[Federal Register Volume 84, Number 197 (Thursday, October 10, 2019)]
[Notices]
[Pages 54659-54671]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22157]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87237; File No. SR-CBOE-2019-093]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
the Exchange's Rules Regarding the Automated Improvement Mechanism and
Solicitation Auction Mechanism for Flexible Exchange Options, and 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
October 4, 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 October 4, 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 Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to amend the Exchange's Rules regarding the automated improvement
mechanism (``AIM'') and solicitation auction mechanism (``SAM'') for
flexible exchange options (``FLEX Options'') (``FLEX AIM'' and ``FLEX
SAM,'' respectively) and moves 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.
[[Page 54660]]
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. 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 proposed rule change amends current Rules 24A.5A and 24A.5B
regarding the FLEX AIM Auction and the FLEX SAM Auction, respectively.
The proposed changes reflect recent amendments to general FLEX trading
rules as well as recent amendments to the non-FLEX AIM and SAM
Auctions.\5\ The proposed rule change amends and moves the following
provisions regarding the terms of FLEX AIM and SAM Auctions from the
current Rulebook to the shell Rulebook. In addition to the substantive
changes described below, the proposed rule change makes additional
nonsubstantive changes to these Rules, including to make the rule text
plain English, simplify the rule provisions, update cross-references
and paragraph numbering and lettering, reorganize certain provisions,
and eliminate redundant provisions.
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\5\ See SR-CBOE-2019-045 (proposed changes to the Exchange's
non-FLEX AIM Auction); SR-CBOE-2019-051 (proposed changes to the
Exchange's non-FLEX complex AIM Auctions); SR-CBOE-2019-063
(proposed changes to the Exchange's non-FLEX SAM Auction); SR-CBOE-
2019-064 (proposed changes to the Exchange's non-FLEX C-SAM
Auction); and SR-CBOE-2019-084 (proposed changes to the Exchange's
FLEX trading rules).
----------------------------------------------------------------------------------------------------------------
Current rule (current Proposed rule (shell Proposed substantive
Rule provision rulebook) rulebook) changes
----------------------------------------------------------------------------------------------------------------
FLEX AIM Auction
----------------------------------------------------------------------------------------------------------------
A FLEX Trader may electronically Rule 24A.5A, Rule 5.73, The proposed rule change
submit for execution an order introductory introductory clarifies that an
(which may be a simple or complex paragraph and paragraph. Initiating Order may
order) it represents as agent Interpretations and consist of one or more
(``Agency Order'') against Policies .04 and .05. solicited orders, as
principal or solicited order(s) further discussed below.
(except for the account of any The proposed rule change
FLEX Market-Maker \6\ with an also specifies in the
appointment in the applicable FLEX introductory paragraph
Option class on the Exchange (an that both simple and
``Initiating Order'') provided it complex orders may be
submits the Agency Order for submitted into a FLEX AIM
electronic execution into a FLEX Auction, as the auction
AIM Auction. will apply to both simple
and complex orders in a
substantially similar
manner, as further
discussed below. The
proposed rule change
deletes a price
requirement related to the
best bid or offer
(``BBO''),\7\ because
there will no longer be an
electronic book (and thus
no BBO) for FLEX
Options.\8\ Because the
Exchange does not
currently have an
electronic book for FLEX
Option classes, and thus
there are no resting
orders to potentially
execute at the conclusion
of a FLEX AIM Auction,
deletion of this provision
will have no impact on how
FLEX AIM Auctions operate.
An Agency Order must be in a FLEX Rule 24A.5A(a)(1)..... Rule 5.73(a)(1)....... None.
Option class the Exchange
designates as eligible for FLEX
AIM Auctions.
The Agency Order and Initiating N/A................... Rule 5.73(a)(2)....... This requirement is not
Order must each be a FLEX Order explicitly stated in the
that complies with Rule 5.72(b) in current Rules; however, it
a permissible FLEX Option series is consistent with current
that complies with Rule 4.21. functionality, and the
proposed rule change
merely states this in the
Rules. For a FLEX AIM
Auction to occur, the
orders submitted would
need to be in a series
eligible for FLEX trading,
and thus include all the
terms necessary to
comprise a FLEX Option
series.\9\
The Initiating FLEX Trader must Rule.................. Rule.................. None.
mark an Agency Order for FLEX AIM 24A.5A(b)(1)(i)....... 5.73(a)(3)............
Auction processing.
There is no minimum size for Agency Rule 24A.5A(a)(1) and Rule 5.73(a)(4)....... The proposed rule change
Orders. The Initiating Order must (2) and deletes the provision from
be for the same size as the Agency Interpretation and current subparagraph
Order. Policy .03. (a)(1) that permits the
Exchange to designate
eligibility size
parameters for FLEX AIM
Auctions. The Exchange has
not designated any such
eligibility size
parameters, and intends to
continue to have no
minimum size requirements
for Agency Orders, so the
Exchange no longer needs
this flexibility. The
proposed rule change
clarifies in the Rules
that the Initiating Order
must be for the same size
as the Agency Order, which
is implied by the current
Rules.\10\
[[Page 54661]]
The price of the Agency Order and Rule.................. Rule 5.73(a)(5)....... The current rule state the
Initiating Order must be in an 24A.5A(b)(1)(vii) and minimum increment for
increment the Exchange determines Interpretation and responses and the
on a class basis (which may not be Policy .05. Initiating TPH's
smaller than the amounts set forth submission is determined
in Rule 5.4(c)(4)\11\ of the shell by the Exchange but may
Rulebook). The price must be in not be smaller than $0.01
the same format (i.e., price or or .01%, and premiums are
percentage) as the exercise price rounded to the nearest
of the FLEX Option series. If the minimum increment. This is
Agency Order and Initiating Order consistent with the
are complex orders, the price must minimum increment
be a net price \12\ for the available for all FLEX
complex strategy. Trading, so the proposed
rule change merely
references Rule 5.4(c)(4)
in the shell Rulebook,
which describes the
permissible minimum
increments for FLEX Option
series, rather than
repeats those increments.
Additionally, while
current rules permit bids
and offers (including the
price submitting into a
FLEX AIM Auction) to be in
a different format than
the exercise price of a
FLEX Option series, the
current functionality does
not permit this. Rule
5.3(e)(3) in the shell
Rulebook makes it clear
that bids and offers must
be in the same format as
the exercise price, as it
would be difficult to
apply a dollar price for a
FLEX Option series with a
percentage-based exercise
price.\13\ There is no
substantive change to the
permissible minimum
increments for orders
submitted to a FLEX AIM
Auction. The proposed rule
change maintains the rule
provision that complex
Agency and Initiating
Orders must include a net
price. See the discussion
below regarding the
application of FLEX AIM to
complex orders, including
proposed changes to
current Rule 24A.5A,
Interpretation and Policy
.05.
An Initiating FLEX Trader may only N/A................... Rule.................. This is consistent with
submit an Agency Order to a FLEX 5.73(a)(6)............ current functionality, as
AIM Auction after trading in FLEX executions cannot occur
Options is open pursuant to Rule prior to the opening of
5.71\14\. trading. The proposed rule
change clarifies this in
the Rule.
The System rejects or cancels both N/A................... Rule 5.73(a).......... This is consistent with
an Agency Order and Initiating current functionality and
Order submitted to a FLEX AIM the concept of eligibility
Auction that do not meet the requirements, and the
conditions in proposed paragraph proposed rule change
(a). explicitly states this in
the Rule.
The Initiating Order must stop the Rule.................. Rule 5.73(b).......... The proposed rule change
entire Agency Order at a price in 24A.5A(b)(1)(vii) and references Rule 5.4 in the
the same format (i.e., price or Interpretation and shell Rulebook, which
percentage) as the exercise price Policy .05. describes the permissible
of the FLEX Option series. If the minimum increments for
Agency Order and Initiating Order FLEX Option series, rather
are complex orders, the price must than repeats those
be a net price for the complex increments. There is no
strategy. substantive change to the
permissible minimum
increments for orders
submitted to a FLEX AIM
Auction.
The Initiating FLEX Trader must Rule.................. Rule 5.73(b)(1) and The proposed rule change
specify (1) a single price at 24A.5A(a)(2) and (2). deletes the provision that
which it seeks to execute the (b)(1)(i). the Agency Order will be
Agency Order against the stopped at the better of
Initiating Order (a ``single-price the BBO or the Agency
submission''), including whether Order's limit price if
it elects to have last priority in designated as auto-match,
allocation (as described in and instead will have an
proposed subparagraph (e)(4)); or initial stop price,
(2) an initial stop price and because there will no
instruction to automatically match longer be an electronic
the price and size of all FLEX AIM book (and thus no BBO) for
responses (``auto-match'') at each FLEX Options.\15\
price, up to a designated limit
price, better than the price at
which the balance of the Agency
Order can be fully executed ( the
``final auction price'').
The System rejects or cancels both N/A................... Rule 5.73(b).......... This is consistent with
an Agency Order and Initiating current functionality and
Order submitted to a FLEX AIM the concept of eligibility
Auction that do not meet the requirements, and the
conditions in proposed paragraph proposed rule change
(b). explicitly states this in
the Rule.
One or more FLEX AIM Auctions in Rule.................. Rule 5.73(c)(1)....... The proposed rule change
the same FLEX Option series or 24A.5A(b) and permits concurrent FLEX
complex strategy, as applicable, Interpretation and AIM Auctions, which the
may occur at the same time. Policy .05. current rule prohibits, as
further discussed below.
The proposed rule change
also deletes the provision
that says unrelated FLEX
Orders may not be
submitted to the
electronic book for the
duration of a FLEX AIM
Auction, because there
will no longer be an
electronic book (and thus
no BBO) for FLEX Options.
