[Federal Register Volume 84, Number 200 (Wednesday, October 16, 2019)]
[Notices]
[Pages 55366-55370]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22484]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87265; File No. SR-CBOE-2019-083]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change Relating
To Amend Its Financial Incentive Programs for Global Trading Hours Lead
Market-Makers
October 9, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on October 2, 2019, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to amend its financial incentive programs for Global Trading Hours Lead
Market-Makers. The text of the proposed rule change is provided in
Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
[[Page 55367]]
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''). Cboe Options intends to migrate its trading platform to
the same system used by the Cboe Affiliated Exchanges, and also migrate
its current billing system to a new billing system, on October 7, 2019
(the ``migration''). As part of the migration to the new billing
system, the Exchange is seeking to simplify and harmonize certain
programs and billing processes, including its financial incentive
programs for Lead Market-Makers (``LMMs'') in VIX and SPX (including
SPXW) during Global Trading Hours (``GTH''). Accordingly, the Exchange
proposes to amend its GTH LMM financial programs, effective October 1,
2019.
Background
By way of background, pursuant to Footnote 38 of the Fees Schedule,
a LMM in SPX will receive a rebate for that month in the amount of a
pro-rata share of a compensation pool equal to $30,000 times the number
of LMMs in that class (or pro-rated amount if an appointment begins
after the first trading day of the month or ends prior to the last
trading day of the month) if the LMM: (1) Provides continuous
electronic quotes in at least the lesser of 99% of the non-adjusted
series or 100% of the non-adjusted series minus one call-put pair in an
GTH allocated class (excluding intraday add-on series on the day during
which such series are added for trading) during GTH in a given month;
(2) enters opening quotes within five minutes of the initiation of an
opening rotation in any series that is not open due to the lack of a
quote, provided that the LMM will not be required to enter opening
quotes in more than the same percentage of series set forth in clause
(1) for at least 90% of the trading days during GTH in a given month;
and (3) satisfies the following time-weighted average quote widths and
bid/ask sizes for each moneyness category: (A) Out of the money options
(``OTM''), average quote width of $0.90 or less and average bid/ask
size of 15 contracts or greater; (B) at the money options (``ATM''),
average quote width of $3.00 or less and bid/ask size of 10 contracts
or greater; and (C) in the money options (``ITM''), average quote width
of $10.00 or less and bid/ask size of 5 contracts or greater.
Also pursuant to Footnote 38 of the Fees Schedule, a LMM in VIX
options during GTH will receive a rebate for that month in the amount
of a pro-rata share of a compensation pool equal to $20,000 times the
number of LMMs in that class (or pro-rated if an appointment begins
after the first trading day of the month or ends prior to the last
trading day of the month) if the LMM: (1) Provides continuous
electronic quotes in at least the lesser of 99% of the non-adjusted
series or 100% of the non-adjusted series minus one call-put pair in an
GTH allocated class (excluding intra-day add-on series on the day
during which such series are added for trading) and (2) enters opening
quotes within five minutes of the initiation of an opening rotation in
any series that is not open due to the lack of a quote, provided that
the LMM will not be required to enter opening quotes in more than the
same percentage of series set forth in clause (1) for at least 90% of
the trading days during GTH in a given month.
GTH LMMs are not currently obligated to satisfy the heightened
quoting standards described in the Fees Schedule. Rather, the LMMs are
eligible to receive a rebate if they satisfy the heightened standards,
which the Exchange believes encourage LMMs to provide liquidity during
GTH. Additionally, the Exchange may consider other exceptions to this
quoting standard based on demonstrated legal or regulatory requirements
or other mitigating circumstances.
Proposed Change
The Exchange now wishes to simplify its billing processes and
harmonize its LMM incentive programs. To that end, the Exchange
proposes to eliminate Footnote [sic] amend the above-mentioned
incentive programs to align with the heightened quoting standard format
currently required under the MSCI LMM Program.\3\ By way of background,
any Market-Maker that is appointed as a LMM in MSCI EAFE Index
(``MXEA'') options and/or MSCI Emerging Markets Index (``MXEF'')
(``MSCI LMM'') and meets the heightened quoting standard described
below, receives $20,000 per month/per product.\4\ Specifically, the LMM
will receive the $20,000 per month/per class if it provides continuous
electronic quotes that meet or exceed the following heightened quoting
standards in at least 90% of the MXEA and/or MXEF series 80% of the
time in a given month:
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\3\ In amending the programs, the Exchange proposes to eliminate
Footnote 38 in its entirety and replace it with separate tables
describing the GTH SPX LMM program and the GTH VIX LMM program.
\4\ MSCI LMMs serve as MSCI LMMs during the RTH session only.
