[Federal Register Volume 84, Number 194 (Monday, October 7, 2019)]
[Notices]
[Pages 53525-53534]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21725]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87192; File No. SR-CBOE-2019-063]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change Relating
to the Solicitation Auction Mechanism (``SAM'' or ``SAM Auction'')
October 1, 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 September 24, 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 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 the
Substance of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to amend the Solicitation Auction Mechanism (``SAM'' or ``SAM
Auction''). The text of the proposed rule change is provided in Exhibit
5.
[[Page 53526]]
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 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
delete Rule 6.74B in the current Rulebook and add the provisions
regarding SAM Auctions for simple orders, as proposed to be modified in
this rule filing, to Rule 5.39 in the shell Rulebook.\5\
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\5\ Current Rule 6.74B, Interpretation and Policy .01 permits
complex orders to be executed through a SAM Auction. The Exchange
intends to adopt a separate rule regarding the execution of complex
orders in SAM Auctions in a separate rule filing.
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The proposed rule change moves the introductory paragraph of
current Rule 6.74B to the introductory paragraph of proposed Rule 5.39
in the shell Rulebook and adds to the introductory paragraph \6\ of
Rule 5.39 that the Solicited Order may consist of one or more solicited
orders.\7\ This accommodates multiple contra-parties and increases the
opportunities for customer orders to be submitted into a SAM Auction
with the potential for price improvement, since the Solicited 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). The Exchange notes that with regard to order
entry, the first order submitted into the system is marked as the
initiating/agency side and the second order is marked as the contra-
side. Additionally, the Solicited Order will always be entered as a
single order, even if that order consists of multiple contra-parties
who are allocated their portion of the trade in a post-trade
allocation.\8\
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\6\ The proposed rule change also adds to the proposed
introductory paragraph that for purposes of proposed Rule 5.39, the
term ``NBBO'' means the national best bid or offer at the particular
point in time applicable to the reference, and the term ``Initial
NBBO'' means the national best bid or national best offer at the
time a SAM Auction is initiated. This is merely an addition of
terminology used throughout the Rule, but has no impact on
functionality.
\7\ The Solicited Order cannot have a Capacity F for the same
executing firm ID (``EFID'') as the Agency Order or for the account
of any Market-Maker with an appointment in the applicable class on
the Exchange. See current Rule 6.74B, Interpretation and Policy .03.
Cboe Options Rule 6.74B does not contain a similar provision, but
enforces the requirement that the contra-side order be a
solicitation rather than a facilitation through surveillance. The
proposed rule change adds this functionality, which will help with
the enforcement of this requirement, in addition to surveillance.
The Agency Order and Solicited Order cannot both be for the accounts
of a customer. Current Rule 6.74B does not contain a similar
prohibition. However, the Exchange believes it is appropriate for
such customer-to-customer crosses to be submitted to an AIM Auction
pursuant to Rule 5.37 in the shell Rulebook, as that rule contains a
provision for Customer-to-Customer Immediate AIM Crosses.
\8\ The Exchange notes that while other exchange rules do not
specify whether the contra-side order in a solicitation auction
mechanism may consist of multiple orders, the contra-side order for
Qualified Contingent Cross Orders (see Rule 6.53 of the current
Rulebook and Rule 5.6(c) of the shell Rulebook), which similarly
have a minimum quantity requirement and are fully crossed against an
Solicited Order that must be for a minimum number of contracts, may
consist of multiple contra-side orders. However, Nasdaq ISE, LLC
(``ISE'') Regulatory Information Circular 2014-013 states that the
contra-side order submitted into a crossing mechanism (including the
ISE solicited order mechanism) may consist of one or more parties.
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Proposed Rule 5.39(a) lists the SAM Auction eligibility
requirements: \9\
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\9\ With respect to the existing SAM Auction eligibility
requirements that the proposed rule change retains but moves from
Rule 6.74B in the current Rulebook to Rule 5.39 in the shell
Rulebook, the proposed rule change makes nonsubstantive changes,
including to make the rule provision more plain English, to simplify
the provisions, to delete any redundant language, and to conform
language to corresponding rules of applicable Cboe Affiliated
Exchanges. Unless otherwise specified in this rule filing, the
proposed rule change makes no substantive changes to these
provisions.
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The proposed rule change moves the requirement that the
Agency Order must be in any class of options the Exchange designates as
eligible for SAM Auctions from current Rule 6.74B(a)(1) to proposed
Rule 5.39(a)(1).
The proposed rule change moves the requirement that the
Initiating TPH mark an Agency Order for SAM Auction processing from
current Rule 6.74B(b)(1)(A) to proposed Rule 5.39(a)(2).
The proposed rule change moves the requirement that the
Agency Order must be for at least the minimum size designated by the
Exchange (which may not be less than 500 standard option contracts or
5,000 mini-option contracts) from current Rule 6.74B(a)(1) to proposed
Rule 5.39(a)(3). Proposed Rule 5.39(a)(3) also states the Solicited
Order must be for (or must total, if the Solicited Order is comprised
of multiple solicited orders) the same size as the Agency Order. While
not explicitly stated in current Rule 6.74B, this proposed provision
clarifies current functionality and is consistent with the current
Rules.\10\
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\10\ See current Rule 6.74B(a)(2) (which requires the Agency
Order to be stopped with a solicited order, and that those orders be
all-or-none (``AON'')); and (b)(2)(A) (which provides the Agency
Order will be executed against the solicited order (in full per the
introductory paragraph of (b)(2)).
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The proposed rule change deletes the requirement that the
Initiating TPH must designate each of the Agency Order and Solicited
Order as AON from current Rule 6.74B(a)(2). The Exchange's new system
has been designed to automatically handle any orders submitted into a
SAM Auction (using the appropriate messaging) as all-or-none, so the
Initiating TPH will no longer be required to add any specific AON
designations to the Agency Order or Solicited Order.
[[Page 53527]]
The proposed rule change moves the requirement that the
price of the Agency Order and the Solicited Order must be in an
increment the Exchange determines on a class basis, which may be no
smaller than $0.01 from current Rule 6.74B(a)(3) to proposed Rule
5.39(a)(4). The proposed rule change makes no changes to the
permissible minimum increments in SAM Auctions.