The System initiates the FLEX AIM Rule.................. Rule 5.73(c)(2)....... The current rule states the
Auction process by sending a FLEX 24A.5A(b)(1)(ii) and auction message (currently
AIM Auction notification message (vi). called a request for
detailing the side, size, Auction responses (``RFR''))
ID, the length of the FLEX AIM details the size and side
Auction period, and FLEX option of the order, which
series or complex strategy, as message is set to all FLEX
applicable, of the Agency Order to Traders that have elected
all FLEX Traders that elect to to receive RFRs upon
receive FLEX AIM Auction receipt of a properly
notification messages. FLEX AIM designated Agency Order
Auction notification messages are for FLEX AIM processing.
not disseminated to OPRA. Other than changes to
terminology and other
nonsubstantive changes,
the proposed rule change
adds that this message
will also include the
Auction ID and options
series or complex
strategy, as applicable,
of the Agency Order. This
is consistent with the
current RFR that is
disseminated, and the
proposed rule change
merely adds details to the
rule. The proposed rule
change to add that the
FLEX AIM Auction
notification message
includes the length of the
FLEX AIM Auction period
relates to the proposed
change below that the
Initiating FLEX Trader,
rather than the Exchange,
will designate the length
of the FLEX AIM Auction
period (and therefore FLEX
Traders will know how long
they have to respond to a
FLEX AIM Auction). The
proposed rule change also
adds that AIM Auction
notification messages are
not included in the
disseminated OPRA, which
is also consistent with
current functionality.\16\
The ``FLEX AIM Auction period'' is Rule.................. Rule 5.73(c)(3)....... The proposed rule change
a period of time designated by the 24A.5A(b)(1)(iii)..... adds a maximum time to the
Initiating FLEX Trader, which may range for the FLEX AIM
be no less than three seconds and Auction period (the
no more than five minutes. The minimum potential auction
designated length of the FLEX AIM period remains three
Auction period may not be longer seconds), which proposed
than the amount of time remaining maximum time is consistent
until the market close. with current Exchange
authority under the
current Rules.
Additionally, this
corresponds to the same
permissible time range as
that for electronic FLEX
Auctions pursuant to Rule
5.72(c) in the shell
Rulebook, and permits the
Initiating FLEX Trader to
designate the length of
the FLEX AIM Auction when
submitting the Agency
Order rather than have the
Exchange establish a
length for all FLEX AIM
Auctions. It also ensures
that a FLEX AIM Auction
will conclude prior to the
close of trading to
prevent executions after
the market close. This is
consistent with the
standard FLEX electronic
auction, which permits
FLEX Traders to designate
the length of that auction
(and permits it to be from
three seconds to five
minutes). This provides
consistency among
electronic FLEX auctions.
Additionally, it provides
FLEX Traders with
flexibility regarding the
duration of the exposure
time, which it may want to
be longer than three
seconds due to the terms
of the FLEX Option series
being auctioned.\17\
An Initiating FLEX Trader may not Rule.................. Rule 5.73(c)(4)....... The proposed rule change
modify or cancel an Agency Order 24A.5A(b)............. makes only nonsubstantive
or Initiating Order after changes to this provision,
submission to a FLEX AIM Auction. as well as clarifies that
the prohibition on the
Initiating FLEX Trader
from modifying or
cancelling an order after
submission to a FLEX AIM
Auction applies to both
the Agency Order and the
Initiating Order (the
current rules only
references the Agency
Order; however, they are
submitted as a pair, and
thus not being able to
modify or cancel the
Agency Order means that
the Initiating FLEX Trader
is not able to modify or
cancel the Initiating
Order either).
Any FLEX Trader may submit Rule.................. Rule 5.73(c)(5)....... The current rule specifies
responses to a FLEX AIM Auction 24A.5A(b)(1)(iv) and that responses must
that are properly marked (v). include prices and sizes;
specifying price, size, side, and the proposed rule change
the Auction ID for the FLEX AIM adds responses must also
Auction to which the FLEX Trader specify side and an
is submitting the response. A FLEX Auction ID, which is
AIM response may only participate consistent with current
in the FLEX AIM Auction with the functionality and merely
Auction ID specified in the adds details to the rule.
response. The proposed rule change
adds that a FLEX AIM
response may only
participate in the AIM
Auction with the Auction
ID specified in the
response. This is
consistent with current
functionality. The
Exchange proposes to
include this language
given the above proposal
that permits concurrent
FLEX AIM Auctions. The
proposed rule change
deletes the provision that
caps the price of a FLEX
AIM response at the
opposite side of the BBO,
because there will no
longer be an electronic
book (and thus no BBO) for
FLEX Options.
[[Page 54662]]
The minimum price increment for Rule.................. Rule 5.73(c)(5)(A).... The proposed rule change
FLEX AIM responses is the same as 24A.5A(b)(1)(vii) and adds that the System
the one the Exchange determines Interpretation and rejects a FLEX AIM
for a class pursuant to Policy .05. response that is not in
subparagraph (a)(4) above, and the applicable minimum
must be in the same format (i.e., increment or format, which
price or percentage) as the is consistent with current
exercise price of the FLEX Option functionality and merely
series. A response to a FLEX AIM adds detail to the rule.
Auction of a complex Agency Order See the discussion below
must have a net price. The System regarding the application
rejects a FLEX AIM response that of FLEX AIM to complex
is not in the applicable minimum orders, including proposed
increment or format. changes to current Rule
24A.5A, Interpretation and
Policy .05.
A FLEX Trader may submit multiple N/A................... Rule.................. This is consistent with
FLEX AIM responses at the same or 5.73(c)(5)(B) and (C). current functionality.
multiple prices to a FLEX AIM Current Rule 24A.5A
Auction. For purposes of a FLEX contains no restriction on
AIM Auction, the System aggregates how many responses a FLEX
all of a FLEX Trader's FLEX AIM Trader may submit; the
responses for the same EFID at the proposed rule change
same price. The System caps the merely makes this explicit
size of a FLEX AIM response, or in the Rules. The proposed
the aggregate size of a FLEX rule change also states
Trader's FLEX AIM responses for for purposes of a FLEX AIM
the same EFID at the same price, Auction, the System
at the size of the Agency Order aggregates all of a FLEX
(i.e., the System ignores size in Trader's FLEX AIM
excess of the size of the Agency responses for the same
Order when processing the FLEX AIM EFID at the same price.
Auction). This (combined with the
proposed size cap) will
prevent a FLEX Trader from
submitting multiple
orders, quotes, or
responses at the same
price to obtain a larger
pro-rata share of the
Agency Order.
FLEX AIM responses must be on the N/A................... Rule.................. This is consistent with
opposite side of the market as the 5.73(c)(5)(D)......... current functionality, and
Agency Order. The System rejects a the proposed rule change
FLEX AIM response on the same side merely adds this detail to
of the market as the Agency Order. the rules. Additionally,
the Exchange believes this
is reasonable given that
the purpose of an AIM
response is to trade
against the Agency Order
in the AIM Auction into
which the AIM response was
submitted.
FLEX AIM responses are not visible Rule.................. Rule.................. None.
to AIM Auction participants or 24A.5A(b)(1)(vi)...... 5.73(c)(5)(E).........
disseminated to OPRA.
A FLEX Trader may modify or cancel Rule.................. Rule.................. The current Rule permits
its FLEX AIM responses during the 24A.5A(b)(1)(viii).... 5.73(c)(5)(F)......... FLEX Traders to cancel a
FLEX AIM Auction. FLEX AIM response, but
does not explicitly state
that those responses may
be modified. A
modification of a response
is equivalent to a
cancellation of an
existing response and
submission of a new
response, but may instead
be done through a
different message type.
Therefore, the proposed
rule change permits the
same activity that can be
done pursuant to the
current rule, but merely
in a different manner
(i.e., modification rather
than cancellation and
separate entry).
A FLEX AIM Auction concludes at the Rule.................. Rule.................. The proposed rule change
earliest to occur of the following 24A.5A(b)(2).......... 5.73(d)............... deletes the provision that
times: (1) The end of the FLEX AIM says a FLEX AIM Auction
Auction period; and (2) any time will conclude any time an
the Exchange halts trading in the RFR response matches the
affected series, provided, BBO on the opposite side
however, that in such instance the of the market from the RFR
FLEX AIM Auction concludes without responses, because there
execution. will no longer be an
electronic book (and thus
no BBO) for FLEX Options.
At the conclusion of the FLEX AIM Rule 24A.5A(b)(3)..... Rule 5.73(e).......... The proposed rule change
Auction, the System allocates the deletes references to
Initiating Order or FLEX AIM executions against FLEX
responses against the Agency Order Orders, and whether the
at the best price(s) to the price final auction price locks
at which the balance of the Agency an order on the electronic
Order can be fully executed (the book, because there will
``final auction price''). If the no longer be an electronic
FLEX AIM Auction results in no book (and thus no BBO) for
price improvement, the System FLEX Options, and thus
executes the Agency Order at the Agency Orders will only
stop price in the following order: execute responses or the
Priority Customer responses Initiating Order, as
receive first priority at each applicable. The proposed
price level, the Initiating Order rule change deletes the
participation entitlement (50% or reference to a FLEX
40% depending on how many FLEX Appointed Market-Maker
Traders submitted FLEX AIM participation entitlement,
responses at the same price as there are currently no
receives second priority at the FLEX Appointed Market-
final auction price, all other Makers, and the Exchange
responses have third priority and has not applied a
are allocated on a pro-rata basis participation entitlement,
pursuant to Rule 5.32(a)(1)(B), and as a result, the
and the Initiating Order would Exchange is deleting FLEX
have fourth priority to the extent Appointed Market-Makers
there are any remaining contracts. from the Rules.\18\ The
If the FLEX AIM Auction results in proposed rule change
price improvement for the Agency provides that non-Priority
Order and the Initiating FLEX Customer FLEX AIM
Trader selected a single-price responses will be
submission, at each price better allocated in a pro-rata
than the final auction price, the manner rather than price-
System executes the Agency Order time. The majority of
first to Priority Customer classes on the Exchange
responses (in time priority) and currently have a base
then to all other FLEX AIM allocation algorithm of
responses, allocated on a pro-rata pro-rata, and therefore
basis. At the final auction price, the Exchange believes it
the System executes any remaining is a reasonable manner in
contracts from the Agency Order at which to allocate FLEX AIM
that price in the order set forth responses. FLEX AIM
in proposed subparagraph (e)(1). Priority Customer \19\
If the FLEX AIM Auction results in responses will continue to
price improvement for the Agency have priority at each
Order and the Initiating FLEX price level (in time
Trader selected auto-match, at priority); however, non-
each price level better than the TPH broker-dealers will
final auction price up to the not and will be treated in
designated limit price, the System the same manner as all
executes the Agency Order against other non-Priority
the Initiating Order for the Customer responses, as
number of contracts equal to the further discussed below.
aggregate size of all FLEX AIM The Exchange notes the
responses and then executes the current rule states public
Agency Order against those customer orders have
responses in the order set forth priority, rather than
in proposed subparagraph (e)(2). Priority Customers.
