[Federal Register Volume 84, Number 179 (Monday, September 16, 2019)]
[Notices]
[Pages 48653-48663]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-19901]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86916; File No. SR-CBOE-2019-051]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Its Rules Regarding How Complex Orders Are Processed Through the
Automated Improvement Mechanism and To Move Those Rules From the
Currently Effective Rulebook to the 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
September 10, 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 28, 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
and II below, which Items have been prepared by the Exchange. The
Exchange filed the proposal 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 the
Substance of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to amend its Rules regarding how complex orders are processed through
the Automated Improvement Mechanism (``C-AIM'' or ``C-AIM Auction''),
and move those Rules from the currently effective Rulebook (``current
Rulebook'') to the 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
In 2016, the Exchange's parent company, Cboe Global Markets, Inc.
(formerly named CBOE Holdings, Inc.) (``Cboe Global''), which is also
the parent company of Cboe C2 Exchange, Inc. (``C2''), acquired Cboe
EDGA Exchange, Inc. (``EDGA''), Cboe EDGX Exchange, Inc. (``EDGX'' or
``EDGX Options''), Cboe BZX Exchange, Inc. (``BZX'' or ``BZX
Options''), and Cboe BYX Exchange, Inc. (``BYX'' and, together with
Cboe Options, C2, EDGX, EDGA, and BZX, the ``Cboe Affiliated
Exchanges''). The Cboe Affiliated Exchanges are working to align
certain system functionality, retaining only intended differences
between the Cboe Affiliated Exchanges, in the context of a technology
migration. Cboe Options intends to migrate its trading platform to the
same system used by the Cboe Affiliated Exchanges, which the Exchange
expects to complete on October 7, 2019. Cboe Options believes offering
similar functionality to the
[[Page 48654]]
extent practicable will reduce potential confusion for market
participants.
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 add
the provisions of its Rules regarding C-AIM Auctions, as proposed to be
modified in this rule filing, to Rule 5.38 in the shell Rulebook.\5\
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\5\ Proposed Rule 5.38 is substantially the same as EDGX Options
Rule 21.22, except as otherwise described below.
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The proposed rule change moves the provisions regarding AIM
Auctions for complex orders from current Interpretations and Policies
.07 and .08(b) \6\ to proposed Rule 5.38, and provides additional
detail to the Rules, as well as makes certain additional changes.
Current Interpretation and Policy .07 states complex orders may be
executed through an AIM Auction at a net debit or net credit price
provided the eligibility requirements in current Rule 6.74A(a) are
satisfied and the Agency Order is eligible for an AIM Auction
considering its complex order type, order origin code (i.e., non-
broker-dealer public customer, broker-dealers that are not Market-
Makers or specialists on an options exchange, and/or Market-Makers or
specialists on an options exchange), class, and marketability as
determined by the Exchange. Order allocation is the same as in current
Rule 6.74A(b)(3), provided that complex order priority rules applicable
to bids and offers in the individual series legs of a complex order
contained in current Rule 6.53C(d) or Interpretation and Policy .06, as
applicable, will continue to apply. Current Rule 6.74A, Interpretation
and Policy .08(b) states that complex orders may be eligible for AIM
customer-to-customer immediate crosses in the same manner as simple
orders, except the condition that requires the execution price of those
crosses to not be through the NBBO will not apply, and instead the
execution price may not be through the BBO.
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\6\ The Exchange proposed to delete Rule 6.74A, Interpretation
and Policy .07 from current Rulebook in SR-CBOE-2019-045 (filed
August 27, 2019).
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The Exchange believes it will provide more clarity to the Rules to
have a separate rule regarding how AIM Auctions apply to complex orders
(``C-AIM Auctions''), and thus proposes to add Rule 5.38 to the shell
Rulebook. As they are today, complex orders will continue to be
processed and executed in a C-AIM Auction in a substantially similar
manner as simple orders are processed and executed in an AIM Auction
pursuant to Rule 5.37 in the shell Rulebook,\7\ and therefore proposed
Rule 5.38 is substantially similar to Rule 5.37 in the shell
Rulebook.\8\
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\7\ See current Rule 6.74A, Interpretation and Policy .07
(``complex orders may be executed through the [AIM] Auction at a net
debit or net credit price'' with certain exceptions''); see also
Securities Exchange Act Release No. 57610 (April 3, 2008), 73 FR
19535 (April 10, 2008) (SR-CBOE-2008-14) (which approved current
Rule 6.74A, Interpretation and Policy .07 and acknowledged that,
except as set forth in that Interpretation and Policy, all other
aspects of the AIM Auction would continue to apply unchanged).
\8\ The Exchange recently proposed certain amendments to the
simple AIM Auction, many of which the Exchange similar proposes to
apply to C-AIM Auctions. See SR-CBOE-2019-048 (filed August 27,
2019). The Exchange notes it proposed to delete all of current Rule
6.74A in that rule filing, and thus the proposed rule change merely
adds all provisions that are applicable to C-AIM Auctions (as
proposed to be amended) to the shell Rulebook.
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The proposed rule change codifies in the proposed introductory
paragraph \9\ that the Initiating Order may consist of one or more
solicited orders. This accommodates multiple contra-parties and
increases the opportunities for customer orders to be submitted into a
C-AIM Auction with the potential for price improvement, since the
Initiating Order must stop the full size of the Agency Order. This has
no impact on the execution of the Agency Order, which may already trade
against multiple contra-parties depending on the final auction price,
as set forth in proposed paragraph (e) (and current Rule 6.74A(b)(3)
and Interpretation and Policy .07). This proposed change is consistent
with the Exchange's current interpretation of current Rule 6.74A, and
the proposed rule change clarifies this in the Rule.\10\
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\9\ The proposed rule change also adds to the proposed
introductory paragraph that for purposes of proposed Rule 5.38, the
term ``SBBO'' means the synthetic best bid or offer on the Exchange
at the particular point in time applicable to the reference. This is
merely an addition of terminology used throughout the Rule, but has
no impact on functionality.
\10\ See Cboe Options Regulatory Circular RG17-074 (May 19,
2017); see also EDGX Rule 21.19; and NASDAQ ISE, LLC (``ISE'') Rule
723(b); see also Rule 5.37, introductory paragraph in the shell
Rulebook; and EDGX Options Rule 21.22, introductory paragraph.
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The proposed rule change deletes the restriction that a solicited
order cannot be for the account of any Market-Maker appointed in the
class. Current Rule 6.74A, Interpretation and Policy .04, which applies
to AIM Auctions of complex orders), imposes this restriction.\11\ With
respect to the simple markets, appointed Market Makers have a variety
of obligations related to providing liquidity and making competitive
markets in their appointed classes. Therefore, prohibiting Market-
Makers from being solicited in a simple AIM Auction may encourage those
Market-Makers to provide liquidity in that auction to provide liquidity
through responses, as well as quotes on the Book that may have the
opportunity to execute against the Agency Order. Because Market-Makers
have no obligations to provide liquidity to complex markets (and there
is no quoting functionality available in the complex order book
(``COB'')), appointed Market-Makers are on equal footing with all other
market participants with respect to C-AIM Auctions. Permitting Market-
Makers to be solicited provides all market participants with the
opportunity to provide liquidity to execute against Agency Orders in C-
AIM Auctions in the same manner (both through solicitation, responses,
and interest resting on the COB).\12\ EDGX Options Rule 21.22 similar
does not restrict appointed Market-Makers from being solicited to
participate on the contra-side of C-AIM Auctions.
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\11\ This restriction exists for simple AIM Auctions. See Rule
5.37, introductory paragraph in the shell Rulebook.
\12\ As further discussed below, the Exchange will no longer
restrict Users that may submit responses to C-AIM Auctions.
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The proposed introductory paragraph for Rule 5.38 is the same as
the corresponding paragraph for simple AIM (Rule 5.37 in the shell
Rulebook), except [sic] introductory paragraph for simple AIM Auctions
does not permit the Initiating Order to be comprised of orders for the
account of an appointed Market-Maker, and it refers to NBBO rather than
SBBO. There is no NBBO for complex orders, as complex orders may be
executed without consideration of any prices for the complex strategy
that might be available on other exchanges trading the same complex
strategy.\13\
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\13\ See current Rule 6.53C (which the Exchange intends to move
to Rule 5.33 in the shell Rulebook). Additionally, executions of
legs of complex orders are exceptions to the prohibition of trade-
throughs. See Rule 6.81(b)(8) in the current Rulebook (Rule
6.57(b)(8) in the shell Rulebook).
