[Federal Register Volume 84, Number 169 (Friday, August 30, 2019)]
[Notices]
[Pages 45812-45816]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18752]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86765; File No. SR-CBOE-2019-047]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change Amending
Its Fees Schedule
August 26, 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 13, 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 fees schedule. 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
[[Page 45813]]
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 Exchange proposes to amend its Fees Schedule in connection with
the Volume Incentive Program (``VIP''). The Exchange intends to
implement the proposed change on August 1, 2019.\3\
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\3\ The Exchange initially filed the proposed fee change
pursuant to SR-CBOE-2019-041 and has withdrawn that filing and
submitted this filing.
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The Exchange first notes that it operates in a highly competitive
market in which market participants can readily direct order flow to
competing venues if they deem fee levels at a particular venue to be
excessive or incentives to be insufficient. More specifically, the
Exchange is only one of 16 options venues to which market participants
may direct their order flow. Based on publicly available information,
no single options exchange has more than 20% of the market share.\4\
The Exchange notes that a similar statistic is also true for exchange
market share in connection with customer volume; no single options
exchange has more than 19% of customer volume.\5\ Thus, in such a low-
concentrated and highly competitive market, no single options exchange
possesses significant pricing power in the execution of option order
flow. The Exchange believes that the ever-shifting market share among
the exchanges from month to month demonstrates that market participants
can shift order flow, or discontinue to reduce use of certain
categories of products, in response to fee changes. Accordingly,
competitive forces constrain the Exchange's transaction fees, and
market participants can readily trade on competing venues if they deem
pricing levels at those other venues to be more favorable. In response
to the competitive environment, the Exchange offers tiered pricing in
it Fees Schedule, like that of other options exchanges fees
schedules,\6\ which provides Trading Permit Holders (``TPHs'')
opportunities to qualify for higher rebates or reduced fees where
certain volume criteria and thresholds are met. Tiered pricing provides
an incremental incentive for TPHs to strive for higher tier levels,
which provides increasingly higher benefits or discounts for satisfying
increasingly more stringent criteria.
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\4\ See Cboe Global Markets U.S. Options Market Volume Summary
(July 31, 2019), available at https://markets.cboe.com/us/options/market_statistics/.
\5\ Options Clearing Corporation (``OCC'') cleared customer
volume, available at https://www.theocc.com/market-data/volume/default.jsp.
\6\ See e.g., NASDAQ Stock Market Rules, Options Rules, Options
7 Pricing Schedule, Sec. 2 Options Market--Fees and Rebates, Tiers
1-6; see also NYSE Arca Options, Fees and Charges, Customer Posting
Credit Tiers in Non-Penny Pilot Issues.
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For example, under VIP, the Exchange credits each TPH the per
contract amount set forth in the VIP table for Public Customer (origin
code ``C'') orders transmitted by TPHs (with certain exceptions) \7\
and executed electronically on the Exchange, provided the TPH meets
certain volume thresholds, in which volume for Professional Customers
and Voluntary Professionals (``Professional Customers'') (origin code
``W''), Broker-Dealers (origin code ``B''), and Joint Back-Offices
(``JBO'') (origin code ``J'') orders are counted toward reaching such
thresholds. Specifically, the percentage thresholds are calculated per
month based on the percentage of national customer volume in all
underlying symbols entered and executed, excluding those in Underlying
Symbol List A,\8\ Sector Indexes,\9\ the MSCI EAFE Index (``MXEA''),
the MSCI Emerging Market Index (``MXEF''), Mini-NDX Index (``MNX''),
the NASDAQ-100 Index (``NDX''), the Dow Jones Industrial Average Index
(``DJX''), Mini-SPX Index (``XSP'') and Mini-XSP Index (AM Settlement)
(``XSPAM''). VIP offers rates for both Complex and Simple orders (both
in AIM and Non-AIM orders, respectively). The Exchange notes that its
market share in customer volume (which includes Customer, Professional
Customers, Broker-Dealer, and JBO order flow) \10\ has historically
been between 16.5% and 18.3%. In recent months, the Exchange's
percentage of such market share has hovered closer to the lower end of
this scale. As stated, the Exchange operates in a highly competitive
market where no single options exchange possesses significant pricing
power in the execution of option order flow, and the ever-shifting
market share among the exchanges from month to month demonstrates that
market participants can shift order flow. Therefore, in light of the
declination of the Exchange's market share in customer volume and
competitive forces, the Exchange now proposes to amend the volume
thresholds for Tiers 4 and 5. Currently, a TPH may meet the criteria