At the final auction price, the Currently, the Exchange
System executes contracts at that does not permit the
price in the order set forth in submission of FLEX Orders
proposed subparagraph (e)(1). If with a Professional
the Initiating FLEX Trader selects Capacity code, and so the
a single-price submission, it may terms public customer and
elect for the Initiating Order to Priority Customer
have last priority to trade practically mean the same
against the Agency Order. If the thing. However, the
Initiating FLEX Trader elects last Exchange plans to make the
priority, then notwithstanding Professional Capacity code
proposed subparagraphs (e)(1) and available for FLEX orders
(2), the System only executes the following migration, and
Initiating Order against any because the System handles
remaining Agency Order contracts Professional orders like
at the stop price after the Agency broker-dealer orders,
Order is allocated to all FLEX AIM those orders will not
responses at all prices equal to receive priority in a FLEX
or better than the stop price. AIM Auction. Therefore,
Last priority information is not only Priority Customer
available to other market responses will receive
participants and may not be priority.\20\ The proposed
modified after it is submitted. rule change also permits
the Initiating FLEX Trader
to select last priority,
as further discussed
below. Finally, the
proposed rule change adds
that any unexecuted
responses (or portions) at
the conclusion of the FLEX
AIM Auction will be
cancelled.
A FLEX Trader may only use a FLEX Rule.................. Rule.................. None.
AIM Auction where there is a 24A.5A, Interpretation 5.73, Interpretation
genuine intention to execute a and Policy .01. and Policy .01.
bona fide transaction.
It will be deemed conduct Rule.................. Rule.................. The proposed rule change
inconsistent with just and 24A.5A, Interpretation 5.73, Interpretation deletes the language that
equitable principles of trade and and Policy .02. and Policy .02. states the Agency Order
a violation of Rule 10.1 (to which cannot be broken up into
the Exchange intends to move Rule separate orders for ``two
4.1 from the current Rulebook) to (2) or fewer contracts,''
engage in a pattern of conduct as that language is not in
where the Initiating FLEX Trader the corresponding
breaks up an Agency Order into provision for non-FLEX AIM
separate orders for the purpose of (see Rules 5.37,
gaining a higher allocation Interpretation and Policy
percentage than the Initiating .02 and 5.38,
FLEX Trader would have otherwise Interpretation and Policy
received in accordance with the .02 of the shell
allocation procedures contained in Rulebook). Deletion of
paragraph (e) above. this language does not
have any impact on the
prohibited conduct in this
provision, and provides
consistency among the
rules in the shell
Rulebook regarding AIM
Auctions.
----------------------------------------------------------------------------------------------------------------
[[Page 54663]]
FLEX SAM Auction
----------------------------------------------------------------------------------------------------------------
A FLEX Trader (the ``Initiating Rule.................. Rule.................. The proposed rule change
FLEX Trader'') may electronically 24A.5B, introductory 5.74, introductory adds that the Solicited
submit for execution an order paragraph and paragraph. Order cannot have a
(which may be a simple or complex Interpretations and Capacity F for the same
order) it represents as agent Policies .01 and .04. executing firm ID
(``Agency Order'') against a (``EFID'') as the Agency
solicited order(s) (which cannot Order. Current Rule 24A.5B
have a Capacity of F for the same does not contain a similar
EFID as the Agency Order or for provision, but the
the account of any FLEX Market Exchange currently
Maker with an appointment in the enforces the requirement
applicable FLEX Option class on that the contra-side order
the Exchange) (``Solicited be a solicitation rather
Order'') if it submits the Agency than a facilitation
Order for electronic execution through surveillance. The
into a FLEX SAM Auction pursuant proposed rule change adds
to this Rule. this functionality, which
will help with the
enforcement of this
requirement, in addition
to surveillance. The
proposed rule change also
specifies in the
introductory paragraph
that both simple and
complex orders may be
submitted into a FLEX SAM
Auction, as the auction
will apply to both simple
and complex orders in a
substantially similar
manner, as further
discussed below.
An Agency Order must be in a FLEX Rule.................. Rule.................. None.
Option class the Exchange 24A.5B(a)(1).......... 5.74(a)(1)............
designates as eligible for FLEX
SAM Auctions.
The Agency Order and Solicited N/A................... Rule.................. This requirement is not
Order must each be a FLEX Order 5.74(a)(2)............ explicitly stated in the
that complies with Rule 5.72(b) in current Rules; however, it
a permissible FLEX Option series is consistent with current
that complies with Rule 4.21. functionality, and the
proposed rule change
merely states this in the
Rules. For a FLEX SAM
Auction to occur, the
orders submitted would
need to be in a series
eligible for FLEX trading,
and thus include all the
terms necessary to
comprise a FLEX Option
series.\21\
The Initiating FLEX Trader must Rule.................. Rule.................. None.
mark an Agency Order for FLEX SAM 24A.5B(b)(1)(i)....... 5.74(a)(3)............
Auction processing.
The Agency Order must be for at Rule.................. Rule.................. The proposed rule change
least the minimum size designated 24A.5B(a)(1) and (2).. 5.74(a)(4)............ deletes the requirement
by the Exchange (which may not be that the Initiating FLEX
less than 500 standard option Trader must designate each
contracts or 5,000 mini-option order entered into a FLEX
contracts). The Solicited Order SAM Auction as all-or-none
must be for (or must total, if the (``AON''). The Exchange's
Solicited Order is comprised of new system has been
multiple solicited orders) the designed to automatically
same size as the Agency Order. The handle any orders
System handles each of the Agency submitted into a SAM
Order and the Solicited Order as Auction (using the
all-or-none. appropriate messaging) as
all-or-none, so the
Initiating FLEX Trader
will no longer be required
to add any specific AON
designations to the Agency
Order or Solicited Order.
Therefore, the proposed
rule change adds that the
System handles each of the
Agency Order and the
Solicited Order as all-or-
none. The proposed rule
change clarifies the size
requirements for mini-
option contracts, which
are 1/10th the size of
standard option contracts.
This is consistent with
current functionality and
is merely adding detail to
the rule. See Rule 5.5,
Interpretation and Policy
.22 in the current
Rulebook (which permits
the listing of mini-
options); see also Rule
5.39(a)(3) (which has the
same size requirements for
non-FLEX SAM Auctions).
The proposed rule change
clarifies in the Rules
that the Solicited Order
must be for the same size
as the Agency Order, which
is implied by the current
Rules.\22\
The price of the Agency Order and Rule.................. Rule.................. The current rule state the
Solicited Order must be in an 24A.5B(a)(3).......... 5.74(a)(5)............ minimum increment for the
increment the Exchange determines Initiating TPH's
on a class basis (which may not be submission is determined
smaller than the amounts set forth by the Exchange but may
in Rule 5.4(c)(4)). The price must not be smaller than $0.01
be in the same format (i.e., price or .01%, and premiums are
or percentage) as the exercise rounded to the nearest
price of the FLEX Option series. minimum increment. This is
If the Agency Order and Solicited consistent with the
Order are complex orders, the minimum increment
price must be a net price for the available for all FLEX
complex strategy. Trading, so the proposed
rule change merely
references Rule 5.4(c)(4)
in the shell Rulebook,
which describes the
permissible minimum
increments for FLEX Option
series, rather than
repeats those increments.
There is no substantive
change to the permissible
minimum increments for
orders submitted to a FLEX
SAM Auction. The proposed
rule change maintains the
rule provision that
complex Agency and
Initiating Orders must
include a net price. See
the discussion below
regarding the application
of FLEX SAM to complex
orders, including proposed
changes to current Rule
24A.5B, Interpretation and
Policy .01.
An Initiating FLEX Trader may only N/A................... Rule.................. This is consistent with
submit an Agency Order to a FLEX 5.74(a)(6)............ current functionality, as
SAM Auction after trading in FLEX executions cannot occur
Options is open pursuant to Rule prior to the opening of
5.71. trading. The proposed rule
change clarifies this in
the Rule.
The System rejects or cancels both N/A................... Rule 5.74(a).......... This is consistent with
an Agency Order and Solicited current functionality, and
Order submitted to a FLEX SAM the proposed rule change
Auction that do not meet the explicitly states this in
conditions in proposed paragraph the Rule.
(a).