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Proposed Rule 5.38(a) sets forth eligibility requirements for a C-
AIM Auction. Proposed Rule 5.38(a)(5) states the Trading Permit Holder
that electronically submits an order into an AIM Auction (the
``Initiating TPH'') may not designate an Agency Order or Initiating
Order as Post Only. A Post Only complex order is a complex order the
System ranks and executes pursuant to Rule 5.33 in the shell
Rulebook,\14\
[[Page 48655]]
subjects to the Price Adjust process pursuant to Rule 5.32 in the shell
Rulebook, or cancels or rejects (including if it is not subject to the
Price Adjust process and locks or crosses a Protected Quotation of
another exchange), as applicable (in accordance with User
instructions), except the order or quote may not remove liquidity from
the Book or route away to another Exchange. The Exchange does not
currently offer Post Only order functionality, but will as of the
technology migration.\15\ The Exchange believes it is appropriate to
not permit the Agency or Initiating Order to be designated as Post
Only, as the purpose of a Post Only order is to not execute upon entry
and instead rest in the COB, while the purpose of a C-AIM Auction is to
receive an execution following the Auction but prior to entering the
COB. Proposed Rule 5.38(a)(6) states the Initiating TPH may only submit
an Agency Order to a C-AIM Auction after the COB opens. This is
consistent with current functionality, as executions cannot occur prior
to the opening of trading. The proposed rule change clarifies this in
the Rule.
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\14\ The Exchange intends to move the provisions regarding
electronic processing of complex orders from Rule 6.53C of the
current Rulebook to Rule 5.33 in the shell Rulebook. The Exchange
does not currently offer Post Only functionality, but will following
the technology migration. See Rule 5.6(c) in the shell Rulebook
(which describes Post Only functionality for simple orders). The
Exchange intends to adopt a similar definition of Post Only for
complex orders, which will be virtually identical to the definition
of Post Only complex orders in the rules of Cboe Affiliated
Exchanges. See C2 Rule 6.13(b)(5) and EDGX Options Rule 21.20(b)
(which define a Post Only complex order as a complex order the
System ranks and executes pursuant to C2 Rule 6.1e [sic] or EDGX
Options Rule 21.20, respectively, or cancels or rejects, as
applicable (in accordance with the User's instructions), except the
order may not remove liquidity from the COB or the Simple Book. The
System cancels or rejects a Post Only market complex order unless it
is subject to each exchange's drill-through protection.
\15\ See Cboe Options Rule 5.6(c) in the shell Rulebook; see
also Securities Exchange Act Release No. 86173 (June 20, 2019), 84
FR 30267 (June 26, 2019) (SR-CBOE-2019-027) (which filing added the
Post Only order instruction to the shell Rulebook).
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The proposed rule change moves the various other C-AIM Auction
eligibility requirements to proposed paragraph (a) and makes
nonsubstantive changes:
The requirement that an Agency Order be in a class of
options the Exchange designates as eligible for C-AIM Auctions moves
from current Interpretation and Policy .07 to proposed subparagraph
(a)(1).\16\
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\16\ The proposed rule change deletes the provisions that the
Agency Order be an order type, have a Capacity (currently referred
to as origin code), or meet marketability criteria determined by the
Exchange, as the current and proposed rule explicitly state any
applicable eligibility parameters. Additionally, the Exchange will
announce all determinations it may make with respect to a C-AIM
Auction pursuant to Rule 1.5 in the shell Rulebook, and therefore
current Interpretation and Policy .05 (and other provisions
regarding how the Exchange will announce these determinations) is no
longer necessary.
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The requirement that the Initiating TPH mark an Agency
Order for AIM processing moves from current subparagraph (b)(1)(A) to
proposed subparagraph (a)(2).
The provision that there is no minimum size for Agency
Orders moves from current Interpretation and Policy .03 to proposed
subparagraph (a)(3). Additionally, the requirement that the Initiating
Order be for the same size as the Agency Order moves from current
subparagraphs (a)(2) and (a)(3) to proposed subparagraph (a)(3).
The provision regarding the minimum increment for the
Agency Order and Initiating Order price moves from current subparagraph
(a)(3) to proposed subparagraph (a)(4). The proposed rule change makes
no changes to the permissible minimum increments for C-AIM Auctions and
merely moves it to a new provision in the shell Rulebook.
The proposed rule change also explicitly states that all of the
eligibility requirements in proposed paragraph (a) must be met for a C-
AIM Auction to be initiated, and that the System rejects or cancels
both an Agency Order and Initiating Order submitted to an AIM Auction
that do not meet the conditions in proposed paragraph (a).
Proposed Rule 5.38(a) is the same as the corresponding paragraph
for simple AIM (Rule 5.37(a)), except the proposed rule change does not
provide that an Initiating TPH may not submit an Agency Order if the
NBBO is crossed (unless the Agency Order is an AIM ISO or Sweep and
AIM). As noted above, there is no NBBO for complex orders, and the legs
of complex orders are not subject to the restriction on NBBO trade-
throughs. Additionally, the proposed rule change references the opening
of the complex order book (``COB'') rather than the market open, as the
opening of the COB is when complex orders may begin trading.
Proposed Rule 5.38(b) sets forth the requirements for the stop
price of the Agency Order. It states the Initiating Order must stop the
entire Agency Order at a price that satisfies the following:
If the Agency Order is to buy (sell) and (a) the
applicable side of the BBO on any component of the complex strategy
represents a Priority Customer order on the Simple Book, the stop price
must be at least one minimum increment better than the SBB (SBO); or
(b) the applicable side of the BBO on each component of the complex
strategy represents a non-Priority Customer order or quote on the
Simple Book, the stop price must be at or better than the SBB (SBO).
This ensures the execution price of the Agency Order will improve the
SBBO if there is a Priority Customer order in any of the legs on the
Simple Book. The proposed rule change protects Priority Customers in
any of the component legs of the Agency Order in the Simple Book. By
permitting a Priority Customer Agency Order to trade at the SBBO if
there is a resting non-Priority Customer order in the Book, the
proposed rule change also protects Priority Customer orders submitted
into a C-AIM Auction. The Exchange believes the proposed rule change is
consistent with general customer priority principles.\17\
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\17\ General principles of customer priority ensure the
execution price of complex orders will not be executed at prices
inferior to the SBBO or at a price equal to the SBBO when there is a
Priority Customer at the BBO for any component.
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If the Agency Order is to buy (sell) and a buy (sell)
complex order rests on the COB, the stop price must be at least one
minimum increment better than the bid (offer) of the resting complex
order, unless the Agency Order is a Priority Customer order and the
resting order is a non-Priority Customer order, in which case the stop
price must be at or better than the bid (offer) of the resting complex
order. This ensures the execution price of the Agency Order will
improve the price of any resting Priority Customer complex orders on
the COB, and that the execution price of a Priority Customer Agency
Order will not be inferior to the price of any resting non-Priority
Customer complex orders on the COB.\18\ Current Rule 6.74A(b)(3)(I)
states if the final auction price locks a Priority Customer order in
the Book (which would be the COB for purposes of complex orders) on the
same side of the market as the Agency Order, then, unless there is
sufficient size in the Auction responses to execute both the Agency
Order and the booked Priority Customer order (in which case they will
both execute at the final auction price), the Agency Order will execute
against the auction responses at one minimum increment worse than the
final auction price against the auction participants that submitted the
final auction price and any balance will trade against the priority
customer order in
[[Page 48656]]
the book at the order's limit price. The proposed rule change protects
Priority Customers on the same side of the COB as the current rule
does, except it does so by applying a check at the initiation of a C-
AIM Auction rather than at the conclusion of a C-AIM Auction. By
permitting a Priority Customer Agency Order to trade at the same price
as a resting non-Priority Customer order, the proposed rule change also
protects Priority Customer orders submitted into a C-AIM Auction.
