[Federal Register Volume 84, Number 168 (Thursday, August 29, 2019)]
[Notices]
[Pages 45565-45568]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18626]
[[Page 45565]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86744; File No. SR-CBOE-2019-049]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change Relating To Make Permanent Certain
Options Market Rules That Are Linked to the Equity Market Plan To
Address Extraordinary Market Volatility
August 23, 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 August 21, 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. (``Cboe'' or the ``Exchange'') is filing with
the Securities and Exchange Commission (the ``Commission'') to make
permanent certain options market rules that are linked to the equity
market Plan to Address Extraordinary Market Volatility. The text of the
proposed rule change is attached [sic] as 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
The purpose of the proposed rule change is to make permanent
certain options market rules in connection with the equity market Plan
to Address Extraordinary Market Volatility (the ``Limit Up-Limit Down
Plan'' or the ``Plan''). This change is being proposed in connection
with the recently approved amendment to the Limit Up-Limit Down Plan
that allows the Plan to continue to operate on a permanent basis
(``Amendment 18'').\3\
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\3\ See Securities Exchange Act Release No. 85623 (April 11,
2019), 84 FR 16086 (April 17, 2019) (Order Approving Amendment No.
18).
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In an attempt to address extraordinary market volatility in NMS
Stocks, and, in particular, events like the severe volatility on May 6,
2010, U.S. national securities exchanges and the Financial Industry
Regulatory Authority, Inc. (collectively, ``Participants'') drafted the
Plan pursuant to Rule 608 of Regulation NMS under the Act.\4\ On May
31, 2012, the Commission approved the Plan, as amended, on a one-year
pilot basis.\5\ Though the Plan was primarily designed for equity
markets, the Exchange believed it would, indirectly, potentially impact
the options markets as well. Thus, the Exchange has previously adopted
and amended Rules 6.3A, 6.3B and Interpretation and Policy .01 to Rule
6.25 to ensure the option markets were not harmed as a result of the
Plan's implementation and implemented such rules on a pilot basis that
has coincided with the pilot period for the Plan (collectively, the
``Options Pilots'').\6\ Rule 6.3A essentially serves as a roadmap for
the Exchange's universal changes due to the implementation of the Plan,
Rule 6.3B provides for trading halts whenever a market-wide trading
halt is initiated due to extraordinary market conditions pursuant to
the Plan, and Rule 6.25.01 provides that transactions executed during a
limit or straddle state are not subject to the obvious and catastrophic
error rules. A limit or straddle state occurs when at least one side of
the National Best Bid (``NBB'') or Offer (``NBO'') bid/ask is priced at
a non-tradable level. Specifically, a straddle state exists when the
NBB is below the lower price band while the NBO is inside the prices
band or when the NBO is above the upper price band and the NBB is
within the band, while a limit state occurs when the NBO equals the
lower price band (without crossing the NBB), or the NBB equals the
upper price band (without crossing the NBO). The Exchange adopted the
Options Pilots to protect investors because when an underlying security
is in a limit or straddle state, there will not be a reliable price for
the security to serve as a benchmark for the price of the option.
Specifically, the Exchange adopted Rule 6.25.01 because the application
of the obvious and catastrophic error rules would be impracticable
given the potential for lack of a reliable NBBO in the options market
during limit and straddle states. When adjusting or busting a trade
pursuant to the obvious error rule, the determination of theoretical
value of a trade generally references the NBB (for erroneous sell
transactions) or NBO (for erroneous buy transactions) just prior to the
trade in question, and is therefore not reliable when at least one side
of the NBBO is priced at a non-tradeable level, as is the case in limit
and straddle states. In such a situation, determining theoretical value
may often times be a very subjective rather than an objective
determination and could give rise to additional uncertainty and
confusion for investors. As a result, application of the obvious and
catastrophic error rules would be impracticable given the lack of a
reliable NBBO in the options market during limit and straddle states,
and may produce undesirable effects or unanticipated consequences. The
Exchange adopted additional measures via other Options Pilot rules that
are designed to protect investors during limit and straddle states. For
example, the Exchange will reject market orders and not elect stop
orders \7\ during a
[[Page 45566]]
Limit Up-Limit Down state to ensure that only those orders with a limit
price will be executed during a limit or straddle state given the
uncertainty of market prices during such a state. Additionally, the
Exchange will initiate a trading halt whenever a market-wide trading
halt is initiated, which ensures that investors have an opportunity to
become aware of and respond to significant price movements.
Furthermore, the Exchange believes that eliminating the application of
obvious error rules during a limit or straddle state eliminates the re-
evaluation of a transaction executed during such a state that could
potentially create an unreasonable adverse selection opportunity due to
lack of a reliable reference price on one side of the market or another
and discourage participants from providing liquidity during limit and
straddle states, which is contrary to the goal in limiting
participants' adverse selection with the application of the obvious
error rule during normal trading states. For these reasons, the
Exchange believes the Options Pilots are designed to add certainty on
the options markets, which encourages more investors to participate in
light of the changes associated with the Plan. The Plan was originally
implemented on a pilot-basis in order to allow the public, the
participating exchanges, and the Commission to assess the operation of
the Plan and whether the Plan should be modified prior to approval on a
permanent basis. As stated, the Exchange adopted the Option Pilots to
coincide with this pilot; to continue the protections therein while the
industry gains further experience operating the Plan.