The Solicited Order must stop the Rule.................. Rule.................. The proposed rule change
entire Agency Order at a price in 24A.5B(a)(3) and 5.74(b)............... adds that the System
the same format (i.e., price or Interpretation and rejects or cancels both an
percentage) as the exercise price Policy .01, and Agency Order and Solicited
of the FLEX Option series. If the 24A.5B(b)(1). Order submitted to a FLEX
Agency Order and Solicited Order SAM Auction that does not
are complex orders, the price must meet the conditions in
be a net price for the complex proposed paragraph (b).
strategy. The Initiating FLEX This is consistent with
Trader must specify a single price current functionality, and
at which it seeks to execute the the proposed rule change
Agency Order against the Solicited explicitly states this in
Order. The System rejects or the Rule. Additionally,
cancels both an Agency Order and while current rules permit
Solicited Order submitted to a bids and offers (including
FLEX SAM Auction that does not the price submitting into
meet the conditions in proposed a FLEX SAM Auction) to be
paragraph (b). in a different format than
the exercise price of a
FLEX Option series, the
current functionality does
not permit this. Rule
5.3(e)(3) in the shell
Rulebook makes it clear
that bids and offers must
be in the same format as
the exercise price, as it
would be difficult to
apply a dollar price for a
FLEX Option series with a
percentage-based exercise
price.\23\
One or more FLEX SAM Auctions in Rule.................. Rule.................. The proposed rule change
the same FLEX Option series or 24A.5B(b) and 5.74(c)(1)............ permits concurrent FLEX
complex strategy, as applicable, Interpretation and SAM Auctions, which the
may occur at the same time. Policy .01. current rule prohibits, as
further discussed below.
The proposed rule change
also deletes the provision
that says unrelated FLEX
Orders may not be
submitted to the
electronic book for the
duration of a FLEX SAM
Auction, because there
will no longer be an
electronic book (and thus
no BBO) for FLEX Options.
The System initiates the FLEX SAM Rule.................. Rule.................. The current rule states the
Auction process by sending a FLEX 24A.5B(b)(1)(ii)...... 5.74(c)(2)............ auction message (currently
SAM Auction notification message called a request for
detailing the side, size, price, responses (``RFR''))
Capacity, Auction ID, the length details the price, size,
of the FLEX SAM Auction period, and side of the order,
and FLEX Option series or complex which message is set to
strategy, as applicable, of the all FLEX Traders that have
Agency Order to all FLEX Traders elected to receive RFRs
that elect to receive FLEX SAM upon receipt of a properly
Auction notification messages. designated Agency Order
FLEX SAM Auction notification for FLEX SAM processing.
messages are not disseminated to Other than changes to
OPRA. terminology and other
nonsubstantive changes,
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
to add that the FLEX SAM
Auction notification
message includes the
length of the FLEX SAM
Auction period relates to
the proposed change below
that the Initiating FLEX
Trader, rather than the
Exchange, will designate
the length of the FLEX SAM
Auction period (and
therefore FLEX Traders
will know how long they
have to respond to a FLEX
SAM Auction). The proposed
rule change also adds that
FLEX SAM Auction
notification messages are
not included in the
disseminated OPRA, which
is also consistent with
current functionality.\24\
[[Page 54664]]
The ``FLEX SAM Auction period'' is Rule.................. Rule.................. The proposed rule change
a period of time designated by the 24A.5B(b)(1)(iii)..... 5.74(c)(3)............ adds a maximum time to the
Initiating FLEX Trader, which may range for the FLEX SAM
be no less than three seconds and Auction period (the
no more than five minutes. The minimum potential auction
designated length of the FLEX SAM period remains three
Auction period may not be longer seconds), which is
than the amount of time remaining consistent with current
until the market close. Exchange authority under
the current Rules.
Additionally, this
corresponds to the same
permissible time range as
that for electronic FLEX
Auctions pursuant to Rule
5.72 in the shell
Rulebook, and permits the
Initiating FLEX Trader to
designate the length of
the FLEX SAM Auction when
submitting the Agency
Order rather than have the
Exchange establish a
length for all FLEX SAM
Auctions. It also ensures
that a FLEX SAM Auction
will conclude prior to the
close of trading to
prevent executions after
the market close. This is
consistent with standard
FLEX electronic auction,
which permits FLEX Traders
to designate the length of
that auction (and permits
it to be from three
seconds to five minutes).
This provides consistency
among FLEX trading.
Additionally, it provides
FLEX Traders with
flexibility regarding the
duration of the exposure
time, which it may want to
be longer than three
seconds due to the terms
of the FLEX Option series
being auctioned.\25\
The Initiating FLEX Trader may not Rule.................. Rule.................. The proposed rule change
modify or cancel an Agency Order 24A.5B(b)............. 5.74(c)(4)............ makes only nonsubstantive
or Solicited Order after changes to this provision,
submission to a SAM Auction. as well as clarifies that
the prohibition on
cancelling a FLEX SAM
Auction practically means
that the Initiating FLEX
Trader may not cancel (or
modify, which would change
the terms of the auction
after it started,
essentially creating a new
auction) the Agency Order
or the Solicited Order,
the entry of which
(subject to eligibility
requirements) initiates
the FLEX SAM Auction.
Any FLEX Trader other than the Rule.................. Rule.................. The current rule specifies
Initiating FLEX Trader (determined 24A.5B(b)(1)(iii) and 5.74(c)(5)............ that responses must
by EFID) may submit responses to a (vi). include prices and sizes;
FLEX SAM Auction that are properly the proposed rule change
marked specifying price, size, adds responses must also
side, and the Auction ID for the specify side and an
FLEX SAM Auction to which the FLEX Auction ID, which is
Trader is submitting the response. consistent with current
A FLEX SAM response may only functionality and merely
participate in the FLEX SAM adds details to the rule.
Auction with the Auction ID The proposed rule change
specified in the response. adds that a FLEX SAM
response may only
participate in the FLEX
SAM Auction with the
Auction ID specified in
the response. This is
consistent with current
functionality. The
Exchange proposes to
include this language
given the above proposal
that permits concurrent
FLEX SAM Auctions. The
proposed rule change
deletes the provision that
caps the price of a FLEX
SAM response at the
opposite side of the BBO,
because there will no
longer be an electronic
book (and thus no BBO) for
FLEX Options. The proposed
rule change permits all
FLEX Traders (including
Market-Makers from another
options exchange) to
submit responses to a FLEX
SAM Auction. By permitting
additional participants to
submit responses to FLEX
SAM Auctions, the Exchange
believes this may provide
the opportunity for
additional liquidity in
these auctions, which
could lead to additional
price improvement
opportunities.
The minimum price increment for Rule.................. Rule.................. The proposed rule change
FLEX SAM responses is the same as 24A.5B(b)(1)(v) and 5.74(c)(5)(A)......... adds that the System
the one the Exchange determines Interpretation and rejects a FLEX SAM
for a class pursuant to Policy .01. response that is not in
subparagraph (a)(4) above, and the applicable minimum
must be in the same format (i.e., increment or format, which
price or percentage) as the is consistent with current
exercise price of the FLEX Option functionality and merely
series. A response to a FLEX SAM adds detail to the rule.
Auction of a complex Agency Order See the discussion below
must have a net price. The System regarding the application
rejects a FLEX SAM response that of FLEX SAM to complex
is not in the applicable minimum orders, including proposed
increment or format. changes to current Rule
24A.5B, Interpretation and
Policy .01.
A FLEX Trader may submit multiple N/A................... Rule.................. This is consistent with
FLEX SAM responses at the same or 5.74(c)(5)(B) and (C). current functionality.
multiple prices to a FLEX SAM Current Rule 24A.5B
Auction. For purposes of a FLEX contains no restriction on
SAM Auction, the System aggregates how many responses a FLEX
all of a FLEX Trader's FLEX SAM Trader may submit; the
responses for the same EFID at the proposed rule change
same price. The System caps the merely makes this explicit
size of a FLEX SAM response, or in the Rules. The proposed
the aggregate size of a FLEX rule change also states
Trader's FLEX SAM responses for for purposes of a FLEX SAM
the same EFID at the same price, Auction, the System
at the size of the Agency Order aggregates all of a FLEX
(i.e., the System ignores size in Trader's FLEX SAM
excess of the size of the Agency responses for the same
Order when processing the FLEX SAM EFID at the same price.
Auction). This (combined with the
proposed size cap) will
prevent a FLEX Trader from
submitting multiple
orders, quotes, or
responses at the same
price to obtain a larger
pro-rata share of the
Agency Order.
FLEX SAM responses must be on the N/A................... Rule.................. This is consistent with
opposite side of the market as the 5.74(c)(5)(D)......... current functionality, and
Agency Order. The System rejects a the proposed rule change
FLEX SAM response on the same side merely adds this detail to
of the market as the Agency Order. the rules. Additionally,
the Exchange believes this
is reasonable given that
the purpose of a FLEX SAM
response is to trade
against the Agency Order
in the FLEX SAM Auction
into which the FLEX SAM
response was submitted.
FLEX SAM responses are not visible Rule.................. Rule.................. None.
to FLEX SAM Auction participants 24A.5B(b)(1)(iv)...... 5.74(c)(5)(E).........
or disseminated to OPRA.
A FLEX Trader may modify or cancel Rule.................. Rule.................. The current Rule permits
its FLEX SAM responses during the 24A.5B(b)(1)(vii)..... 5.74(c)(5)(F)......... FLEX Traders to cancel a
FLEX SAM Auction. FLEX SAM response, but
does not explicitly state
that those responses may
be modified. A
modification of a response
is equivalent to a
cancellation of an
existing response and
submission of a new
response, but may instead
be done through a
different message type.
Therefore, the proposed
rule change permits the
same activity that can be
done pursuant to the
current rule, but merely
in a different manner
(i.e., modification rather
than cancellation and
separate entry).
A FLEX SAM Auction concludes at the Rule.................. Rule.................. The proposed rule change
earliest to occur of the following 24A.5A(b)(2).......... 5.74(d)............... deletes the provision that
times: (1) The end of the FLEX SAM says a FLEX SAM Auction
Auction period; and (2) any time will conclude any time an
the Exchange halts trading in the RFR response matches the
affected series, provided, BBO on the opposite side
however, that in such instance the of the market from the RFR
FLEX SAM Auction concludes without responses, , because there
execution. will no longer be an
electronic book (and thus
no BBO) for FLEX Options.