Proposed Rule 5.39(a)(5) states the Initiating TPH may not
designate an Agency Order or Solicited Order as Post Only. A Post Only
order is an order the System ranks and executes pursuant to proposed
Rule 5.32, subjects to the Price Adjust process pursuant to Rule 5.32,
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.\11\ The
Exchange believes it is appropriate to not permit the Agency or
Solicited 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 Book,
while the purpose of a SAM Auction is to receive an execution following
the Auction but prior to entering the Book.
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\11\ See Cboe Options Rule 5.6(c) in the shell Rulebook.
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Proposed Rule 5.39(a)(6) states an Initiating TPH may only
submit an Agency Order to a SAM Auction after the market open. 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.
Proposed Rule 5.39(a)(7) states an Initiating TPH may not
submit an Agency Order if the NBBO is crossed (unless the Agency Order
is a SAM Intermarket Sweep Order (``SAM ISO'') (see discussion below)).
This is consistent with current functionality and ISO orders, as well
as linkage rules, and the proposed rule change clarifies this in the
Rule. The Exchange believes it is appropriate to not permit a SAM
Auction to be initiated if the NBBO is crossed, as a crossed NBBO may
indicate price uncertainty within the market. The Exchange believes
this may prevent executions at potentially erroneous prices.
The proposed rule change also explicitly states that all of the
eligibility requirements in proposed paragraph (a) must be met for a
SAM Auction to be initiated, and that the System rejects or cancels
both an Agency Order and Solicited Order submitted to a SAM Auction
that do not meet the conditions in proposed paragraph (a). This is
consistent with current functionality and the concept of eligibility
requirements, and merely adds this detail the Rules.
Proposed Rule 5.39(b) lists the requirements related to the price
at which the Solicited Order must stop the Agency Order: \12\
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\12\ With respect to the existing SAM Auction eligibility
requirements that the proposed rule change retains but moves from
Rule 6.74B in the current Rulebook to Rule 5.39 in the shell
Rulebook, the proposed rule change makes nonsubstantive changes,
including to make the rule provision more plain English, to simplify
the provisions, to delete any redundant language, and to conform
language to corresponding rules of applicable Cboe Affiliated
Exchanges. Unless otherwise specified in this rule filing, the
proposed rule change makes no substantive changes to these
provisions.
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The proposed rule change moves the requirement that the
stop price for a buy (sell) Agency Order must be at or better than the
then-current national best offer (``NBO'') (national best bid
(``NBB'')) from current Rule 6.74B(a)(2) and (b)(1)(A) to proposed Rule
5.39(b)(1). The current rule also requires the stop price to be at or
better than the same side NBBO. While the proposed rule change does not
impose that restriction, it requires the execution price to be at or
better than the Initial NBBO, and thus it has the same ultimate effect.
Proposed rule 5.39(b)(2) states if the Agency Order is to
buy (sell), the stop price must be at least one minimum increment
better than the Exchange best bid (offer) (``BBO''), 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 Exchange best bid (offer). Current Rule 6.74B is silent
regarding whether the stop price must be at or better than the same-
side Exchange best bid or offer; however, the execution price must be
at or better than the Exchange best bid or offer, and the proposed stop
price requirement is consistent with the provision, which merely
applies this protection at the initiation of the SAM Auction. The
Exchange believes this condition protects orders on the same side as
the Agency Order resting on the Book, including Priority Customer
orders. By permitting a Priority Customer Agency Order to be entered at
the same price as a resting non-Priority Customer order, the proposed
rule change also protects Priority Customer orders submitted into a SAM
Auction. The proposed rule change is consistent with general customer
priority principles.
If the Agency Order is to buy (sell) and the Exchange best
offer (bid) represents (a) a Priority Customer order on the Book, the
stop price must be at least one minimum increment better than the
Exchange best offer (bid); or (b) a quote or order that is not a
Priority Customer order on the Book, the stop price must be at or
better than the Exchange best offer (bid). Current Rule 6.74B is silent
regarding whether the stop price must be at or better than the
opposite-side Exchange best bid or offer; however, the execution price
may not be at the same price as priority customer orders resting on the
book on the opposite side of the Agency Order (unless the priority
customer orders execute against the Agency Order), and the proposed
stop price requirement is consistent with the provision, which merely
applies this protection at the initiation of the SAM Auction. The
Exchange believes this condition protects orders on the opposite side
of the Agency Order resting on the Book, including Priority Customer
orders.
Proposed Rule 5.39(b)(4) states if the Initiating TPH
submits a SAM sweep order to a SAM Auction, the stop price, SAM
responses, and executions are permitted at a price inferior to the
Initial NBBO. A ``SAM sweep order'' or ``SAM ISO'' is the submission of
two orders for crossing in a SAM Auction without regard for better-
priced Protected Quotes (as defined in Rule 5.65) because the
submitting TPH routed an intermarket sweep order (``ISO'')
simultaneously with the routing of the SAM ISO to execute against the
full displayed size of any Protected Quote that is better than the stop
price and has swept all interest in the Book with a price better than
the stop price. Any execution(s) resulting from these sweeps accrue to
the SAM Agency Order. Current Rule 6.74B is silent on whether ISOs are
permitted with respect to SAM Auctions. However, the proposed
definition of a SAM ISO is consistent with linkage rules.
The proposed rule change also explicitly states that the System
rejects or cancels both an Agency Order and Solicited Order submitted
to a SAM Auction that do not meet these conditions. This is consistent
with current functionality and the concept of price conditions, and
merely adds this detail the Rules.
Proposed Rule 5.39(c) describes the SAM Auction process, which
commences upon receipt of an Agency Order that meets the conditions in
[[Page 53528]]
proposed paragraphs (a) and (b), as described above: \13\
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\13\ With respect to the provisions regarding the SAM Auction
process that the proposed rule change retains but moves from Rule
6.74B in the current Rulebook to Rule 5.39 in the shell Rulebook,
the proposed rule change makes nonsubstantive changes, including to
make the rule provision more plain English, to simplify the
provisions, to delete any redundant language, and to conform
language to corresponding rules of applicable Cboe Affiliated
Exchanges. Unless otherwise specified in this rule filing, the
proposed rule change makes no substantive changes to these
provisions.
