[Federal Register Volume 84, Number 176 (Wednesday, September 11, 2019)]
[Notices]
[Pages 47977-47984]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-19610]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86878; File No. SR-CBOE-2019-050]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Exchange Rules Regarding Routing Services, Including the Hybrid Agency
Liaison System, and Move Those Rules From the Currently Effective
Rulebook to the Shell Rulebook To Be Effective Upon Migration
September 5, 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 23, 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
Exchange filed the proposal as a ``non-controversial'' proposed rule
change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule
19b-4(f)(6) thereunder.\4\ The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend the Exchange's Rules regarding
routing services, including the Hybrid Agency Liaison (``HAL'') system,
and move those Rules from the currently effective Rulebook (``current
Rulebook'') to the
[[Page 47978]]
shell structure for the Exchange's Rulebook that will become effective
upon the migration of the Exchange's trading platform to the same
system used by the Cboe Affiliated Exchanges (as defined below)
(``shell Rulebook''). The text of the proposed rule change is provided
in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
In 2016, the Exchange's parent company, Cboe Global Markets, Inc.
(formerly named CBOE Holdings, Inc.) (``Cboe Global''), which is also
the parent company of Cboe C2 Exchange, Inc. (``C2''), acquired Cboe
EDGA Exchange, Inc. (``EDGA''), Cboe EDGX Exchange, Inc. (``EDGX'' or
``EDGX Options''), Cboe BZX Exchange, Inc. (``BZX'' or ``BZX
Options''), and Cboe BYX Exchange, Inc. (``BYX'' and, together with
Cboe Options, C2, EDGX, EDGA, and BZX, the ``Cboe Affiliated
Exchanges''). The Cboe Affiliated Exchanges are working to align
certain system functionality, retaining only intended differences,
between the Cboe Affiliated Exchanges, in the context of a technology
migration. Cboe Options intends to migrate its trading platform to the
same system used by the Cboe Affiliated Exchanges, which the Exchange
expects to complete on October 7, 2019. In connection with this
technology migration, the Exchange has a shell Rulebook that resides
alongside its current Rulebook, which shell Rulebook will contain the
Rules that will be in place upon completion of the Cboe Options
technology migration.
The Exchange proposes to harmonize its rules in connection with
routing functions on the Exchange to that of the Cboe Affiliated
Exchanges. Specifically, the Exchange proposes to update and amend
current Rule 6.14A, which governs the operation of the HAL system to be
consistent with of the corresponding rule of EDGX Options, Rule 21.18,
which governs the operation of the Step Up Mechanism (``SUM''). The
Exchange also proposes to harmonize Rule 6.6A, Rule 6.14B, and Rule
6.14C with that of its affiliate option exchange, C2, Rule 6.15, as
well as EDGX and BZX Rule(s) 21.9, which provide for order routing
rules of the exchange. The Exchange proposes these amendments to
reflect the routing functions rule language of the Cboe Affiliated
Exchange rules, retaining only slight differences regarding Exchange-
specific language/definitions. In conforming its routing rules to that
of the Cboe Affiliated Exchanges' rules, the Exchange proposes few
substantive changes, namely amending the rules to allow for all Users
\5\ to respond to a SUM (the Exchange proposes to rename HAL as SUM,
and refers to SUM herein) exposure message, to allow a User to opt out
of having its exposed order routed to other exchanges at the conclusion
of a SUM exposure period, to update the scenarios in which a SUM
auction will terminate early (which includes incorporating provisions
that account for All-or-None orders), and, finally, to adopt the order
routing functionality currently in place on the Cboe Affiliated
Exchanges.
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\5\ The term ``User'' means any TPH or Sponsored User who is
authorized to obtain access to the System. See Rule 1.1 in the shell
Rulebook.
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The Exchange also proposes to make non-substantive changes to
simplify, clarify, and generally update its routing rules by
consolidating its routing provisions into a single rule, simplify rule
language, update the rule text to read in plain English, reformat the
paragraph lettering and/or numbering, and update cross-references to
rules not yet in the shell Rulebook but that will be in the shell
Rulebook and implemented upon migration.
Proposed Rule 5.35
Current Rule 6.14A governs the operation of HAL. SUM is the EDGX
Options equivalent of the Exchange's HAL. Both systems allow for orders
not automatically executed by the respective exchange to ``step up'' to
meet the NBBO in order to interact with orders sent to the Exchange.
