges actually employed
in previous exercise settlement value determination days versus the
strike ranges the proposed approach would have employed. The vertical
lines identify the actual strikes used in the settlement strips on the
exercise settlement value determination days during the timeframes in
the charts, and the horizontal lines identify the highest call strike
and lowest put strike that Exchange's algorithm would have used on
those exercise settlement value determination days.\69\
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\69\ Note the Exchange did not apply the algorithm it intends to
use to make any updates to the strike range after 8:45 a.m. Eastern
Time.
---------------------------------------------------------------------------
The Exchange applied the approach it intends to use to determine
the strike range of the settlement strip to 32 previous exercise
settlement value determination days for VIX derivatives with standard
expirations between September 21, 2016 and April 19, 2019 to compare
which settlement strip the formula would have selected to the actual
settlement strip on those days. The Exchange also determined how use of
the settlement strip determined by the formula as proposed would have
changed the actual VIX settlement value on those days. There was no
directional bias in the differences observed and the average absolute
difference was 0.09 in those cases.
[[Page 35158]]
[GRAPHIC] [TIFF OMITTED] TN22JY19.000
Similarly, the Exchange applied the approach it intends to use to
determine the strike range of the settlement strip to 107 previous
exercise settlement value determination days for VIX derivatives with
weekly expirations between August 24, 2016 and April 10, 2019 to
compare which settlement strip the formula would have selected to the
actual settlement strip on those days. The Exchange also determined how
use of the settlement strip determined by the formula as proposed would
have changed the actual VIX settlement value on those days. There was
no directional bias in the differences observed and the average
absolute difference was 0.07 in those cases.
[[Page 35159]]
[GRAPHIC] [TIFF OMITTED] TN22JY19.001
The Exchange intends to begin determining the strike range for the
settlement strip prior to the opening rotation on the first exercise
settlement value determination date following the technology migration
(which would be October 9, 2019), and thus, this selection process
would apply to the settlement of VIX derivative positions that were
created prior to this change. The Exchange believes the Exchange is
providing the marketplace and investors with sufficient notice that the
Exchange will determine the strike range for the settlement strip used
to determine the exercise settlement value for all VIX derivative
contracts listed for trading prior to and after the System migration.
Additionally, because the approach the Exchange intends to use is
designed to approximate the same settlement strip as would be used
pursuant to the current methodology, and in light of the Exchange's
analysis described above, the Exchange believes the proposed rule
change will have a de minimis impact, if any, on the settlement strip
(and thus the VIX settlement value) that would have been selected (and
thus the VIX settlement value) if the current procedure had been
applied to existing VIX derivatives.
Additionally, while the Exchange believes the current settlement
process is not readily susceptible to manipulation, the proposed rule
change may provide additional protection against manipulation since the
Exchange will be solely responsible for determining the strike range
used of the settlement strip. This is because the non-zero bid
provision and two consecutive zero-bid provisions in the current VIX
settlement methodology will no longer be used for determining the
settlement strip used to calculate the exercise settlement value for
VIX derivatives. The Exchange's algorithm that will determine the
strike range of the settlement strip will employ numerous market
inputs, including prices (both on the exercise settlement value
determination day (including during the GTH trading day) and the
previous trading day) of SPX options, SPY options, e-mini S&P 500
options. Therefore it is unlikely for one of these inputs of the
Exchange's algorithm to have a material impact on the determination of
the strike range. The Exchange believes this feature will therefore
will further enhance the modified opening auction process in a manner
that contributes to a fair and orderly opening and settlement process
and that protects investors.
Proposed Rule 5.31(j)(4) states the opening rotation on exercise
settlement value determination days will be the same as the opening
rotation that occurs on all other days, with one exception.
Specifically, the opening rotation on exercise settlement value
determination days will occur as follows:
First, the System will conduct the Maximum Composite Width
check, as set forth in proposed Rule 5.31(e)(1). As noted above, the
Exchange will have different Maximum Composite Widths applicable to
constituent series on exercise settlement value determination days.