Additionally, application of this check at the initiation of a C-AIM
Auction may result in the Agency Order executing at a better price,
since the stop price must improve any same-side complex orders (with
the exception of a Priority Customer Agency Order and a resting non-
Priority Customer order described above), as under the current Rule,
the Agency Order may execute at one minimum increment worse. The
proposed rule change is consistent with general customer priority
principles.
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\18\ This corresponds to the same-side simple order check for
AIM, which requires the Agency Order to improve the price of a
resting Priority Customer order on the Simple Book, or a non-
Priority Customer order or quote on the Simple Book unless the
Agency Order is for a Priority Customer and the resting order is not
a Priority Customer, in which case the stop price must be at or
better than the Exchange best bid (offer). See Rule 5.37(b)(2) in
the shell Rulebook.
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If the Agency Order is to buy (sell) and (a) the BBO of
any component of the complex strategy represents a Priority Customer
order on the Simple Book, the stop price must be at least one minimum
increment better than the SBO (SBB), or (b) the BBO of each component
of the complex strategy represents a non-Priority Customer order on the
Simple Book, the stop price must be at or better than the SBO (SBB).
This ensures the execution price of the Agency Order will improve the
price of the opposite side of the SBBO if there is a Priority Customer
order on any leg, and not be through the opposite side of the SBBO.
While the stop price may cross the opposite side best-priced complex
order resting on the opposite side of the COB, as noted below, any
complex interest at a better price than the stop price will trade ahead
of the Initiating Order. Pursuant to proposed paragraph (e), any
contra-side interest available at better prices than the stop price at
the conclusion of a C-AIM Auction will execute against the Agency Order
ahead of the Initiating Order. Therefore, the Agency Order will execute
at the best prices available at the conclusion of the C-AIM Auction,
even if the stop price was inferior to those prices. Simple AIM
Auctions may similarly start at prices inferior to the NBBO for the
series in certain instances.\19\
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\19\ Simple AIM has no price checks for orders on the opposite
side of the Agency Order. See Rule 5.37(b) in the shell Rulebook.
The proposed rule change adopts price checks for simple orders that
constitute the SBBO on the opposite side of the Agency Order to
ensure that the Agency Order does not execute at a price through the
opposite side SBBO to protect orders (including Priority Customer
orders) resting in the Simple Book. While there is no complex AIM
sweep or complex sweep and AIM order for C-AIM, because complex
orders do not route (and there is no applicable NBBO), permitting
the stop price to cross the opposite side of the COB is consistent
with those order types in simple AIM, which permit the stop price to
be inferior to the Initial NBBO. See Rule 5.37(b)(3) in the shell
Rulebook. The execution at the conclusion of a C-AIM Auction will
essentially ``sweep'' better-priced contra-side complex interest
that is available on the Exchange.
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The Initiating TPH must specify (a) a single price at
which it seeks to execute the Agency Order against the Initiating Order
(a ``single-price submission''), including whether it elects to have
last priority in allocation (as described below), or (b) an initial
stop price and instruction to automatically match the price and size of
all C-AIM responses and other trading interest (``auto-match'') up to a
designated limit price or at all prices that improve the stop price.
The proposed rule change moves this provision from current subparagraph
(b)(1)(A) to proposed subparagraph (b)(3). It is also the same as the
corresponding simple AIM provision.\20\
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\20\ See Rule 5.37(b)(4) in the shell Rulebook.
The proposed rule change also explicitly states that all of the
conditions in proposed paragraph (b) must be met for a C-AIM Auction to
be initiated, and that the System rejects or cancels both an Agency
Order and Initiating Order submitted to a C-AIM Auction that do not
meet the conditions in proposed paragraph (b).
Proposed paragraph (c) describes the C-AIM Auction process.
Currently, only one C-AIM Auction may be ongoing at any given time in a
series, and C-AIM Auctions in the same series may not queue or overlap
in any manner.\21\ The Exchange proposes to permit concurrent C-AIM
Auctions in the same complex strategies. Pursuant to proposed Rule
5.38(c)(1), with respect to Agency Orders for which the smallest leg is
less than 50 standard option contracts (or 500 mini-option contracts),
only one C-AIM Auction may be ongoing at any given time in a complex
strategy, and C-AIM Auctions in the same complex strategy may not queue
or overlap in any manner. Therefore, the proposed rule change has no
impact on these smaller Agency Orders. One or more C-AIM Auctions in
the same complex strategy for Agency Orders for which the smallest leg
is 50 standard option contracts (or 500 mini-option contracts) or more
may occur at the same time. C-AIM Auctions in different complex
strategies may be ongoing at any given time, even if the complex
strategies have overlapping components. A C-AIM Auction may be ongoing
at the same time as an AIM Auction in any component of the complex
strategy.
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\21\ See current Rule 6.74A(b).
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To the extent there is more than one C-AIM Auction in a complex
strategy underway at a time, the C-AIM Auctions conclude sequentially
based on the exact time each C-AIM Auction commenced, unless terminated
early pursuant to proposed Rule 5.38(d). In the event there are
multiple C-AIM Auctions underway that are each terminated early
pursuant to proposed paragraph (d), the System processes the C-AIM
Auctions sequentially based on the exact time each C-AIM Auction
commenced. If the System receives a simple order that causes an AIM and
C-AIM (or multiple AIM and/or C-AIM) Auctions to conclude pursuant to
proposed Rules 5.37(d) and 5.38(d), the System first processes AIM
Auctions (in price-time priority) and then processes C-AIM Auctions (in
price-time priority). At the time each C-AIM Auction concludes, the
System allocates the Agency Order pursuant to proposed paragraph (e)
and takes into account all C-AIM Auction responses and unrelated orders
and quotes in place at the exact time of conclusion.\22\
\22\ See proposed Rule 5.38(c)(1), which is the same as the
corresponding proposed paragraph for simple AIM (see Rule 5.37(c)(1)
in the shell Rulebook), except the proposed change adds how the
System will handle ongoing auctions that include an overlapping
component (whether that component is the subject of an ongoing
simple AIM Auction or part of a complex strategy for which a
different C-AIM Auction is ongoing) and adds that whether concurrent
C-AIM Auctions (subject to the same minimum size restriction as
simple orders) in the same complex strategy may occur is based on
the size of the smallest leg of the Agency Order.
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The Exchange believes it is appropriate to permit concurrent C-AIM
Auctions in the same complex strategy (for Agency Orders for which the
smallest leg is for 50 or more contracts). Different complex strategies
are essentially different products, as orders in those strategies
cannot interact, just as orders in different series or classes cannot
interact. Similarly, while it is possible for a complex order to leg
into the Simple Book, a complex order may only execute against simple
orders if there is interest in each component in the appropriate ratio
for the complex strategy. A simple order in one component of a complex
strategy cannot on its own interact with a complex order in that
complex strategy. Therefore, the Exchange believes it is appropriate to
permit concurrent AIM and C-AIM Auctions that share a component. As
proposed, C-AIM Auctions will ensure that Agency Orders execute at
prices that protect
[[Page 48657]]
Priority Customer orders in the Simple Book and that are not inferior
to the SBBO at the conclusion of the C-AIM Auction, even when there are
concurrent simple and complex auctions occurring. The proposed rule
change sets forth how any AIM auctions with overlapping components will
conclude if terminated due to the same event.
The Exchange notes it is currently possible for auctions in a
component leg and a complex strategy containing that component (such as
a simple AIM Auction in the component and a complex order auction
(``COA'') in the complex strategy that contains that component) to
occur concurrently, and at the end of each auction, it is possible for
interest resting in the Simple Book to trade against the complex order
subject to the COA. While these auctions may be occurring at the same
time, they will be processed in the order in which they are terminated
(similar to how the System will process auctions as proposed above). In
other words, suppose today there is an AIM Auction in a series and a
COA in a complex strategy for which one of the components is the same
series both occurring, which began and will terminate in that order,
and each of which last 100 milliseconds. While it is possible for both
auctions to terminate nearly simultaneously, the System will still
process them in the order in which they terminate. When the AIM Auction
terminates, the System will process it in accordance with current Rule
6.74A (Rule 5.37 in the shell Rulebook), and the auctioned order may
trade against any resting interest (in addition to the contra-side
order and responses submitted to that AIM Auction, which may only trade
against the order auctioned in that AIM current Rule 6.74A (Rule 5.37
in the shell Rulebook)). The System will then process the COA Auction
when it terminates, and the auctioned order may trade against any
resting interest, including any simple interest that did not execute
against the AIM order (in addition to the contra-side order and
responses submitted to that COA Auction, which may only trade against
the order auctioned in that COA), pursuant to current Rule 6.53C.\23\
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\23\ The Exchange will similarly permit concurrent simple AIM
Auctions upon the technology migration. See Rule 5.37(c)(1) in the
shell Rulebook.