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\4\ See Securities Exchange Act Release No. 64547 (May 25,
2011), 76 FR 31647 (June 1, 2011) (File No. 4-631).
\5\ See Securities and Exchange Act Release No. 67091 (May 31,
2012) 77 FR 33498 (June 6, 2012).
\6\ See Securities Exchange Act Release Nos. 69328 (April 5,
2013), 78 FR 21642 (April 11, 2013) (SR-CBOE-2013-030) (amending
certain options rules to coincide with the pilot period for the
Plan, including Rule 6.3A and Rule 6.25); 65438 (September 28,
2011), 76 FR 61447 (October 4, 2011) (SR-CBOE-2011-087) (amending
Rule 6.3B for determining when to halt trading in all stocks and
stock options due to extraordinary market volatility); 68770
(January 30, 2013), 78 FR 8211 (February 5, 2013) (SR-CBOE-2013-011)
(amending Rule 6.3B to delay the operative date of the pilot to
coincide with the initial date of operations of the Plan); and 85616
(April 11, 2019), 84 FR 16093 (April 17, 2019) (SR-CBOE-2019-020)
(proposal to extend the pilot for certain options pilots).
\7\ This includes rules in connection with special handling for
market orders, market-on-close orders, stop orders, and stock-option
orders, as well as for certain electronic order handling features in
a Limit Up-Limit Down state, the obvious error rules, and providing
that the Exchange will not require Market-Makers to quote in series
of options when the underlying security is in a Limit Up-Limit Down
state.
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In connection with the order approving the establishment of the
obvious error pilot, as well as the extensions of the obvious error
pilot, the Exchange committed to submit monthly data regarding the
program and to submit an overall analysis of the obvious error pilot in
conjunction with the data submitted under the Plan and any other data
as requested by the Commission. Pursuant to a rule filing, approved on
April 3, 2014, each month, the Exchange committed to provide the
Commission, and the public, a dataset containing the data for each
straddle and limit state in optionable stocks that had at least one
trade on the Exchange.\8\ The Exchange has continued to provide the
Commission with this data on a monthly basis from October 2015. For
each trade on the Exchange, the Exchange provides (a) the stock symbol,
option symbol, time at the start of the straddle or limit state, an
indicator for whether it is a straddle or limit state, and (b) for the
trades on the Exchange, the executed volume, time-weighted quoted bid-
ask spread, time-weighted average quoted depth at the bid, time-
weighted average quoted depth at the offer, high execution price, low
execution price, number of trades for which a request for review for
error was received during straddle and limit states, an indicator
variable for whether those options outlined above have a price change
exceeding 30% during the underlying stock's limit or straddle state
compared to the last available option price as reported by OPRA before
the start of the limit or straddle state. In addition, to help evaluate
the impact of the pilot program, the Exchange has provided to the
Commission, and the public, assessments relating to the impact of the
operation of the obvious error rules during limit and straddle states
including: (1) An evaluation of the statistical and economic impact of
limit and straddle states on liquidity and market quality in the
options markets, and (2) an assessment of whether the lack of obvious
error rules in effect during the straddle and limit states are
problematic. The Exchange has concluded that the obvious error pilot
does not negatively impact market quality during normal market
conditions,\9\ and that there has been insufficient data to assess
whether a lack of obvious error rules is problematic, however, the
Exchange believes the continuation of Rule 6.25.01 functions to protect
against any unanticipated consequences in the options markets during a
limit or straddle state and add certainty on the options markets.
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\8\ See Securities Exchange Act Release No. 71857 (April 3,
2014), 79 FR 19678 (April 9, 2014) (SR-CBOE-2014-033); see also Cboe
Global Markets, LULD Limit and Straddle Reports, available at http://markets.cboe.com/us/options/market_statistics/luld_reports/?mkt=opt.
\9\ See also Cboe Global Markets, LULD Limit and Straddle
Reports, available at http://markets.cboe.com/us/options/market_statistics/luld_reports/?mkt=opt. During the most recent
Review Period the Exchange did not receive any obvious error review
requests for Limit Up-Limit Down trades, and Limit Up-Limit Down
trade volume accounted for nominal overall trade volume.
