[Federal Register Volume 84, Number 148 (Thursday, August 1, 2019)]
[Notices]
[Pages 37697-37701]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-16364]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86493; File No. SR-CboeEDGX-2019-028]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice
of Filing of Amendment No. 1 and Order Granting Accelerated Approval of
a Proposed Rule Change, as Modified by Amendment No. 1, To Adopt Rule
21.22 (Complex Automated Improvement Mechanism)
July 26, 2019.
I. Introduction
On April 26, 2019, Cboe EDGX Exchange, Inc. (the ``Exchange'' or
``EDGX Options'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt Exchange Rule 21.22, Complex Automated
Improvement Mechanism (``C-AIM'' or ``C-AIM Auction''), to permit the
use of the Exchange's Automated Improvement Mechanism (``AIM'' or ``AIM
Auction'') for complex orders. The proposed rule change was published
for comment in the Federal Register on May 16, 2019.\3\ On June 14,
2019, the Exchange filed Amendment No. 1 to the proposed rule
change.\4\ On June 26, 2019, pursuant to Section 19(b)(2) of the
Act,\5\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to approve or disapprove
the proposed rule change.\6\ The Commission has received no comments
regarding the proposal. The Commission is publishing this notice to
solicit comment on Amendment No. 1 and is approving the proposed rule
change, as modified by Amendment No. 1, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 85831 (May 10,
2019), 84 FR 22178 (the ``Notice'').
\4\ Amendment No. 1 revises the proposal to (1) cap the prices
of C-AIM responses based on the Synthetic Best Bid or Offer and the
prices of orders resting on the top of the Complex Order Book at the
conclusion of the C-AIM Auction, rather than at the beginning of the
C-AIM Auction; (2) incorporate the new defined terms ``C-AIM Auction
period'' and ``final auction price'' into the proposed rule text;
(3) provide additional justification for the proposal to allow an
Options Market Maker registered in the applicable series on the
Exchange to be solicited to participate in a C-AIM Auction for a
complex order that includes those series; (4) provide additional
justification for the proposal to allow Agency Orders to execute
only against complex interest at the conclusion of a C-AIM Auction;
(5) make non-substantive simplifying, clarifying, and correcting
changes to the proposed rule text; and (6) make non-substantive
clarifications and corrections to the Form 19b-4 discussion of the
proposed rule change. Amendment No. 1 is available at https://www.sec.gov/comments/sr-cboeedgx-2019-028/srcboeedgx2019028-5679914-185869.pdf.
\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 86202, 84 FR 31646
(July 2, 2019). The Commission designated August 14, 2019, as the
date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to approve or disapprove,
the proposed rule change.
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II. Description of the Proposed Rule Change
A. Background
As described more fully in the Notice,\7\ the Exchange proposes to
adopt Exchange Rule 21.22 to establish the C-AIM Auction for complex
orders. The Exchange notes that the C-AIM Auction will operate in a
manner that is substantially similar to the Exchange's AIM Auction for
single leg orders, with differences to, among other things, ensure that
execution prices in the C-AIM Auction are consistent with complex order
priority principles.\8\ The Exchange states that the proposed C-AIM
Auction is similar to the complex order price improvement mechanisms of
Cboe Exchange, Inc. (``Cboe Options'') and other options exchanges and
will provide market participants with an opportunity to receive price
improvement for their complex orders.\9\
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\7\ See Notice, supra note 3.
\8\ See Notice, 84 FR at 22184.
\9\ See Notice, 84 FR at 22178-79.