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The proposed rule change moves and makes nonsubstantive changes to
other provisions regarding the C-AIM Auction process to proposed
paragraph (c):
The proposed rule change moves the provision regarding the
C-AIM Auction notification message (currently called a request for
responses (``RFR'')) from current subparagraph (b)(1)(B) to proposed
subparagraph (c)(2). The proposed provision specifies that the message
will detail the side, size, Auction ID, and complex strategy of the
Agency Order to all Users that elect to receive C-AIM Auction
notification messages. This is consistent with the current RFR that is
disseminated. The current rule states that the RFR states the side and
size of the Agency Order; the proposed rule change adds details
regarding other information that is included in the notification
messages. The Exchange believes not certain information about the
Agency Order (such as the stop price and Capacity) encourages market
participants to submit responses with their best possible prices, which
may result in more price improvement for the Agency Order. The proposed
rule change also adds that C-AIM Auction notification messages are not
included in OPRA, which is also consistent with current functionality.
The proposed rule change moves the provision regarding the
length of the C-AIM Auction period from current subparagraph (b)(1)(C)
to proposed subparagraph (c)(3). The proposed rule change makes no
changes to the current range of permitted lengths of C-AIM Auction
periods.
The proposed rule change moves the provision that
prohibits an Initiating TPH from modifying or cancelling an Agency
Order or Initiating Order after submission to a C-AIM Auction from
current subparagraph (b)(1)(A) to proposed subparagraph (c)(4).
The proposed rule change also moves all provisions regarding C-AIM
Auction responses into proposed subparagraph (c)(5), as well as makes
certain changes described below, as well as nonsubstantive changes:
The proposed rule change moves the provision regarding
which market participants may respond to C-AIM Auctions from current
subparagraphs (b)(1)(D) and (E) to proposed subparagraph (c)(5).
Currently, only Market-Makers with an appointment in the applicable
class and Trading Permit Holder (``TPHs'') representing orders as agent
at the top of the Book may respond to C-AIM Auctions.\24\ The Exchange
proposes to permit all Users (other than the Initiating TPH (the
response cannot have the same EFID as the Initiating Order)) \25\ to
respond to C-AIM Auctions. By permitting additional participants to
submit responses to C-AIM Auctions, the Exchange believes this may
provide the opportunity for additional liquidity in these auctions,
which could lead to additional price improvement opportunities. EDGX
Options similarly permits all Users to respond to C-AIM Auctions.\26\
---------------------------------------------------------------------------
\24\ See current Rule 6.74A(b)(1)(D) and (E) (pursuant to
current Interpretation and Policy .07, these provisions apply to AIM
Auctions of complex orders); and Rule 5.37(c)(5) in the shell
Rulebook; see also supra note 7 and Cboe Options Regulatory Circular
RG17-145 (October 17, 2017) (which Regulatory Circular states that
the restrictions on which market participants may respond to AIM
Auctions applies to both auctions of simple orders and complex
orders).
\25\ As further discussed below, the Initiating Order may
receive an entitlement of 40% or 50% of the Agency Order. The
Exchange believes it is appropriate to not permit the Initiating TPH
to also submit responses in order to try to trade against a larger
percentage of the Agency Order. This is consistent with proposed
allocation rules, pursuant to which the Initiating Order may only
receive more than 40% or 50%, as applicable, of the Agency Order if
there are remaining contracts after all other interest has executed.
See proposed Rule 5.38(e)(1).
\26\ See EDGX Options Rule 21.22(c)(5).
---------------------------------------------------------------------------
The proposed rule change moves provisions regarding what
must be specified in the responses (including price, size, side, and
Auction ID) from current subparagraphs (b)(1)(D) and (E) to proposed
subparagraph (c)(5).
The current rule specifies that responses must specify
prices and sizes; the proposed rule change adds responses must also
specify side and an Auction ID. The proposed rule change adds that a C-
AIM response may only participate in the C-AIM Auction with the Auction
ID specified in the response. This is consistent with current
functionality.\27\ The Exchange proposes to include this language given
the above proposal that permits concurrent C-AIM Auctions in the same
series for larger Agency Orders.
---------------------------------------------------------------------------
\27\ Current subparagraph (b)(3)(K) permits an unexecuted
balance of a response to an AIM Auction of a complex order after the
Agency Order has been executed and the balance to trade against any
unrelated order(s) that cause the AIM Auction of a complex order to
conclude. The proposed rule change deletes that provision given the
proposed rule change to permit concurrent auctions, as described
above, and thus the requirement that responses may only trade with
an Agency Order in the C-AIM Auction into which the C-AIM response
was submitted. If a responder wishes to execute interest against any
orders that caused a C-AIM Auction to conclude and that are resting
in the Book, that responder may separately submit an order to the
Exchange.
---------------------------------------------------------------------------
The proposed rule change moves the provision regarding the
permissible minimum increment for C-AIM responses from current
subparagraph (b)(1)(G) to proposed subparagraph (c)(5)(A), but makes no
substantive changes.
Proposed subparagraph (c)(5)(B) states that C-AIM buy
(sell) responses are capped at the following prices that exist at the
conclusion of the C-AIM Auction: (i) the better of the SBO (SBB)
[[Page 48658]]
or the offer (bid) of a resting complex order at the top of the COB; or
(ii) one minimum increment lower (higher) than the better of the SBO
(SBB) or the offer (bid) of a resting complex order at the top of the
COB if the BBO of any component of the complex strategy or the resting
complex order, respectively, is a Priority Customer order. The System
executes these C-AIM responses, if possible, at the most aggressive
permissible price not outside the SBBO at the conclusion of the C-AIM
Auction or price of the resting complex order. This will ensure the
execution price is at or better than the SBBO or prices of resting
complex orders at the end of the C-AIM Auction, which the stop price
must be at or better than (and must be better than if represented by a
Priority Customer order) as set forth in proposed Rule 5.38(e).\28\
This is similar to current subparagraph (b)(1)(E), which does not
permit responses to cross the opposite side of the Exchange's
disseminated quote that exists at the conclusion of the Auction.\29\
---------------------------------------------------------------------------
\28\ The proposed rule change also does not specify that C-AIM
responses may not be designated as FOK (as Rule 5.37 in the shell
Rulebook does). The Exchange does intend to permit complex orders to
be designated as FOK, and thus does not need to specify for complex
responses that Time-in-Force will not be available.
\29\ This is also consistent with a similar requirement for
responses to a simple AIM Auction, except the proposed rule change
references the SBBO and orders on the COB rather than the BBO and
prices of orders on the Simple Book. See Rule 5.37(c)(5)(B) in the
shell Rulebook.
---------------------------------------------------------------------------
Proposed subparagraph (c)(5)(C) states a User may submit
multiple C-AIM responses at the same or multiple prices to a C-AIM
Auction. This is consistent with current functionality. Current Rule
6.74A contains no restriction on how many responses a User may submit;
the proposed rule change merely makes this explicit in the Rules. The
proposed rule change also states for purposes of a C-AIM Auction, the
System aggregates all of a User's complex orders on the COB and C-AIM
responses for the same EFID at the same price. This (combined with the
proposed size cap) will prevent a User from submitting multiple orders
or responses at the same price to obtain a larger pro-rata share of the
Agency Order.\30\
---------------------------------------------------------------------------
\30\ This is similar to the corresponding provision for simple
AIM Auctions, except that provision also aggregates quotes (there is
not quoting functionality available for complex orders), so it is
not included in the C-AIM provision. See Rule 5.37(c)(5)(C) in the
shell Rulebook.