Both rules govern the current handling of orders eligible for such
automatic handling, which include (i) an order that is marketable
against the Exchange's disseminated quotation (the ``BBO'', as
specifically defined in the Exchange's Rules) while not the NBBO and
(ii) an order that would improve the BBO and that is marketable against
quotations disseminated by other exchanges (the ``ABBO'') that are
participants in the Options Order Protection and Locked/Crossed Plan
(the ``Linkage Plan'').\6\ In anticipation of migration, the Exchange
proposes to move Rule 6.14A to proposed Rule 5.35 (and subsequently
delete Rule 6.14A upon migration) and amend the current provisions
under Rule 6.14A to be consistent with EDGX Option's corresponding Rule
21.18. This includes renaming ``HAL'' to be called ``SUM'', which, as
stated, is a substantially similar system for processing orders not
automatically executed by the respective exchanges. The automatic
handling systems across the affiliated exchanges will function in a
substantively identical manner upon migration, therefore updating HAL
to be called SUM will mitigate any potential investor confusion and
provide for uniform rules regarding the same functionality.
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\6\ The proposed rule deletes an additional eligible order
provision that will no longer apply the rules and functionality on
Cboe Options upon migration because the drill through provision
referenced will mirror that of EDGX Options, which is not SUM
specific.
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Currently on HAL, pursuant to Rule 6.14A(b), only Market-Makers
with an appointment in the relevant option class and Trading Permit
Holders (``TPHs'') acting as agent for orders resting at the top of the
Book in the relevant option series opposite the order submitted to HAL
may submit responses to the exposure message during the exposure period
(unless the Exchange determines, on a class-by-class basis, to allow
all TPHs to submit responses to the exposure message). The proposed
rule change updates this provision to align with the manner in which
SUM responses function on EDGX Options; all Users may submit responses
to the exposure message during the exposure period.\7\ The Exchange
currently allows all TPHs to respond to all classes during the exposure
period, therefore this change does not change or impact the manner in
which the SUM process currently functions, but instead merely removes
the flexibility for the Exchange to allow all TPHs to respond on a
class-by-class basis, as this is the manner in which the Exchange
intends for the
[[Page 47979]]
SUM process to continue to function upon migration.
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\7\ See proposed 5.35(b)(2).
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The Exchange notes that as a result of this proposed change, the
proposed rule also removes: (i) The current rule text which provides
that an order will not be exposed if the Exchange quotation contains
resting orders and does not contain sufficient Market Maker quotation
interest to satisfy the entire order; (ii) the early termination
provision that terminate an exposure period if Market Maker interest
decrements to an amount equal to the size of the exposed order; and
(iii) the current Interpretation and Policy .01 which prohibits the
redistribution of exposure messages to market participants not eligible
to respond to such messages. The proposed rule change removes these
provisions because the Exchange proposes for SUM to not be dependent
only on Market-Maker interest in any way and all Users will be
permitted to respond to all exposure messages.
The proposed rule change also amends the current provision
regarding allocation of exposed orders to allow for a User to opt out
of having the remaining portion of its exposed order routed to other
exchanges following the exposure period.\8\ This is consistent with the
EDGX Options SUM rule and the manner in which Users on EDGX Options may
currently opt out of having their remaining portion of SUM exposed
orders routed away.
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\8\ See proposed Rule 5.35(c)(4).
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The proposed rule change also updates the rule to be consistent
with how EDGX Options SUM process handles an All or None (``AON'')
order,\9\ which is currently an order type available on the Exchange.