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Proposed Rule 5.39(c)(1) states that one or more SAM
Auctions in the same series may occur at the same time. To the extent
there is more than one SAM Auction in a series underway at a time, the
SAM Auctions conclude sequentially based on the exact time each SAM
Auction commenced, unless terminated early pursuant to proposed
paragraph (d). At the time each SAM Auction concludes, the System
allocates the Agency Order pursuant to proposed paragraph (e) and takes
into account all SAM Auction responses and unrelated orders in place at
the exact time of conclusion. In the event there are multiple SAM
Auctions underway that are each terminated early pursuant to proposed
paragraph (d), the System processes the SAM Auctions sequentially based
on the exact time each SAM Auction commenced.\14\ The Exchange believes
the proposed new functionality may lead to an increase in SAM Auctions,
which may provide additional opportunities for price improvement for
Agency Orders.
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\14\ See proposed Rule 5.39(c)(1). This provision regarding
concurrent SAM Auctions is the same as the Automated Improvement
Mechanism (``AIM'') provision that permits concurrent AIM Auctions
for Agency Orders of 50 contracts or more. See Rule 5.37(c)(1) of
the shell Rulebook.
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The Exchange notes it is also possible for various types of
auctions (such as an AIM Auction or a complex order auction (``COA''))
today to occur concurrently in the same series, and at the end of each
auction, it is possible for interest resting in the Book to trade
against any of the auctioned orders in the series. 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 processes SAM
Auctions as discussed above). In other words, suppose there is an AIM
Auction, a SAM Auction, and a COA all occurring in the same series,
which began and will terminate in that order, and each of which last
100 milliseconds. While it is possible for all three 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 Rule 6.74A in the current
Rulebook (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 pursuant to Rule 6.74A (Rule
5.37 in the shell Rulebook). The System will then process the SAM
Auction when it terminates, and the auctioned order may trade against
any resting interest that did not execute against the AIM order (in
addition to the contra-side order and responses submitted to that SAM
Auction, which may only trade against the order auctioned in that SAM
pursuant to current Rule 6.74B (proposed Rule 5.39)). Finally, the
System will then process the COA Auction when it terminates, and the
COA order may leg into the Book and trade against any resting interest
that did not execute against the AIM order or SAM order (in addition to
any interest resting on the complex order book and COA responses
pursuant to current Rule 6.53C in the current Rulebook (which the
Exchange intends to move to Rule 5.33 in the shell Rulebook)).
The proposed rule change moves the provision regarding the
SAM Auction notification message (currently referred to as a request
for responses message) from current Rule 6.74B(b)(1)(B) to proposed
Rule 5.39(c)(2). The proposed provision specifies that the message will
detail the Capacity of the Agency Order, an Auction ID, and the option
series, in addition to the price, side, and size, of the Agency Order,
which message is sent to all TPHs that elect to receive SAM Auction
notification messages. This is consistent with the current auction
message that is disseminated; the proposed rule change adds these
details to the rule. The proposed rule change also adds that SAM
Auction notification messages are not included in the disseminated BBO
or OPRA, which is also consistent with current functionality.
The proposed rule change moves the provision regarding the
length of the SAM Auction period from current Rule 6.74B(b)(1)(C) to
proposed Rule 5.39(c)(3). The proposed rule change makes no changes to
the current range of permitted lengths of SAM Auction periods.
The proposed rule change clarifies in proposed Rule
5.39(c)(4) that the Initiating TPH may not modify or cancel an Agency
Order or Solicited Order after submission to a SAM Auction. This is
consistent with current functionality, and the proposed rule change
merely adds this detail to the Rules.
Proposed Rule 5.39(c)(5) describes the provisions related to SAM
responses: \15\
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\15\ With respect to the provisions regarding SAM responses that
the proposed rule change retains but moves from Rule 6.74B in the
current Rulebook to Rule 5.39 in the shell Rulebook, the proposed
rule change makes nonsubstantive changes, including to make the rule
provision more plain English, to simplify the provisions, to delete
any redundant language, and to conform language to corresponding
rules of applicable Cboe Affiliated Exchanges. Unless otherwise
specified in this rule filing, the proposed rule change makes no
substantive changes to these provisions.
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The proposed rule change moves the provision that states a
SAM response must specify size and side from current Rule
6.74B(b)(1)(C) to proposed Rule 5.39(c)(5). The proposed rule change
deletes the requirement that a SAM response include a price, and
instead permits a SAM response to specify a limit price or be treated
as market. This provides Users with more flexibility regarding the
price at which it is willing to trade against an Agency Order. The
proposed rule change adds that a SAM response must also specify an
Auction ID, and that a SAM response may only participate in the AIM
Auction with the Auction ID specified in the response. While not
specified in current Rule 6.74B, this is consistent with current
functionality, and the proposed rule change adds this detail to the
Rules. The Exchange proposes to include this language given the above
proposal that permits concurrent SAM Auctions in the same series.
Current Rule 6.74B(b)(1)(C) permits all Trading Permit Holders may
submit responses to a SAM request for responses (``RFR''), except that
responses may not be entered for the account of an options market-maker
from another options exchange. The proposed rule change permits all
Users (including Market-Makers from another options exchange) \16\ to
submit responses to a SAM Auction. By permitting additional
participants to submit responses to SAM Auctions, the Exchange believes
this may provide the opportunity for additional liquidity in these
auctions, which could lead to additional price improvement
opportunities. Rules of other exchanges do not contain restrictions on
who may
[[Page 53529]]
respond to similar solicitation auction mechanisms.\17\
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\16\ The proposed rule change also prohibits the Initiating TPH
from submitting a response to a SAM Auction (and notes the system
helps enforce this prohibition by not permitting a response to have
the same EFID as the Agency Order). This will prevent the submitter
of a Solicited Order from submitting a response to attempt to
participate in the execution of an Agency Order in the event the
Solicited Order does not execute against the Agency Order, which is
consistent with the requirement that the Solicited Order cannot be a
facilitation.
\17\ See, e.g., Miami International Securities Exchange, LLC
(``MIAX'') Rule 515A(b).
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The proposed rule change moves the provision that states
the minimum price increment for SAM response is the same as the one the
Exchange determines for a class (pursuant to proposed Rule 5.39(a)(4)),
and the System rejects a SAM response that is not in the applicable
minimum increment from current Rule 6.74B(b)(1)(E) to proposed Rule
5.39(c)(5)(A).