Second, after a series satisfies the Maximum Composite
Width Check described in proposed subparagraph (e)(1), if there are
orders and quotes marketable against each other at a price not outside
the Opening Collar, the System determines the Opening Trade Price for
the series. As noted above, the Exchange will have different Opening
Collar widths applicable to constituent series on exercise settlement
value determination days. If there are no such orders or quotes, there
is no Opening Trade Price. The System will determine
[[Page 35160]]
the VMIM price pursuant to proposed subparagraphs (e)(2)(A) through
(C), as described above (in the same manner as it determines the VMIM
price on all other days). During the opening rotation on non-exercise
settlement value determination days, the Opening Trade Price is the
VMIM price that is not outside the Opening Collar. In other words, if
the System determines that the VMIM price is outside of the Opening
Collar, rather than not open, the System will use the collar limit as
the opening price. For example, assume the Composite Market is 1.00--
1.20, with size 100 x 100, and the Opening Collar range is 1.00--1.20.
There is also an order to sell 100 at 1.25 and an order to buy 101 for
1.25 in the Queuing Book. The VMIM is 1.25, which is outside the
Opening Collar. The System instead will use 1.20 as the Opening Trade
Price, and trade 100 contracts of the buy order with 100 contracts of
the Market-Maker offer at 1.20, which is the VMIM price not outside the
Opening Collar.
On exercise settlement value determination days for constituent
series, this part of the opening rotation process will be different
than on other days. Pursuant to proposed Rule 5.31(j)(4)(C), if (1) the
VMIM price is outside the Opening Collar or (2) there would be
unexecuted market orders (or remaining portions), the series would not
open.\70\ In either case, the Queuing Period for the series continues
(including the dissemination of opening auction updates) until the VMIM
price is not outside the Opening Collar, or the Exchange opens the
series pursuant to proposed paragraph (h). Using the same example as
above, assume the Composite Market is 1.00--1.20, with size 100 x 100,
and the Opening Collar is 1.00--1.20. There is also an order to sell
100 at 1.25 and an order to buy 101 for 1.25 in the Queuing Book. The
VMIM is 1.25, which is outside the Opening Collar range, so the series
is not eligible to open. As another example, using the same Composite
Market and Opening Collar, but the only liquidity in the Queuing Book
is a market order to buy 101. The VMIM is 1.20, but the series is not
eligible to open because there would be an unexecuted portion of a
market order remaining.
---------------------------------------------------------------------------
\70\ As is the case on all other days, on an exercise settlement
value determination day, if the VMIM price is not outside the
Opening Collar, it is the Opening Trade Price, and the System opens
the series pursuant to proposed subparagraph (e)(3). See proposed
subparagraph (j)(4)(B).
---------------------------------------------------------------------------
While this approach is different than the proposed opening auction
process on other days, it is consistent with the current opening
auction process in classes in which HAL is not activated at the
open.\71\ The Exchange does not activate HAL at the open for SPX, and
therefore the proposed approach is consistent with an opening condition
that applies to the current modified opening auction process. The
Exchange proposes to keep this same opening requirement in place for
the modified opening auction process, because the opening trading
prices that will be used to determine the settlement values of expiring
VIX derivatives will be determined by prices of interest in the market
(subject to, but not capped by, an Exchange-determined price range to
protect against potentially erroneous executions). The Exchange
believes maintaining this same opening condition for the modified
opening auction process will contribute (as it does today) to a fair
and orderly auction and settlement process.
---------------------------------------------------------------------------
\71\ See current Rule 6.2(d)(i)(C) and (D).
---------------------------------------------------------------------------
Third, if the System establishes an Opening Trade Price,
the System executes orders and quotes in the Queuing Book at the
Opening Trade Price, and if there is no Opening Trade Price, the System
opens a series without a trade, as set forth in proposed Rule
5.31(e)(3).
Proposed Rule 5.31(j)(2)(A) states that, to the extent the Exchange
makes a determination for the opening auction process pursuant to
proposed Rule 5.31, it may make a separate determination for the
modified opening auction process pursuant to proposed paragraph (j),
including but not limited to (1) the Opening Collar width, (2) the
Maximum Composite Width, and (3) the time intervals at which the
Exchange disseminates opening auction updates. This is consistent with
current Exchange authority pursuant to current Rule 6.2, Interpretation
and Policy .05; the proposed rule change merely states this explicitly
in the Rules. Given the unique purpose of the modified opening auction
process, the Exchange believes this flexibility is appropriate to
permit the Exchange to facilitate a fair and orderly opening and
settlement process.