The Agency Order executes against Rule.................. Rule 5.74(e).......... The proposed rule change
the Solicited Order at the stop 24A.5B(b)(3).......... deletes references to
price if there are no Priority executions against FLEX
Customer FLEX SAM responses and Orders, and whether the
the aggregate size of FLEX SAM execution price is better
responses at an improved price(s) than the BBO, because
is insufficient to satisfy the there will no longer be an
Agency Order. The Agency Order electronic book (and thus
executes against FLEX SAM no BBO) for FLEX Options,
responses if: (a) There is a and thus Agency Orders
Priority Customer FLEX SAM will only execute
response and the aggregate size of responses or the
that response and all other FLEX Initiating Order, as
SAM responses is sufficient to applicable. The proposed
satisfy the Agency Order or (b) rule change deletes the
the aggregate size of FLEX SAM reference to a FLEX
responses at an improved price(s) Appointed Market-Maker
is sufficient to satisfy the participation entitlement,
Agency Order. At each price level, as there are currently no
Priority Customer FLEX SAM FLEX Appointed Market-
responses have first priority, and Makers, and the Exchange
all other FLEX SAM responses are has not applied a
allocated second on a pro-rata participation entitlement,
basis. There is no execution at and as a result, the
the conclusion of a FLEX SAM Exchange is deleting FLEX
Auction if there is a Priority Appointed Market-Makers
Customer FLEX SAM response and the from the Rules (as noted
aggregate size of that response above). The proposed rule
and other FLEX SAM responses is change provides that FLEX
insufficient to satisfy the Agency SAM responses will be
Order. The System cancels or allocated in a pro-rata
rejects any unexecuted FLEX SAM manner rather than time
responses (or unexecuted portions) priority. The majority of
at the conclusion of a FLEX SAM classes on the Exchange
Auction. currently have a base
allocation algorithm of
pro-rata, and therefore
the Exchange believes it
is a reasonable manner in
which to allocate FLEX SAM
responses. FLEX SAM
Priority Customer
responses will continue to
have priority at each
price level; however, non-
TPH broker-dealers will
not and will be treated in
the same manner as all
other non-Priority
Customer responses, as
further discussed below.
Finally, the proposed rule
change adds that any
unexecuted responses (or
portions) at the
conclusion of the FLEX SAM
Auction will be cancelled.
See discussion above with
respect to FLEX AIM
regarding changing the
term ``public customer''
to ``Priority Customer,''
as the same reasoning
applies to the proposed
change in the FLEX SAM
rule.
[[Page 54665]]
Prior to entering Agency Orders Rule 24A.5B, Rule 5.74, None.
into a FLEX SAM Auction on behalf Interpretation and Interpretation and
of customers, Initiating FLEX Policy .03. Policy .01.
Traders must deliver to the
customer a written notification
informing the customer that his
order may be executed using the
FLEX SAM Auction. The written
notification must disclose the
terms and conditions contained in
proposed Rule 5.74 and be in a
form approved by the Exchange.
Under proposed Rule 5.74, Rule 24A.5B, Rule 5.74, None.
Initiating FLEX Traders may enter Interpretation and Interpretation and
contra-side orders that are Policy .04. Policy .02.
solicited. FLEX SAM provides a
facility for FLEX Traders that
locate liquidity for their
customer orders. FLEX Traders may
not use the FLEX SAM Auction to
circumvent Rule 5.9 or 5.73 in the
shell Rulebook limiting principal
transactions. This may include,
but is not limited to, FLEX
Traders entering contra-side
orders that are solicited from (a)
affiliated broker-dealers or (b)
broker-dealers with which the FLEX
Trader has an arrangement that
allows the FLEX Traders to realize
similar economic benefits from the
solicited transaction as it would
achieve by executing the customer
order in whole or in part as
principal.
----------------------------------------------------------------------------------------------------------------
The proposed rule change clarifies in the proposed introductory
paragraph of each of proposed Rules 5.73 and 5.74 that the Initiating
Order or Solicited Order, respectively, 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
FLEX AIM or SAM Auction with the potential for price improvement, since
the Initiating Order or Solicited Order, respectively, 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) of each of proposed Rules 5.73 and 5.74.
---------------------------------------------------------------------------
\6\ A FLEX Market-Maker with an appointment in a FLEX Option
class is not what is currently referred to as a ``FLEX Appointed
Market-Maker'' in the current Rulebook. Under current Rules, a
``FLEX Qualified Market-Maker'' is an Exchange-registered Market-
Maker that is eligible to trade FLEX Options and is appointed to one
or more FLEX Option classes, and a ``FLEX Appointed Market-Maker''
is an Exchange-registered Market-Maker that is eligible to trade
FLEX Options that is selected by the Exchange to serve in such
capacity for one or more FLEX Option classes, which has certain FLEX
quoting obligations. See current Rule 24A.9. The Exchange currently
has no FLEX Appointed Market-Makers in any FLEX Option class, and
does not intend to, so it has deleted its rules related to FLEX
Appointed Market-Makers. See Securities Exchange Act Release No.
87024 (September 19, 2019), 84 FR 50545 (September 25, 2019) (SR-
CBOE-2019-059).
\7\ With respect to FLEX Options, the term ``BBO'' means the
best bid or offer, or both, as applicable, entered in response to a
Request for Quotes or resting in the electronic book. With respect
to FLEX AIM and SAM Auctions, which are different than a Request for
Quotes, the BBO only incorporates any bids and offers resting in the
electronic book. While the Exchange currently has an electronic book
for FLEX Options, it has only been used in recent months by one
customer for limited purpose, and for a minimal amount of FLEX
volume. Therefore, it is unlikely there would be resting FLEX Orders
to be incorporated into the BBO. The Exchange will no longer have an
electronic FLEX Book. See SR-CBOE-2019-084. Additionally, there is
no RFQ process that is part of a FLEX AIM Auction.
\8\ See SR-CBOE-2019-084 (which filing describes the current
minimal, limited use of an electronic FLEX Book and the elimination
of a book for FLEX Orders as of the System migration, and deletes
rule provisions related to a FLEX electronic book from the rules in
current Chapter XXIV).
\9\ See Rule 5.72(b) of the shell Rulebook (which states that
submission of a FLEX Order into a FLEX AIM Auction establishes a
FLEX Option series as eligible for trading); see also Rule 4.21
(which describes the permissible terms of FLEX Option series, and
states that a FLEX Option series may not have the same terms as a
non-FLEX Option series on the same undelyring security or index that
is already available for trading) and Rule 4.22 (which describes
fungibility provisions when the Exchange lists for trading a non-
FLEX Option series with identical terms as a FLEX Option series).
\10\ See current Rule 24A.5A(a)(2), which states the Initiating
TPH must stop the ``entire'' Agency Order.
\11\ Pursuant to Rule 5.4(c)(4) in the shell Rulebook, the
minimum increment for bids and offers on FLEX Options may be no
smaller than (A) $0.01, if the exercise price for the FLEX Option
series is a fixed price, or (B) 0.01%, if the exercise price for the
FLEX Option series is a percentage of the closing value of the
underlying equity security or index. The System rounds bids and
offers to the nearest minimum increment.
\12\ In current Rules 24A.5A, Interpretation and Policy .05 and
24A.5B, Interpretation and Policy .01, the price of a complex order
is referenced as a net debit or net credit price, while proposed
Rules 5.73 and 5.74 just use the simplified term ``net price'' as
that is consistent with the term used in other FLEX Rules in the
shell Rulebook. See, e.g., Rule 5.72(b)(2) in the shell Rulebook. A
net debit price is merely a complex order with a net price to buy,
and a net credit price is merely a complex order with a net price to
sell, so the term net price covers both terms.
\13\ See also SR-CBOE-2019-084.
\14\ Pursuant to Rule 5.71 in the shell Rulebook, trading in
FLEX Options in a trading session may begin, with respect to the
Regular Trading Hours trading session, after 9:30 a.m. of the first
disseminated (a) transaction on the primary listing market in the
security underlying an equity option or (b) index value for the
index underlying an index option, and with respect to the Global
Trading Hours trading session, after 3:00 a.m.
\15\ See supra note 7.
\16\ This is also consistent with the auction notification
message for non-FLEX AIM Auctions. See Rules 5.37(c)(3) and
5.38(c)(3) in the shell Rulebook.
\17\ The Exchange believes the proposed time range is
reasonable, because it is consistent with the lengths designated by
FLEX Traders in the current electronic RFQ process. Specifically,
the Exchange notes that from January through August of 2019, for
electronic FLEX trading in the FLEX RFQ process (but not FLEX AIM
and SAM Auctions), the average RFQ Response period is less than nine
seconds, and the average RFQ Reaction period is approximately three
minutes. Therefore, the average length of the electronic RFQ process
is within the proposed exposure interval. Additionally, in 2019,
only 25 of 3457 (or 0.7%) of electronic FLEX RFQs lasted for a total
of more than five minutes in 2019, so the Exchange does not believe
capping the length of the proposed electronic FLEX Auction at five
minutes will have a significant impact on FLEX trading. See SR-CBOE-
2019-084.
\18\ See supra note 6.
\19\ As defined in Rule 1.1 in the shell Rulebook, a ``Priority
Customer'' is a person or entity that is a Public Customer (which is
a person that is not a broker or dealer in securities) or a
Professional (which is defined as any person or entity that (a) is
not a broker or dealer in securities, and (b) places more than 390
orders in listed options per day on average during a calendar month
for its own beneficial account(s); the System handles Professional
orders in the same manner as broker-dealer orders unless otherwise
specified).
