[Federal Register Volume 84, Number 203 (Monday, October 21, 2019)]
[Notices]
[Pages 56267-56270]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22834]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87311; File No. SR-CBOE-2019-049]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of Amendment No. 2 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To Make 
Permanent Certain Options Market Rules That Are Linked to the Equity 
Market Plan To Address Extraordinary Market Volatility

October 15, 2019.

I. Introduction

    On August 21, 2019, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to make permanent certain options market rules 
that are linked to the equity market Plan to Address Extraordinary 
Market Volatility (the ``Plan''). The proposed rule change was 
published for comment in the Federal Register on August 29, 2019.\3\ On 
October 10, 2019, the Exchange filed Amendment No. 1 to the proposed 
rule change.\4\ On October 11, 2019, the Exchange filed Amendment No. 2 
to the proposed rule change, which amended and superseded the proposed 
rule change, as modified by Amendment No. 1.\5\ On October 11, 2019, 
pursuant to Section 19(b)(2) of the Act,\6\ the Commission designated a

[[Page 56268]]

longer period within which to approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to approve or disapprove the proposed rule change.\7\ 
The Commission received no comment letters on the proposed rule change. 
This order approves the proposed rule change, as modified by Amendment 
Nos. 1 and 2, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 86744 (August 23, 
2019), 84 FR 45565 (``Notice'').
    \4\ In Amendment No. 1, the Exchange revised the proposed rule 
text to reflect rule numbering and organizational changes enacted by 
separate proposed rule changes that became effective while the 
instant proposal was pending before the Commission. Because 
Amendment No. 1 is a technical amendment that does not materially 
alter the substance of the proposed rule change or raise unique or 
novel regulatory issues, it is not subject to notice and comment. 
Amendment No. 1 to the proposed rule change is available at: https://www.sec.gov/comments/sr-cboe-2019-049/srcboe2019049-6279378-193288.pdf.
    \5\ In Amendment No. 2, the Exchange revised the proposal to 
remove the aspect of the proposed rule change that would have 
permitted current Rule 5.22--relating to market-wide trading halts 
due to extraordinary market volatility--to operate on a permanent 
basis. In Amendment No. 2, the Exchange notes that it intends to 
submit a separate rule filing proposing to continue to allow Rule 
5.22 to operate on a pilot basis. Amendment No. 2 to the proposed 
rule change is available at: https://www.sec.gov/comments/sr-cboe-2019-049/srcboe2019049-6285845-193338.pdf.
    \6\ 15 U.S.C. 78s(b)(2).
    \7\ See Securities Exchange Act Release No. 87291. The 
Commission extended the date by which the Commission shall approve 
or disapprove the proposed rule change to October 18, 2019.
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II. Description of the Proposal