under Tier 4 if its qualifying volume in the qualifying classes is
above 3.00% and up to 3.75% of national customer volume, and may meet
criteria under Tier 5 if their qualifying volume is above 3.75% of
national customer volume. The Exchange now proposes to increase the
volume threshold percentage in Tier 4 to above 3.00% and up to 4.00%
and to increase the threshold percentage in Tier 5 to above 4.00%. The
purpose of these changes is to adjust for current volume trends by
encouraging more volume as the Exchange's market share in customer
volume has declined over recent months and the proposed increased
threshold is designed to incentivize more volume to earn the same
credits while also maintaining an incremental incentive for TPHs to
strive for the highest tier level. The Exchange notes that the credits
offered under VIP are not changing. The proposed change is designed to
increase the amount of volume TPHs provide on the Exchange and further
encourage them to contribute to a deeper, more liquid market, as well
as to increase transactions and take such execution opportunities
provided by such increased liquidity. The Exchange believes that this,
in turn, benefits all market participants by contributing towards a
robust and well-balanced market ecosystem. The Exchange notes the
proposed tiers are competitively achievable for all TPHs that submit
significant customer order flow, in that all firms that submit the
requisite significant customer order flow could compete to meet the
tiers.
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\7\ See Cboe Options Fees Schedule, Footnote 36.
\8\ See Cboe Options Fees Schedule, Footnote 34. Underlying
Symbol List A includes Underlying Symbol List A: OEX, XEO, RUT, RLG,
RLV, RUI, AWDE, FTEM, FXTM, UKXM, SPX (includes SPXw), VIX,
VOLATILITY INDEXES and binary options.
\9\ See Cboe Options Fees Schedule, Footnote 47.
\10\ See supra note 5.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the objectives of Section 6 of the Act, in general, and furthers
the objectives of Section 6(b)(4), in particular, as it is designed to
provide for the equitable
[[Page 45814]]
allocation of reasonable dues, fees and other charges among its Members
and issuers and other persons using its facilities. The Exchange also
believes that the proposed rule change is consistent with the
objectives of Section 6(b)(5) 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,
and, particularly, is not designed to permit unfair discrimination
between customers, issuers, brokers, or dealers.
The Exchange operates in a highly competitive market in which
market participants can readily direct order flow to competing venues
if they deem fee levels at a particular venue to be excessive or
incentives to be insufficient. The proposed rule change reflects a
competitive pricing structure designed to incentivize market
participants to direct their order flow to the Exchange, which the
Exchange believes would enhance market quality to the benefit of all
TPHs.
In particular, the Exchange believes the proposed tier is
reasonable because it continues to encourage TPHs to take the
opportunity to receive credits on Customer orders by reaching the
proposed volume thresholds. The Exchange notes that relative volume-
based incentives and discounts have been widely adopted by exchanges
\11\ and are reasonable, equitable and non-discriminatory because they
are open to all members on an equal basis and provide additional
benefits or discounts that are reasonably related to (i) the value to
an exchange's market quality and (ii) associated higher levels of
market activity, such as higher levels of liquidity provision and/or
growth patterns. Additionally, as noted above, the Exchange operates in
a highly competitive market. The Exchange is only one of several
options venues to which market participants may direct their order
flow. Competing options exchanges offer similar tiered pricing
structures to that of the Exchange, including schedules of rebates/
credits and fees that apply based upon members achieving certain volume
and/or growth thresholds. These competing pricing schedules, moreover,
are presently comparable to those that the Exchange provides, including
the pricing of comparable tiers.\12\
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\11\ See supra note 6.
\12\ Id.
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The Exchange believes adjusting the VIP volume thresholds for Tiers
4 and 5 is reasonable because it adjusts for the current volume trends
and is a reasonable means to continue to encourage TPHs to increase
their overall order flow to the Exchange based on increasing their
Customer, Professional Customer, Broker-Dealer, and JBO executed orders
as a percentage of national customer volume. Particularly, the Exchange
believes the proposed threshold change is reasonable because it will
encourage increased volume, thus a deeper, more liquid market, and an
increase in transaction opportunities provided by the increased
liquidity. In turn, these increases benefit all TPHs by contributing
towards a robust and well-balanced market ecosystem. Increased overall
order flow benefits all investors by deepening the Exchange's liquidity
pool, providing greater execution incentives and opportunities,
offering additional flexibility for all investors to enjoy cost
savings, supporting the quality of price discovery, promoting market
transparency, and improving investor protection.