Proposed Rule 5.31(j)(2)(B) states the Exchange may determine it is
necessary in the interests of a fair and orderly market (for example,
due to the existence of unusual market conditions or circumstances) to
delay the time at which the System begins attempting to observe an
opening rotation trigger pursuant to proposed subparagraph (d)(1) above
for the modified opening auction process. If that delay occurs, the
Exchange will determine a revised time and announce it to market
participants as soon as reasonably possible. Additionally, to
correspond to that revised time, the Exchange will adjust (1) the times
at which it determines the strike range of the settlement strip, and
(2) the order entry cut-off time.\72\ Proposed Rule 5.31(j)(2)(C)
states the Exchange may determine it is necessary in the interests of a
fair and orderly market (for example, due to the existence of unusual
market conditions or circumstances) to not use the modified opening
auction process described in proposed paragraph (j). If that occurs,
the Exchange will announce that to market participants as soon as
reasonably possible. These proposed provisions are consistent with
current Exchange authority pursuant to current Rule 6.2(e) and proposed
Rule 5.31(h); the proposed rule change merely states this explicitly in
the Rules, and references the specific times in the proposed modified
opening auction process that may be adjusted given such unusual
conditions or circumstances.
---------------------------------------------------------------------------
\72\ For example, if the Exchange determine to delay the time at
which the System begins attempting to observe an opening rotation
trigger from 9:30 a.m. to 12:00 p.m., the times between which the
Exchange would determine the strike range of the settlement strip
would move from 8:45 a.m. through 9:15 a.m. to 11:15 a.m. through
11:45 a.m.; and the cut-off time would move from 9:20 a.m. to 11:50
a.m.
---------------------------------------------------------------------------
Proposed Rule 5.31(j)(5) states a User may submit multiple orders
and quotes in accordance with proposed subparagraph (j)(3). If, during
the opening rotation, the System executes an order or quote of that
User against another order or quote of that User, the Exchange does not
deem that fact alone to cause these executions to be considered
violations of Section 9(a)(1) of the Exchange Act, and instead will
evaluate other facts and circumstances.\73\ The Exchange reviews all
activity, including these executions, during the modified opening
auction
[[Page 35161]]
process for compliance with the Rules and the Exchange Act, including
current Rule 4.7 (which the Exchange intends to propose to move to Rule
10.6 in the shell Rulebook).\74\
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\73\ Section 9(a)(1) of the Exchange Act states it is unlawful
for any person, directly or indirectly, by the use of the mails or
any means or instrumentality of interstate commerce, or of any
facility of any national securities exchange, or for any member of a
national securities exchange, for the purpose of creating a false or
misleading appearance of active trading in any security other than a
government security, or a false or misleading appearance with
respect to the market for any such security, (a) to effect any
transaction in such security which involves no change in the
beneficial ownership thereof, (b) to enter an order or orders for
the purpose of such security with the knowledge that an order or
orders of substantially the same size, at substantially the same
time, and at substantially the same price, for the sale of any such
security, has been or will be entered by or for the same or
different parties, or (c) to enter any order or orders for the sale
of any such security with the knowledge that an order or orders of
substantially the same size, at substantially the same time, and at
substantially the same price, for the purchase of such security, has
been or will be entered by or for the same or different parties.
\74\ Current Rule 4.17 (which the Exchange intends to move to
Rule 8.17 in the shell Rulebook) states no TPH may effect or induce
the purchase, sale, or exercise of any security for the purpose of
creating or inducing a false, misleading, or artificial appearance
of activity in such security or in the underlying security, or for
the purpose of unduly or improperly influencing the market price of
such security or of the underlying security or for the purpose of
making a price that does not reflect the true state of the market in
such security or in the underlying security. No TPH or any other
person or organization subject to the jurisdiction of the Exchange
may directly or indirectly participate in or have any interest in
the profit of a manipulative operation or knowingly manage or
finance a manipulative operation.
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Market participants may currently submit multiple orders and quotes
to the modified opening auction process.\75\ It is possible that a
User's order or quote may execute against another order or quote of
that User. For example, if a User today submits a strategy order prior
to the cut-off time, and then submits a non-strategy order in response
to an imbalance EOI following the cut-off time, it is possible for
those orders to execute against each other during the opening rotation.
