[Federal Register Volume 84, Number 206 (Thursday, October 24, 2019)]
[Notices]
[Pages 57078-57081]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23168]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87349; File No. SR-CboeBZX-2019-090]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Make
Permanent an Options Market Rule Linked to the Equity Market Plan To
Address Extraordinary Market Volatility
October 18, 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 17, 2019, Cboe BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission
(``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 BZX Exchange, Inc. (``BZX'' or the ``Exchange'') is filing
with the Securities and Exchange Commission (the ``Commission'') to
make permanent an options market rule linked to the equity market Plan
to Address Extraordinary Market Volatility. 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://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), 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
The purpose of the proposed rule change is to make permanent
certain options market rules in connection with the equity market Plan
to Address Extraordinary Market Volatility (the ``Limit Up-Limit Down
Plan'' or the ``Plan''). This change is being proposed in connection
with the recently approved amendment to the Limit Up-Limit Down Plan
that allows the Plan to continue to operate on a permanent basis
(``Amendment 18'').\5\
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\5\ See Securities Exchange Act Release No. 85623 (April 11,
2019), 84 FR 16086 (April 17, 2019) (Order Approving Amendment No.
18).
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In an attempt to address extraordinary market volatility in NMS
Stocks, and, in particular, events like the severe volatility on May 6,
2010, U.S. national securities exchanges and the Financial Industry
Regulatory Authority, Inc. (collectively, ``Participants'') drafted the
Plan pursuant to Rule 608 of Regulation NMS under the Act.\6\ On May
31, 2012, the Commission approved the Plan, as amended, on a one-year
pilot basis.\7\ Though the Plan was primarily designed for equity
markets, the Exchange believed it would, indirectly, potentially impact
the options markets as well. Thus, the Exchange has previously adopted
and amended Rule 20.6.01 to ensure the option markets were not harmed
as a result of the Plan's implementation and implemented such rule on a
pilot basis that has coincided with the pilot period for the Plan (the
``Options Pilot'').\8\ Rule 20.6.01 provides that transactions executed
during a limit or straddle state are not subject to the obvious and
catastrophic error rules. A limit or straddle state occurs when at
least one side of the National Best Bid (``NBB'') or Offer (``NBO'')
bid/ask is priced at a non-tradable level.
[[Page 57079]]
Specifically, a straddle state exists when the NBB is below the lower
price band while the NBO is inside the prices band or when the NBO is
above the upper price band and the NBB is within the band, while 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). The Exchange adopted the Options Pilot to protect
investors because 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. Specifically, the Exchange
adopted Rule 6.29.01 because the application of the obvious and
catastrophic error rules would be impracticable given the potential for
lack of a reliable NBBO in the options market during limit and straddle
states. When adjusting or busting a trade pursuant to the obvious error
rule, the determination of theoretical value of a trade generally
references the NBB (for erroneous sell transactions) or NBO (for
erroneous buy transactions) just prior to the trade in question, and is
therefore not reliable when at least one side of the NBBO is priced at
a non-tradeable level, as is the case in limit and straddle states. In
such a situation, determining theoretical value may often times be a
very subjective rather than an objective determination and could give
rise to additional uncertainty and confusion for investors. As a
result, application of the obvious and catastrophic error rules would
be impracticable given the lack of a reliable NBBO in the options
market during limit and straddle states, and may produce undesirable
effects or unanticipated consequences. Furthermore, the Exchange
believes that eliminating the application of obvious error rules during
a limit or straddle state eliminates the re-evaluation of a transaction
executed during such a state that could potentially create an
unreasonable adverse selection opportunity due to lack of a reliable
reference price on one side of the market or another and discourage
participants from providing liquidity during limit and straddle states,
which is contrary to the goal in limiting participants' adverse
selection with the application of the obvious error rule during normal
trading states. For these reasons, the Exchange believes the Options
Pilot is designed to add certainty on the options markets, which
encourages more investors to participate in light of the changes
associated with the Plan. The Plan was originally implemented on a
pilot-basis in order to allow the public, the participating exchanges,
and the Commission to assess the operation of the Plan and whether the
Plan should be modified prior to approval on a permanent basis. As
stated, the Exchange adopted the Option Pilot to coincide with this
pilot; to continue the protections therein while the industry gains
further experience operating the Plan.