---------------------------------------------------------------------------
Proposed subparagraph (c)(5)(D) states the System caps the
size of a C-AIM response, or the aggregate size of a User's complex
orders on the COB and C-AIM responses for the same EFID at the same
price, at the size of the Agency Order (i.e., the System ignores size
in excess of the size of the Agency Order when processing the C-AIM
Auction). This is consistent with current subparagraph (b)(1)(H),
except the proposed rule change caps the aggregate size of a User's
interest at the same price, rather than the size of an individual
response. The Exchange believes this is reasonable to prevent a User
from submitting an order, quote, or response with an extremely large
size in order to obtain a larger pro-rata share of the Agency
Order.\31\
---------------------------------------------------------------------------
\31\ This is similar to the corresponding provision for simple
AIM Auctions, except that provision also aggregates quotes (there is
not quoting functionality available for complex orders), so it is
not included in the C-AIM provision. See Rule 5.37(c)(5)(D) in the
shell Rulebook.
---------------------------------------------------------------------------
Proposed subparagraph (c)(5)(E) states C-AIM responses
must be on the opposite side of the market as the Agency Order, and the
System rejects an AIM response on the same side of the market as the
Agency Order. This is consistent with current functionality, and the
proposed rule change merely adds this detail to the rules.
Additionally, the Exchange believes this is reasonable given that the
purpose of a C-AIM response is to trade against the Agency Order in the
C-AIM Auction into which the C-AIM response was submitted.\32\
---------------------------------------------------------------------------
\32\ This is similar to the corresponding provision for simple
AIM Auctions. See Rule 5.37(c)(5)(E) in the shell Rulebook.
---------------------------------------------------------------------------
Proposed subparagraph (c)(5)(F) states C-AIM responses may
be designated with the match trade prevention (``MTP'') modifier of MTP
Cancel Newest, but no other MTP modifiers, and the System rejects a C-
AIM response with any other MTP modifier.\33\ An incoming order marked
with MTP Cancel Newest will not execute against opposite side interest
marked with any MTP modifier originating from the same Unique
Identifier, and the incoming order (the C-AIM response in this case)
will be cancelled back to the originating User. If an Agency Order and
response have the same Unique Identifier and an MTP modifier, the
System will cancel the response and permit the Agency Order to execute
against other interest. This is consistent with the prohibition on the
Agency Order being cancelled after it is submitted.\34\
---------------------------------------------------------------------------
\33\ See Rule 5.6(c) in the shell Rulebook for definitions of
the various types of MTP Modifiers that will be available on the
Exchange as of the System migration. The Exchange does not currently
have any equivalent to an MTP modifier that may be applied to orders
or auction responses.
\34\ This is similar to the corresponding provision for simple
AIM Auctions. See Rule 5.37(c)(5)(F) in the shell Rulebook.
---------------------------------------------------------------------------
Proposed subparagraph (c)(5)(G) states C-AIM responses may
not be designated as immediate-or-cancel (``IOC'') and the System
rejects a C-AIM response designated as IOC.\35\ This is consistent with
the purpose of a C-AIM response, which is to potentially execute
against an Agency Order at the conclusion of a C-AIM Auction (and thus
not immediately upon entry, as required by the time-in-force of
IOC).\36\
---------------------------------------------------------------------------
\35\ See Rule 5.6(d) in the shell Rulebook. Current C-AIM
response functionality does not permit a User to apply this order
instruction to C-AIM responses.
\36\ This is similar to the corresponding provision for simple
AIM Auctions, except that provision also prohibits Users from
designated an AIM response as fill-or-kill (``FOK''), which time-in-
force will not be available for complex orders, and thus the
proposed rule change does not include it in the C-AIM Rule. See Rule
5.37(c)(5)(G) in the shell Rulebook.
---------------------------------------------------------------------------
The provision that states C-AIM responses are not visible
to C-AIM Auction participants or disseminated to OPRA moves from
current subparagraph (b)(1)(F) to proposed subparagraph (c)(5)(H).\37\
---------------------------------------------------------------------------
\37\ This is similar to the corresponding provision for simple
AIM Auctions. See Rule 5.37(c)(5)(H) in the shell Rulebook.
---------------------------------------------------------------------------
The provision that states C-AIM responses may be cancelled
moves from current subparagraph (b)(1)(I) to proposed subparagraph
(c)(5)(I). The proposed rule change also clarifies that C-AIM responses
may be modified (which is consistent with current functionality and
merely clarified in the rules).\38\
---------------------------------------------------------------------------
\38\ This is similar to the corresponding provision for simple
AIM Auctions. See Rule 5.37(c)(5)(I) in the shell Rulebook. Proposed
subparagraph (e)(6) states the System will cancel or reject any
unexecuted C-AIM responses (or unexecuted portions) at the
conclusion of the C-AIM Auction.
---------------------------------------------------------------------------
Pursuant to proposed Rule 5.38(d), a C-AIM Auction concludes at the
earliest to occur of the following times:
The end of the C-AIM Auction period;
upon receipt by the System of an unrelated non-Priority
Customer complex order on the same side as the Agency Order that would
post to the COB at a price better than the stop price;
upon receipt by the System of an unrelated Priority
Customer complex order on the same side as the Agency Order that would
post to the COB at a price equal to or better than the stop price;
upon receipt by the System of an unrelated non-Priority
Customer order or quote that would post to the Simple Book and cause
the SBBO on the same side as the Agency Order to be better than the
stop price;
upon receipt by the System of a Priority Customer order in
any
[[Page 48659]]
component of the complex strategy that would post to the Simple Book
and cause the SBBO on the same side as the Agency Order to be equal to
or better than the stop price;
upon receipt by the System of a simple non-Priority
Customer order that would cause the SBBO on the opposite side of the
Agency Order to be better than the stop price, or a Priority Customer
order that would cause the SBBO on the opposite side of the Agency
Order to be equal to or better than the stop price;
upon receipt by the System of an order that would case the
SBBO to be a price not permissible under the Limit Up-Limit Down Plan
or Regulation SHO, provided, however, that in such instance, the C-AIM
Auction concludes without execution;
the market close; and
any time the Exchange halts trading in the complex
strategy or any component of the complex strategy, provided, however,
that in such instance, the C-AIM Auction concludes without execution.
The proposed events that would cause a C-AIM Auction to conclude early
are similar to those that would cause a simple AIM Auction to conclude
early (as is currently the case),\39\ except they are based on the
entry of simple or complex orders that impact the SBBO or the best
available prices on the same side of the COB rather than the BBO.
---------------------------------------------------------------------------
\39\ See Rule 5.37(d) in the shell Rulebook.
---------------------------------------------------------------------------
The Exchange proposes to conclude the C-AIM Auction in response to
the incoming orders described above, as they would cause the SBBO or
the best-priced complex order on the same side of the market as the
Agency Order to be better priced than the stop price, or cause the stop
price to be the same price as the SBBO with a Priority Customer order
on the BBO for a component or a Priority Customer complex order on the
COB. Similarly, the incoming orders described above would cause the
opposite side SBBO to be at or better than the stop price. These events
would create circumstances under which a C-AIM Auction would not have
been initiated, and therefore, the Exchange believes it is appropriate
to conclude a C-AIM Auction when they exist.
Additionally, the proposed rule change would conclude a C-AIM
Auction in response to an incoming order that would cause the SBBO to
be at a price not permissible under the Limit Up-Limit Down Plan or
Regulation SHO,\40\ and would conclude the C-AIM Auction without
execution. This will ensure that the stock leg of a stock-option order
submitted into a C-AIM Auction does not execute at a price not
permissible under that plan or regulation. This is consistent with
current C-AIM functionality to ensure that stock legs do not trade at
prices not permissible under the Limit Up-Limit Down Plan or Regulation
SHO, and the proposed rule change codifies this in the Rules.
---------------------------------------------------------------------------
\40\ See current Rule 6.53C, Interpretation and Policy .06(f).