Similarly, as proposed, a market participant may submit orders that
replicate the vega exposure of its expiring VIX derivatives prior to
the cut-off time, and then submit a SLOO after the cut-off time to
contribute liquidity to the opening process (including to offset any
imbalances). In both cases, the purpose of submitting the second order
(assuming there were no other factors demonstrating a different
purpose) was not to execute against the strategy order (and thus effect
a transaction that involves no change in beneficial ownership to create
a false or misleading appearance of active trading in SPX options), but
rather to contribute liquidity to the modified opening auction process
to offset an existing imbalance and to contribute to a fair and orderly
opening process for that series.
---------------------------------------------------------------------------
\75\ While current Rule 6.2, Interpretation and Policy .01 does
not explicitly state this principle, there is no restriction on
market participants submitting multiple orders and quotes to the
modified opening auction process.
---------------------------------------------------------------------------
The Exchange proposes to expressly state in the Rules that, subject
to other facts and circumstances (such as that may demonstrate a
different purpose for the submission of the orders), the Exchange will
not consider self-trades resulting from the execution of a User's
orders against each other during the opening rotation of the modified
opening auction process to be violations of Section 9(a)(1) of the
Exchange Act. If the Exchange observes other facts and circumstances
surrounding these executions that demonstrate these orders may have
been submitted for improper purposes (i.e., not for bona fide reasons
to submit orders to the modified opening auction process), the Exchange
may review that activity for compliance with Section 9(a)(1) of the
Exchange Act, and all other sections of the Securities Exchange Act of
1934 (the ``Act'') and the Rules. The following are examples of
occurrences of self-trades that, based on the facts and circumstances
(assuming there were no other circumstances that may indicate
manipulative intent), appear not to have been conducted for an improper
purpose, and thus to be self-trades the Exchange would not deem to be
violations of Section 9(a)(1) of the Exchange Act:
Example #1
Strike range of settlement strip determined at 9:15 a.m. Eastern Time:
2800 through 3200 calls, and 2800 through 1500 puts
Best SPX Market-Maker Quote Range in the 2000 put series at 9:20 a.m.
Eastern Time: 0-0.20 (0 x 500 contracts)
Firm A submits vega replicating market order to buy 1,000,000 vega at
9:17 a.m. Eastern Time
Firm B submits vega replicating market order to buy 500,000 vega at
9:18 a.m. Eastern Time
This example focuses on the 2000 put series, in which Firm A has a
market order to buy 1,000 contracts of the 2000 put and Firm B has a
market order to buy 500 contracts of the 2000 put. At the 9:20 cut-off
time, the book depth shows a GTC order to sell 10,000 of the 2000 put
for 0.50 was previously submitted. The Opening Collar range is 0 to
0.25.\76\ At 9:20 a.m., the then-current expected opening price based
on orders and quotes in the Queuing Book is 0.50, at which price there
are 1,500 contracts to buy (from the vega replicating orders of Firms A
and B) and 1,500 contracts to sell (from the resting GTC order), which
price is outside of the Opening Collar. As a result, the opening
auction updates indicate more sellers are needed at a price of no more
than 0.25 in order for the series to open. At 9:22 a.m., Firm A sees
one of those messages and submits a SLOO to sell 500 of the 2000 put at
0.20. The same imbalance continues to exist (because more contracts
will execute at a price of 0.50 than 0.20), so the opening auction
updates continue, except the amount of the imbalance has been reduced
(there are now 1,500 contracts to buy and 1,000 contracts to sell at
that price). At 9:28 a.m., Firm C sees one of those messages and
submits a SLOO to sell 500 at 0.15. As a result, there are 1500
contracts on each side of the market to open with an Opening Trade
Price of 0.20. Assuming no other sellers enter the market prior to the
opening of trading, during the opening rotation:
---------------------------------------------------------------------------
\76\ Assume for a Composite Bid of 0, the Exchange has
determined the width of the Opening Collar is 0.30, and the range is
determined by adding and subtracting half of that width to the
Market-Maker quote midpoint of 0.10.
Firm A buys 1,000 contracts of the 2000 put at 0.20
Firm B buys 500 contracts of the 2000 put at 0.20
Firm A sells 500 contracts of the 2000 put at 0.20
Firm C sells 500 contracts of the 2000 put at 0.20
Market-Makers sell 500 contracts of the 2000 put at 0.20
If the System executed some or all of the contracts comprising Firm
A's SLOO against 500 contracts comprising part of Firm A's vega
replicating market order to buy, based on this information (and in the
absence of other facts and circumstances demonstrating a different
intent), it appears Firm A submitted the SLOO because it deemed that
submission to be in Firm A's interest to try to execute against contra-
side interest causing the imbalance and ensure the series opens at a
reasonable price, rather than to influence the settlement price.