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B. C-AIM Auction Eligibility
The proposal will allow an Options Member (the ``Initiating
Member'') to electronically submit for execution a complex order it
represents as agent (the ``Agency Order'') against principal interest
or a solicited complex order(s), provided the Initiating Member submits
the Agency Order for electronic execution in a C-AIM Auction.\10\ The
Agency Order may be in any class of options traded on the Exchange, and
there is no minimum size for Agency Orders.\11\ The Initiating Member
must stop the entire Agency Order at a stop price that: (1) is at least
$0.01 better than the same-side Synthetic Best Bid (``SBB'') or
Synthetic Best Offer (``SBO'') \12\ if the BBO on any component of the
complex strategy represents a Priority Customer order on the Simple
Book, or is at or better than the same-side SBB (SBO) if each component
of the complex strategy represents a non-Priority Customer order or
quote on the Simple Book; (2) is at least $0.01 better than a same-side
complex order resting in the Complex Order Book (``COB''),\13\ unless
the Agency Order is a Priority Customer Order and the resting order is
a non-Priority Customer order, in which case the stop price must be at
or better than the bid (offer) of the resting complex order; and (3) is
at least $0.01 better than the opposite side SBO (SBB) if the BBO of
any component of the complex strategy represents a Priority Customer
quote or order on the Simple Book, or is at or better than the opposite
side SBO (SBB) if the BBO of each component of the complex strategy
represents a non-Priority Customer order or quote on the Simple
Book.\14\ The Initiating Member must specify (A) a single price at
which it seeks to execute the Agency Order against the Initiating Order
(``single-price submission''), including whether it elects to have last
priority in allocation; or (B) an initial stop price and instruction to
automatically match the price and size of all C-AIM responses and other
trading interest (``auto-match'') up to a designated limit price or at
all prices that improve the stop price.\15\
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\10\ See proposed Exchange Rule 21.22.
\11\ See proposed Exchange Rule 21.22(a)(1) and (3). In
addition, proposed Exchange Rule 21.22(a) provides that: the
Initiating Member must mark an Agency Order for C-AIM Auction
processing; the Initiating Order must be for the same size as the
Agency Order; the price of the Agency Order and Initiating Order
must be in an increment of $0.01; the Initiating Member may not
designate an Agency Order or Initiating Order as Post Only; and an
Initiating Member may only submit an Agency Order to a C-AIM Auction
after the Complex Order Book opens. The System rejects or cancels
both an Agency Order and an Initiating Order submitted to a C-AIM
Auction that do not meet these conditions.
\12\ The Synthetic Best Bid or Offer (``SBBO'') is calculated
using the best displayed price for each component of a complex
strategy from the Simple Book. The Simple Book is the Exchange's
regular electronic book of orders. See Exchange Rules 21.20(a)(10)
and (11). For purposes of proposed Rule 21.22, the SBBO means the
SBBO at the particular point in time applicable to the reference.
See proposed Exchange Rule 21.22.
\13\ The COB is the Exchange's electronic book of complex orders
and used for all trading sessions. See Exchange Rule 21.20(a)(6).
\14\ See proposed Exchange Rule 21.22(b)(1)-(3) and Amendment
No. 1.
\15\ See proposed Exchange Rule 21.22(b)(4). The System rejects
or cancels both an Agency Order and an Initiating Order submitted to
a C-AIM Auction that do not meet the conditions of proposed Exchange
Rule 21.22(b).
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One or more C-AIM Auctions in the same complex strategy for Agency
[[Page 37698]]
Orders for which the smallest leg is 50 standard option contracts (or
500 mini-option contracts) or more may occur at the same time.\16\ C-
AIM Auctions in different complex strategies may be ongoing at any
given time, even if the complex strategies have overlapping
components.\17\ In addition, a C-AIM Auction may be ongoing at the same
time as an AIM Auction in any component of the complex strategy.\18\ To
the extent there is more than one C-AIM Auction in a complex strategy
underway at a time, the C-AIM Auctions conclude sequentially based on
the exact time each C-AIM Auction commenced, unless terminated early
pursuant to proposed Exchange Rule 21.22(d).\19\ In the event there are
multiple C-AIM Auctions underway that are each terminated early, the
System processes the C-AIM Auctions sequentially based on the exact
time each C-AIM Auction commenced.\20\ If the System receives a simple
order that causes an AIM and C-AIM (or multiple AIM and/or C-AIM)
Auctions to conclude early, the System first processes AIM Auctions (in
price-time priority) and then processes C-AIM Auctions (in price-time
priority).\21\
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\16\ See proposed Exchange Rule 21.22(c)(1)(A). With respect to
Agency Orders for which the smallest leg is less than 50 standard
option contracts (or 500 mini-option contracts), only one C-AIM
Auction may be ongoing at any given time in a complex strategy, and
C-AIM Auctions in the same complex strategy may not queue or overlap
in any manner. See id.