Currently (and as proposed), any responses priced at the prevailing
NBBO or better, and any unrelated order or quote on the opposite side
of the market from the exposed order that could trade against the
exposed order at the prevailing NBBO or better, will immediately trade
against the exposed order, and the exposure period will continue. A SUM
(current HAL) exposure period will currently terminate upon the receipt
of a response (or unrelated order or quote) to trade the entire exposed
order at the NBBO or better. Because an AON order cannot partially
execute pursuant to its terms, the proposed rule change makes it
explicit that during the exposure of an AON order, the System will hold
responses priced at or better than the prevailing NBBO (rather than
trade against the exposed AON immediately) until there is sufficient
aggregate size to satisfy the AON order,\10\ and that a SUM exposure
period will terminate upon the receipt of multiple responses with
sufficient aggregate size to satisfy the AON order.\11\ This is the
manner in which the HAL system currently functions, and the proposed
change merely codifies this in the proposed rule. In addition to this,
the proposed rule change provides that if an AON order is exposed and
the Exchange receives an unrelated order or quote that would be
displayed at a price at or better than the NBBO with insufficient size
to satisfy the exposed order, the SUM exposure period terminates and
the exposed order is processed pursuant to the allocation of exposed
orders provision \12\ under the SUM process.\13\ This is consistent
with current HAL functionality, to which an order is eligible for the
process if its price is marketable against the Exchange's disseminated
quotation that is not at the NBBO. Because a SUM auction would not have
begun if the Exchange displayed a contra-side order at the NBBO, the
Exchange believes it is appropriate to terminate the exposure period if
that situation arises in connection with exposed AON orders during the
exposure period.\14\ As stated, this is consistent with the way in
which the current HAL system and SUM on EDGX Options function.
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\9\ Pursuant to Rule 1.1 in shell Rulebook an ``All-or-None'' or
``AON'' order is an order to be executed in its entirety or not at
all. An AON order may be a market or limit order.
\10\ See proposed Rule 5.35(c)(1).
\11\ See proposed Rule 5.35(d).
\12\ See proposed Rule 5.35(c).
\13\ If an AON order is exposed and the Exchange receives an
unrelated AON order with a price at or better than the NBBO with
insufficient size to satisfy the exposed order the exposure period
will continue because the incoming AON order would not be displayed
at a price at or better than the NBBO.
\14\ For example, suppose the NBBO is 1.00 x 1.20 and the Cboe
Options BBO is 1.00 x 1.25, and an AON order to buy 10 at 1.20 is
exposed at 1.20 pursuant to SUM. During the exposure period, the
Exchange receives an order to sell 5 at 1.20. The incoming order
cannot satisfy the size of the exposed AON order, so it would enter
the Cboe Options Book and would cause the Cboe Options BBO to become
1.00 x 1.20. Therefore, upon receipt of that order, the exposure
period terminates and the exposed AON order will be process pursuant
to proposed Rule 5.35(c).
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The Exchange amends the other provisions in connection with early
termination of exposure period to be consistent with the EDGX Option's
SUM rule. The proposed rule change amends these provisions to include
early termination when the exposed order is no longer marketable
against the NBBO or if a resting order on the Exchange is locked or
crossed by another options exchange.\15\ In addition to aligning with
the reasons a SUM auction may currently terminate on EDGX Options, the
Exchange believes that these scenarios are reasonable to terminate the
SUM process because if an order is no longer marketable, then it cannot
be executed through the SUM process and no longer benefit from
exposure, and continuing to expose a resting order resting in a locked
or crossed market may likely presents difficulties with respect to the
handling of the resting order, particularly if an exposed, routable
order should be routed for potential price improvement to another
options exchange that has published a crossing quotation. The proposed
rule change also removes current early termination provisions which
would terminate an exposure period when a same-side order is received
by the Exchange and if the underlying security enters a limit up limit
down state. The Exchange believes because a User will have the ability
to cancel its order after the SUM process is initiated coupled with the
fact that the Exchange will only execute an order that has been exposed
via the SUM process to the extent the order is marketable against the
NBBO (as proposed below) will mitigate any potential concern in
removing these early termination provisions. As stated, this is
consistent with the scenarios for early termination currently on EDGX
Options and the Exchange does not believe that the proposed updates
present any new or novel changes or significantly impact functionality
of the step up process as it will operate in substantially the same
manner as it currently does.
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\15\ See proposed Rule 5.35(d)(1)-(2).
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The Exchange notes other proposed changes such as making explicit
that bulk messages will not be eligible for SUM. Cboe Options intends
to implement bulk message functionality upon migration, therefore now
proposes to reflect this functionality in its proposed SUM rule (as
well as in proposed Rule 5.36 for order routing, described in detail
below).\16\ Bulk messages are the equivalent of the Exchange's current
quoting functionality. Currently, quotes do not route to other
exchanges, and thus are not eligible for HAL. Therefore, the proposed
rule change is consistent with current functionality. EDGX Options Rule
21.18 also states that bulk messages are not eligible for SUM. The
proposed change also includes a few additional details that are
consistent with EDGX Options SUM rule and the manner in which the HAL
process currently functions but are not made explicit in the current
HAL rule. This
[[Page 47980]]
includes making clear that responses are ``cancelled back'' at the end
of the exposure period if unexecuted,\17\ that responses may become
executable based on changes to the prevailing NBBO,\18\ and that the
Exchange will not initiate the SUM process if the NBBO is crossed.\19\
These updates do not alter the manner in which HAL currently functions
but merely make explicit in the rules the operation of the proposed SUM
process.\20\
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\16\ See Rule 5.5(c).