Proposed Rule 5.39(c)(5)(B) states SAM buy (sell)
responses are capped at the Exchange best offer (bid), or one minimum
increment better than the Exchange best offer (bid) if it is
represented by a Priority Customer on the Book (unless the Agency Order
is a SAM ISO) that exists at the conclusion of the SAM Auction. The
System will execute SAM responses, if possible, at the most aggressive
permissible price not outside the BBO at the conclusion of the SAM
Auction or the Initial NBBO. The proposed rule change ensures the
execution price of a response will not cross the Initial NBBO in
accordance with linkage rules.\18\ Additionally, proposed subparagraph
(e) requires the execution price to be at or between the BBO at the
conclusion of the SAM Auction. Therefore, as proposed, the price at
which any response may be entered (and thus be executed) will
ultimately not be through the Initial NBBO or the BBO at the conclusion
of the SAM Auction.
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\18\ See Rule 6.81(b)(8) in the current Rulebook (Rule
5.66(b)(8) in the shell Rulebook) (requires an order to be stopped
at a price no worse than the price at the time of receipt of the
order).
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Proposed Rule 5.39(c)(5)(C) states a User may submit
multiple SAM responses at the same or multiple prices to a SAM Auction.
This is consistent with current functionality. Current Rule 6.74B
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 SAM Auction, the
System aggregates all of a User's orders and quotes on the Book and SAM
responses for the same EFID at the same price. This (combined with the
proposed size cap described below) will prevent a User from submitting
multiple orders, quotes, or responses at the same price to obtain a
larger pro-rata share of the Agency Order.
Proposed Rule 5.39(c)(5)(D) states the System caps the
size of a SAM response, or the aggregate size of a User's orders and
quotes on the Book and SAM 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 AIM
Auction). This is consistent with current subparagraph (b)(1)(F),
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.
Proposed Rule 5.39(c)(5)(E) states SAM responses must be
on the opposite side of the market as the Agency Order, and the System
rejects a SAM 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 SAM
response is to trade against the Agency Order in the SAM Auction into
which the SAM response was submitted.
The proposed rule change moves the provision that says SAM
responses are not visible to SAM Auction participants or disseminated
to OPRA from current Rule 6.74B(b)(1)(D) to proposed Rule
5.39(c)(5)(F).
The proposed rule change moves the provision that says a
User may modify or cancel its SAM responses during a SAM Auction from
current Rule 6.74B(b)(1)(G) to proposed Rule 5.39(c)(5)(G).
Current Rule 6.74B(b)(2) states a SAM Auction at the sooner of Rule
6.74A(b)(2)(A) through (F), which are the provisions that describe when
an AIM Auction concludes. The Exchange recently amended the events that
may cause an AIM Auction to conclude, so the proposed rule change
similarly amends the events that may cause a SAM Auction to conclude to
be the same as the events that may cause an AIM Auction to conclude
(and adds them to proposed Rule 5.39). Therefore, proposed Rule 5.39(d)
states a SAM Auction concludes at the earliest to occur of the
following times:
The end of the SAM Auction period;
upon receipt by the System of a Priority Customer order on
the same side of the market with a price the same as or better than the
stop price that would post to the Book;
upon receipt by the System of an unrelated order or quote
that is not a Priority Customer order on the same side of the market as
the Agency Order that would cause the stop price to be outside of the
BBO;
the market close (consistent with current functionality
and merely added to the Rules); and
any time the Exchange halts trading in the affected
series, provided, however, that in such instance the SAM Auction
concludes without execution (consistent with current Rule
6.74A(b)(2)(F), and the proposed rule change adds detail that a SAM
Auction in such a case will conclude without execution, which is
consistent with current functionality, as no executions may occur while
a series is halted for trading).
The proposed rule change deletes the following events that
currently cause a SAM Auction to conclude early:
Upon receipt by the System of an unrelated order (in the
same series as the Agency Order) that is marketable against either the
BBO (when such quote is the NBBO) or the RFR responses;
upon receipt by the System of an unrelated limit order (in
the same series as the Agency Order and on the opposite side of the
market as the Agency Order) that improves any RFR responses; and
any time there is a quote lock on the Exchange pursuant to
Rule 6.45(c) in the current Rulebook.
As discussed below, unrelated orders on the opposite side of the
Agency Order received during the SAM Auction may execute against
interest outside of the SAM Auction, and therefore, the Exchange will
no longer terminate a SAM Auction due to the receipt of an order on the
opposite side of the Agency Order. The proposed rule change to conclude
a SAM Auction early upon receipt of certain orders on the same side as
the Agency Order ensure that the execution price does not occur at the
same price as a Priority Customer order on the Book or at a price worse
on than a non-Priority Customer order on the Book. This is consistent
with the requirements for the stop price described above. Additionally,
the Exchange will not have quote lock functionality following the
technology migration, and therefore proposes to delete that as an event
that may cause a SAM Auction to terminate early.\19\
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\19\ See Securities Exchange Act Release No. 86374 (July 15,
2019), 84 FR 34963 (July 19, 2019) (SR-CBOE-2019-033) (proposed rule
change in which the Exchange deletes quote lock functionality).
---------------------------------------------------------------------------
An unrelated market or marketable limit order (against the BBO),
including a Post Only Order, on the opposite side of the Agency Order
received during the AIM Auction does not cause the SAM
[[Page 53530]]
Auction to end early and executes against interest outside of the SAM
Auction. If contracts remain from such unrelated order at the time the
SAM Auction ends, they may be allocated for execution against the
Agency Order pursuant to proposed paragraph (e). Because these orders
may have the opportunity to trade against the Agency Order following
the conclusion of the SAM Auction, which execution must still be at or
better than the Initial NBBO and BBO at the conclusion of the SAM
Auction, the Exchange does not believe it is necessary to cause a SAM
Auction to conclude early in the event the Exchange receives such
orders. This will provide more time for potential 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 interest.
The proposed rule change moves the provisions regarding the
allocation of the Agency Order at the conclusion of the SAM Auction
against the Solicited Order or contra-side interest (which includes
orders and quotes resting in the Book and SAM responses) from current
Rule 6.74B(b)(2) to proposed Rule 5.39(e). Executions at the conclusion
of the SAM Auction will occur in the same manner as they do today,
except the proposed rule change prioritizes Priority Customer AON
orders over all non-Priority Customer contra-side interest (displayed
Priority Customer orders will have priority over Priority Customer AON
orders) in executions following SAM Auctions.\20\ The Exchange believes
this encourages market participants, including Priority Customers, to
display their best bids and offers, which may lead to enhanced
liquidity and tighter markets.