\17\ See proposed Exchange Rule 21.22(c)(1)(A).
\18\ See id.
\19\ See proposed Exchange Rule 21.22(c)(1)(B).
\20\ See id.
\21\ See id.
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C. C-AIM Auction Process
Upon receipt of an Agency Order that meets the conditions in
proposed Exchange Rules 21.22(a) and (b), the System \22\ initiates a
C-AIM Auction by sending a C-AIM notification message detailing the
side, size, price, origin code, Auction ID, and complex strategy of the
Agency Order to all Options Members that elect to receive C-AIM Auction
notification messages.\23\ The Exchange will determine the C-AIM
Auction period, which may be no less than 100 milliseconds and no more
than one second.\24\ An Initiating Member may not modify or cancel an
Agency Order or Initiating Order after submitting them to a C-AIM
Auction.\25\
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\22\ The System is the electronic communications and trading
facility designated by the Board through which securities orders of
Users are consolidated for ranking, execution and, when applicable,
routing away. See EDGX Rule 1.5(cc).
\23\ C-AIM Auction messages will not be included in OPRA. See
proposed Exchange Rule 21.22(c)(2) and Amendment No. 1.
\24\ See proposed Exchange Rule 21.22(c)(3) and Amendment No. 1.
\25\ See proposed Exchange Rule 21.22(c)(4).
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Any User other than the Initiating Member, determined by Executing
Firm ID (``EFID''), may submit responses to a C-AIM Auction that are
properly marked specifying size, side of the market, and the Auction ID
for the C-AIM Auction to which the User is submitting the response.\26\
The minimum price increment for C-AIM responses is $0.01, and C-AIM
responses must be on the opposite side of the market as the Agency
Order.\27\ C-AIM responses will not be visible to C-AIM Auction
participants or disseminated to OPRA.\28\ A User may submit multiple C-
AIM responses to the Auction at the same or multiple prices, and the
System will aggregate all of a User's complex orders on the COB and C-
AIM responses for the same EFID at the same price.\29\ The System will
cap the size of a C-AIM response, or the aggregate size of a User's
complex orders on the COB and C-AIM responses for the same EFID at the
same price, at the size of the Agency Order (i.e., the System ignores
size in excess of the size of the Agency Order when processing the C-
AIM Auction).\30\ In addition, the C-AIM responses are capped at
specified prices that exist at the conclusion of the C-AIM Auction.\31\
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\26\ A C-AIM Auction response may only participate in the C-AIM
Auction with the Auction ID specified in the response and may not be
designated as Immediate-or-Cancel (``IOC''). C-AIM responses may be
designated with the Match Trade Prevention (``MTP'') modifier of MTP
Cancel Newest, but no other MTP modifiers. A User may modify or
cancel its C-AIM responses during the Auction. See proposed Exchange
Rules 21.22(c)(5)(F), (G), and (I).
\27\ See proposed Exchange Rules 21.22(c)(5)(A) and (E).
\28\ See proposed Exchange Rule 21.22(c)(5)(H).
\29\ See proposed Exchange Rules 21.22(c)(5)(C).
\30\ See proposed Exchange Rules 21.22(c)(5)(D).
\31\ C-AIM buy (sell) responses are capped at the following
prices that exist at the conclusion of the C-AIM Auction: (i) the
better of the SBO (SBB) or the offer (bid) of a resting complex
order at the top of the COB; or (ii) $0.01 lower (higher) than the
better of the SBO (SBB) or the offer (bid) of a resting complex
order at the top of the COB if the BBO of any component of the
complex strategy or the resting complex order, respectively, is a
Priority Customer order. The System executes these C-AIM responses,
if possible, at the most aggressive permissible price not outside
the SBBO at the conclusion of the C-AIM Auction or the price of the
resting complex order. See proposed Exchange Rules 21.22(c)(5)(B)
and Amendment No. 1.