\17\ See proposed Rule 5.35(b)(3).
\18\ See proposed Rule 5.35(c)(3).
\19\ See proposed Rule 5.35(a). The Exchange notes that this is
current EDGX Rule 21.18.02.
\20\ The Exchange also removes Interpretation and Policy .01
which provides that all pronouncements regarding determinations by
the Exchange pursuant to Rule 6.14A and the Interpretations and
Policies thereunder will be announced to Trading Permit Holders via
Regulatory Circular as upon migration all Exchange determinations
under the Rules will automatically be made pursuant to
specifications, Notices, or Regulatory Circulars with appropriate
advanced notice, which are posted on the Exchange's website, or
electronic message. See Rule 1.5 in the shell Rulebook.
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Proposed Rule 5.36
The Exchange proposes to adopt the order routing rule of its
affiliated options exchange, C2 Rule 6.15, under proposed Rule 5.36 in
the shell Rulebook. The Exchange will continue to support orders that
are designated to be routed to the NBBO as well as orders that will
execute only within Cboe Options.
Proposed Rule 5.36(a) states for System securities, the order
routing process is available to Users from 9:30 a.m. until market
close. Users can designate an order as either available or not
available for routing. Orders designated as not available for routing
and bulk messages, which will not be for routing, are processed
pursuant to Rule 5.32 \21\ (which will be the rule governing order and
quote Book processing, display, priority, and execution upon
migration). For an order designated as available for routing, the
System first checks for the Book for available contracts for execution
against the order pursuant to Rule 5.32. Unless otherwise instructed by
the User, the System then designates the order (or unexecuted portion)
as Immediate-or-Cancel (``IOC'') \22\ and routes it to one or more
options exchanges for potential execution, per the User's instructions.
After the System receives responses to the order, to the extent it was
not executed in full through the routing process, the System processes
the order (or unexecuted portion) as follows, depending on parameters
set by the User when the incoming order was originally entered:
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\21\ See Rule 5.32 in the shell Rulebook.
\22\ Pursuant to Rule 1.1 in the shell Rulebook, the terms
``Immediate-or-Cancel'' and ``IOC'' mean, for an order so
designated, a limit order that must execute in whole or in part as
soon as the System receives it; the System cancels and does not post
to the Book an IOC order (or unexecuted portion) not executed
immediately on the Exchange or another options exchange.
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(i) Cancels the order (or unexecuted portion) back to the User;
posts the unfilled balance of the order to the Book, subject to the
Price Adjust process described in proposed Rule 5.32(b), if applicable;
(ii) repeats the process described above by executing against the
Book and/or routing to the other options exchanges until the original,
incoming order is executed in its entirety;
(iii) repeats the process described above by executing against the
Book and/or routing to the other options exchanges until the original,
incoming order is executed in its entirety, or, if not executed in its
entirety and a limit order, posts the unfilled balance of the order on
the Book if the order's limit price is reached; or
(iv) to the extent the System is unable to access a Protected
Quotation and there are no other accessible Protected Quotations at the
NBBO, cancels or rejects the order back to the User, provided, however,
that this provision does not apply to Protected Quotations published by
an options exchange against which the Exchange has declared self-help.
Currently, the Exchange automatically routes intermarket sweep
orders, consistent with the definition in current Rule 6.80(8).\23\
This routing process is functionally equivalent to the current Exchange
routing process, and, as proposed, referred to as SWPA and is
specifically described in proposed Rule 5.36(a)(2)(B), which is a
routing option (and will be the default routing option following
migration, and thus, if no other routing option is specified by a User,
a User's order subject to routing will be handled in the same way it is
today). Following the migration, the Exchange will offer additional
routing options identical to the routing options offered by C2 Rule
6.15, as well as by EDGX Options and BZX Options Rule(s) 21.9. Under
proposed Rule 5.36(a)(2), routing options may be combined with all
available Order Instructions \24\ and Times-in-Force, with the
exception of those whose terms are inconsistent with the terms of a
particular routing option. The System considers the quotations only of
accessible markets. The term ``System routing table'' refers to the
proprietary process for determining the specific options exchanges to
which the System routes orders and the order in which it routes them.