---------------------------------------------------------------------------
Proposed Rule 5.38(d)(2) states if the System receives an unrelated
market or marketable limit complex order (against the SBBO or the best
price of a complex order resting in the COB), including a Post Only
complex order, on the opposite side of the market during a C-AIM
Auction, the C-AIM Auction does not end early, and the System executes
the order against interest outside the C-AIM Auction or posts the
complex order to the COB. If contracts remain from the unrelated
complex order at the time the C-AIM Auction ends, they may be allocated
for execution against the Agency Order pursuant to proposed Rule
5.38(e). Because these orders may have the opportunity to trade against
the Agency Order following the conclusion of the C-AIM Auction, which
execution must still be at or better than the SBBO and the best-priced
complex orders on the COB, the Exchange does not believe it is
necessary to cause a C-AIM Auction to conclude early in the event the
Exchange receives such orders. This will provide more time for
potential price improvement, and the unrelated complex order will have
the opportunity to trade against the Agency Order in the same manner as
all other contra-side interest.\41\
---------------------------------------------------------------------------
\41\ This is similar to the corresponding provision for simple
AIM Auctions. See Rule 5.37(d)(2) in the shell Rulebook.
---------------------------------------------------------------------------
At the conclusion of a C-AIM Auction, the System executes the
Agency Order against the Initiating Order or contra-side complex
interest in the same manner as it does today (and similar to the manner
in which it executes a simple Agency Order).\42\ The Agency Order will
execute at the best price(s), to the price at which the balance of the
Agency Order can be fully executed (the ``final auction price''). Any
execution prices must be at or between the SBBO and the best prices of
any complex orders resting on each side of the COB at the conclusion of
the C-AIM Auction. This is consistent with executions following a C-AIM
Auction today, which must be consistent with complex order priority
rules.\43\ The proposed allocation of complex interest to an Agency
Order at the conclusion of a C-AIM Auction is similar to the allocation
of simple interest to an Agency Order at the conclusion of a simple AIM
Auction, except the Exchange does not propose to make Priority Orders
available in C-AIM, and does not offer complex reserve orders so there
would be no displayed Reserve Quantity available on the COB for
execution.\44\
---------------------------------------------------------------------------
\42\ See proposed Rule 5.38(e).
\43\ See current Rule 6.74A, Interpretation and Policy .08; see
also current Rule 6.53C(d) and Interpretation and Policy .06.
\44\ See Rule 5.37(e) in the shell Rulebook.
---------------------------------------------------------------------------
Unlike today, the Agency Order will only execute against the
Initiating Order, C-AIM responses, and complex orders resting in the
COB, and will not leg into the Simple Book, at the conclusion of a C-
AIM Auction. As proposed, the execution prices for an Agency Order will
always be better than the SBBO existing at the conclusion of the C-AIM
Auction if it includes a Priority Customer order on any leg, and thus
is consistent with general customer priority principles with respect to
complex orders, pursuant to which complex orders may only trade against
complex interest at prices that improve the BBO of any component that
is represented by a Priority Customer order.\45\
---------------------------------------------------------------------------
\45\ See proposed Rule 5.38(e)(5).
---------------------------------------------------------------------------
The Simple Book and the COB are separate, and orders on each do not
interact unless a complex order legs into the Simple Book. As a result,
the System is not able to calculate the aggregate size of complex
auction responses and complex orders on the COB and the size of simple
orders in the legs that comprise the complex strategy at each potential
execution price (as executions may occur at multiple prices) prior to
execution of an order following an auction for complex orders. The
current priority following a C-AIM Auction provides that the System
will first execute the complex order against all interest in the Simple
Book, and then against interest in the COB.\46\ If the Exchange were to
permit legging into the Simple Book following a C-AIM Auction in
accordance with the complex order allocation that will be in place
following the technology migration,\47\ the System would first look
[[Page 48660]]
to determine whether there are Priority Customer orders resting in the
Simple Book at the final auction price (and in the applicable ratio).
If there are, the System would execute the complex order against those
simple orders. Following that execution, the System would then look
back at C-AIM responses and complex orders resting in the COB to
determine whether there is interest against which the order can
execute. If there is, the System would execute the remaining portion of
the complex order against that complex contra-side interest. Finally,
if there is any size left, the System would look back at the Simple
Book to determine whether any orders in the legs are able to trade
against any remaining contracts in the complex order. If there is, the
System would execute the remaining portion of the complex order again
against orders in the Simple Book. Because of this process, prior to
execution against any Priority Customer simple orders at a single price
level, the System would not know the aggregate interest available on
both the Simple Book and COB to execute against the auctioned order at
that price level.
---------------------------------------------------------------------------
\46\ See current Rule 6.74A, Interpretation and Policy .08; see
also current Rule 6.53C(d).
\47\ As part of the Cboe Affiliated Exchanges' efforts to align
certain system functionality, the Exchange intends to amend and move
complex order rules from current Rule 6.53C in the current Rulebook
to Rule 5.33 in the shell Rulebook, which rule would be
substantively the same as EDGX Rule 21.20. Proposed Rule 5.38(e)(5)
explicitly states that execution following a C-AIM Auction for a
complex Agency Order will be subject to the complex order price
restrictions and priority in Rule 5.33(f)(2). Pursuant to EDGX Rule
21.20(f)(2) (the Exchange intends to adopt an identical provision),
the System will not execute a complex order at a net price (i) that
would cause any component of the complex strategy to be executed at
a price of zero; (ii) worse than the SBBO or equal to the SBBO when
there is a Priority Customer Order at the SBBO, except AON complex
orders may only execute at prices better than the SBBO; (iii) that
would cause any component of the complex strategy to be executed at
a price worse than the individual component prices on the Simple
Book; (iv) worse than the price that would be available if the
complex order Legged into the Simple Book; or (v) that would cause
any component of the complex strategy to be executed at a price
ahead of a Priority Customer Order on the Simple Book without
improving the BBO of at least one component of the complex strategy.
The proposed execution provisions for C-AIM Auctions are consistent
with this priority.
---------------------------------------------------------------------------
The amount of aggregate interest available to execute against the
Agency Order is relevant in a C-AIM Auction with respect to the
allocation of contracts against the Agency Order and other interest at
each price level, and with respect to determining the final price level
at which the Agency Order will execute. For example, when auto-match is
selected, because the System will not be able to determine the
aggregate size of contra-side interest (including simple and complex)
at that price level, it would not be able to determine how many
contracts of the Agency Order should execute against the Initiating
Order (which should equal the aggregate size of that contra-side
interest). Additionally, because the System will not be able to
determine the aggregate size of contra-side interest (including simple
and complex) at the stop price, it would not be able to determine the
applicable percentage of the Agency Order that should execute against
the Initiating Order.
The Exchange notes there would be significant technical
complexities associated with reprogramming priority within the System
to permit Agency Orders to leg into the Simple Book following a C-AIM
Auction and allocate the Agency Order in a manner consistent with
standard priority principles and crossing auctions, while making the
most crossing functionality available to TPHs. The proposed rule change
will ensure the Agency Order executes in accordance with the C-AIM
allocation principles (which are consistent with AIM allocation
principles), which provide Priority Customers with priority over the
Initiating Order (and other contra-side interest) but also provide for
the Initiating Order to execute against a certain portion of the Agency
Order, as well as provide Initiating TPHs with flexibility to submit
single-price submissions or auto-match at multiple price levels. The
Exchange believes providing this functionality will encourage TPHs to
submit complex orders into C-AIM Auctions and provide customer orders
with opportunities for price improvement. It will also ensure orders
(including Priority Customer orders) on the Simple Book are protected
in accordance with standard complex order priority principles, as an
Agency Order will only be permitted to execute at prices that do not
trade at the SBBO existing at the conclusion of the C-AIM Auction if it
includes a Priority Customer order on any leg, and that do not trade
through the SBBO existing at the conclusion of the C-AIM Auction.
As noted above, the stop price of the Agency Order must be better
than the same and opposite side of the SBBO if there is a Priority
Customer order at the BBO in any component of the complex strategy.