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Premium Expiring Near term Mid term Long term
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7 days or 8 days to 60 61 days to 270 271 days or
less days days greater
Level ---------------------------------------------------------------
Width Size Width Size Width Size Width Size
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$0-$5.00........................................ $3.00 5 $1.50 20 $2.50 15 $5.00 10
$5.01-$15.00.................................... 6.00 3 3.00 15 5.00 10 10.00 7
$15.01-$50.00................................... 15.00 2 7.50 10 10.00 7 20.00 5
$50.01-$100.00.................................. 25.00 1 15.00 7 20.00 5 30.00 3
$100.01-$200.00................................. 40.00 1 25.00 3 35.00 3 48.00 2
Greater Than $200.01............................ 60.00 1 40.00 1 50.00 1 72.00 1
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The Exchange may also consider other exceptions to this quoting
standard based on demonstrated legal or regulatory requirements or
other mitigating circumstances. Like GTH LMMs, for purposes of the
financial
[[Page 55368]]
benefit, MSCI LMM(s) are not be obligated to satisfy the heightened
quoting standard shown above. Rather, the MSCI LMM(s) only receive the
financial benefit if they satisfy the abovementioned heightened quoting
standard. If a MSCI LMM does not meet the heightened quoting standard,
then it simply will not receive the financial benefit for that month.
Additionally, MSCI LMM(s), like GTH LMMs must still comply with the
continuous quoting obligation and other obligations of Market-Makers
and LMMs described in Cboe Options Rules.\5\
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\5\ See e.g., Cboe Options Rule 8.7 and Rule 8.15.
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The Exchange first proposes to amend the GTH SPX LMM program.
First, the Exchange proposes to separate the available rebate and
quoting standard for SPX and SPXW. More specifically, the Exchange
proposes to provide that if the LMM meets the heightened quoting
standard described below for SPX, the LMM will receive a pro-rata share
of a compensation pool for SPX equal to 15,000 times the number of LMMs
appointment in SPX and if the LMM meets the heightened quoting standard
described below for SPXW, the LMM will receive an additional pro-rata
share of a compensation pool for SPXW equal to $15,000 times the number
of LMMs in that class (for a total of $30,000 per month for meeting the
standard for both SPX and SPXW).\6\ The Exchange next proposes to amend
the heighted quoting standard to provide that in order to receive the
rebates under the program, the SPX LMM(s) must provide continuous
electronic quotes that meet or exceed the following heightened quoting
standards in at least 99% of each of SPX and SPXW series 90% of the
time in a given month during GTH:
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\6\ The Exchange proposes to continue to include in the Fees
Schedule an example of how the compensation pools work.
Specifically, the Exchange will provide the following example: if
two LMMs are appointed in SPX a compensation pool will be
established each month for (i) SPX totaling $30,000 and (ii) SPXW
totaling $30,000. If each LMM meets the heightened continuous
quoting standard in SPX and SPXW during a month, each will receive
$30,000. If only one LMM meets the heightened continuous quoting
standard in SPX and SPXW during a month, that LMM would receive
$60,000 and the other one would receive nothing.
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Premium Expiring Near term Mid term Long term
----------------------------------------------------------------------------------------------------------------
7 days or 8 days to 60 61 days to 270 271 days or
less days days greater
Level ---------------------------------------------------------------
Width Size Width Size Width Size Width Size
----------------------------------------------------------------------------------------------------------------
$0-$5.00........................................ $0.50 10 $0.40 25 $0.60 15 $1.00 10
$5.01-$15.00.................................... 2.00 7 1.60 18 2.40 11 4.00 7
$15.01-$50.00................................... 5.00 5 4.00 13 6.00 8 10.00 5
$50.01-$100.00.................................. 10.00 3 8.00 8 12.00 5 20.00 3
$100.01-$200.00................................. 20.00 2 16.00 5 24.00 3 40.00 2
Greater Than $200.00............................ 30.00 1 24.00 3 36.00 1 60.00 1
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The Exchange also proposes to similarly amend the GTH VIX LMM
program. The Exchange first notes that it will maintain the current
compensation pool and continue to provide that if a GTH VIX LMM meets
the proposed heightened quoting standard described below, it will
receive a pro-rata share of a compensation pool for VIX equal to
$20,000 times the number of LMMs in that class (or pro-rated amount if
an appointment begins after the first trading day of the month or ends
prior to the last trading day of the month) for that month.\7\ In order
for an LMM to receive the rebate of $20,000 per month, the Exchange
proposes to provide that the LMM(s) must provide continuous electronic
quotes that meet or exceed the following heightened quoting standards
in at least 99% of the VIX series 90% of the time in a given month: \8\
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\7\ The Exchange proposes to continue to include in the Fees
Schedule an example of how the compensation pools work.
Specifically, the Exchange will provide the following example: If
two LMMs are appointed in VIX a compensation pool will be
established each month totaling $40,000. If each LMM meets the
heightened continuous quoting standard in VIX during a month, each
will receive $20,000. If only one LMM meets the heightened
continuous quoting standard in VIX during a month, that LMM would
receive $40,000 and the other one would receive nothing.
\8\ For the month of October 2019, the Exchange proposes to
apply the heightened quoting standard from October 7 to October 31,
in light of the migration of the Exchange's billing system.