Therefore, the Exchange would not view execution of Firm A's SLOO
against its vega replicating order would not be deemed a violation of
Section 9(a)(1) of the Exchange Act.
Example #2
Strike range of settlement strip determined at 9:15 a.m. Eastern Time:
2800 through 3200 calls, and 2800 through 1500 puts
Best SPX Market-Maker Quote Range in the 2800 call series at 9:20 a.m.
Eastern Time: 10.00-11.00 (500 x 500 contracts)
Firm A submits vega replicating market order to buy 1,000,000 vega at
9:17 a.m. Eastern Time
Firm B submits vega replicating market order to sell 500,000 vega at
9:18 a.m. Eastern Time
This example focuses on the 2800 call series, in which Firm A has a
market order to buy 200 contracts of the 2800 call and Firm B has a
market order to sell 100 contracts of the 2800 call. The
[[Page 35162]]
Opening Collar range is 10.10-10.90.\77\ At 9:20 a.m., the then-current
expected opening price based on orders and quotes in the Queuing Book
is 11.00, at which price there are 200 contracts to buy (from the vega
replicating order of Firm A) and 200 contracts to sell (from Market-
Makers), which price is outside of the Opening Collar. As a result, the
opening auction updates indicate more sellers are needed at a price of
no more than 10.90 in order for the series to open. At 9:22 a.m., Firm
A sees one of those messages and submits a SLOO to sell 100 of the 2800
call at 10.80. As a result, there are 200 contracts on each side of the
market to open with an Opening Trade Price of 10.90. Assuming no other
sellers enter the market prior to the opening of trading, during the
opening rotation:
---------------------------------------------------------------------------
\77\ Assume for a Composite Bid of 10.00, the Exchange has
determined the width of the Opening Collar is 0.80, and the range is
determined by adding and subtracting half of that width to the
Market-Maker quote midpoint of 10.50.
Firm A buys 200 contracts of the 2800 call at 10.90
Firm A sells 100 contracts of the 2800 call at 10.90
Firm B sells 100 contracts of the 2800 call at 10.90
In this case, the 100 contracts from Firm A's SLOO executed against
100 contracts of Firm A's vega replicating market order to buy. Based
on this information (and in the absence of other facts and
circumstances demonstrating a different intent), it appears Firm A
submitted the SLOO because it deemed that submission to be in Firm A's
interest to try to execute against contra-side interest causing the
imbalance and ensure the series opens at a reasonable price, rather
than to influence the settlement price. Therefore, the Exchange would
not view execution of Firm A's SLOO against its vega replicating order
would not be deemed a violation of Section 9(a)(1) of the Exchange Act.
Example #3
Strike range of settlement strip determined at 9:15 a.m.: 2800 through
3200 calls, and 2800 through 1500 puts
Firm A submits vega replicating market order to buy 3,000,000 vega at
9:17 a.m. Eastern Time Eastern Time Firm B submits vega replicating
market order to buy 1,500,000 vega at 9:18 a.m. Eastern Time
As a result, the opening auction updates indicate more sellers are
needed in most of the strikes in the settlement strip series. At 9:25
a.m., Firm A determines from the auction update messages that the
indicative VIX value may be above 17.5 with a total amount of 4,500,000
vega. Separately, the auction update messages indicate at least
1,000,000 vega to sell is necessary to open. Firm A responds to these
auction update messages by submitting a SLOO in each series in the
settlement strip that need sellers based on 1,000,000 vega with an
indicative VIX value of 16.5. Other market participants also submit
SLOOs to offset the imbalances. The indicative VIX settlement value is
16.75. Assuming no other sellers enter the market prior to the opening
of trading, during the opening rotation:
Firm A buys 3,000,000 vega at 16.75
Firm B buys 1,500,000 vega at 16.75
Firm A sells 1,000,000 vega at 16.75
MMs sell 3,500,000 vega at 16.75
If the System executed some or all of the contracts comprising Firm
A's SLOO to sell against contracts comprising part of Firm A's vega
replicating market order to buy, based on this information (and in the
absence of other facts and circumstances demonstrating a different
intent), it appears Firm A submitted the SLOO because it deemed that
submission to be in Firm A's interest to try to execute against contra-
side interest causing the imbalance and ensure the series opens at a
reasonable price, rather than to influence the settlement price.