Additionally, the stop price must be better than the price of any
Priority Customer order resting at the top of the COB on the same side
as the Agency Order. Further, a C-AIM Auction will conclude upon
receipt of an unrelated Priority Customer order in any component of the
complex strategy that would post to the Simple Book and cause the SBBO
on either side of the Agency Order to be equal to or better than the
stop price, or upon the receipt of an unrelated Priority Customer
complex order on the same side as the Agency Order that post to the COB
with a price equal to or better than the stop price. Additionally, any
execution prices at the conclusion of the C-AIM Auction will be subject
to the standard complex order priority rules in Rule 5.33 in the shell
Rulebook,\48\ which ensures an Agency Order must execute at a price
that improves the SBBO if there is a Priority Customer order at the BBO
in any leg.\49\ Therefore, the proposed rule change protects Priority
Customer orders in the Simple Book even though Agency Orders may not
leg into the Simple Book.
---------------------------------------------------------------------------
\48\ See id.
\49\ If there was a Priority Customer order resting at the BBO
in any leg of a complex strategy in the Simple Book, and a complex
order was submitted to the Exchange (outside of a C-AIM Auction)
with a price one minimum increment better than the SBBO, that
complex order would not be able to execute against interest in the
leg markets (including the Priority Customer order).
---------------------------------------------------------------------------
Proposed Rule 5.38(f) regarding Customer-to-Customer C-AIM
Immediate crosses is consistent with current functionality, and merely
adds detail regarding the current price restrictions applicable to
these executions.\50\
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\50\ See current Rule 6.74A, Interpretation and Policy .08(b).
The Exchange notes, pursuant to current Rule 6.74A, Interpretation
and Policy .08(b), it has not designated any class in which complex
orders are eligible for AIM customer-to-customer immediate crosses.
Following the technology migration, the Exchange intends to make
customer-to-customer immediate crosses for complex orders available
in any class in which the Exchange designates as eligible for C-AIM
Auctions pursuant to proposed Rule 5.38(a).
---------------------------------------------------------------------------
Proposed Rule 5.38, Interpretations and Policies .01 through .03
are the same as current Rule 6.74A, Interpretations and Policies .01,
.02, and .08, which currently apply to AIM Auctions for complex
orders.\51\
---------------------------------------------------------------------------
\51\ These provisions are also virtually identical to the ones
applicable to simple AIM Auctions. See Rule 5.37, Interpretations
and Policies .01 through .03 in the shell Rulebook.
---------------------------------------------------------------------------
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.\52\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \53\ 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,
[[Page 48661]]
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) \54\ requirement that the rules of an exchange not be designed
to permit unfair discrimination between customers, issuers, brokers, or
dealers.
---------------------------------------------------------------------------
\52\ 15 U.S.C. 78f(b).
\53\ 15 U.S.C. 78f(b)(5).
\54\ Id.
---------------------------------------------------------------------------
The proposed rule change is generally intended to align certain
system functionality currently offered by Cboe Options to the
Exchange's System 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. This will provide Users with greater
harmonization of price improvement auction mechanisms available among
the Cboe Affiliated Exchanges.
The Exchange's C-AIM will function in a substantially similar
manner following the technology migration as it does today. The
proposed rule change clarifies in the Rules that the Initiating Order
may be comprised of multiple contra-party orders will benefit
investors. As noted above, this is consistent with current
functionality, and the proposed rule change merely adds this detail to
the rule, which additional transparency will benefit investors.
Permitting the Initiating Order to be comprised of multiple contra-
party orders may increase the opportunity for customers to have orders
participate in a C-AIM auction. As a result, this may increase
opportunities for price improvement, because this will increase the
liquidity available for the Initiating Order, which is consistent with
the purpose of C-AIM Auctions. The Exchange believes that this is
beneficial to participants because allowing multiple contra-parties
should foster competition for filling the Initiating Order and thereby
result in potentially better prices, as opposed to only allowing one
contra-party and, thereby requiring that contra-party to do a larger
size order which could result in a worse price for the trade.
The proposed rule change to prohibit Initiating TPHs from
designating an Agency Order or Initiating Order as Post Only is
appropriate, as the purpose of a Post Only order is to not execute upon
entry and instead rest in the Book, while the purpose of a C-AIM
Auction is to receive an execution following the Auction but prior to
entering the Book.
The proposed rule change to require the stop price to be at least
one minimum increment better than the best-priced complex order in the
COB, unless the Agency Order is a Priority Customer order and the
resting order is not a Priority Customer, in which case the stop price
must be at or better than the price of the complex order will protect
investors. It will protect Priority Customer orders on the same side of
the COB, as the current rule does, except it does so by applying a
check at the initiation of a C-AIM Auction rather than at the
conclusion of the Auction. By permitting a Priority Customer Agency
Order to trade at the same price as a resting non-Priority Customer
order, the proposed rule change also protects Priority Customer orders
submitted into a C-AIM Auction. Additionally, application of this check
at the initiation of a C-AIM Auction may result in the Agency Order
executing at a better price, since the stop price must improve any
same-side orders (with the exception of a Priority Customer Agency
Order and a resting non-Priority Customer order described above), as
under the current Rule, the Agency Order may execute at one minimum
increment worse. The proposed rule change is consistent with general
customer priority principles.
As noted above, the proposed rule change will allow C-AIM Auctions
for which the smallest leg is for 50 standard option contracts (or 500
mini-option contracts) or more to occur concurrently with other C-AIM
Auctions. Although C-AIM Auctions for larger Agency Orders will be
allowed to overlap, the Exchange does not believe that this raises any
issues that are not addressed by the proposed rule change. For example,
although overlapping, each C-AIM Auction will be started in a sequence
and with a time that will determine its processing. Thus, even if there
are two C-AIM Auctions that commence and conclude, at nearly the same
time, each C-AIM Auction will have a distinct conclusion at which time
the Auction will be allocated. In turn, when the first C-AIM Auction
concludes, unrelated orders that then exist will be considered for
participation in the Auction. If unrelated orders are fully executed in
such C-AIM Auction, then there will be no unrelated orders for
consideration when the subsequent Auction is processed (unless new
unrelated order interest has arrived). If instead there is remaining
unrelated order interest after the first C-AIM Auction has been
allocated, then such unrelated order interest will be considered for
allocation when the subsequent Auction is processed. As another
example, each C-AIM response is required to specifically identify the
Auction for which it is targeted and if not fully executed will be
cancelled back at the conclusion of the Auction. Thus, C-AIM responses
will be specifically considered only in the specified Auction.
The proposed rule change to allow multiple auctions to overlap for
Agency Orders of 50 standard option contracts (or 500 mini-option
contracts) or more is consistent with functionality already in place on
other exchanges.\55\ Different complex strategies are essentially
different products--orders in different strategies cannot interact,
just as orders in different classes or series cannot interact.
Therefore, the Exchange believes concurrent C-AIM Auctions in different
complex strategies is appropriate. Additionally, while it is possible
for a complex order to leg into the Simple Book, a complex order may
only execute against simple orders if there is interest in each
component in the ratio of the complex strategy. A simple order in one
component of a complex strategy cannot on its own interact with a
complex order in that complex strategy. Therefore, the Exchange
believes it is appropriate to permit concurrent C-AIM Auctions in the
same component. As proposed, C-AIM Auctions will ensure that Agency
Orders execute at prices that protect Priority Customer orders in the
Simple Book and that are not inferior to the SBBO, even when there are
concurrent Auctions occurring. The proposed rule change sets forth how
any Auctions with overlapping complex strategies or overlapping
components will conclude if terminated due to the same event. The Rules
do not currently prevent a COA in a complex strategy from occurring at
the same time as an AIM in one of the components of the complex
strategy. Therefore, the Exchange believes it is similarly reasonable
to permit multiple C-AIM in a complex strategy to occur at the same
time as an AIM in one of the components of the complex strategy. The
Exchange believes this new functionality may lead to an increase in
Exchange volume and should allow the Exchange to better compete against
other markets that permit overlapping
[[Page 48662]]
price improvement auctions, while providing an opportunity for price
improvement for Agency Orders and assuring that Priority Customers on
the simple Book and COB are protected.
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\55\ See, e.g., EDGX Rule 21.22(c)(1); see also, e.g. Nasdaq ISE
LLC (``ISE'') Rules 716(d) and 723, Interpretation and Policy .04;
and Boston Options Exchange LLC (``BOX'') Rule 7270 and BOX IM-7150-
3.