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The Commission recently approved the Plan on a permanent basis
(Amendment 18).\10\ In connection with this approval, the Exchange now
proposes to amend Exchange Rules 6.3A, 6.3B and Interpretation and
Policy .01 to Rule 6.25 that currently implement the provisions of the
Plan on a pilot basis to eliminate the pilot basis, which effectiveness
expires on October 18, 2019, and to make such rules permanent. In its
approval order to make the Plan permanent, the Commission recognized
that, as a result of the Participants' and industry analysis of the
Plan's operation, the Limit Up-Limit Down mechanism effectively
addresses extraordinary market volatility. Indeed, the Plan benefits
markets and market participants by helping to ensure orderly markets,
but also, the Exchange believes, based on the data made available to
the public and the Commission during the pilot period, that the obvious
error pilot does not negatively impact market quality during normal
market conditions.\11\ Rather, the Exchange believes the obvious error
pilot functions to protect against any unanticipated consequences in
the options markets during a limit or straddle state and add certainty
on the options markets. The Exchange also believes the other Options
Pilots rules provide additional measures designed to protect investors
during limit and straddle states. For example, the Exchange will reject
market orders and not elect stop orders \12\ during a Limit Up-Limit
Down state to ensure that only those orders with a limit price will be
executed during a limit or straddle state given the uncertainty of
market prices during such a state. In addition to this, the Exchange
will initiate a trading halt whenever a market-wide trading halt is
initiated, which ensures that investors have an opportunity to become
aware of and respond to significant price movements. This removes
impediments to and perfects the mechanism of a free and open market and
national market system by encouraging more investors to participate in
light of the changes associated with the Plan. The Exchange believes
that if approved on a permanent basis, the Options Pilots would
permanently provide investors with the above-described additional
certainty of market prices and mitigation of unanticipated consequences
and unreasonable adverse selection risk during limit and straddle
states.
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\10\ See supra note 3.
\11\ See supra note 9.
\12\ See supra note 7.
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The Exchange understands that the other national securities
exchanges will also file similar proposals to make permanent their
respective pilot programs. Since the Commission's approval of Amendment
18 allowing the Plan to operate on a permanent basis, the Exchange and
other national
[[Page 45567]]
securities exchanges have determined that no further amendments should
be made to the Options Pilots; \13\ the current Options Pilots
effectively address extraordinary market volatility, are reasonably
designed to comply with the requirements of the Plan, facilitate
compliance with the Plan and should now operate on a permanent basis,
consistent with the Plan. The Exchange does not propose any substantive
or additional changes to Exchange Rules 6.3A, 6.3B or Interpretation
and Policy .01 to Rule 6.25.
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\13\ See Securities Exchange Act Release No. 85616 (April 11,
2019), 84 FR 16093 (April 17, 2019) (SR-CBOE-2019-020) (proposal to
extend the pilot for certain options market rules linked to the
Plan).
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\14\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \15\ 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) \16\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
\16\ Id.
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In particular, the Exchange believes that the proposed rule
supports the objectives of perfecting the mechanism of a free and open
market and the national market system because it promotes transparency
and uniformity across markets concerning rules for options markets
adopted to coincide with the Plan. The Exchange believes that
eliminating the pilot basis for the Options Pilots and making such
rules permanent facilitates compliance with the Plan by adding
certainty to the markets during periods of market volatility, which has
been approved and found by the Commission to be reasonably designed to
prevent potentially harmful price volatility in NMS Stocks. It has been
determined by the Commission that the Plan benefits markets and market
participants by helping to ensure orderly markets, and, based on the
data made available to the public and the Commission during the pilot
period for Rule 6.25.01, the Plan does not negatively impact options
market quality during normal market conditions. Rather, the Plan, as it
is implemented under the obvious error pilot, functions to protect
against any unanticipated consequences in the options markets during a
limit or straddle state and add certainty on the options markets.
During a limit or straddle state, determining theoretical value of an
option may be a subjective rather than an objective determination given
the lack of a reliable NBBO, which may create an unreasonable adverse
selection opportunity and discourage participants from providing
liquidity during limit and straddle states. Therefore, the Exchange
believes eliminating obvious error review in such states would, in
turn, eliminate uncertainty and confusion for investors and benefit
investors by encouraging more participation in light of the changes
associated with the Plan. As stated, the Exchange believes the other
Options Pilots rules provide additional measures designed to protect
investors during limit and straddle states. For example, the Exchange
will reject market orders and not elect stop orders \17\ during a Limit
Up-Limit Down state to ensure that only those orders with a limit price
will be executed during a limit or straddle state given the uncertainty
of market prices during such a state. Additionally, the Exchange will
initiate a trading halt whenever a market-wide trading halt is
initiated, which ensures that investors have an opportunity to become
aware of and respond to significant price movements. Accordingly, the
Exchange believes that making the Options Pilots permanent will further
the goals of investor protection and fair and orderly markets as the
rules effectively address extraordinary market volatility pursuant to
the Plan.
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\17\ See supra note 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 would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed rule change is
necessary to reflect that the Plan no longer operates as a pilot and
has been approved to operate on a permanent basis by the Commission. As
such, Exchange Rules 6.3A, 6.3B or Interpretation and Policy .01 to
Rule 6.25, which implement protections in connection with the Plan,
should be amended to operate on a permanent basis. The Exchange
understands that the other national securities exchanges will also file
similar proposals to make permanent their respective pilot programs.
Thus, the proposed rule change will help to ensure consistency across
market centers without implicating any competitive issues.
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 self-regulatory organization 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-2019-049 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-2019-049. This file
number should be included on the subject line if email is used. To help
the Commission process and review your
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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-2019-049, and should be submitted on or before September 19, 2019.
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\18\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-18626 Filed 8-28-19; 8:45 am]
BILLING CODE 8011-01-P