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Premium Expiring Near term Mid term Long term
----------------------------------------------------------------------------------------------------------------
7 days or 8 days to 60 61 days to 270 271 days or
less days days greater
Level ---------------------------------------------------------------
Width Size Width Size Width Size Width Size
----------------------------------------------------------------------------------------------------------------
$0-$3.00........................................ $0.50 25 $0.40 50 $0.50 25 $1.00 10
$3.01-$5.00..................................... 0.75 15 0.60 30 0.75 15 1.50 7
$5.01-$10.00.................................... $1.00 10 0.80 20 1.00 10 2.00 5
$10.01-$30.00................................... 3.00 5 1.00 10 3.00 5 5.00 3
$30.01-$30.00................................... 5.00 3 3.00 5 5.00 3 7.00 2
Greater Than $100.00............................ 10.00 1 5.00 1 10.00 1 12.00 1
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The Exchange believes the proposed rebates provided under the GTH
LMM programs, as amended, continues to encourage GTH LMMs to provide
significant liquidity in SPX, SPXW and VIX options during GTH, just as
the standards and rebate under the current MSCI financial incentive
program similarly incentivizes MSCI LMMs to provide significant
liquidity in MSCI products. Additionally, the Exchange notes that both
GTH LMMs and MSCI LMMs may need to undertake expenses to be able to
quote at a significantly heightened standard in these classes, such as
purchase more logical connectivity based on their increased capacity
needs. The Exchange notes that
[[Page 55369]]
the proposed amendments to the GTH LMM program provides a harmonized
approach to financial incentive programs for LMMs. The programs, as
proposed, continue to offer financial benefits for meeting heightened
quoting standards.
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.\9\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \10\ 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
Section 6(b)(4) of the Act,\11\ which requires that Exchange rules
provide for the equitable allocation of reasonable dues, fees, and
other charges among its Trading Permit Holders and other persons using
its facilities.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
\11\ 15 U.S.C. 78f(b)(4).
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First, the Exchange believes the proposed changes to the GTH LMM
financial benefit programs are reasonable as the Exchange believes the
proposed amendments provide for a simpler and more streamlined
heightened quoting standard, is easier to administer on the new billing
platform and provides harmonization across LMM financial benefit
programs (e.g., conforms with the format of the MSCI LMM program). The
Exchange also believes the proposed amended rebates are reasonable as
the proposed rebates are similar to the rebates offered currently.
Particularly, the Exchange proposes to maintain the current
compensation pools and rebate amounts, with the only change being that
SPX and SPXW will have separate compensation pools. (i.e., GTH SPX LMMs
are currently eligible for a compensation pool equal to $30,000 times
the number of LMMs in SPX, and post-migration they will be eligible for
two compensation pools, one for SPX at $15,000 times the number of LMMs
in SPX and another for SPXW at $15,000 times the number of LMMs in
SPX). The Exchange also believes the GTH LMM financial incentive
programs are reasonable, equitable and not unfairly discriminatory
because the Exchange wants to ensure it continues incentivizing the
LMMs to provide liquid and active markets in these products during GTH.
The Exchange believes it is equitable and not unfairly discriminatory
to only offer this financial incentive to the GTH LMMs because it
benefits all market participants trading SPX, SPXW and VIX during GTH
to encourage the LMMs to satisfy the heightened quoting standards,
which may increase liquidity and provide more trading opportunities and
tighter spreads. Indeed, the Exchange notes that the GTH LMMs provide a
crucial role in providing quotes and the opportunity for market
participants to trade during GTH, which can lead to increased volume,
thereby providing a robust market. The Exchange also notes that the GTH
LMM may have added costs each month that it needs to undertake in order
to satisfy that heightened quoting standard (e.g., having to purchase
additional logical connectivity).
The Exchange ultimately wishes to ensure a GTH LMM is adequately
incentivized to provide liquid and active markets in SPX, SPXW and VIX
during GTH to encourage liquidity. The Exchange believes that the
program, even as amended, will continue to encourage increased quoting
to add liquidity in SPX, SPXW and VIX products, thereby protecting
investors and the public interest. Additionally, if a GTH LMM does not
satisfy the heightened quoting standards for the duration of the
required time, then it simply will not receive the offered per class
payment for that month.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule changes will
impose any burden on competition that are not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe that the proposed rule change will impose any burden on
intramarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act because it applies uniformly to
similarly situated GTH LMMs, which market participants play a crucial
role in providing active and liquid markets during GTH. The Exchange
does not believe that the proposed rule change will impose any burden
on intermarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act because SPX, SPXW and VIX
options are proprietary products that will only be traded on Cboe
Options. To the extent that the proposed changes make Cboe Options a
more attractive marketplace for market participants at other exchanges,
such market participants are welcome to become Cboe Options market
participants.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \12\ and paragraph (f) of Rule 19b-4 \13\
thereunder. At any time within 60 days of the filing of the proposed
rule change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission will institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
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\12\ 15 U.S.C. 78s(b)(3)(A).
\13\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
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-2019-083 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.
[[Page 55370]]
All submissions should refer to File Number SR-CBOE-2019-083. 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 offices 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-2019-083, and should be submitted
on or before November 6, 2019.
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\14\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-22484 Filed 10-15-19; 8:45 am]
BILLING CODE 8011-01-P