The proposed volume thresholds also do not represent a significant
departure from the current required criteria under the Exchange's
existing tiers and is therefore still reasonable based on the
difficulty of satisfying the tiers' criteria and ensures the existing
credit and proposed thresholds appropriately reflect the incremental
difficulty to achieve the existing VIP tiers. For example, the volume
threshold amount under existing Tier 3 is currently set as a range
within a whole percentage point, between 2.00% up to 3.00%. The
Exchange believes the proposed tiers are in line with this existing
tier, as the natural next highest tier, both in required criteria and
credits, is reasonable to also set as a range within a whole percentage
point, between 3.00% and 4.00%, and then over 4.00%, as proposed. The
Exchange also believes that a volume threshold increase of .25
percentage points is a reasonable increment to encourage overall order
flow to the Exchange without so significantly increasing the difficulty
in reach the tiers' criteria.
The Exchange believes that the proposal represents an equitable
allocation of rebates and is not unfairly discriminatory because all
TPHs have the opportunity to meet the proposed tier thresholds. Given
that TPHs change their trading strategies and patterns month-to-month
to align with changing market trends and conditions, as well as pricing
and functionality changes across other exchanges, and without having a
view of activity on other markets and off-exchange venues, the Exchange
has no way of knowing whether this proposed rule change would
definitively result in a shift of TPHs qualifying for the proposed
tiers. While the Exchange has no way of predicting with certainty how
the rule change will impact Trading Permit Holders, the Exchange
anticipates the impact of the proposed change to be minimal in at least
one TPH will be able to reach proposed Tier 5. The Exchange notes that
typically five or six firms compete to qualify across all of the VIP
tiers and at least two such firms typically compete to qualify for the
top two tiers. As stated, the Exchange believes that the proposed
threshold increases do not represent a significant departure from the
current required criteria, is still reasonable based on the difficulty
of satisfying each tier's criteria, and is appropriately aligned with
the incremental difficulty to achieve the existing VIP tiers. As such,
the Exchange does not anticipate the proposed threshold change to
impact the number of firms that compete across all tiers, including
those that regularly compete across the top two tiers, but instead
encourages competition by encouraging increase in order flow to meet
the proposed tiers. Therefore, the Exchange does not believe that the
proposed tiers are unfairly discriminatory as it would not impact the
range of typical competition across such tiers.
The Exchange also notes that the proposed tier will not adversely
impact any TPH's pricing or ability to qualify for other credit tiers.
Rather, should a TPH not meet the proposed criteria, the TPH will
merely not receive the proffered credit.
The Exchange also notes that, while only certain orders would count
towards the qualifying thresholds, specifically, Customer, Professional
Customer, Broker-Dealer and JBO order, these market participants'
orders are primarily executed by an agent and VIP is an incentive
program for agency trading, whose order flow would bring greater volume
and liquidity, which benefits all market participants by providing more
trading opportunities and tighter spreads. The Exchange notes that
incentive programs based on aggregate volume of certain agency
[[Page 45815]]
trading market participants also exist on other options exchanges.\13\
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\13\ See NASDAQ Stock Market Rules, Options Rules, Options 7
Pricing Schedule, Sec. 2 Options Market--Fees and Rebates, Tiers 1-
6.
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Additionally, the Exchange believes that it is equitable and not
unfairly discriminatory to continue to only apply credits to Customer
orders (i.e., ``C'' origin code) because Customer order flow enhances
liquidity on the Exchange for the benefit of all market participants.
Specifically, Customer volume is important because it continues to
attract liquidity to the Exchange, which benefits all market
participants by providing more trading opportunities, which attracts
Market-Makers. An increase in Market-Maker activity, in turn,
facilitates tighter spreads, which may cause an additional
corresponding increase in order flow from other market participants.
Moreover, the options industry has a long history of providing
preferential pricing to Customers orders and the Exchange's current
Fees Schedule currently does so in many places, as do the fees
structures of multiple other exchanges.\14\
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\14\ See id, specifically, Tier 6.