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D. Conclusion of a C-AIM Auction
A C-AIM Auction will conclude at the earliest to occur of several
circumstances, including the end of the C-AIM Auction period, the
market close, or when the Exchange halts trading in the complex
strategy or in any component of the complex strategy.\32\ In addition,
a C-AIM Auction will conclude upon receipt by the System of certain
unrelated orders.\33\ A C-AIM Auction will not conclude early if the
System receives an unrelated market or marketable limit complex order
(against the SBBO or the best price of a complex order resting in the
COB), including a Post Only complex order, on the opposite side of the
market during a C-AIM Auction, and the System will execute the order
against interest outside the C-AIM Auction or post the complex order to
the COB.\34\ Any contracts remaining from the unrelated complex order
at the time the C-AIM Auction ends may be allocated for execution
against the Agency Order pursuant to proposed Exchange Rule
21.22(e).\35\
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\32\ See proposed Exchange Rules 21.22(d)(1)(a), (g), and (h).
If the Exchange halts trading in the complex strategy or a component
of the complex strategy, the C-AIM Auction concludes without
execution. See proposed Exchange Rule 21.22(d)(1)(h).
\33\ A C-AIM Auction will conclude upon receipt by the System of
the following unrelated orders: An unrelated non-Priority Customer
complex order on the same side as the Agency Order that would post
to the COB at a price better than the stop price; an unrelated
Priority Customer complex order on the same side as the Agency Order
that would post to the COB at a price equal to or better than the
stop price; an unrelated non-Priority Customer order or quote that
would post to the Simple Book and cause the SBBO on the same side as
the Agency Order to be better than the stop price; an unrelated
Priority Customer order in any component of the complex strategy
that would post to the Simple Book and cause the SBBO on the same
side as the Agency Order to be equal to or better than the stop
price; a simple non-Priority Customer order that would cause the
SBBO on the opposite side of the Agency Order to be better than the
stop price, or a Priority Customer order that would cause the SBBO
on the opposite side of the Agency Order to be equal to or better
than the stop price. See proposed Exchange Rules 21.22(d)(1)(b)-(f).
\34\ See proposed Exchange Rule 21.22(d)(2).
\35\ See id.
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E. Allocations at the Conclusion of a C-AIM Auction
At the conclusion of a C-AIM Auction, the System executes the
Agency Order against the Initiating Order or contra-side complex
interest, including complex orders on the COB and C-AIM responses, at
the best price(s), to the price at which the balance of the Agency
Order can be fully executed (the ``final auction price'').\36\ Any
execution price(s) must be at or between the SBBO and the best prices
of any complex orders resting on each side of the COB at the conclusion
of the C-AIM Auction.\37\ Executions of a complex Agency Order at the
conclusion of a C-AIM Auction are
[[Page 37699]]
subject to the complex order priority in Exchange Rule 21.20(c)(3).\38\
Allocations at the conclusion of the C-AIM Auction will vary depending
on whether the Auction results in price improvement for the Agency
Order \39\ and, if there is price improvement, whether the Initiating
Member has selected single-price submission (with or without a last
priority election) \40\ or auto-match.\41\
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\36\ See proposed Exchange Rule 21.22(e) and Amendment No. 1.
\37\ See proposed Exchange Rule 21.22(e).
\38\ See proposed Exchange Rule 21.22(e)(5).
\39\ If the C-AIM Auction results in no price improvement, the
System executes the Agency Order at the final auction price (which
equals the stop price) against contra-side interest in the following
order: (A) Priority Customer complex orders on the COB (in time
priority); (B) the Initiating Order for the greater of (i) one
contract or (ii) up to 50% of the Agency Order if there is contra-
side complex interest from one other User at the final auction price
or 40% of the Agency Order if there is contra-side complex interest
from two or more other Users at the final auction price (which
percentages are based on the number of contracts remaining after
execution against Priority Customer complex orders); (C) all other
contra-side complex interest in a pro-rata manner; and (D) the
Initiating Order to the extent there are any remaining contracts.