---------------------------------------------------------------------------
\20\ Providing displayed interest with priority over
nondisplayed interest is consistent with the Exchange's general
allocation rules. See Rule 5.32(a)(3)(A) in the shell Rulebook
(which provides that displayed orders have priority over
nondisplayed orders).
---------------------------------------------------------------------------
The proposed rule change adds detail regarding the priority of
contra-side interest that executes against the Agency Order, which is
consistent with the general priority rules in current Rule 6.45 in the
current Rulebook (Rule 5.32 in the shell Rulebook), except for the AON
provision noted above. The proposed rule change also explicitly states
that the System cancels or rejects any unexecuted SAM responses (or
unexecuted portions) at the conclusion of a SAM Auction. While the
current rule does not state this, it is consistent with current
functionality. Additionally, it is consistent with the provision (as
described above) that Users submit responses to a specific auction to
potentially execute against the Agency Order and the proposed provision
that responses may only execute in the SAM Auction into which they are
submitted. The proposed rule change also makes nonsubstantive changes
to the allocation provisions, including to make the rule provision more
plain English, to simplify the provisions, to delete any redundant
language, and to conform language to corresponding rules of applicable
Cboe Affiliated Exchanges. Unless otherwise specified in this rule
filing, the proposed rule change makes no substantive changes to these
provisions.
The proposed rule change moves current Rule 6.74B, Interpretations
and Policies .02 and .03 to proposed Rule 5.39, Interpretations and
Policies .01 and .02, respectively, making only nonsubstantive changes.
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.\21\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \22\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \23\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\21\ 15 U.S.C. 78f(b).
\22\ 15 U.S.C. 78f(b)(5).
\23\ Id.
---------------------------------------------------------------------------
The Exchange's SAM Auction as proposed will function in a
substantially similar manner following the technology migration as it
does today. The proposed rule change will benefit investors by
providing continued consistency across the Exchange's (and the Cboe
Affiliated Exchanges', as applicable) price improvement mechanisms. The
general framework of the SAM Auction process as proposed to be amended
(such as the eligibility requirements, the auction response period, the
same-side stop price requirements, response requirements, and auction
notification process) will continue to be substantively the same as the
framework for the AIM price improvement auction the Exchange's current
price improvement auction, as the Exchange recently amended.\24\ The
Exchange continued similarity of its SAM Auction to its AIM Auction
will allow the Exchange's proposed price improvement functionality to
fit seamlessly into the options market and benefit market participants
with consistency across similar functionality. The Exchange also
believes this will encourage Users to compete vigorously to provide the
opportunity for price improvement for customer orders in a competitive
auction process.
---------------------------------------------------------------------------
\24\ See SR-CBOE-2019-045 (filed August 28, 2019).
---------------------------------------------------------------------------
The Exchange believes the proposed rule change to permit the
Solicited Order to be comprised of multiple orders that total the size
of the Agency Order may increase liquidity and opportunity for Agency
Orders to participate in SAM Auctions, and therefore provide Agency
Orders with additional opportunities for price improvement, which is
consistent with the principles behind the SAM Auction. The Exchange
believes that this will be beneficial to participants because allowing
multiple contra-parties should foster competition for filling the
contra-side 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. Another exchange permits the contra-side in a
solicited auction mechanism to be comprised of multiple contra-
parties.\25\ The Exchange notes the contra-side of a Qualified
Contingent Cross order may be comprised of multiple orders.\26\
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\25\ See ISE Options 3, Section 11(d); and ISE Regulatory
Information Circular 2014-013.
\26\ Unlike orders submitted to a SAM Auction, Qualified
Contingent Cross orders may immediately execute and are not exposed
to the market for possible price improvement.
---------------------------------------------------------------------------
The proposed rule that an Initiating TPH may not designate an
Agency Order or Solicited Order as Post Only protects investors,
because it provides transparency regarding functionality that will not
be available for SAM. The Exchange believes this 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 submitting orders to a SAM
Auction is to receive an execution following the
[[Page 53531]]
auction and not enter the Book. Pursuant to current Rule 6.74B and
proposed Rule 5.39, an Agency Order will fully execute against contra-
side interest (possibly against the Solicited Order, which must be for
the same size as the Agency Order), or will be cancelled in the event
there is no execution following a SAM Auction, and thus there cannot be
remaining contracts in an Agency Order or Solicited Order to enter the
Book.
The proposed stop price requirements will benefit investors, as
they will protect Priority Customer orders in the Book (as well as
Agency Orders for Priority Customers). The current rule essentially
enforces these price requirements at the conclusion of a SAM Auction;
the proposed rule change merely applies this check at the initiation of
a SAM Auction. The Exchange believes application of this price check at
the initiation of a SAM 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). The
proposed rule change is consistent with general customer priority
principles.
As discussed above, the Exchange has proposed to allow SAM Auctions
to occur concurrently with other SAM Auctions. Although SAM Auctions
for Agency Orders will be allowed to overlap, the Exchange does not
believe this raises any issues that are not addressed through the
proposed rule change described above. For example, although
overlapping, each SAM Auction will be started in a sequence and with a
time that will determine its processing. Thus, even if there are two
SAM Auctions that commence and conclude, at nearly the same time, each
SAM Auction will have a distinct conclusion at which time the SAM
Auction will be allocated. In turn, when the first Auction concludes,
unrelated orders that then exist will be considered for participation
in the SAM Auction. If unrelated orders are fully executed in such SAM
Auction, then there will be no unrelated orders for consideration when
the subsequent SAM Auction is processed (unless new unrelated order
interest has arrived). If instead there is remaining unrelated order
interest after the first SAM Auction has been allocated, then such
unrelated order interest will be considered for allocation when the
subsequent SAM Auction is processed. As another example, each SAM
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, SAM responses will be specifically
considered only in the specified SAM Auction. The Exchange does not
believe that allowing multiple auctions to overlap for Agency Orders
presents any unique issues that differ from functionality already in
place on the Exchange or other exchanges. Pursuant to Rule 5.37(c)(1)
in the shell Rulebook, multiple AIM Auctions for Agency Orders for 50
or more contracts may overlap. Additionally, other options exchanges
permit other auctions to overlap.\27\
---------------------------------------------------------------------------
\27\ See, e.g., ISE Options 3, Section 11(d); and Boston Options
Exchange (``BOX'') Rule 7270.