The Exchanges reserves the right to maintain a different System routing
table for different routing options and to modify the System routing
table at any time without notice. These additional routing options are
ROUT, destination specific, and directed ISO:
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\23\ Pursuant to Rule 6.80(8), an ``Intermarket Sweep Order
(``ISO'')'' means a Limit Order for an options series that,
simultaneously with the routing of the ISO, one or more additional
ISOs, as necessary, are routed to execute against the full displayed
size of any Protected Bid, in the case of a limit order to sell, or
any Protected Offer, in the case of a limit order to buy, for the
options series with a price that is 290 superior to the limit price
of the ISO. See also Rule 1.1 in the shell Rulebook. The Exchange
relies on the marking of an order by a User as an ISO order when
handling such order, and thus, it is the entering User's
responsibility, not the Exchange's responsibility, to comply with
the requirements relating to ISOs.
\24\ See Rule 5.6 in shell Rulebook.
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(i) ROUT is a routing option under which the System checks the Book
for available contracts to execute against an order and then sends it
to destinations on the System routing table. A User may select either
Route To Improve (``RTI'') or Route To Fill (``RTF'') for the ROUT
routing option. RTI may route to multiple destinations at a single
price level simultaneously while RTF may route to multiple destinations
and at multiple price levels simultaneously.
(ii) Destination specific is a routing option under which the
System checks the Book for available contracts to execute against an
order and then sends it to a specific away options exchange.
(iii) Directed ISO is a routing option under which the System does
not check the Book for available contracts and sends the order to
another options exchange specified by the User. It is the entering
User's responsibility, not the Exchanges responsibility, to comply with
the requirements relating to Intermarket Sweep Orders.
Proposed Rule 5.36(a)(3) offers two options for Re-Route
instructions, Aggressive Re-Route and Super Aggressive Re-Route, either
of which can be assigned to routable orders:
(i) Pursuant to the Aggressive Re-Route instruction, if the
remaining portion of a routable order has been posted to the Book
pursuant proposed subparagraph (a)(1) (i.e., routing away to options
exchanges), if the order's price is subsequently crossed by the quote
of another accessible options exchange, the System routes the order to
the crossing options exchange if the User has selected the Aggressive
Re-Route instruction.
(ii) Pursuant to the Super Aggressive Re-Route instruction, to the
extent the unfilled balance of a routable order has been posted to the
Book pursuant to
[[Page 47981]]
subparagraph (a)(1), if the order's price is subsequently locked or
crossed by the quote of another accessible options exchange, the System
routes the order to the locking or crossing options exchange if the
User has selected the Super Aggressive Re-Route instruction.
Proposed Rule 5.36(b) states the System does not rank or maintain
in the Book pursuant to Rule 5.32 orders it has routed to other options
exchanges, and therefore those orders are not available to execute
against incoming orders. Once routed by the System, an order becomes
subject to the rules and procedures of the destination options exchange
including, but not limited to, order cancellation. If a routed order
(or unexecuted portion) is subsequently returned to the Exchange, the
order (or unexecuted portion), the order receives a new time stamp
reflected the time the System receives the returned order. Proposed
Rule 5.36(c) states Users whose orders are routed to other options
exchanges must honor trades of those orders executed on other options
exchanges to the same extent they would be required to honor trades of
those orders if they had executed on the Exchange. These provisions are
consistent with the corresponding rules of its affiliated options
exchanges, they are substantively identical to the current rule text
and functionality of C2 Rule 6.15 and also substantively the same as
EDGX Options and BZX Options Rule(s) 21.9.
Proposed Rule 5.36(d) and (f) make explicit certain requirements in
connection with Cboe Trading, which, pursuant to current Exchange
rules,\25\ is an affiliate of the Exchange that provides inbound and
outbound routing services, which currently apply to Cboe Trading today.