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\6\ See Securities Exchange Act Release No. 64547 (May 25,
2011), 76 FR 31647 (June 1, 2011) (File No. 4-631).
\7\ See Securities and Exchange Act Release No. 67091 (May 31,
2012) 77 FR 33498 (June 6, 2012).
\8\ See Securities Exchange Act Release Nos. 76231 (October 22,
2015), 80 FR 66069 (October 28, 2015) (SR-BATS-2015-91) (extending
the effectiveness of the pilot program of Interpretation and Policy
.01 of Rule 20.6 to coincide with the pilot period for the Plan);
and 85604 (April 11, 2019), 84 FR 16071 (April 17, 2019) (SR-
CboeBZX-2019-026) (proposal to extend the pilot for the Options
Pilot).
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In connection with the order approving the establishment of the
obvious error pilot, as well as the extensions of the obvious error
pilot, the Exchange committed to submit monthly data regarding the
program and to submit an overall analysis of the obvious error pilot in
conjunction with the data submitted under the Plan and any other data
as requested by the Commission. Pursuant to a rule filing, approved on
October 22, 2015, each month, the Exchange committed to provide the
Commission, and the public, a dataset containing the data for each
straddle and limit state in optionable stocks that had at least one
trade on the Exchange.\9\ The Exchange has continued to provide the
Commission with this data on a monthly basis from October 2015. For
each trade on the Exchange, the Exchange provides (a) the stock symbol,
option symbol, time at the start of the straddle or limit state, an
indicator for whether it is a straddle or limit state, and (b) for the
trades on the Exchange, the executed volume, time-weighted quoted bid-
ask spread, time-weighted average quoted depth at the bid, time-
weighted average quoted depth at the offer, high execution price, low
execution price, number of trades for which a request for review for
error was received during straddle and limit states, 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. In addition, to help evaluate
the impact of the pilot program, 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 straddle and limit states are
problematic. The Exchange has concluded that the obvious error pilot
does not negatively impact market quality during normal market
conditions,\10\ and that there has been insufficient data to assess
whether a lack of obvious error rules is problematic, however, the
Exchange believes the continuation of Rule 20.6.01 functions to protect
against any unanticipated consequences in the options markets during a
limit or straddle state and add certainty on the options markets.
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\9\ See Securities Exchange Act Release No. 76231 (October 22,
2015), 80 FR 66069 (October 28, 2015) (SR-BATS-2015-91); see also
Cboe Global Markets, LULD Limit and Straddle Reports, available at
http://markets.cboe.com/us/options/market_statistics/luld_reports/?mkt=opt.
\10\ See also Cboe Global Markets, LULD Limit and Straddle
Reports, available at http://markets.cboe.com/us/options/market_statistics/luld_reports/?mkt=opt. During the 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.
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The Commission recently approved the Plan on a permanent basis
(Amendment 18).\11\ In connection with this approval, the Exchange now
proposes to amend Exchange Rule 20.6.01 that currently implement the
provisions of the Plan on a pilot basis to eliminate the pilot basis,
which effectiveness expires on October 18, 2019, and to make such rule
permanent. In its approval order to make the Plan permanent, the
Commission recognized that, as a result of the Participants' and
industry analysis of the Plan's operation, the Limit Up-Limit Down
mechanism effectively addresses extraordinary market volatility.
Indeed, the Plan benefits markets and market participants by helping to
ensure orderly markets, but also, the Exchange believes, based on the
data made available to the public and the Commission during the pilot
period, that the obvious error pilot does not negatively impact market
quality during normal market conditions.\12\ Rather, the Exchange
believes the obvious error pilot functions to protect against any
unanticipated consequences in the options markets during a limit or
straddle state and add certainty on the options markets. This removes
impediments to and perfects the mechanism of a free and open market and
national market system by encouraging more investors to participate in
light of the changes associated with the Plan. The Exchange believes
that if approved on a permanent basis, the Options Pilot would
permanently provide investors with the above-described additional
certainty of market prices and mitigation of unanticipated
[[Page 57080]]
consequences and unreasonable adverse selection risk during limit and
straddle states.
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\11\ See supra note 5.
\12\ See supra note 11.