---------------------------------------------------------------------------
The proposed rule change will also perfect the mechanism of a free
and open market and a national market system, as it is consistent with
linkage rules. Proposed Rule 5.39 does not permit Agency Orders to be
submitted when the NBBO is crossed and requires Agency Order execution
prices at the end of SAM Auctions to be at or between the Initial NBBO
and the BBO at the conclusion of the SAM Auction. The proposed stop
price requirements and the events to terminate a SAM Auction early
further ensure execution prices at or better than the Initial NBBO and
BBO. Additionally, the proposed SAM ISO order type (which is similar to
current AIM ISO functionality) will provide TPHs with an efficient
method to initiate a SAM Auction while preventing trade-throughs.
The proposed rule change to permit all Users (other than the
Initiating TPH) to respond to SAM Auctions will benefit investors.
Permitting all Users to submit responses to SAM Auctions may result in
more Users having the opportunity to participate in executions at the
conclusion of SAM Auctions. Additionally, it may increase liquidity in
SAM Auctions, which may lead to more opportunities to 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.\28\
---------------------------------------------------------------------------
\28\ See, e.g., MIAX Rule 515A(b)(2)(i)(C).
---------------------------------------------------------------------------
The proposed SAM Auction response requirements are reasonable and
promote a fair and orderly market and national market system, as they
provide clarity regarding how they may respond to a SAM Auction. The
proposed provisions regarding the aggregation of responses with other
contra-side interest of the same User, and capping the size and price
of that interest at the price and size of the Agency Order, will
protect investors by preventing a User from submitting multiple orders,
quotes, or responses at the same price to obtain a larger pro-rata
share of the Agency Order. The proposed response provisions also ensure
responses will be available for execution at prices at or better than
the BBO at the conclusion of the SAM Auction, and the Initial NBBO, in
accordance with linkage rules, as discussed above.
Unlike current Rule 6.74B, the Exchange will not conclude a SAM
Auction early due to the receipt of an opposite side order. 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 SAM Auction, which
execution must still be at or better than the Initial NBBO and BBO
existing at the conclusion of the SAM Auction. 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 interest.
With respect to trading halts, as described herein, in the case of
a trading halt on the Exchange in the affected series, the Auction will
be cancelled without execution. Cancelling Auctions without execution
in this circumstance is consistent with Exchange handling of trading
halts in the context of continuous trading on the Exchange and promotes
just and equitable principles of trade and, in general, protects
investors and the public interest.\29\
---------------------------------------------------------------------------
\29\ The Exchange notes that trading on the Exchange in any
option contract will be halted whenever trading in the underlying
security has been paused or halted by the primary listing market and
other circumstances. See Rule 6.3 in the current Rulebook.
---------------------------------------------------------------------------
Agency Orders will execute against contra-side interest at the
conclusion of a SAM Auction in the same manner as it does today, except
that the proposed rule change will also provide priority to Priority
Customer AON orders over all non-Priority Customer contra-side
interest. Displayed Priority Customer orders will have priority over
Priority Customer AON orders, SAM Auctions, which the Exchange believes
encourages market participants, including Priority Customers, to
display their best bids and offers, which may lead to enhanced
liquidity and tighter markets. Prioritizing displayed interest over
nondisplayed interest is consistent with the Exchange's current
allocation and priority rules, which have been
[[Page 53532]]
previously filed with the Commission.\30\ The Exchange believes this
will ensure a fair and orderly market by maintaining priority of orders
and quotes and protecting Priority Customer orders, while still
affording the opportunity for price improvement during each SAM Auction
commenced on the Exchange. The proposed allocation will continue to
ensure that the Agency Order will be filled if there is a Priority
Customer order on the Book at the stop price and sufficient other
contra-side interest to satisfy the Agency Order.
---------------------------------------------------------------------------
\30\ See Rule 5.32(a)(3)(A) in the shell Rulebook.
---------------------------------------------------------------------------
While other exchange rules do not discuss how AON orders are
prioritizes at the conclusion of similar solicitation auction
mechanisms, the Commission has previously considered this issue. The
Commission has stated that not protecting AON public customer order on
the book while permitting the agency order and solicited order to
execute would disadvantage the public customer order.\31\ The proposed
rule change to prioritize Priority Customer AON orders over non-
Priority Customer contra-side interest ensures that the Agency order
and Solicited Order will not cross when a Priority Customer AON order
at the stop price is resting on the Exchange's Book, and thus is
consistent with the Act, as it promotes just and equitable principles
of trade, removes impediments to and perfects the mechanism of a free
and open market and a national market system, and, in general, protects
investors and the public interest. As noted above, the Commission has
also previously considered the issue of prioritizing displayed interest
over nondisplayed interest, as that concept exists in the Exchange's
Rules (and was therefore previously filed with the Commission). While
Priority Customer AON orders generally execute after all other
interest,\32\ the Exchange believes it is appropriate to provide this
priority to Priority Customer AON orders in the context of a SAM
Auction and give these orders an increased change to execute \33\
against the Agency Order (assuming there is sufficient size to satisfy
the Agency Order and the AON contingency can be satisfied) given that
such orders may prevent an Agency Order from executing against a
Solicited Order. As a result, the proposed rule change ensures a
Priority Customer AON resting on the Book at the stop price at the
conclusion of a SAM Auction will not be disadvantaged.
---------------------------------------------------------------------------
\31\ The Commission previously stated that permitting ``the
Agency Order and Solicited Order to cross when an all-or-none
customer order at the stop price exists on Phlx's order book would
result in an outcome that is not consistent with the Act.
Specifically, rather than protecting the all-or-none public customer
order at the stop price, Phlx's proposal to allow the Solicited
Order to execute against the Agency Order and leave the all-or-none
public customer order on the order book would disadvantage the
public customer order. While such a result may be expedient for the
firm that entered the Agency Order and Solicited Order into the
Solicitation Auction and for the solicited party, it would raise
concerns under Section 6(b)(5) of the Act, which, among other
things, requires that the rules of a national securities exchange be
designed `to promote just and equitable principles of trade, 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 . . .' '' See Securities Exchange
Act Release No. 75300 (June 25, 2015), 80 FR 37672, 37683 (July 1,
2015) (SR-Phlx-2014-66) (order disapproving a proposed rule change
to adopt an electronic solicitation mechanism).