See proposed Exchange Rule 21.22(e)(1).
\40\ If the C-AIM Auction results in price improvement for the
Agency Order and the Initiating Member selected a single-price
submission, the System executes the Agency Order at each price level
better than the stop price against contra-side complex interest in
the following order: (A) Priority Customer complex orders on the COB
(in time priority); and (B) all other contra-side complex interest
in a pro-rata manner. If the final auction price equals the stop
price, the System executes any remaining contracts from the Agency
Order at that price in the order set forth in proposed Exchange Rule
21.22(e)(1). See proposed Exchange Rule 21.22(e)(2). If the
Initiating Member elects last priority, then notwithstanding
proposed Exchange Rules 21.22(e)(1) and (2), the System only
executes the Initiating Order against any remaining Agency Order
contracts at the stop price after the Agency Order is allocated to
all other contra-side interest (in the order set forth in proposed
Exchange Rule 21.22(e)(2)) at all prices equal to or better than the
stop price. Last priority information is not available to other
market participants and may not be modified after it is submitted.
See proposed Exchange Rule 21.22(e)(4).
\41\ If the C-AIM Auction results in price improvement for the
Agency Order and the Initiating Member selected auto-match, at each
price level better than the final auction price (or at each price
level better than the final auction price up to the limit price if
the Initiating Member specified one), the System executes the Agency
Order against the Initiating Order for the number of contracts equal
to the aggregate size of all other contra-side complex interest and
then executes the Agency Order against that contra-side complex
interest in the order set forth in proposed Exchange Rule
21.22(e)(2). At the final auction price, the System executes those
contracts at that price in the order set forth in proposed Exchange
Rule 21.22(e)(1).
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F. Customer-to-Customer Immediate Crosses
In lieu of the C-AIM Auction process described above, an Initiating
Member may enter an Agency Order for the account of a Priority Customer
paired with a solicited order(s) for the account of a Priority
Customer.\42\ The System will automatically execute these paired orders
without a C-AIM Auction (``Customer-to-Customer C-AIM Immediate
Cross''), subject to certain conditions. Customer-to-Customer C-AIM
Immediate Crosses are subject to the following conditions: (1) The
transaction price must be at or between the SBBO and may not equal
either side of the SBBO if the BBO of any component of the complex
strategy represents a Priority Customer order on the Simple Book; (2)
the transaction price must be at or between the best-priced complex
orders in the complex strategy resting on the COB and may not equal the
price of a Priority Customer complex order resting on either side of
the COB; and (3) the System will not initiate a Customer-to-Customer
Complex C-AIM Immediate Cross if the transaction price equals (A)
either side of the SBBO and the BBO of any component of the complex
strategy represents a Priority Customer order on the Simple Book, or
(B) the price of a Priority Customer complex order resting on either
side of the COB. Instead, the System cancels the Agency Order and
Initiating Order.\43\ Thus, Customer-to-Customer C-AIM Crosses will
trade at a price that is at least as good as the price at which the
orders would have executed had they been submitted separately to the
COB.\44\ The Exchange believes that Customer-to-Customer C-AIM
Immediate Crosses will provide Options Members with a more efficient
means of executing their customer complex orders, subject to the
Exchange's existing requirements limiting principal transactions.\45\
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\42\ See proposed Exchange Rule 21.22(f).
\43\ See proposed Exchange Rule 21.22(f).
\44\ See id.
\45\ See id.
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G. Additional Requirements and Order Exposure Rule
An Options Member may only use a C-AIM Auction where there is a
genuine intention to execute a bona fide transaction.\46\ A pattern or
practice of submitting orders or quotes for the purpose of disrupting
or manipulating C-AIM Auctions, including to cause a C-AIM Auction to
conclude before the end of the C-AIM Auction period, will be deemed
conduct inconsistent with just and equitable principles of trade and a
violation of Exchange Rule 3.1.\47\ It will also be deemed conduct
inconsistent with just and equitable principles of trade and a
violation of Exchange Rule 3.1 to engage in a pattern of conduct where
the Initiating Member breaks up an Agency Order into separate orders
for the purpose of gaining a higher allocation percentage than the
Initiating Member would have otherwise received in accordance with the
allocation procedures contained in proposed Exchange Rule 21.22(e).\48\
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\46\ See proposed Exchange Rule 21.22, Interpretation and Policy
.01.