    The Exchange proposes to make permanent certain options market 
rules in connection with the Plan. In an attempt to address 
extraordinary market volatility in NMS stocks, the national securities 
exchanges and the Financial Industry Regulatory Authority, Inc. adopted 
the Plan pursuant to Rule 608 of Regulation NMS under the Act.\8\ 
Following the initial adoption of the Plan, the Exchange adopted and 
amended current Rule 5.21, Rule 5.22 \9\ and Interpretation and Policy 
.01 to Rule 6.5 to address certain aspects of the options market that 
it believed may be impacted by the operation of the Plan, and 
implemented such rules on a pilot basis that has coincided with the 
pilot period for the Plan. These rules are scheduled to expire on 
October 18, 2019.\10\
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    \8\ See Securities Exchange Act Release Nos. 64547 (May 25, 
2011), 76 FR 31647 (June 1, 2011) and 67091 (May 31, 2012), 77 FR 
33498 (June 6, 2012) (order approving the initial Plan, as amended, 
on a pilot basis).
    \9\ The Exchange has determined not to propose to make the 
provisions in Rule 5.22 permanent at this time. See supra note 5.
    \10\ See Securities Exchange Act Release No. 69328 (April 5, 
2013), 78 FR 21642 (April 11, 2013) (SR-CBOE-2013-030) (``Options 
Pilot Approval'') (order approving certain options rule changes to 
coincide with the pilot period for the Plan, including Rule 5.21). 
See also Amendment No. 1, supra note 4 (describing the relocation of 
these rules to their current location in the Cboe Options rulebook).
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    In order to codify changes to its rules in connection with the 
Plan, the Exchange adopted Rule 5.21, which essentially serves as a 
roadmap for the Exchange's universal changes due to the implementation 
of the Plan.\11\ The Exchange also amended Rule 6.5 to modify its 
obvious and catastrophic error rules in connection with the 
implementation of the Plan.\12\ After the Plan was approved on a 
permanent basis, the pilot periods in Rules 5.21, 5.22 and 6.5 were 
extended until the close of business on October 18, 2019.\13\ The 
Exchange now proposes to make these pilot periods permanent. The 
Exchange is not proposing any additional or substantive changes to 
Rules 5.21 or 6.5.\14\ At this time, the Exchange is not proposing to 
make the pilot period in Rule 5.22 permanent.\15\
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    \11\ See Options Pilot Approval, supra note 10, at 21643. 
Specifically, Rule 5.21 includes rule changes in connection with 
special handling for market orders, market-on-close orders, stop 
orders, and stock-option orders; certain electronic order handling 
features in a limit up-limit down state; the obvious error rules; 
and market-maker to quoting requirements during a limit up-limit 
down state.
    \12\ See id. at 21645. The amendments to Rule 6.5 were 
originally adopted on a one-year pilot basis, which was later 
extended to coincide with the pilot period for the Plan. See 
Securities Exchange Act Release No. 76223 (October 22, 2015), 80 FR 
66102 (October 28, 2015) (SR-CBOE-2015-097).
    \13\ See Securities Exchange Act Release Nos. 85623 (April 11, 
2019), 84 FR 16086 (April 17, 2019) (order approving Amendment No. 
18 to the Plan, which, among other things, allowed the Plan to 
continue to operate on a permanent basis) and 85616 (April 11, 
2019), 84 FR 16093 (April 17, 2019) (SR-CBOE-2019-020) (extending 
the pilot periods in Rules 5.21 and 6.5 to October 18, 2019).
    \14\ According to the Exchange, it expects the other national 
securities exchanges to also file similar proposals to make their 
respective pilot programs permanent. See Notice, supra note 3, at 
45566.
    \15\ See supra note 5.
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    Interpretation and Policy .01 to Rule 6.5 currently provides that 
options transactions executed while the underlying security was in a 
limit or straddle state (as defined in the Plan) will not be subject to 
review as an obvious or catastrophic error during a pilot period that 
expires on October 18, 2019 (``Obvious Error Pilot'').\16\ A limit or 
straddle state occurs when at least one side of the National Best Bid 
(``NBB'') or National Best Offer (``NBO'' and, together with the NBB, 
the ``NBBO'') is priced at a non-tradable level.\17\ Specifically, a 
straddle state exists when the NBB is below the lower price band while 
the NBO is within the price band or when the NBO is above the upper 
price band and the NBB is within the band.\18\ A limit state occurs 
when the NBO equals the lower price band (without crossing the NBB) or 
the NBB equals the upper price band (without crossing the NBO).\19\
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    \16\ Such transactions may still be reviewed on an Exchange 
official's own motion pursuant to Rule 6.5(c)(3), or adjusted or 
nullified pursuant to Rule 6.5(e)-(j) and Interpretation and Policy 
.05. See Interpretation and Policy .01 to Rule 6.5.
    \17\ See Notice, supra note 3, at 45565. Pursuant to the Plan, 
each NMS stock is subject to a lower price band and a higher price 
band, designed to prevent trades in individual NMS stocks from 
occurring outside of the specified price bands. See Options Pilot 
Approval, supra note 10, at 21642.
    \18\ See Notice, supra note 3, at 45565.
    \19\ See id.
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    Pursuant to Rule 6.5, the determination of the theoretical price of 
an option, which is used to determine whether to adjust or nullify an 
options transaction subject to obvious or catastrophic error review, 
generally references the NBB (for erroneous sell transactions) or NBO 
(for erroneous buy transactions) just prior to the trade in question. 
The Exchange states that this process is not reliable when at least one 
side of the NBBO is priced at a non-tradeable level, as is the case 
during limit and straddle states.\20\ According to the Exchange, when 
an underlying security is in a limit or straddle state, there will not 
be a reliable price for the security to serve as a benchmark for the 
price of the option and, therefore, the application of the obvious and 
catastrophic error rules would be impracticable given the potential for 
the lack of a reliable NBBO in the options market during such limit or 
straddle state.\21\
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    \20\ See id.
    \21\ See id.
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    During the course of the Obvious Error Pilot, the Exchange has 
provided, to the Commission and the public, data for each limit and 
straddle state in optionable stocks that had at least one trade on the 
Exchange.\22\ In addition, the Exchange has provided, to the Commission 
and the public, assessments relating to the impact of the operation of 
the obvious error rules during limit and straddle states, including: 
(1) An evaluation of the statistical and economic impact of limit and 
straddle states on liquidity and market quality in the options markets; 
and (2) an assessment of whether the lack of obvious error rules in 
effect during the limit and straddle states are problematic. The 
Exchange states that, during its most recent review period, the 
Exchange did not receive any obvious error review requests for limit-
up-limit down trades, and limit up-limit down trade volume accounted 
for nominal overall trade volume.\23\ Accordingly, and based on the 
data made available to the Commission and the public during the pilot 
period, the Exchange believes that the Obvious

[[Page 56269]]