Proposed Rule 5.36(d) states that the Exchange will route orders in
options via Cboe Trading, which currently serves as the Outbound Router
of the Exchange. The Outbound Router will route orders in options
listed and open for trading on the Exchange to other options exchanges
pursuant to Exchange Rules solely on behalf of the Exchange. The
Outbound Router is subject to regulation as a facility of the Exchange,
including the requirement to file proposed rule changes under Section
19 of the Exchange Act. Use of Cboe Trading or Routing Services (under
current Rule 6.14B and proposed Rule 5.36(e)) to route orders to other
market centers is optional. Parties that do not desire to use Cboe
Trading or other Routing Services provided by the Exchange must
designate orders as not available for routing. Proposed Rule 5.35(f)
states that in addition to the Rules regarding routing to away options
exchanges, Cboe Trading has, pursuant to Rule 15c3-5 under the Exchange
Act, implemented certain tests designed to mitigate the financial and
regulatory risks associated with providing Trading Permit Holders with
access to away options exchanges. Pursuant to the policies and
procedures developed by Cboe Trading to comply with Rule 15c3-5, if an
order or series of orders are deemed to be erroneous or duplicative,
would cause the entering Trading Permit Holder's credit exposure to
exceed a preset credit threshold, or are noncompliant with applicable
pre-trade regulatory requirements, Cboe Trading will reject the orders
prior to routing and/or seek to cancel any orders that have been
routed. As stated, these provisions are the same as C2 Rule 6.15(d) and
(f) and EDGX Options and BZX Options Rule(s) 21.9(f), and currently
apply to Cboe Trading, therefore the proposed change just makes these
provisions in connection with Cboe Trading explicit as well as
harmonizes its order routing rules with that of its affiliated options
exchanges' routing rules.
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\25\ See Rule 3.11(c), Rule 3.12; and Rule 3.13.
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The proposed rule change moves current Rule 6.14B which governs the
routing services provided by non-affiliated routing brokers, to
proposed Rule 5.36(e) which is consistent with the corresponding rules
of the Exchanges' affiliated options exchanges, C2, EDGX Options, and
BZX Options. The Exchange does not proposed any substantive changes to
the rule. The Exchange deletes current Interpretation and Policy .01
which states that a routing broker is not prohibited from designating a
preferred market-maker at the other exchange to which the order is
being routed, which is consistent with the agreements currently in
place between the Exchange and its routing brokers, which do not allow
for routing broker discretion in connection with order flow. The
Exchange also notes that this proposed change is consistent with the
corresponding order routing rules of the Exchange's affiliated options
exchanges, C2, EDGX Options, and BZX Options.
Finally, the Exchange deletes current Rule 6.6A and current Rule
6.14C because they are duplicative of Exchange Rules and/or routing
broker agreements already in place. Current Rule 6.6A provides for the
Exchange to cancel or release orders as it deems necessary to maintain
fair and orderly markets if a technical or systems issue occurs. These
provisions are already covered under other Exchange Rules: Rule 6.6A(a)
and (b) are already provided for under current Rule 3.12(a)(6) \26\ and
current Rule 6.14B(f) (proposed Rule 5.36(e)(6)); and Rule 6.6A(c) is
already provided for under current Rule 3.12(a)(7)(C). Current Rule
6.14C provides for rules in connection with Routing Service Error
Accounts. The provisions in connection with the Exchange's Error
Account are currently provided for under Rule 3.12(7), which already
requires Cboe Trading, as the Exchange's affiliated outbound router, to
maintain an Error Account, provides the Exchange with the authority to
assign resulting Error Positions to TPHs or have resulting Error
Positions liquidated, and prohibits Cboe Trading from accepting any
positions in its error account from an account of a TPH, or permitting
any TPH to transfer any positions from the TPH's account to Cboe
Trading's error account. The provisions regarding a routing broker's
Error Account are already in place in all contracts between the
Exchange and its routing brokers pursuant to current Rule 6.14B(a) and
(h) (proposed Rule 5.36(e)(1) and (8)). As a result, the proposed rule
change deletes current Rules 6.6A and 6.14C as they are duplicative of
the current Exchange Rules. The Exchange also notes that this proposed
change aligns the Exchange's Rules with that of its affiliated options
exchanges, C2, EDGX Options, and BZX Options.
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\26\ The Exchange notes that the Exchange's discretion to cancel
orders as either it deems necessary to maintain fair and orderly
markets if a technical or systems issue occurs pursuant to Rule
3.12(a)(6) entails its discretion to ``release'' orders being held
awaiting an away exchange execution, that is such orders are
cancelled back to Users if a technical or systems issue occurs at
the Exchange, a routing broker, or another exchange to which an
Exchange order has been routed.