\47\ See proposed Exchange Rule 21.22, Interpretation and Policy
.02.
\48\ See id.
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Exchange Rule 22.12 prevents an Options Member from executing an
agency order to increase its economic gain from trading against the
order without first giving other trading interests on the Exchange an
opportunity to either trade with the agency order or to trade at the
execution price when the Options Member was already bidding or offering
on the book.\49\ However, the Exchange recognizes that it may be
possible for an Options Member to establish a relationship with a
Priority Customer or other person to deny agency orders the opportunity
to interact on the Exchange and to realize similar economic benefits as
it would achieve by executing agency order as principal.\50\ It would
be a violation of Exchange Rule 22.12 for an Options Member to
circumvent such rule by providing an opportunity for (a) a Priority
Customer affiliated with the Options Member, or (b) a Priority Customer
with whom the Options Member has an arrangement that allows the Options
Member to realize similar economic benefits from the transaction as the
Options Member would achieve by executing agency orders as principal,
to regularly execute against agency orders handled by the firm
immediately upon their entry as Customer-to-Customer C-AIM Immediate
Crosses pursuant to proposed Rule 21.22(f).\51\
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\49\ See proposed Exchange Rule 21.22, Interpretation and Policy
.03.
\50\ See id.
\51\ See id.
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The Exchange proposes to amend Exchange Rule 22.12(c) to add a
reference to the C-AIM Auction as an exception to the general
restriction on Options Members executing as principal orders they
represent as agent.
III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange and, in particular, with
Section 6(b) of the Act.\52\ In
[[Page 37700]]
particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\53\ which requires, among
other things, that the rules of a national securities 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.
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\52\ 15 U.S.C. 78f(b). In approving this proposed rule change,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\53\ 15 U.S.C. 78f(b)(5).
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The Commission believes that allowing Options Members to enter
complex orders into the C-AIM Auction could provide opportunities for
complex orders to receive price improvement. Under the proposal, an
Initiating Member that submits an Agency Order to the C-AIM Auction
also submits an Initiating Order, representing principal or solicited
interest, that stops the entire Agency Order at a price that is at
least $0.01 better than the same- and opposite-side SBBO if the BBO for
any component of the complex strategy represents a Priority Customer
order on the Simple Book, and is at or better than the same- and
opposite-side SBBO if each component of the complex strategy represents
a non-Priority Customer order or quote on the Simple Book.\54\ In
addition, the stop price must be at least $0.01 better than the price
of any same-side complex order resting in the COB, unless the Agency
Order is a Priority Customer order and the resting complex order is a
non-Priority Customer Order, in which case the stop price must be at or
better than the bid or offer of the resting complex order.\55\ An
Initiating Member may not modify or cancel an Agency Order or
Initiating Order after submitting them to a C-AIM Auction.\56\ At the
conclusion of the C-AIM Auction, the Agency Order is executed in full
at the best price(s) available, taking into consideration the
Initiating Order, complex orders in the COB, and C-AIM responses.\57\
Thus, a complex order entered into a C-AIM Auction will be guaranteed
an execution in full at its stop price and will be given an opportunity
for price improvement by being exposed to Users during a C-AIM Auction.
The Commission notes that other exchanges have previously adopted
similar rules to permit the entry of complex orders into a price
improvement mechanism.\58\ In addition, with respect to Customer-to-
Customer C-AIM Immediate Crosses, the Commission notes that another
exchange has adopted a similar rule.\59\
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\54\ See proposed Exchange Rules 21.22(b)(1) and (3).
\55\ See proposed Exchange Rule 21.22(b)(2).