Error Pilot does not negatively impact market quality during normal 
market conditions.\24\ The Exchange also concluded that there has been 
insufficient data to assess whether a lack of obvious error rules is 
problematic.\25\ However, the Exchange believes the continuation of 
Interpretation and Policy .01 to Rule 6.5 would protect against any 
unanticipated consequences and add certainty in the options markets 
during a limit or straddle state.\26\
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    \22\ See Cboe Global Markets, LULD Limit and Straddle Reports, 
available at http://markets.cboe.com/us/options/market_statistics/luld_reports/?mkt=opt. For each trade on the Exchange, the Exchange 
has provided: (a) The stock symbol, the option symbol, the time at 
the start of the limit or straddle state, and an indicator for 
whether it is a limit or straddle state; and (b) the executed 
volume, the time-weighted quoted bid-ask spread, the time-weighted 
average quoted depth at the bid, the time-weighted average quoted 
depth at the offer, the high execution price, the low execution 
price, the number of trades for which a request for review for error 
was received during limit and straddle states, and an indicator 
variable for whether those options outlined above have a price 
change exceeding 30% during the underlying stock's limit or straddle 
state compared to the last available option price as reported by 
OPRA before the start of the limit or straddle state.
    \23\ See Notice, supra note 3, at 45566 n.9.
    \24\ See id. at 45566.
    \25\ See id.
    \26\ See id.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendments No. 1 and 2, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\27\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\28\ which requires, among other things, 
that the rules of a national securities 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 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.
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    \27\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \28\ 15 U.S.C. 78f(b)(5).
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    In the Options Pilot Approval, the Commission noted the potential 
inequity of nullifying or adjusting executions occurring during limit 
or straddle states due to the lack of a reliable NBBO.\29\ At the same 
time, the Commission expressed concern about the potential impact on 
investors during limit and straddle states without the protections of 
the obvious or catastrophic error rules.\30\ However, in the same 
order, the Commission also highlighted certain aspects of the 
Exchange's proposal that could help mitigate those concerns. 
Specifically, the Exchange stated that there are additional measures in 
place designed to protect investors, despite the removal of obvious and 
catastrophic error protection during limit and straddle states.\31\ For 
example, the Exchange stated that by rejecting market orders and not 
triggering stop orders, only those orders with a limit price will be 
executed during a limit or straddle state.\32\ Additionally, the 
Exchange noted the existence of Rule 15c3-5 under the Act,\33\ 
requiring broker-dealers to have controls and procedures in place that 
are reasonably designed to prevent the entry of erroneous orders.\34\ 
Further, the Commission stressed the importance of placing the proposal 
on a pilot and requesting data to allow the Commission to further 
evaluate the effect of the proposal prior to any determination to make 
such changes permanent.\35\
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    \29\ See Options Pilot Approval, supra note 10, at 21645, 21647.
    \30\ See id. at 21647.
    \31\ See id.
    \32\ See id. See also Rule 5.32(c)(5).
    \33\ 17 CFR 240.15c3-5.
    \34\ See Options Pilot Approval, supra note 10, at 21647.
    \35\ See id. at 21647-48.
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    Under the terms of the Options Pilot Approval, the Exchange 
provided the Commission and the public with data and assessments 
relating to the impact of the operation of the obvious and catastrophic 
error rules during limit and straddle states.\36\ The Commission notes 
that, as described above, the Exchange stated that it did not receive 
any obvious error review requests for limit up-limit down trades during 
its most recent review period.\37\ Accordingly, based on the data from 
the Exchange and in light of the additional measures in place designed 
to protect investors, despite the removal of obvious and catastrophic 
error protection during limit and straddle states, the Commission 
believes it is appropriate to permit the Obvious Error Pilot to operate 
on a permanent basis.
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    \36\ See supra note 22.
    \37\ See Notice, supra note 3, at 45566 n.9.
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IV. Solicitation of Comments on Amendment No. 2 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 2 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-2019-049 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-2019-049. 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-2019-049, and should be submitted 
on or before November 12, 2019.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment Nos. 1 and 2

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment Nos. 1 and 2, prior to the thirtieth 
day after the date of publication of notice of the filing of Amendment 
No. 2 in the Federal Register. As discussed above, in Amendment No. 2, 
the Exchange revised the proposal to remove the aspect of the proposed 
rule change that would permit current Rule 5.22 to operate on a 
permanent basis. The Commission believes that Amendment No. 2 does not 
raise any novel regulatory issues. Instead, it removes one aspect of 
the proposed rule change that does not alter remaining aspects of the 
proposal, which was subject to a full

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notice and comment period during which no comments were received. The 
Commission also notes that, according to the Exchange, it intends to 
submit a separate rule filing proposing to continue to allow Rule 5.22 
to operate on a pilot basis.\38\ Accordingly, the Commission finds good 
cause, pursuant to Section 19(b)(2) of the Act,\39\ to approve the 
proposed rule change, as modified by Amendment Nos. 1 and 2, on an 
accelerated basis.
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    \38\ See Amendment No. 2, supra note 5.
    \39\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\40\ that the proposed rule change (SR-CBOE-2019-049), as modified 
by Amendment Nos. 1 and 2, be, and hereby is, approved on an 
accelerated basis.
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    \40\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-22834 Filed 10-18-19; 8:45 am]
 BILLING CODE 8011-01-P