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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.\27\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \28\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to
[[Page 47982]]
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) \29\ requirement that the rules
of an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\27\ 15 U.S.C. 78f(b).
\28\ 15 U.S.C. 78f(b)(5).
\29\ Id.
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The proposed rule changes are generally intended to add or align
certain system functionality currently offered by the Exchange and the
Cboe Affiliated Exchanges in order to provide a consistent technology
offering for the Cboe Affiliated Exchanges. A consistent technology
offering, in turn, will simplify the technology implementation, changes
and maintenance by Users of the Exchange that are also participants on
Cboe Affiliated Exchanges. The proposed rule change does not propose to
implement new or unique functionality that has not been previously
filed with the Commission, found to be consistent with the Act, or is
not available on Cboe Affiliated Exchanges. The Exchange notes that the
proposed rule text is primarily based on EDGX Options Rules, as well as
substantially the same as BZX and C2 Options rules, and is different
only to the extent that it makes non-substantive changes to retain some
Exchange-specific language/definitions, simplify language and make the
rule provisions plain English. The Exchange believes that consistent
rules will simplify the regulatory requirements and increase the
understanding of the Exchange's operations for Trading Permit Holders
that are also participants on the Cboe Affiliated Exchanges. The
proposed rule change seeks to provide greater harmonization between the
rules of the Cboe Affiliated Exchanges, which would result in greater
uniformity and less burdensome and more efficient regulatory
compliance. As such, the proposed rule change would foster cooperation
and coordination with persons engaged in facilitating transactions in
securities and would remove impediments to and perfect the mechanism of
a free and open market and a national market system. The Exchange also
believes that the proposed amendments will contribute to the protection
of investors and the public interest by making the Exchange's rules
easier to understand.
The Exchange believes that the proposed rule change to make the
current HAL process consistent with the EDGX Options SUM process will
serve to remove impediments to and perfect the mechanism of a free and
open market and national market system and facilitate transactions in
securities because the current HAL process is already equivalent to the
EDGX Options SUM process and the proposed rule changes do not raise any
new or significant policy concerns, but instead serve to harmonize
functionality and the rules across the affiliate exchanges so as to
provide market participants with the same product offerings and bolster
collective understanding of the rules upon migration.
In addition to protecting and benefitting market participants by
providing consistent functionality and rules, the proposed change will
continue to allow all Users to submit responses to the exposure message
during the exposure period, which the Exchange already does, which will
remove impediments to and perfect the mechanism of a free and open
national market system in that it will continue to provide all Users
with the opportunity to improve their prices and ``step up'' to meet
the NBBO and interact with exposure messages and allow the market
participant sending an order to the Exchange to increase its chances of
receiving an execution on the preferred venue in which it has chosen to
participate (i.e., Cboe Options), thereby benefitting all market
participants. In addition to this, the proposed rule change that allows
for a User to opt out of having the remaining portion of their exposed
order routed to other exchanges following the exposure period will
remove impediments to and perfect the mechanism of a free and open
national market system by providing Users with additional control
regarding the execution of their orders and by providing them with
consistent opportunities and functionality across the affiliated
exchanges upon migration.
The Exchange also believes the proposed rule change regarding the
handling of AON orders exposed in a SUM auction will protect investors
because it is identical to the handling of AON orders exposed in the
EDGX Options SUM process. Additionally, the proposed rule change will
provide AON orders with execution opportunities when the Exchange is
not at the NBBO in a manner consistent with the current SUM process and
makes it explicit that the exposure period for an AON order will
terminate when there is sufficient aggregate contra-side interest to
satisfy the exposed AON order (except it will not execute any incoming
contra-side interest immediately against the exposed AON order, unless
it has sufficient size which will prevent a partial execution in
conflict with the AON size contingency), which is the manner in which
the current HAL process already functions. This benefits market
participants by providing them with rules that accurately reflect
current functionality (as well as functionality that will be provided
on the Exchange upon migration). The proposed rule change regarding an
early termination of the exposure period of an AON order is consistent
with current reasons that will cause an exposure period to terminate;
it will prevent an exposure period from continuing when new conditions
arise that would have prevented an exposure period from initiating in
the first place. The proposed rule change will remove impediments to
and perfect the mechanism of free and open market and a national market
system, because it ensures an AON order will be handled in a manner
consistent with the current SUM process.