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The proposed rule change to permit all Users to respond to C-AIM
Auctions will benefit investors. Permitting all Users to submit
responses to C-AIM Auctions, rather than appointed Market-Makers and
TPHs representing orders as agent at the top of the Book or COB, may
result in more Users having the opportunity to participate in
executions at the conclusion of C-AIM Auctions. Additionally, it may
increase liquidity in C-AIM Auctions, which may lead to more
opportunities to [sic] price improvement. The Exchange believes the
proposed rule change will remove impediments to and perfect the
mechanism of a free and open market and a national market system,
because other exchanges permit all market participants to respond to
similar price improvement auctions.\56\
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\56\ See, e.g., EDGX Options Rule 21.22(c)(5).
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The proposed rule changes regarding permissible designations on
responses are reasonable and promote a fair and orderly market, because
they are consistent with the general auction functionality. The
proposed rule change that prohibits Users from designating a C-AIM
Auction response with an MTP Modifier other than MTP Cancel Newest is
consistent with the prohibition on the Agency Order being cancelled
after it is submitted. Additionally, the proposed rule change that
prohibits Users from designating a response as IOC is reasonable,
because it consistent with the purpose of an AIM response, which is to
potentially execute against an Agency Order at the conclusion of a C-
AIM Auction (and thus not immediately upon entry, as required by the
time-in-force of IOC).
The proposed events that will conclude a C-AIM Auction are
reasonable and promote a fair and orderly market and national market
system, because they will ensure that executions at the conclusion of
an Auction occur at permissible prices (such as not outside the SBBO
(and not at the SBBO if there is a Priority Customer order in any
component on the Simple Book) and not at the same price as a Priority
Customer order on the COB). The proposed rule change will also benefit
investors by providing clarity regarding what will cause a C-AIM
Auction to conclude. These events would create circumstances under
which a C-AIM Auction would not have been permitted to start, or that
would cause the auction price no longer be consistent with the
permissible prices at which executions at the conclusion of an Auction
may occur. Thus the Exchange believes it is appropriate to conclude a
C-AIM Auction if those circumstances occur. The Exchange will no longer
conclude a C-AIM Auction early due to the receipt of an opposite side
complex order other than one proposed instance. The Exchange believes
this promotes just and equitable principles of trade, because these
orders may have the opportunity to trade against the Agency Order
following the conclusion of the Auction, which execution must still be
at or better than the SBBO, as well as prices of complex orders in the
COB. The Exchange believes this will protect investors, because it will
provide more time for price improvement, and the unrelated order will
have the opportunity to trade against the Agency Order in the same
manner as all other contra-side complex interest.
The Exchange believes the proposed execution of Agency Orders are
reasonable and promote a fair and orderly market and national market
system, because best-priced contra-side interest executes against the
Agency Order first, and Priority Customer complex orders will have
first priority at each price level, followed by other contra-side
complex interest. The proposed rule change does not adopt Priority
Order status for C-AIM, which is only available in simple AIM for
classes the Exchange designates.
In a separate rule filing, the Exchange intends to adopt complex
order allocation rules consistent with those in EDGX Options Rule 21.20
as part of its efforts harmonize rules and functionality across the
Cboe Affiliated Exchanges. Pursuant to that rule, if an order is able
to leg into the Simple Book, the System would first execute an order
against Priority Customer orders in the Simple Book, then against any
complex order interest in the COB (or auction responses), and last
against any other simple interest in the Simple Book (with executions
against the Simple Book occurring in the applicable ratio). This would
occur at each price at which the complex order may execute. Requiring
the System to make these determinations by going ``back and forth''
between the Simple Book and the COB at multiple price levels would be
more complicated after a C-AIM Auction. The System must determine the
aggregate amount of interest available at each execution price level
before executing any portion of the Agency Order to determine the final
auction price and how to allocate the Agency Order against contra-side
interest at the conclusion of a C-AIM Auction. This is necessary
because the System must determine at each price level the aggregate
non-Priority Customer interest to calculate any auto-match amounts, and
to determine the aggregate number of contracts remaining in the Agency
Order at the final auction price to calculate the allocation percentage
for the Initiating Order.
There would be significant technical complexities associated with
reprogramming priority within the System to permit Agency Orders to leg
into the Simple Book following a C-AIM Auction and allocate the Agency
Order in a manner consistent with standard priority principles and
crossing auctions, while making the most crossing functionality
available to TPHs. As discussed above, the Exchange believes the
proposed rule change protects Priority Customer orders on the Simple
Book, because executions following a C-AIM Auction are subject to the
general complex order priority\57\ that will apply to executions of all
complex orders on the Exchange. It ensures an Agency Order will only
execute at prices better than the SBBO existing at the conclusion of
the C-AIM Auction if there is a Priority Customer order at the BBO on
any leg, and at prices equal to or better than the SBBO existing at the
conclusion of the C-AIM Auction if there is no Priority Customer order
at the BBO on any leg. The proposed allocation will also ensure the
Agency Order does not trade at the same price as a Priority Customer
complex order resting on the COB or through the best-priced complex
orders on the COB, and will protect investors by providing Priority
Customer complex orders with priority at each price level.
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\57\ See proposed Rule 5.38(e)(5) and supra note 47.
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Given the infrequency with which complex orders currently leg into
the Simple Book, including at the conclusion of C-AIM Auctions for
complex orders, the Exchange believes it is in the best interest of
investors to not implement additional technical complexities given the
expected minimal impact, if any, that not permitting Agency Orders to
leg into the Simple Book following a C-AIM Auction would have on
execution opportunities for orders in the Simple Book.\58\
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\58\ The Exchange notes the complex order crossing auctions of
other options exchanges do not leg agency orders into the simple
book at the conclusion of the auction as long as there is price
improvement over the equivalent of the SBBO for that exchange. See,
e.g., EDGX Options Rule 21.22(e); and NYSE American, LLC (``Amex'')
Rule 971.2NY(c)(4).
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[[Page 48663]]
The Exchange believes the proposed rule changes that add detail to
the Rules, which are consistent with current functionality, will remove
impediments to and perfect the mechanism of a free and open market and
protect investors, as these changes provide transparency in the Rules
regarding C-AIM Auctions. Additionally, the proposed rule change aligns
rule language with corresponding provisions in EDGX Options Rule 21.22.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe the proposed rule change to amend the C-AIM Auction will impose
any burden on intramarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as the proposed
changes to the C-AIM Auction will apply to all orders submitted to an
Auction in the same manner. C-AIM Auctions will continue to be
voluntary for TPHs to use, and are available to all TPHs. The Exchange
does not believe the proposed rule change will impose any burden on
intermarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act, because the proposed changes
are substantially the same as another options exchange's rules.\59\ The
general framework and primary features of the Exchange's current C-AIM
Auction is not changing, and will continue to protect orders, including
Priority Customer orders, resting in the Book and the COB.
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\59\ See EDGX Options Rule 21.22; see also Amex Rule
971.2NY(c)(4).
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The Exchange does not believe the proposed rule change to permit
all Users to respond to C-AIM Auctions will impose any burden on
intramarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act, because it will permits more
types of market participants (i.e., all Users) to submit responses to
C-AIM Auctions, rather than just appointed Market-Makers and TPHs
acting as agent for orders at the top of the Book or COB. This may
result in more Users having the opportunity to participate in
executions at the conclusion of C-AIM Auctions. The Exchange does not
believe the proposed rule change will impose any burden on intermarket
competition that is not necessary or appropriate in furtherance of the
purposes of the Act, because it may increase liquidity in C-AIM
Auctions, which may lead to more opportunities to price improvement.
Additionally, other exchanges permit all market participants to respond
to similar price improvement auctions.\60\
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\60\ See, e.g., EDGX Options Rule 21.19.
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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
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 \61\ and
Rule 19b-4(f)(6) \62\ thereunder.\63\ 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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\61\ 15 U.S.C. 78s(b)(3)(A).
\62\ 17 CFR 240.19b-4(f)(6).
\63\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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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-2019-051 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-2019-051. 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 such 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-2019-051, and should be submitted
on or before October 7, 2019.
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\64\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\64\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-19901 Filed 9-13-19; 8:45 am]
BILLING CODE 8011-01-P