\20\ This is consistent with other Exchange auction
functionality that prioritizes Priority Customer orders, as well as
the customer overlay, which prioritizes Priority Customer orders,
rather than Public Customer orders. See, e.g., Rules 5.32(a)(2)(A)
(describing the Priority Customer overlay), 5.33(d)(5) (describing
how Priority Customers receive first priority following a complex
order auction), and 5.37(e) (describing how Priority Customers
receive first priority at each price level following an AIM
Auction).
\21\ See supra note 9.
\22\ See current Rule 24A.5B(a)(2) (b)(3), which states each
order entered into the FLEX SAM Auction must be AON, and that the
Agency Order executes in full or is cancelled, and may be allocated
entirely to the Solicited Order, subject to certain conditions.
Given that both orders must be AON, if the Solicited Order was not
the same size as the Agency Order, they would not be able to execute
against each other at the conclusion of a FLEX SAM Auction.
\23\ See also SR-CBOE-2019-084.
\24\ This is also consistent with the auction notification
message for non-FLEX SAM Auctions. See Rules 5.39(c)(3) and
5.40(c)(3) in the shell Rulebook.
\25\ See supra note 17.
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Rules 24A.5A, Interpretation and Policy .05 and 24A.5B,
Interpretation and Policy .01 currently describe the applicability of
FLEX AIM and SAM Auctions, respectively. Because FLEX AIM and SAM
Auctions apply to
[[Page 54666]]
complex orders in the same manner as they apply to simple orders, other
than the need for complex orders (and responses to auctions of complex
orders) to include a net price (as required in current Rules 24A.5A,
Interpretation and Policy .05 and 24A.5B, Interpretation and Policy
.01),\26\ the Exchange no longer believes a separate interpretation and
policy is necessary for complex orders. The Exchange makes FLEX AIM and
SAM Auctions, respectively, available for complex orders in any FLEX
Option class in which it makes the applicable auction available for
simple orders, so the Exchange no longer needs separate flexibility to
apply each auction to complex orders as provided by current Rules
24A.5A, Interpretation and Policy .05 and 24A.5B, Interpretation and
Policy .01 (which state the Exchange may determine on a class-by-class
basis to make the FLEX AIM Auction or FLEX SAM Auction, respectively,
available for complex orders). As discussed below, the proposed rule
change will permit multiple FLEX AIM and SAM Auctions for a complex
strategy, and in any of the same individual series legs of the
strategy, to be ongoing at the same time, so the proposed rule change
deletes the provisions from current Rules 24A.5A, Interpretation and
Policy .05 and 24A.5B, Interpretation and Policy .01 that state only
one FLEX AIM Auction may be ongoing at any given time. Additionally,
the proposed rule change deletes the provision in current Rules 24A.5A,
Interpretation and Policy .05 and 24A.5B, Interpretation and Policy .01
that state unrelated FLEX Orders in any individual series legs may not
be submitted to the electronic book for the duration of a FLEX AIM or
SAM Auction, as there will no longer be a book available for FLEX
Orders.\27\ The Exchange believes this will simplify the FLEX AIM and
SAM Auctions.
---------------------------------------------------------------------------
\26\ See supra note 12.
\27\ See SR-CBOE-2019-084.
---------------------------------------------------------------------------
All eligibility requirements for FLEX AIM and SAM Auctions are set
forth in the proposed rules,\28\ so the proposed rule change also
deletes the current flexibility to determine order types, origin codes,
and marketability that are eligible for those auctions from current
Rules 24A.5A, Interpretation and Policy .05 and 24A.5B, Interpretation
and Policy .01. As discussed above, complex orders, like simple orders,
will only be able to trade against FLEX AIM or SAM responses, as
applicable, so the proposed rule change deletes the provisions that
state complex orders will only be eligible to trade with other complex
orders through a FLEX AIM or SAM Auction, respectively. Order
allocation for simple and complex orders following a FLEX AIM or SAM
Auction will continue to be the same, as proposed Rule 5.73(e) and
5.74(e) apply to both simple and complex orders, and therefore the
proposed rule change deletes that provision from current Rules 24A.5A,
Interpretation and Policy .05 and 24A.5B, Interpretation and Policy
.01. Finally, because there will no longer be an electronic book (and
thus no BBO) for FLEX Options, the proposed rule change deletes the
provisions in Rules 24A.5A, Interpretation and Policy .05 and 24A.5B,
Interpretation and Policy .01 regarding the impact of bids and offers
in the electronic book on FLEX AIM and SAM Auctions, respectively, and
regarding the ability of orders in the individual legs to be submitted
to the electronic book during an auction.
---------------------------------------------------------------------------
\28\ See proposed Rules 5.73(a) and 5.74(a), respectively.
---------------------------------------------------------------------------
With respect to FLEX AIM Auctions, the proposed rule change
provides that if the Initiating FLEX Trader selects a single-price
submission, it may elect for the Initiating Order to have last priority
to trade against the Agency Order.\29\ If the Initiating FLEX Trader
selects a single-price submission, it may elect for the Initiating
Order to have last priority to trade against the Agency Order. In this
case, the Initiating Order would only execute against any remaining
Agency Order contracts at the stop price after the Agency Order is
allocated to all FLEX AIM responses at all prices equal to or better
than the stop price. Last priority information is not available to
other market participants and may not be modified after it is
submitted. This proposed rule change provides Initiating FLEX Traders
with additional control over its execution of an Initiating Order
against an Agency Order, which may further encourage FLEX Traders to
submit Agency Orders to a FLEX AIM Auction for potential price
improvement opportunities for those orders. This may also provide more
opportunities for other FLEX Traders to participate in the FLEX AIM
Auctions. The proposed last priority option is the same as the last
priority provision option available in non-FLEX AIM Auctions, and thus
the proposed rule change provides further consistency across the
Exchange's auction mechanisms.\30\
---------------------------------------------------------------------------
\29\ See proposed Rule 5.73(e)(4).
\30\ See Rule 5.37(e) in the shell Rulebook.
---------------------------------------------------------------------------
The proposed rule change permits the Initiating FLEX Trader to
designate the length of FLEX AIM and SAM Auctions, rather than the
Exchange. The permissible length of the auctions continues to have a
minimum of three seconds, which is consistent with the current Rules.
The proposed rule change also imposes a maximum for the length of the
auctions of five minutes, which is consistent with the permissible
times for the FLEX electronic auction.\31\ This will permit the
Initiating FLEX Trader to determine a reasonable timeframe for the
duration of an auction based on the FLEX Option series or complex
strategy submitted into the auction, as well as provide for a timely
execution of Agency Orders.
---------------------------------------------------------------------------
\31\ See Rule 5.72(b)(1)(F) in the shell Rulebook.
---------------------------------------------------------------------------
Unlike today, one or more FLEX AIM or SAM Auctions in the same FLEX
Option series or complex strategy (as applicable) may occur at the same
time. To the extent there is more than one FLEX AIM or SAM Auction in a
FLEX Option series or complex strategy (as applicable) underway at the
same time, the auctions will conclude sequentially based on the times
at which each auction period concludes. At the time each auction
concludes, the System allocates the Agency Order pursuant to proposed
Rule 5.73(e) or 5.74(e), as applicable, and takes into account all FLEX
responses submitted during the auction period. Concurrent auctions will
be permitted in various other electronic auctions on the Exchange
following migration.\32\ If a FLEX Trader attempts to initiate a FLEX
AIM or SAM Auction in a FLEX Option series while another auction in
that series is ongoing, the Exchange believes it will provide that
second FLEX Order with an opportunity for execution in a timely manner
by initiating another FLEX Auction, rather than requiring the FLEX
Trader to wait for the first auction to conclude. The second FLEX
Trader may not be able to submit a response to trade in the ongoing
FLEX AIM or SAM Auction, because the terms may not be consistent with
that FLEX Trader's order (for example, there may not be sufficient
size, and the FLEX Trader may only receive a share of the auctioned
order depending on other responses). Therefore, the Exchange believes
providing this functionality for FLEX AIM and SAM Auctions may
similarly lead to an increase in these auctions, which may provide
additional opportunities for execution of FLEX Orders.
---------------------------------------------------------------------------
\32\ See, e.g., Rule 5.37(c)(1), 5.38(c)(1), 5.39(c)(1), and
5.40(c)(1).
---------------------------------------------------------------------------
The proposed rule change eliminates priority for non-TPH broker-
dealer responses at the conclusion of FLEX AIM and SAM Auctions, and
thus those responses will be prioritized in the same
[[Page 54667]]
manner as all other non-Priority Customer responses. Non-TPH broker-
dealers do not, and have not, received priority in the non-FLEX AIM and
SAM Auctions, so the proposed rule change aligns the provision
regarding who receives first priority in a FLEX AIM or SAM Auction with
the corresponding provisions for non-FLEX AIM and SAM Auctions.\33\ The
Exchange currently prioritizes contra-interest from these market
participants to ensure that FLEX AIM and SAM Auctions satisfy the ``G''
exemption for yielding priority to non-members under Section 11(a)(1)
of the Act. However, as discussed below, the Exchange believes the FLEX
AIM and SAM Auctions, as proposed, satisfy the ``Effect vs. Execute''
exemption from Section 11(a) under the Act, and therefore does not need
to provide additional functionality for TPHs to satisfy another
exemption from Section 11(a) under the Act. Priority Customer responses
will continue to receive first priority in both FLEX AIM and SAM
Auctions, as they do in non-FLEX AIM and SAM Auctions. Therefore, the
proposed rule change provides further consistency across the Exchange's
auction mechanisms.\34\
---------------------------------------------------------------------------
\33\ See Rules 5.37(e), 5.38(e), 5.39(e), and 5.40(e) in the
shell Rulebook.
\34\ See Rules 5.37(e) and 5.39(e) in the shell Rulebook.