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The Exchange notes that the Commission recently approved to make
permanent a substantively identical options pilot rule of the
Exchange's affiliated exchange, Cboe Options Exchange, Inc. (``Cboe
Options) \13\, and understands that the other national securities
exchanges will also file similar proposals to make permanent their
respective pilot programs. Since the Commission's approval of Amendment
18 allowing the Plan to operate on a permanent basis, the Exchange and
other national securities exchanges have determined that no further
amendments should be made to the Options Pilot; \14\ the current
Options Pilot effectively addresses extraordinary market volatility, is
reasonably designed to comply with the requirements of the Plan,
facilitates compliance with the Plan and should now operate on a
permanent basis, consistent with the Plan. The Exchange does not
propose any substantive or additional changes to Exchange Rule 20.6.01.
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\13\ See Securities and Exchange Act Release No. 87311 (October
15, 2019) (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) (SR-CBOE-2019-049).
\14\ See Securities Exchange Act Release No. 85616 (April 11,
2019), 84 FR 16093 (April 17, 2019) (SR-CBOE-2019-020) (proposal to
extend the pilot for certain options market rules linked to the
Plan).
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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.\15\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \16\ 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) \17\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
\17\ Id.
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In particular, the Exchange believes that the proposed rule
supports the objectives of perfecting the mechanism of a free and open
market and the national market system because it promotes transparency
and uniformity across markets concerning rules for options markets
adopted to coincide with the Plan. As stated, the Commission recently
approved to make permanent a substantively identical options pilot
within the rules of the Exchange's affiliated exchange, Cboe Options,
and the Exchange now proposes the same. The Exchange believes that
eliminating the pilot basis for the Options Pilot and making such rule
permanent facilitates compliance with the Plan by adding certainty to
the markets during periods of market volatility, which has been
approved and found by the Commission to be reasonably designed to
prevent potentially harmful price volatility in NMS Stocks. It has been
determined by the Commission that the Plan benefits markets and market
participants by helping to ensure orderly markets, and, based on the
data made available to the public and the Commission during the pilot
period for Rule 6.29.01, the Plan does not negatively impact options
market quality during normal market conditions. Rather, the Plan, as it
is implemented under the obvious error pilot, functions to protect
against any unanticipated consequences in the options markets during a
limit or straddle state and add certainty on the options markets.
During a limit or straddle state, determining theoretical value of an
option may be a subjective rather than an objective determination given
the lack of a reliable NBBO, which may create an unreasonable adverse
selection opportunity and discourage participants from providing
liquidity during limit and straddle states. Therefore, the Exchange
believes eliminating obvious error review in such states would, in
turn, eliminate uncertainty and confusion for investors and benefit
investors by encouraging more participation in light of the changes
associated with the Plan. Accordingly, the Exchange believes that
making the Options Pilot permanent will further the goals of investor
protection and fair and orderly markets as the rule effectively
addresses extraordinary market volatility pursuant to the Plan.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed rule change is
necessary to reflect that the Plan no longer operates as a pilot and
has been approved to operate on a permanent basis by the Commission. As
such, Exchange Rule 20.6.01, which implements protections in connection
with the Plan, should be amended to operate on a permanent basis. The
Exchange understands that the other national securities exchanges will
also file similar proposals to make permanent their respective pilot
programs, and, as stated above, notes that the Commission recently
approved to make permanent substantively the same options pilot rule on
Cboe Options. Thus, the proposed rule change will help to ensure
consistency across market centers without implicating any competitive
issues.
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 \18\ and Rule 19b-
4(f)(6) thereunder.\19\
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\18\ 15 U.S.C. 78s(b)(3)(A).
\19\ 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 under Rule 19b-4(f)(6) \20\ normally
does not become operative prior to 30 days after the date of the
filing. However, Rule 19b-4(f)(6)(iii) \21\ permits the Commission to
designate a shorter time if such action is consistent with the
[[Page 57081]]
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposed
rule change may become effective and operative immediately upon filing.
The Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest, as
it will allow the current Options Pilot to continue on a permanent
basis without any changes, prior to the pilot expiration on October 18,
2019. For this reason, the Commission hereby waives the 30-day
operative delay and designates the proposed rule change as operative
upon filing.\22\
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\20\ 17 CFR 240.19b-4(f)(6).
\21\ 17 CFR 240.19b-4(f)(6)(iii).
\22\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CboeBZX-2019-090 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-CboeBZX-2019-090. 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-CboeBZX-2019-090 and should be submitted
on or before November 14, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-23168 Filed 10-23-19; 8:45 am]
BILLING CODE 8011-01-P