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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
not impose any burden on intramarket or intermarket competition that is
not necessary or appropriate in furtherance of the purposes of the Act.
Rather, as discussed above, the Exchange believes that the proposed
change would encourage the submission of additional liquidity to a
public exchange, thereby promoting market depth, price discovery and
transparency and enhancing order execution opportunities for all TPHs.
As a result, the Exchange believes that the proposed change furthers
the Commission's goal in adopting Regulation NMS of fostering
competition among orders, which promotes ``more efficient pricing of
individual stocks for all types of orders, large and small.'' \15\
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\15\ See Securities Exchange Act Release No. 51808, 70 FR 37495,
37498-99 (June 29, 2005) (S7-10-04) (Final Rule).
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The Exchange believes the proposed rule change does not impose any
burden on intramarket competition that is not necessary or appropriate
in furtherance of the purposes of the Act. Particularly, the proposed
change applies to all TPHs submitting qualified orders equally, in that
all TPHs submitting such orders are eligible for the proposed tiers,
have a reasonable opportunity to meet the tiers' criteria and will all
receive the existing credit if such criteria is met. As described
above, while only certain orders would count towards the qualifying
thresholds, specifically, Customers, Professionals, Broker-Dealers and
JBOs, these market participants' orders are primarily executed as
agency orders, whose order flow would bring greater volume and
liquidity, which benefits all market participants by providing more
trading opportunities and tighter spreads. Moreover, the Exchange does
not believe the current application of the credit to Customer orders
imposes any burden on intermarket competition because, as stated,
preferential pricing to Customers is a long-standing options industry
practice which serves to enhance Customer order flow, thereby
attracting Marker-Makers to facilitate tight spreads and trading
opportunities to the benefit of all market participants. Overall, the
proposed change is designed to encourage additional order flow to the
Exchange, which the Exchange believes benefits all market participants
on the Exchange by providing more liquidity, thus trading
opportunities, encouraging even more TPHs to send orders, thereby
contributing towards a robust and well-balanced market ecosystem to the
benefit of all market participants.
Next, the Exchange believes the proposed rule change does not
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act. As previously
discussed, the Exchange operates in a highly competitive market.
Members have numerous alternative venues that they may participate on
and direct their order flow, including 15 other options exchanges.
Based on publicly available information, no single options exchange has
more than 20% of the market share.\16\ Therefore, no exchange possesses
significant pricing power in the execution of option order flow.
Indeed, participants can readily choose to send their orders to other
exchange, and, additionally off-exchange venues, if they deem fee
levels at those other venues to be more favorable. Moreover, the
Commission has repeatedly expressed its preference for competition over
regulatory intervention in determining prices, products, and services
in the securities markets. Specifically, in Regulation NMS, the
Commission highlighted the importance of market forces in determining
prices and SRO revenues and, also, recognized that current regulation
of the market system ``has been remarkably successful in promoting
market competition in its broader forms that are most important to
investors and listed companies.'' \17\ The fact that this market is
competitive has also long been recognized by the courts. In
NetCoalition v. Securities and Exchange Commission, the D.C. Circuit
stated as follows: ``[n]o one disputes that competition for order flow
is `fierce.' . . . As the SEC explained, `[i]n the U.S. national market
system, buyers and sellers of securities, and the broker-dealers that
act as their order-routing agents, have a wide range of choices of
where to route orders for execution'; [and] `no exchange can afford to
take its market share percentages for granted' because `no exchange
possesses a monopoly, regulatory or otherwise, in the execution of
order flow from broker dealers'. . . .''.\18\ Accordingly, the Exchange
does not believe its proposed fee change imposes any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act.
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\16\ See supra note 4.
\17\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37499 (June 29, 2005).
\18\ NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010)
(quoting Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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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
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \19\ and paragraph (f) of Rule 19b-4 \20\
thereunder. At any time within 60 days of the filing of the proposed
rule change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission will institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
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\19\ 15 U.S.C. 78s(b)(3)(A).
\20\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
[[Page 45816]]
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-2019-047 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-2019-047. 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-2019-047 and should be submitted on
or before September 20, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-18752 Filed 8-29-19; 8:45 am]
BILLING CODE 8011-01-P