---------------------------------------------------------------------------
As proposed, the general framework of the FLEX AIM and SAM Auctions
will continue to be the same as the Exchange's non-FLEX AIM and SAM
Auctions, with the differences being only those relating to the
differences between FLEX and non-FLEX Options. The Exchange believes it
will benefit investors to provide continued consistency across the
Exchange's price improvement mechanisms.
The proposed rule change deletes Rule 24A.5A, Interpretation and
Policy .06 and Rule 24A.5B, Interpretation and Policy .02 regarding
post-trade verification procedures for FLEX AIM and SAM Auctions for
complex orders. Due to the System updates in connection with the System
migration, parties to executions follow FLEX AIM and SAM Auctions will
no longer need to take additional steps with respect to executions of
complex orders following an electronic FLEX AIM or SAM Auction.\35\
These procedures require FLEX Traders to input the leg price, exercise
price, and/or premium information into the System following execution
of a complex FLEX Order. Pursuant to Rule 5.72(b)(2) in the shell
Rulebook, FLEX Traders must submit all of this information upon entry
of a FLEX Order. Therefore, pursuant to the proposed rule change, a
FLEX Trader will be required to input the same information for each leg
of a complex FLEX Order prior to submission rather than following
execution. A FLEX Official may nullify a transaction following a FLEX
AIM or SAM Auction pursuant to Rule 5.75(b) (such as if it did not
conform to the terms in Rule 4.21 in the shell Rulebook),\36\ or update
any inaccurate information in a complex FLEX Order in the same manner
as any TPH may update any inaccurate information in any order pursuant
to current Rule 6.67.\37\ Because all FLEX Orders will now be
systematized, as discussed above, there is no longer a need for
separate procedures regarding the correction of inaccurate information
entered for FLEX transactions.
---------------------------------------------------------------------------
\35\ Note current Rule 24A.5A, Interpretation and Policy .06 and
Rule 24A.5B, Interpretation and Policy .02 also apply to electronic
transactions in FLEX Options with exercise prices and premiums based
on a methodology for fixing that number or based on a percentage. As
described in another rule filing, the Exchange will no longer offer
exercise prices and premiums based on such a methodology. See SR-
CBOE-2019-084 (in which filing the Exchange proposes to delete the
provisions from current Rules regarding the ability of FLEX Traders
to designate exercise prices and premiums in these formats).
\36\ Rule 5.75(b) of the shell Rulebook states, among other
things, that a FLEX Official may nullify a FLEX Option transaction
if it determines the transaction did not conform to the terms of
Rules 4.21, 4.22, 5.3, or 5.4 (or the priority principles set forth
in Rule 5.72(c) and (d), which do not apply to transactions
following a FLEX AIM or SAM Auction).
\37\ Rule 6.67 in the current Rulebook describes the Exchange's
Cboe Trade Match System, which permits TPHs to correct bona fide
errors, subject to certain restrictions. The Exchange moved Rule
6.67 from the current Rulebook to Rule 6.6 in the shell Rulebook in
separate rule filings. See Securities Exchange Act Release No. 86920
(September 10, 2019), 84 FR 48687 (September 16, 2019) (SR-CBOE-
2019-056); and 87079 (September 24, 2019) (SR-CBOE-2019-062).
---------------------------------------------------------------------------
The proposed rule change deletes Rule 24A.5A, Interpretation and
Policy .07 and Rule 24A.5B, Interpretation and Policy .05 regarding
determinations made pursuant to those Rules, because the Exchange will
announce all determinations it may make with respect to FLEX AIM and
SAM Auctions pursuant to Rule 1.5 in the shell Rulebook, making these
current interpretations no longer necessary.
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.\38\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \39\ 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) \40\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------
\38\ 15 U.S.C. 78f(b).
\39\ 15 U.S.C. 78f(b)(5).
\40\ Id.
---------------------------------------------------------------------------
The Exchange's FLEX AIM and SAM Auctions as proposed--both for
simple and complex orders--will function in a substantially similar
manner following the technology migration as they do today. 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, and, in general, protect investors and the public
interest by providing continued consistency across the Exchange's price
improvement mechanisms for both FLEX and non-FLEX Option. The general
framework of the FLEX AIM and SAM Auction process as proposed to be
amended will continue to be substantively the same as the framework for
the non-FLEX AIM and SAM Auctions, as the Exchange recently amended,
retaining differences that relate to the differences between FLEX and
non-FLEX Options (e.g., exercise prices in prices or percentages, no
electronic book and thus no BBO).\41\ The continued similarity of the
Exchange's price improvement auctions will allow the Exchange's price
improvement functionality to continue to fit seamlessly into the
options market and benefit market participants with consistency across
similar functionality. When auctions have similar functionality,
Trading Permit Holders can use the same technology and coding for
multiple auctions, rather than have to expend resources to participate
in different auctions. Therefore, maintaining consistency across
auction functionality will benefit investors. The Exchange also
believes this will encourage Trading Permit Holders to compete
vigorously to provide the opportunity for price improvement for
[[Page 54668]]
customer orders in FLEX Options in competitive auction processes, which
will further benefit and protect investors.
---------------------------------------------------------------------------
\41\ See SR-CBOE-2019-084.
---------------------------------------------------------------------------
The Exchange believes the proposed rule change to permit an
Initiating Order submitted into a FLEX AIM Auction, and a Solicited
Order submitted into a FLEX SAM Auction, to be comprised of multiple
contra-party orders will, in general, protect investors and the public
interest, because it may increase the opportunity for customers to have
orders participate in a FLEX AIM or SAM Auction. As a result, this may
increase opportunities for price improvement, because this will
increase the liquidity available for the Initiating Order or Solicited
Order, as applicable, which is consistent with the purpose of FLEX AIM
and SAM Auctions. The Exchange believes that this is beneficial to
participants because allowing multiple contra-parties should foster
competition for filling the Initiating Order or Solicited Order, as
applicable, 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.
As noted above, the proposed rule change will allow FLEX AIM and
SAM Auctions to occur concurrently with other FLEX AIM and SAM
Auctions. Although FLEX AIM and SAM Auctions 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 FLEX AIM or SAM Auction will be started in a sequence
and with a duration that determines its processing. Thus, even if there
are two FLEX AIM or SAM Auctions that commence and conclude, at nearly
the same time, each Auction will have a distinct conclusion at which
time the Auction will be allocated, and only against responses
submitted into that Auction. As discussed above, each FLEX AIM or SAM
response is required to specifically identify the FLEX AIM or SAM
Auction, respectively, for which it is targeted and if not fully
executed will be cancelled back at the conclusion of the Auction. Thus,
responses will be specifically considered only in the specified
Auction.
The proposed rule change to allow multiple auctions to overlap for
Agency Orders is consistent with functionality already in place on
other exchanges, and will therefore remove impediments to and perfect
the mechanism of a free and open market and a national market
system.\42\ Additionally, the proposed rule change is consistent with
the Exchange's rules for non-FLEX AIM and SAM Auctions.\43\ Those
issues generally relate to the interaction of auctioned orders with
contra-side interest at the end of the various auctions. Different
series or complex strategies, as applicable, are essentially different
products--orders different strategies or in different series cannot
interact, just as orders in different classes cannot interact.
Therefore, the Exchange believes concurrent FLEX AIM and SAM Auctions
in different series or complex strategies, respectively, is
appropriate. 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 price improvement
auctions, while providing an opportunity for price improvement for
Agency Orders and assuring that Priority Customers are protected.
Therefore, the Exchange believes this proposed rule change will protect
investors and the public interest.
---------------------------------------------------------------------------
\42\ See, e.g., EDGX Rules 21.19(c)(1) and 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.
\43\ See Rules 5.37(c)(1), 5.38(c)(1), and 5.39(c)(1) in the
shell Rulebook.
---------------------------------------------------------------------------
While the terms of FLEX Options are different than those of non-
FLEX Options, any potential issues raised by concurrent auctions are
the same for non-FLEX and FLEX Options. Additionally, unlike in non-
FLEX trading, there is no electronic book for FLEX trading. As noted
above, responses submitted to a FLEX AIM or SAM Auction may only
execute against the Agency Order in the Auction into which the
responses were submitted, so there can be no conflict among contra-side
interest with respect to executions. Further, unlike in non-FLEX
trading, because there is no electronic book for FLEX Options, there
are no events that cause a FLEX AIM or SAM Auction to conclude prior to
the end of the respective auction period that would result in an
execution, and therefore, the same event could not cause multiple
auctions to conclude early. As discussed above, the proposed rule
change addresses any of these potential issues.
The proposed range for the length of each of the FLEX AIM and SAM
Auction periods is consistent with the range for the exposure interval
of the electronic FLEX Auction. Because of the unique terms of FLEX
Options, the Exchange believe it is appropriate to provide a reasonable
and sufficient amount of time in which market participants may submit
responses. Therefore, the minimum length of a FLEX AIM and SAM Auction
(and is proposed to continue to be) three seconds. The Exchange also
proposes a maximum length of an auction period of five minutes, as the
Exchange also believes it is appropriate to provide for efficient and
timely executions so that customers do not potentially miss a market.
The proposed rule change also permits the Initiating FLEX Trader to
establish the length of the auction period (which will be included in
the auction notification message), as the FLEX Trader can determine a
reasonable period of time to provide other FLEX Traders to respond
based on the complexity of the FLEX Option series that is the subject
of the auction, as well as based on market conditions (for example, in
a volatile market, the FLEX Trader may believe it is in the best
interests of a customer to have shorter auction given quickly changing
prices).
The Exchange believes the proposed rule change to permit all FLEX
Traders (other than the Initiating FLEX Trader) to respond to FLEX SAM
Auctions will promote just and equitable principles of trade, remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and not designed to permit unfair
discrimination between customers, issuers, brokers, or dealers, because
it permits all FLEX Traders to submit responses to FLEX SAM Auctions.