Therefore, the Exchange would not view execution of Firm A's SLOO
against its vega replicating order would not be deemed a violation of
Section 9(a)(1) of the Exchange Act.
The Exchange has an adequate surveillance program in place to
review options activity during the modified opening auction process
that occurs on each exercise settlement value determination day. The
Exchange is updating its surveillance program to reflect the proposed
amendments to the process, and will continue to review its surveillance
program to determine whether additional enhancements are necessary or
appropriate.
The Exchange will continue to evaluate the modified opening auction
process to identify potential enhancements, and intends to modify the
procedure as it deems appropriate to contribute to a fair and orderly
opening process. A fair and orderly opening in these series benefits
all market participants who trade in the volatility index derivatives
and series that comprise the settlement strip.
The proposed rule change deletes current Rule 6.2, Interpretation
and Policy .02(a) regarding the Exchange's ability to determine minimum
size requirements for Market-Maker opening quotes. The Exchange
currently does not impose a minimum size requirement for opening
quotes, and does not intend to. The proposed rule change also deletes
current Rule 6.2, Interpretation and Policy .02(b) regarding the
Exchange's ability to set bid/ask differential requirements for Market-
Makers' opening quotes, as the Exchange no longer intends to impose
these requirements on Market-Maker opening quotes.\78\ As noted above,
pursuant to current Rule 8.7 (which the Exchange expects to move to
Rule 5.51 in the shell Rulebook), a Market-Maker has general
obligations to, among other things, engage (to a reasonable degree
under existing circumstances) in dealings for the Market-Maker's own
account when there exists a lack of price continuity, a temporary
disparity between the supply of and demand for an option (i.e., an
imbalance), to compete with other Market-Makers to improve markets in
its appointed classes, and to update market quotations in response to
changed market conditions in its appointed classes. Therefore, the
Exchange believes at this time it is unnecessary to impose other
obligations on Market-Makers. Additionally, the Exchange believes the
proposed Maximum Composite Width and Opening Collars that generally
must be satisfied for a series to open will further incentive [sic]
Market-Makers to submit competitive quotes.
---------------------------------------------------------------------------
\78\ The Exchange notes other options exchanges do not impose
these requirements on Market-Makers at the opening of trading. See,
e.g., C2 Rule 6.11.
---------------------------------------------------------------------------
The proposed rule change deletes current Rule 6.2, Interpretation
and Policy .05 regarding Exchange determinations, as it is duplicative
of Rule 1.5 in the shell Rulebook.
The Exchange intends to add a rule regarding the use of aftermarket
valuation processes for SPX options, as currently described in Rule
6.2, Interpretation and Policy .06, to the shell Rulebook in a separate
rule filing. Because proposed Rule 5.31 relates solely to the opening
of option series, the Exchange believes it is appropriate to move the
provision regarding non-trading closing rotations to a different rule.
The proposed rule change moves the provision regarding how the
existence of a limit up-limit down state in a class will impact the
opening auction process from current Rule 6.2, Interpretation and
Policy .07 to proposed Rule 5.31(i). The proposed rule change makes no
substantive changes to that provision.
[[Page 35163]]
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.\79\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \80\ 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) \81\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------
\79\ 15 U.S.C. 78f(b).
\80\ 15 U.S.C. 78f(b)(5).
\81\ Id.
---------------------------------------------------------------------------
In particular, the proposed opening auction process is
substantially similar to the Exchange's current opening auction
process. The Exchange believes the proposed opening auction process
will continue to create opportunities for price discovery based on
then-current market conditions when the Exchange opens series for
trading. The Exchange believes the proposed opening auction process
will promote competitive liquidity and open series at prices consistent
with then-current market conditions, and thus will promote a fair and
orderly opening process.
While the proposed Queuing Period for the GTH trading session
begins later than the current order entry period, the Exchange believes
market participants will continue to have sufficient time prior to the
GTH trading session to submit orders and quotes for participation in
the opening auction process for that trading session. This proposed
rule change promotes just and equitable principles of trade, as it
provides market participants with the same amount of time to submit
orders and quotes for participation in the opening auction process for
the RTH trading session (approximately one hour).