The proposed rule changes to the other provisions in connection
with early termination of exposure period align with the reasons a SUM
auction may currently terminate on EDGX Options and will remove
impediments to and perfect the mechanism of a free and open market and
national market system by terminating an orders that would no longer
benefit from exposure or would likely present order handling
difficulties, which could impact market participants. In addition to
this, because a User will have the ability to cancel its order after
the SUM process is initiated coupled with the fact that the Exchange
will only execute an order that has been exposed via the SUM process to
the extent the order is marketable against the NBBO will mitigate any
potential concern in removing other early termination provisions. The
Exchange believes that the other updates proposed to align the
Exchange's proposed rule with that of the EDGX Options SUM process do
not alter the manner in which HAL currently functions but merely make
explicit in the rules the operation of the proposed SUM process.
The proposed change to adopt C2's order routing rules (which are
also substantially the same as the routing rules on EDGX Options and
BZX Options) will likewise serve to protect and benefit market
participants by providing consistent functionality and rules in
connection with order routing. As stated, the order routing rule of the
Exchange's affiliated options exchanges have previously been filed with
the Commission. Proposed Rule 5.36 will serve to remove impediments to
and perfect the mechanism of a free and open market and national market
system because it will allow Users to route orders in much the same way
in which
[[Page 47983]]
they may already route ISO orders on the Exchange today, and in the
same manner as Users may already route orders on the Exchange's
affiliated options exchanges, C2, EDGX Options, and BZX Options. Under
the proposed rules the System will still process, display and
prioritize orders as it currently does as well as ensure the same price
protections currently in place, thereby protecting investors. The
additional routing options that the proposed rule change offers are the
same routing options already available to Users on the Exchange's
affiliated options exchange, therefore these options do not raise any
new or novel functionality for market participants but ensure that upon
migration market participants across the Cboe Affiliated Exchanges will
have access to the same functionality and product offerings.
The proposed provisions regarding Cboe Trading will benefit market
participants by making explicit certain rules that already apply to
Cboe Trading on the Exchange, as well as serve to harmonize the
Exchange's routing rules with the corresponding rules of C2 and EDGX
Options, as well as BZX Options. The other proposed changes will also
remove impediments to and perfect the mechanism of a free and open
national market system by removing rules that are duplicative of other
Exchange rules that currently provide for the same and are already
effectively provided for in the contracts between the Exchange and its
non-affiliated routing brokers. This, in turn, provides market
participants with up-to-date, streamlined rules with are easy to
understand, and mirror the corresponding rules of C2 and EDGX Options,
as well as BZX Options.
The proposed rule change makes other various non-substantive
changes throughout the rules that will protect investors and benefit
market participants as these changes simplify the rules and use plain
English throughout the rules.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange reiterates that
the proposed rule change is being proposed in the context of a
technology migration of the Cboe Affiliated Exchanges. As stated, the
proposed changes to the rules that reflect functionality that will be
in place come October 7, 2019 provide clear, consistent rules for
market participants upon the completion of migration. The Exchange
believes the proposed rule change will benefit Exchange participants in
that it will provide a consistent technology offering for Users by the
Cboe Affiliated Exchanges.
The Exchange does not believe the proposed rule change will impose
any burden on intramarket competition. The proposed SUM process and
order routing functionality will apply to all Users and order and
quotes submitted by Users in the same manner. Like HAL currently, the
Exchange's proposed SUM is open to all Users. Additionally, all Users
will have the option to route orders to away exchanges, and apply the
different proposed routing instructions, under the proposed order
routing provisions.
The Exchange does not believe that the proposed rules change will
impose any burden on intermarket competitions. As discussed above, the
basis for the proposed rule changes in this filing are the rules of C2
and EDGX Options, as well as substantial similarities to the approved
rules of BZX Options, which have already been filed with the
Commission. The Exchange also notes that market participants on other
exchanges are welcome to become participants on the Exchange if they
determine that this proposed rule change has made Cboe Options a more
attractive or favorable venue.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not:
A. Significantly affect the protection of investors or the public
interest;
B. impose any significant burden on competition; and
C. become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act \30\ and
Rule 19b-4(f)(6) \31\ 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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\30\ 15 U.S.C. 78s(b)(3)(A).
\31\ 17 CFR 240.19b-4(f)(6).
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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
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-2019-050 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-2019-050. 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-2019-050 and
[[Page 47984]]
should be submitted on or before October 2, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-19610 Filed 9-10-19; 8:45 am]
BILLING CODE 8011-01-P