\56\ See proposed Exchange Rule 21.22(c)(4).
\57\ See proposed Exchange Rule 21.22(e). Any execution price(s)
must be at or between the SBBO and the best prices of any complex
orders resting on each side of the COB at the conclusion of the C-
AIM Auction. See id.
\58\ See, e.g., BOX Rule 7245.
\59\ See ISE Options 3, Section 12(b).
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For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment No. 1, is consistent with
Sections 6(b)(5) of the Act.\60\
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\60\ 15 U.S.C. 78f(b)(5).
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IV. Section 11(a) of the Act
Section 11(a)(1) of the Act \61\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises investment discretion
(collectively, ``covered accounts'') unless an exception applies. Rule
11a2-2(T) under the Act,\62\ known as the ``effect versus execute''
rule, provides exchange members with an exemption from the Section
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member,
subject to certain conditions, to effect transactions for covered
accounts by arranging for an unaffiliated member to execute
transactions on the exchange. To comply with Rule 11a2-2(T)'s
conditions, a member: (i) Must transmit the order from off the exchange
floor; (ii) may not participate in the execution of the transaction
once it has been transmitted to the member performing the execution;
\63\ (iii) may not be affiliated with the executing member; and (iv)
with respect to an account over which the member or an associated
person has investment discretion, neither the member nor its associated
person may retain any compensation in connection with effecting the
transaction except as provided in the Rule. For the reasons set forth
below, the Commission believes that Exchange members entering orders
into the C-AIM Auction would satisfy the requirements of Rule 11a2-
2(T).
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\61\ 15 U.S.C. 78k(a)(1).
\62\ 17 CFR 240.11a2-2(T).
\63\ This prohibition also applies to associated persons. The
member may, however, participate in clearing and settling the
transaction.
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The Rule's first condition is that orders for covered accounts be
transmitted from off the exchange floor. In the context of automated
trading systems, the Commission has found that the off-floor
transmission requirement is met if a covered account order is
transmitted from a remote location directly to an exchange's floor by
electronic means.\64\ The Exchange represents that the System and the
proposed C-AIM Auction receive all orders electronically through remote
terminals or computer-to-computer interfaces.\65\ The Exchange also
represents that orders for covered accounts from Options Members will
be transmitted from a remote location directly to the proposed C-AIM
mechanism by electronic means. Because no Exchange members may submit
orders into the C-AIM Auction from on the floor of the Exchange, the
Commission believes that the C-AIM Auction satisfies the off-floor
transmission requirement.
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\64\ See, e.g., Securities Exchange Act Release Nos. 61419
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031)
(approving BATS options trading); 59154 (December 23, 2008), 73 FR
80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity
securities listing and trading on BSE); 57478 (March 12, 2008), 73
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 53128 (January 13, 2006), 71
FR 3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq
Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November
1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility); and 15533
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979
Release'').
\65\ See Notice, 84 FR at 22188.
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Second, the Rule requires that the member and any associated person
not participate in the execution of its order after the order has been
transmitted. The Exchange represents that at no time following the
submission to the C-AIM Auction of an order or C-AIM response is an
Options Member able to acquire control or influence over the result or
timing of the order's or response's execution.\66\ According to the
Exchange, the execution of an order (including the Agency and the
Initiating Order) or a C-AIM response sent to the C-AIM mechanism is
determined by what other orders and responses are present and the
priority of those orders and
[[Page 37701]]
responses.\67\ Accordingly, the Commission believes that a member does
not participate in the execution of an order or response submitted to
the C-AIM mechanism.
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\66\ See id. (also representing, among other things, that: (1)
No Options Member, including the Initiating Member, will see a C-AIM
response submitted into a C-AIM Auction and therefore will not be
able to influence or guide the execution of their Agency Orders,
Initiating Orders, or C-AIM responses, as applicable; and (2) the
last priority feature will not permit an Options Member to have any
control over an order, and the election to last priority is
available prior to the submission of the order, will not be
broadcast and further, the last priority option may not be modified
by the Initiating Member during the C-AIM Auction).