Permitting all FLEX Traders to submit responses to FLEX SAM Auctions
may result in more FLEX Traders having the opportunity to participate
in executions at the conclusion of FLEX SAM Auctions. Additionally, it
may increase liquidity in FLEX SAM Auctions, which may lead to more
opportunities to price improvement, which the Exchange believes
ultimately protects investors and the public interest. The Exchange's
SAM Auction for non-FLEX Options similarly permits market-makers from
other options exchange to submit responses.\44\
---------------------------------------------------------------------------
\44\ See Rules 5.39(c)(5) and 5.40(c)(5) in the shell Rulebook.
---------------------------------------------------------------------------
Additionally, much of the proposed rule change is merely relocating
provisions from the FLEX AIM and SAM Auction Rules (such as certain
auction eligibility requirements, provisions related to auction
responses, and provisions related to executions following the
conclusion of an auction) from the current Rulebook to the shell
Rulebook and making only nonsubstantive changes, which will
[[Page 54669]]
therefore have no impact on FLEX AIM and SAM Auctions. The Exchange
believes providing a reorganized, holistic rulebook upon migration will
also benefit investors.
The proposed rule change is also consistent with Section 11(a)(1)
of the Act \45\ 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,
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),\46\ the ``G''
exemption for yielding priority to non-members under Section
11(a)(1)(G) of the Act and Rule 11a1-1(T) thereunder,\47\ and ``Effect
vs. Execute'' exemption under Rule 11a2-2(T) under the Act.\48\
---------------------------------------------------------------------------
\45\ 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.
\46\ 15 U.S.C. 78k(a)(1)(A).
\47\ 15 U.S.C. 78k(a)(1)(G) and 17 CFR 240.11a1-1(T).
\48\ 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: (a) Must transmit the order from off the exchange
floor; (b) may not participate in the execution of the transaction once
it has been transmitted to the member performing the execution; \49\
(c) may not be affiliated with the executing member; and (d) 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 a FLEX AIM or SAM Auction would
satisfy the requirements of Rule 11a2-2(T).
---------------------------------------------------------------------------
\49\ The member may, however, participate in clearing and
settling the transaction.
---------------------------------------------------------------------------
The Exchange believes FLEX AIM and SAM Auctions will place all
users--both TPHs and non-TPHs--on the ``same footing'' as intended by
Rule11a2-2(T). Given the automated matching and execution at the
conclusion of a FLEX AIM or SAM Auction, no TPH would enjoy any special
control over the time of execution or special order handling advances
for orders executed electronically following a FLEX AIM or SAM Auction,
because such orders would be centrally processed for execution by
computer, as compared to being handled by a member through bids and
offers on the trading floor. Because the electronic trading platform
components are designed to prevent any TPHs from gaining any time and
place advantages, the Exchange believes each of the FLEX AIM and SAM
Auctions satisfies the four components of the ``Effect vs. Execute''
rule as well as the general policy objectives of Section 11(a) of the
Act.
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.\50\ Because the Exchange's FLEX AIM and
SAM Auctions each receive, and will continue to receive, orders from
FLEX Traders electronically through remote terminals or computer-to-
computer interfaces, the Exchange believes that orders submitted to a
FLEX AIM or SAM Auction from off the Exchange's trading floor will
satisfy the off-floor transmission requirement.\51\
---------------------------------------------------------------------------
\50\ 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'').
\51\ See Rule 5.72(e) in the shell Rulebook.
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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 a FLEX AIM or SAM Auction, an order or response will be executed
automatically pursuant to the Rules set forth for the applicable
Auction. In particular, execution of an order or response sent to a
FLEX AIM or SAM Auction depends not on the FLEX Trader 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 FLEX Trader
or associated person of such FLEX Trader able to acquire control or
influence over the result or timing of order or response execution. The
Initiating FLEX Trader may not cancel or modify the Agency Order or
applicable contra-side order once submitted into a FLEX AIM or SAM
Auction, but FLEX Traders may modify or cancel their responses after
being submitted into a FLEX AIM or SAM Auction.\52\ Once the Agency
Order and Initiating Order or Solicited Order, or response, as
applicable, have been transmitted, the FLEX Trader that submitted the
order or response will not participate in its execution. No FLEX
Trader, including the Initiating FLEX Trader, will see a response
submitted into a FLEX AIM or SAM Auction, and therefore and will not be
able to influence or guide the execution of the Agency Orders (or
contra-side orders) or responses, as applicable. Finally, with respect
to FLEX AIM, the last priority feature will not permit a FLEX Trader to
have any control over an order. The election to apply last priority to
an Initiating Order is available prior to the submission of the order
and therefore could not be utilized to gain influence or guide the
execution of the Agency Order and Initiating Order. The information
provided with respect to the last priority feature by the Initiating
FLEX Trader will not be broadcast and further, the information may not
be modified by the Initiating FLEX Trader during the FLEX AIM
Auction.\53\
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\52\ 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'').
\53\ See proposed Rule 5.73(e)(4).
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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 FLEX AIM and SAM
Auctions, 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
[[Page 54670]]
transmitting them to the exchange.\54\ The Exchange represents that the
FLEX AIM and SAM Auctions are designed so that no FLEX Trader has any
special or unique trading advantage in the handling of its orders or
responses after transmitting them to the mechanisms.
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\54\ 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.
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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 the FLEX AIM or
SAM Auction from the trading floor and satisfy the ``Effect vs.
Execute'' exemption (assuming the other conditions are satisfied).\55\
However, a TPH, relying on this exemption, could not submit an order
for a covered account to its ``house'' floor broker on the trading
floor for execution. Because a TPH may not rely on the ``G'' exemption
when submitting an order to a FLEX AIM or SAM Auction,\56\ it must
ensure another exception applies in this situation.
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\55\ Orders for covered accounts that rely on the ``Effect vs.
Execute'' exemption in this scenario must be transmitted from a
remote location directly to the Floor Broker on the trading floor by
electronic means.
\56\ See Rule 5.72(e) in the shell Rulebook; see also proposed
Rules 5.73(e) and 5.74(e) (which do not prioritize non-TPH broker-
dealers, as would be necessary for submission of orders into the
FLEX AIM and SAM Auctions to comply with the ``G: exemption).
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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.\57\ The
Exchange recognizes that FLEX Traders relying on Rule 11a2-2(T) for
transactions effected through a FLEX AIM or 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.
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\57\ 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 (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, 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.
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. FLEX AIM and SAM Auctions will continue to be voluntary
for FLEX Traders to use and will be available to all FLEX Traders.
Additionally, the ability to respond to FLEX SAM Auctions will now be
available to all FLEX Traders (except the Initiating TPH, which is
consistent with the requirement that the contra-side order be a
solicitation rather than a facilitation). These auction mechanisms will
apply to all FLEX Traders in the same manner. The Exchange believes the
FLEX AIM and SAM Auctions will continue to provide opportunities price
improvement for Agency Orders in FLEX Options in a competitive auction
process.
The Exchange does not believe the proposed rule change will impose
any burden on intermarket competition. The Exchange believes keeping
FLEX AIM and SAM Auctions aligned with corresponding non-FLEX auction
mechanisms, with the only differences relating to the differences
between FLEX and non-FLEX options, may further encourage submission of
FLEX Orders into these price improvement mechanisms. By enhancing our
FLEX trading platform, the Exchange believes it may be a more
attractive alternative to the OTC market. The Exchange believes market
participants benefit from being able to trade customized options in an
exchange environment in several ways, including but not limited to the
following: (1) Enhanced efficiency in initiating and closing out
position; (2) increased market transparency; and (3) heightened contra-
party creditworthiness due to the role of OCC as issuer and guarantor
of FLEX Options.
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 \58\ and Rule 19b-
4(f)(6) thereunder.\59\
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\58\ 15 U.S.C. 78s(b)(3)(A).
\59\ 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 \60\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \61\ 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 requested that the Commission waive the 30-day operative delay so
that the proposed rule change may become operative prior to the
proposed Exchange's system migration on October 7, 2019, in order to
permit the Exchange to provide FLEX AIM and SAM Auction functionality
to market participants on an uninterrupted basis. In support of its
waiver request, the Exchange states that the FLEX AIM and SAM Auctions
for both simple and complex orders will function in a substantially
similar manner following the technology
[[Page 54671]]
migration as they do today. The Exchange further notes that the general
framework of the Exchange's FLEX AIM and SAM Auction process will
continue to be substantively the same as the framework for the non-FLEX
AIM and SAM Auctions, except for differences that relate to the
distinctions between FLEX and non-FLEX Options.\62\ Additionally, the
Exchange states that the proposal relocates certain provisions from the
current Rulebook to the shell Rulebook, such as provisions related to
auction eligibility requirements, auction responses, and executions
following the conclusion of an auction, and makes only non-substantive
changes to such provisions, which the Exchange believes will have no
impact on FLEX AIM and SAM Auctions. The Exchange further notes that it
has provided market participants with notice of this change in advance
of the system migration.\63\ For these reasons, the Commission believes
that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest. Accordingly, the
Commission designates the proposed rule change to be operative upon
filing.\64\
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\60\ 17 CFR 240.19b-4(f)(6).
\61\ 17 CFR 240.19b-4(f)(6)(iii).
\62\ See supra note 41.
\63\ See, e.g, Exchange Notice C2019092500, Trading of FLEX
Options on Cboe Options Exchange (September 25, 2019); Exchange
Notice 2019092501, Cboe Town Hall on FLEX Trading on the New Cboe
Options Exchange Platform (September 25, 2019); BOE and FIX
Specifications, available at http://markets.cboe.com/us/options/support/technical/.
\64\ 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 will 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-2019-093 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-2019-093. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CBOE-2019-093 and should be submitted on
or before October 31, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\65\
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\65\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-22157 Filed 10-9-19; 8:45 am]
BILLING CODE 8011-01-P