The proposed rule change will remove impediments to and perfect the
mechanism of a free and open market, and protect investors by ensuring
market participants will continue to have access to robust information
regarding the opening of a series. While the information the Exchange
will disseminate in opening auction updates will differ slightly from
the information the Exchange currently disseminates in EOIs, the
information to be disseminated is equivalent to the currently
disseminated information, and will continue to provide market
participants with transparency that will permit them to participate in
the opening auction process and contribute to, and benefit from, the
price discovery the auction may provide. The Exchange believes the
proposed opening auction updates are not designed to permit unfair
discrimination between customers, issuers, brokers, or dealers, because
all market participants may subscribe to the Exchange's data feeds that
deliver these messages, and thus all market participants will have
access to this information.
The proposed opening rotation triggers are substantially similar to
the current events that will trigger series openings on the Exchange.
The proposed trigger events will remove impediments to and perfect the
mechanism of a free and open market and a national market system, as
they ensure that during Regular Trading Hours, the underlying
securities will have begun trading, or the underlying index values will
have begun being disseminated, before the System opens a series for
trading. As this information will not be available during Global
Trading Hours, the Exchange believes it is appropriate to continue to
begin the opening rotation for Global Trading Hours at a specified
time. Additionally, the Exchange believes its current flexibility to
open certain equity option classes and certain index option classes
based on different triggers is no longer necessary. The Exchange
believes opening all equity option classes based on the same trigger
will protect investors by simplifying the process.
The proposed Maximum Composite Width Check and Opening Collar will
protect investors by providing price protection measures to prevent
orders from executing at extreme prices at the open. The Exchange
believes it is appropriate to open a series under the proposed
circumstances and provide marketable orders with an opportunity to
execute at a reasonable opening price (as discussed below), because
there is minimal risk of execution at an extreme price. These proposed
price protection mechanisms are substantially similar to the current
price protection mechanisms the Exchange applies during the opening
auction process, as they are based on all available pricing
information, including Market-Maker bulk messages (which are generally
used to price markets for series) and any quotes disseminated from away
markets. The proposed price protection mechanisms, like the current
price protection mechanisms, will also consider whether there are
crossing orders or quotes when determining whether the opening width
and trade price are reasonable. As a result, the Exchange believes the
proposed process to determine an Opening Trade Price will incorporate
then-current market conditions. While the Exchange proposes to
calculate the maximum width and opening price range in a slightly
different manner, the Exchange believes this proposed manner is
reasonable and will promote a fair and orderly opening.
The Exchange believes the proposed modified opening auction process
will protect investors, as it will continue to provide investors with
the opportunity to submit vega replicating orders and other liquidity
into the auction. The proposed modified opening auction process will
function in a substantially similar manner as the current modified
opening auction process. The proposed elimination of the concept of
strategy orders and the adoption of a systematically enforced (and thus
definitive) approach regarding the types of orders market participants
may submit following the cut-off time is the primary difference between
the current and proposed auction process. The Exchange believes this
change will provide clarity and certainty to market participants
regarding the orders and quotes they may submit following the cut-off
time, which may encourage them to provide additional liquidity to the
modified opening auction process. All market participants will have the
opportunity following the cut-off time to address order imbalances and
provide price transparency to the auction process without the perceived
risk of potentially modifying a previously submitted strategy order.
The Exchange believes the proposed rule change removes an
impediment that may have discouraged market participants from
submitting orders to offset imbalances and from providing price
discovery in response to changing market conditions prior to the open.
As a result, the Exchange believes the proposed rule change to permit
all Users to submit SLOOs, which functionally cannot create or increase
an imbalance, and to continue to let appointed SPX Market-Makers update
quotes following the cut-off time, should result in
[[Page 35164]]
increased liquidity in the modified opening auction process. This
increased liquidity may increase execution opportunities, reduce
imbalances in series in the settlement strip, promote price
transparency, and increase the presence of quotes within the Opening
Collar range. This will ultimately benefit all market participants who
trade VIX derivatives and the SPX option series that comprise the
settlement strip.
The proposed rule change that the Exchange will determine the
strike range of the settlement strip prior to the opening of trading is
consistent with one of the primary purposes of the modified opening
auction process, which is to provide investors with an opportunity to
replicate the vega risk exposure of their expiring VIX derivatives. The
proposed rule change will benefit investors, as it will provide market
participants with the opportunity to perfectly replicate this exposure,
as they will have a minimum of five minutes to enter or modify their
vega replicating orders prior to the cut-off time to conform them to
the actual settlement strip.