\32\ See Rule 5.32(a)(3)(C) in the shell Rulebook.
\33\ If the Priority Customer AON order received last priority
(except for non-Priority Customer AON orders, as is normally the
case (see Rule 5.32(a)(3)(C) in the shell Rulebook), the Priority
Customer AON order would have a reduced change to execute against
the Agency Order.
---------------------------------------------------------------------------
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 SAM Auctions. Additionally, the proposed rule change is
substantially the same as the rule of another exchange.\34\
---------------------------------------------------------------------------
\34\ See EDGX Options Rule 21.21; see also Securities Exchange
Act Release No. 87060 (September 23, 2019) (SR-CboeEDGX-2019-047).
---------------------------------------------------------------------------
The proposed rule change is also consistent with Section 11(a)(1)
of the Act \35\ and the rules promulgated thereunder. Generally,
Section 11(a)(1) of the Act restricts any member of a national
securities exchange from effecting any transaction on such exchange for
(i) the member's own account, (ii) the account of a person associated
with the member, or (iii) an account with respect to which the member
or a person associated with the member exercises investment discretion
(collectively referred to as ``covered accounts''), unless a specific
exemption is available. Examples of common exemptions include the
exemption for transactions by broker dealers acting in the capacity of
a market maker under Section 11(a)(1)(A),\36\ the ``G'' exemption for
yielding priority to non-members under Section 11(a)(1)(G) of the Act
and Rule 11a1-1(T) thereunder,\37\ and ``Effect vs. Execute'' exemption
under Rule 11a2-2(T) under the Act.\38\
---------------------------------------------------------------------------
\35\ 15 U.S.C. 78k(a). Section 11(a)(1) prohibits a member of a
national securities exchange from effecting transactions on that
exchange for its own account, the account of an associated person,
or an account over which it or its associated person exercises
discretion unless an exception applies.
\36\ 15 U.S.C. 78k(a)(1)(A).
\37\ 15 U.S.C. 78k(a)(1)(G) and 17 CFR 240.11a1-1(T).
\38\ 17 CFR 240.11a2-2(T).
---------------------------------------------------------------------------
The ``Effect vs. Execute'' exemption permits an exchange member,
subject to certain conditions, to effect transactions for covered
accounts by arranging for an unaffiliated member to execute
transactions on the exchange. To comply with Rule 11a2-2(T)'s
conditions, a member: (i) Must transmit the order from off the exchange
floor; (ii) may not participate in the execution of the transaction
once it has been transmitted to the member performing the execution;
\39\ (iii) may not be affiliated with the executing member; and (iv)
with respect to an account over which the member has investment
discretion, neither the member nor its associated person may retain any
compensation in connection with effecting the transaction except as
provided in the Rule. For the reasons set forth below, the Exchange
believes that TPHs entering orders into SAM would satisfy the
requirements of Rule 11a2-2(T).
---------------------------------------------------------------------------
\39\ The member may, however, participate in clearing and
settling the transaction.
---------------------------------------------------------------------------
In the context of automated trading systems, the Commission has
found that the off-floor transmission requirement is met if a covered
account order is transmitted from off the floor directly to the
Exchange by electronic means.\40\ Because the Exchange's SAM Auction
receives, and will continue to receive, orders from TPHs electronically
through remote terminals or computer-to-computer interfaces, the
Exchange believes that orders submitted to a SAM Auction from off the
Exchange's trading floor will satisfy the off-floor transmission
requirement.\41\
---------------------------------------------------------------------------
\40\ See, e.g., Securities Exchange Act Release Nos. 61419
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031)
(approving BATS options trading); 59154 (December 23, 2008), 73 FR
80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity
securities listing and trading on BSE); 57478 (March 12, 2008), 73
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 53128 (January 13, 2006), 71
FR 3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq
Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November
1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility); and 15533
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979
Release'').
\41\ A TPH may not enter an order for a covered account from on
the trading floor and rely on the Effect v. Execute, and therefore
another exception must apply. A TPH may not send an order for a
covered account for an affiliated TPH on the floor and rely on the
Effect v. Execute, and therefore another exception must apply.
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[[Page 53533]]
The second condition of Rule 11a2-2(T) requires that neither a
member nor an associated person of such member participate in the
execution of its order. The Exchange represents that, upon submission
to the SAM Auction, an order or SAM response will be executed
automatically pursuant to the rules set forth for SAM Auctions. In
particular, execution of an order (including the Agency and the
Solicited Order) or a SAM response sent to the mechanism depends not on
the TPH entering the order or response, but rather on what other orders
and responses are present and the priority of those orders and
responses. Thus, at no time following the submission of an order or
response is a TPH or associated person of such TPH able to acquire
control or influence over the result or timing of order or response
execution.\42\ Once the Agency Order and Solicited Order, or the
response, as applicable, have been transmitted, the Initiating TPH that
transmitted the orders, or the User that submitted the response,
respectively, will not participate in its execution of the Agency Order
or Solicited Order, or the response, respectively. No TPH, including
the Initiating TPH, will see a SAM response submitted into SAM, and
therefore and will not be able to influence or guide the execution of
their Agency Orders, Solicited Orders, or SAM responses, as applicable.
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\42\ n Initiating TPH may not cancel or modify an Agency Order
or Solicited Order after it has been submitted into SAM, but Users
may modify or cancel their responses after being submitted into a
SAM. See proposed Rule 5.39(c)(4) and (c)(5)(G). The Exchange notes
that the Commission has stated that the non-participation
requirement does not preclude members from cancelling or modifying
orders, or from modifying instructions for executing orders, after
they have been transmitted so long as such modifications or
cancellations are also transmitted from off the floor. See
Securities Exchange Act Release No. 14563 (March 14, 1978), 43 FR
11542, 11547 (the ``1978 Release'').
---------------------------------------------------------------------------
Rule 11a2-2(T)'s third condition requires that the order be
executed by an exchange member who is unaffiliated with the member
initiating the order. The Commission has stated that the requirement is
satisfied when automated exchange facilities, such as the SAM Auction,
are used, as long as the design of these systems ensures that members
do not possess any special or unique trading advantages in handling
their orders after transmitting them to the exchange.\43\ The Exchange
represents that the SAM Auction is designed so that no TPH has any
special or unique trading advantage in the handling of its orders or
responses after transmitting them to the mechanism.