\67\ See id. The Exchange notes that an Initiating Member may
not cancel or modify an Agency Order or Initiating Order after it
has been submitted into a C-AIM Auction, but that Options Members
may modify or cancel their responses after being submitted to a C-
AIM Auction. See id. at 22188, n.64. As the Exchange notes, the
Commission has stated that the non-participation requirement does
not preclude members from cancelling or modifying orders, or from
modifying instructions for executing orders, after they have been
transmitted so long as such modifications or cancellations are also
transmitted from off the floor. See Securities Exchange Act Release
No. 14563 (March 14, 1978), 43 FR 11542, 11547 (the ``1978
Release'').
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Third, Rule 11a2-2(T) requires that the order be executed by an
exchange member who is unaffiliated with the member initiating the
order. The Commission has stated that this requirement is satisfied
when automated exchange facilities, such as the C-AIM mechanism, are
used, as long as the design of these systems ensures that members do
not possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange.\68\ The Exchange
represents that the C-AIM is designed so that no Options Member has any
special or unique trading advantage in the handling of its orders after
transmitting its orders to the mechanism.\69\ Based on the Exchange's
representation, the Commission believes that the C-AIM mechanism
satisfies this requirement.
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\68\ In considering the operation of automated execution systems
operated by an exchange, the Commission noted that, while there is
not an independent executing exchange member, the execution of an
order is automatic once it has been transmitted into the system.
Because the design of these systems ensures that members do not
possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange, the Commission has
stated that executions obtained through these systems satisfy the
independent execution requirement of Rule 11a2-2(T). See 1979
Release, supra note 71.
\69\ See Notice, 84 FR at 22188.
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Fourth, in the case of a transaction effected for an account with
respect to which the initiating member or an associated person thereof
exercises investment discretion, neither the initiating member nor any
associated person thereof may retain any compensation in connection
with effecting the transaction, unless the person authorized to
transact business for the account has expressly provided otherwise by
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\70\ The Exchange represents that Options Members
relying on Rule 11a2-2(T) for transactions effected through the C-AIM
Auction must comply with this condition of the Rule and that the
Exchange will enforce this requirement pursuant to its obligations
under Section 6(b)(1) of the Act to enforce compliance with federal
securities laws.\71\
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\70\ In addition, Rule 11a2-2(T)(d) requires a member or
associated person authorized by written contract to retain
compensation, in connection with effecting transactions for covered
accounts over which such member or associated persons thereof
exercises investment discretion, to furnish at least annually to the
person authorized to transact business for the account a statement
setting forth the total amount of compensation retained by the
member or any associated person thereof in connection with effecting
transactions for the account during the period covered by the
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra
note 74, at 11548 (stating ``[t]he contractual and disclosure
requirements are designed to assure that accounts electing to permit
transaction-related compensation do so only after deciding that such
arrangements are suitable to their interests'').
\71\ See Notice, 84 FR at 22188.
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V. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 1 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-CboeEDGX-2019-028 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-CboeEDGX-2019-028. 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-CboeEDGX-2019-028, and should be
submitted on or before August 22, 2019.
VI. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
1 in the Federal Register. The Commission believes that Amendment No. 1
provides additional clarity to the rule text and additional analysis of
aspects of the proposal, thereby facilitating the Commission's ability
to make the findings set forth above to approve the proposal. In
addition, the Commission believes that Amendment No. 1 does not raise
novel regulatory issues or make significant substantive changes to the
original proposal, which was published for notice and comment and which
received no comments. Accordingly, the Commission finds good cause,
pursuant to Section 19(b)(2) of the Act,\72\ to approve the proposed
rule change, as modified by Amendment No. 1, on an accelerated basis.
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\72\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\73\ that the proposed rule change (SR-CboeEDGX-2019-028), as
modified by Amendment No. 1, is approved on an accelerated basis.
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\73\ 15 U.S.C. 78s(b)(2).
\74\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\74\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-16364 Filed 7-31-19; 8:45 am]
BILLING CODE 8011-01-P