The Exchange also believes the modified opening auction process,
including the change pursuant to which the Exchange will determine the
strike range of the settlement strip prior to the cut-off time, will
continue to be designed to prevent fraudulent and manipulative acts and
practices. The proposed rule change may provide additional protection
against manipulation since the Exchange will be solely responsible for
determining the strike range of the settlement strip, meaning it would
become impossible for anyone to attempt to manipulate the VIX
settlement process by attempting to artificially affect which SPX
series will have zero bids at the opening. The Exchange believes this
will therefore will [sic] further enhance the modified opening auction
process in a manner that contributes to a fair and orderly opening and
settlement process and that protects investors.
All market participants (include those that may submit orders and
quotes following the cut-off time) will continue to be required to
abide by current Rules 4.1 (Just and Equitable Principles of Trade),
4.7 (Manipulation), and 4.18 (Prevention of the Misuse of Material,
Nonpublic Information). The Exchange will continue to conduct
surveillance to monitor all trading activity in constituent option
series on exercise settlement value determination days, including but
not limited to monitoring the entry of orders and quotes following the
cut-off time, as well as compliance with other Rules.
The proposed rule change is generally intended to align system
functionality currently offered by the Exchange with other Cboe
Affiliated Exchange functionality in order to provide a consistent
technology offering for the Cboe Affiliated Exchanges. The proposed
opening auction process (other than the modified opening auction
process, which only occurs on the Exchange) is virtually identical to
the opening auction process on two other Cboe Affiliated Exchanges.\82\
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 Exchange
believes this consistency will promote a fair and orderly national
options market system. When Cboe Options migrates to the same
technology as that of the 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.
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\82\ See C2 Rule 6.11 and EDGX Options Rule 21.7.
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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 that the proposed rule change to amend the standard opening
auction process 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 orders and quotes of all market
participants in the same manner. The order types that may not be
accepted prior to the opening of trading, or that may not participate
in the opening of trading, are substantially similar to the
restrictions currently in place. The Exchange does not believe that the
proposed rule change to amend the standard opening auction process will
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act, because it is
designed to open series on the Exchange in a fair and orderly manner.
The Exchange believes the proposed opening auction process will
continue to provide market participants with an opportunity for price
discovery based on then-current market conditions when the Exchange
opens series for trading. This will facilitate the presence of
sufficient liquidity in a series when it opens, and increase the
ability of series to open at prices consistent with then-current market
conditions (at the Exchange and other exchanges) rather than at extreme
prices that could result in unfavorable executions to market
participants. Additionally, as discussed above, the proposed opening
auction process is substantially similar to the opening auction process
in the rules of certain Cboe Affiliated Exchanges.\83\
---------------------------------------------------------------------------
\83\ See C2 Rule 6.11 and EDGX Options Rule 21.7.
---------------------------------------------------------------------------
The Exchange does not believe that the proposed rule change to
amend the modified opening auction process 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 orders
and quotes of all market participants in the same manner. The proposed
rule change will continue to permit all market participants to submit
orders and quotes, including vega replicating orders, prior to a cut-
off time that will provide market participants with sufficient time to
respond to imbalances (which is consistent with the initial purpose of
the cut-off time). All market participants may submit SLOOs following
the cut-off time, which will be handled by the System in the same
manner. Market-Makers will continue to have the ability to submit
quotes following the cut-off time to offset imbalances and update the
prices of their quotes in response to changing market conditions prior
to the open.
The Exchange does not believe the proposed rule change to amend the
modified opening auction process will impose any burden on intermarket
competition that is not necessary or appropriate in furtherance of the
purposes of the Act, because it is designed to promote a fair and
orderly opening and settlement process for series that trade on the
Exchange and are used to determine the exercise settlement value for
VIX derivatives. The Exchange believes the proposed rule change will
contribute to price transparency and liquidity in the series that
comprise the settlement strip, and thus to a fair, competitive, and
orderly opening and settlement process on exercise settlement value
determination days.
[[Page 35165]]
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be 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-CBOE-2019-034 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-CBOE-2019-034. 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-CBOE-2019-034 and should be submitted on
or before August 12, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\84\
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\84\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-15475 Filed 7-19-19; 8:45 am]
BILLING CODE 8011-01-P