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\43\ In considering the operation of automated execution systems
operated by an exchange, the Commission noted that, while there is
not an independent executing exchange member, the execution of an
order is automatic once it has been transmitted into the system.
Because the design of these systems ensures that members do not
possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange, the Commission has
stated that executions obtained through these systems satisfy the
independent execution requirement of Rule 11a2-2(T). See 1979
Release.
---------------------------------------------------------------------------
A TPH (not acting in a market-maker capacity) could submit an order
for a covered account from off of the Exchange's trading floor to an
unaffiliated Floor Broker for submission for execution in the SAM
Auction from the Exchange's trading floor and satisfy the effect-
versus-execute exemption (assuming the other conditions are
satisfied).\44\ However, a TPH could not submit an order for a covered
account to its ``house'' Floor Broker on the trading floor for
execution and rely on this exemption. Because a TPH may not rely on the
``G'' exemption when submitting an order to a SAM Auction,\45\ it would
need to ensure another exception applies in this situation.
---------------------------------------------------------------------------
\44\ Orders for covered accounts that rely on the ``effect
versus execute'' exemption in this scenario must be transmitted from
a remote location directly to the Floor Broker on the trading floor
by electronic means.
\45\ See proposed Rule 5.39(e) (which describes the allocation
of the Agency Order at the conclusion of the SAM Auction, which does
not prioritize non-TPH broker-dealers, as would be required by the
``G'' exemption).
---------------------------------------------------------------------------
Rule 11a2-2(T)'s fourth condition requires that, in the case of a
transaction effected for an account with respect to which the
initiating member or an associated person thereof exercises investment
discretion, neither the initiating member nor any associated person
thereof may retain any compensation in connection with effecting the
transaction, unless the person authorized to transact business for the
account has expressly provided otherwise by written contract referring
to Section 11(a) of the Act and Rule 11a2-2(T) thereunder.\46\ The
Exchange recognizes that TPHs relying on Rule 11a2-2(T) for
transactions effected through the SAM Auction must comply with this
condition of the Rule, and the Exchange will enforce this requirement
pursuant to its obligations under Section 6(b)(1) of the Act to enforce
compliance with federal securities laws.
---------------------------------------------------------------------------
\46\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written
contract to retain compensation, in connection with effecting
transactions for covered accounts over which such member or
associated persons thereof exercises investment discretion, to
furnish at least annually to the person authorized to transact
business for the account a statement setting forth the total amount
of compensation retained by the member in connection with effecting
transactions for the account during the period covered by the
statement which amount must be exclusive of all amounts paid to
others during that period for services rendered to effect such
transactions. See also 1978 Release, at 11548 (stating ``[t]he
contractual and disclosure requirements are designed to assure that
accounts electing to permit transaction-related compensation do so
only after deciding that such arrangements are suitable to their
interests'').
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Therefore, the Exchange believes that the instant proposal is
consistent with Rule 11a2-2(T), and that therefore the exception should
apply in this case. Therefore, the Exchange believes the proposed rule
change is consistent with Section 11(a) of the Act and the Rules
thereunder.
The proposed rule change is generally intended to amend certain
system functionality currently offered by Cboe Options 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.
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 will impose any burden on intramarket
competition, as the proposed changes to the Exchange's SAM Auction will
apply to all orders submitted to a SAM Auction in the same manner. SAM
Auctions will continue to be voluntary for TPHs to use, and are
available to all TPHs. Additionally, the ability to respond to SAM
Auctions will not be available to all Users (except the Initiating TPH,
which is consistent with the requirement that the contra-side order be
a solicitation rather than a facilitation). The proposed rule change to
provide Priority Customer AON orders with priority over all non-
Priority Customer contra-side interest protects additional Priority
Customer orders and will ensure that a Priority Customer AON order
resting on the Book at the stop price is not disadvantaged.
The Exchange does not believe the proposed rule change will impose
any burden on intermarket competition, because the general framework
and primary features of the Exchange's current SAM Auction are not
changing, and will continue to protect orders,
[[Page 53534]]
including Priority Customer orders, resting in the Book, as applicable.
The proposed rule change will provide continued consistency across the
Exchange's (and the Cboe Affiliated Exchanges', as applicable) price
improvement mechanisms. The general framework and primary features of
the proposed SAM Auction process (such as the eligibility requirements,
auction response period, same-side stop price requirements, response
requirements, and auction notification process), are substantively the
same as the framework for the AIM price improvement auction the
Exchange's current price improvement auction, as recently proposed to
be amended in connection with the Exchange's upcoming technology
migration.\47\ Additionally, other options exchanges also offer similar
auction mechanisms.\48\
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\47\ See supra note 24.
\48\ See, e.g., Nasdaq ISE, LLC (``ISE'') Options 3, Section
11(d); and MIAX Rule 515A(b).
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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: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
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 \49\ and Rule 19b-
4(f)(6) thereunder.\50\
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\49\ 15 U.S.C. 78s(b)(3)(A).
\50\ 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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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \51\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \52\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has asked the Commission to waive the 30-day operative delay so that
the Exchange may implement the proposed rule change at the time of its
anticipated October 7, 2019 system migration. The Exchange notes that
the proposed rule change is substantially identical to EDGX Options
Rule 21.21 and similar to functionality on other options exchanges, and
believes waiver of the operative delay would permit the Exchange to
continue to provide the SAM functionality to market participants on a
continuous, uninterrupted basis.\53\ For these reasons, the Commission
believes that waiver of the 30-day operative delay is consistent with
the protection of investors and the public interest. Therefore, the
Commission hereby waives the operative delay and designates the
proposal as operative upon filing.\54\
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\51\ 17 CFR 240.19b-4(f)(6).
\52\ 17 CFR 240.19b-4(f)(6)(iii).
\53\ See supra notes 34 and 48.
\54\ For purposes only of waiving the 30-day operative delay,
the Commission also has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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 shall institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2019-063 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-2019-063. 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-2019-063, and should be submitted
on or before October 28, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\55\
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\55\ 7 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-21725 Filed 10-4-19; 8:45 am]
BILLING CODE 8011-01-P