[Federal Register Volume 85, Number 7 (Friday, January 10, 2020)]
[Notices]
[Pages 1362-1365]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-00201]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87892; File No. SR-C2-2019-028]


Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
the Opening Triggers for Its Opening Rotation Process for Equity 
Options

January 6, 2020
    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 December 23, 2019, Cboe C2 Exchange, Inc. (the ``Exchange'' or 
``C2'') 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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 6.11 (Opening Auction Process) 
in connection with the opening triggers for

[[Page 1363]]

its opening rotation process for the Regular Trading Hours (``RTH'') 
trading session in equity options.
    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/options/regulation/rule_filings/ctwo/), 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 Exchange proposes to amend Rule 6.11 (Opening Auction Process) 
in connection with the opening triggers for its opening rotation 
process for the Regular Trading Hours (``RTH'') trading session in 
equity options. Currently, Rule 6.11(d)(1) governs the RTH opening 
rotation triggers for equity options, as well as index options. 
Particularly, regarding equity options, Rule 6.11(d)(1) provides that 
the System \5\ will initiate the opening rotation after a time period 
(which the Exchange determines for all classes) following the System's 
observation after 9:30 a.m. of the first disseminated transaction on 
the primary market in the security underlying an equity option. In 
order to ensure a more orderly opening process, the Exchange proposes 
to amend the opening trigger process in order to contemplate the first 
disseminated quote (in addition to the already included first 
disseminated transaction) on the primary market in the underlying 
security in determining whether to initiate the opening rotation, as 
well as to add an additional timing process following the System's 
observation of one, but not both, of the opening triggers.
---------------------------------------------------------------------------

    \5\ See C2 Rule 1.1, which defines the ``System'' to mean the 
automated trading system the Exchange uses for the trading of option 
contracts.
---------------------------------------------------------------------------

    Specifically, the Exchange proposes to include the System's 
observation of the first disseminated quote on the primary market in 
the security underlying the equity options as an additional opening 
trigger for equity options.\6\ The Exchange notes this trigger is 
intended to tie the Exchange's opening process to quoting in the 
underlying security. The Exchange believes that quoting activity in the 
underlying market is an additional trigger that generally indicates the 
presence of post-open price discovery and liquidity in the primary 
market for the underlying, and, therefore, that the market for the 
underlying is adequately situated for the commencement of options 
trading on the underlying. This additional trigger is also consistent 
with general practice in the industry, as other options exchanges use 
the first disseminated quote, as well as first disseminated 
transaction, as an opening trigger for their opening auction 
processes.\7\ As a result, the proposed additional trigger is an 
industry practice to which market participants are generally already 
accustomed and will provide for greater consistency in the opening 
process across the industry. In light of this additional opening 
trigger, the Exchange also proposes to adopt additional timing 
specifications prior to the initiation of the opening rotation and 
contingent upon the System's observation of the first disseminated 
transaction and/or quote, as proposed, on the primary market in the 
underlying security. Specifically, under proposed Rule 
6.11(d)(1)(A),\8\ the System would initiate the opening rotation after 
an Exchange-determined time period (which it currently does) upon the 
earlier occurrence of either: (i) The passage of two minutes (or such 
shorter time as determined by the Exchange) after the System's 
observation after 9:30 a.m. of either the first disseminated 
transaction or the first disseminated quote on the primary market in 
the security underlying an equity option; or (ii) the System's 
observation after 9:30 a.m. of both the first disseminated transaction 
and the first disseminated quote on the primary market in the security 
underlying an equity option.
---------------------------------------------------------------------------

    \6\ The quote must be a two-sided quote.
    \7\ See Nasdaq PHLX LLC (``PHLX'') Rule 1017(d)(i); Nasdaq ISE 
LLC (``ISE'') Options 3 Section 8(c)(1); Nasdaq GEMX LLC (``GEMX'') 
Options 3 Section 8(c)(1); Nasdaq MRX LLC (``MRX'') Options 3 
Section 8(c)(1); Miami International Securities Exchange, LLC 
(``MIAX'') Rule 503(e); NYSE American, Inc. (``NYSE American'') Rule 
952NY; and NYSE Arca, Inc. (``NYSE Arca'') Rule 6.64-O(b).
    \8\ The Exchange also proposes to format current Rule 6.11(d)(1) 
into two subparagraphs; subparagraph (d)(1)(A), governing the RTH 
opening rotation triggers for equity options, and subparagraph 
(d)(1)(B), governing such for index options. This proposed 
formatting change will make the rule better organized and easier to 
follow and understand.
---------------------------------------------------------------------------

    The proposed additional timing steps in connection with the opening 
triggers are intended to ensure that the market for the underlying 
security has had sufficient time to open prior to the initiation of the 
opening rotation where there is not both a two-sided quote and an 
execution in the underlying security. By waiting a requisite amount of 
time after the System observes one of the opening triggers, the 
proposed process pursuant to proposed Rule 6.11(d)(1)(A)(i) is intended 
to permit post-opening price discovery to occur in the underlying 
security prior to the opening of options on the security. Similarly, by 
initiating the opening rotation upon the System's observation of both 
opening triggers prior to the passage of two minutes, proposed Rule 
6.11(d)(1)(A)(ii) ties the Exchange's opening process to specific 
market conditions in the underlying security that generally indicate 
that sufficient post-opening price discovery has occurred prior to the 
opening of options on the security. To illustrate, if the System were 
to observe a disseminated quote (or transaction) in the primary market 
for the underlying security, it would begin the two-minute (or shorter) 
timer pursuant to proposed Rule 6.11(d)(1)(A)(i). If two minutes then 
passed without the System's observation of a disseminated transaction 
(or quote) on the primary market for the underlying security (which 
would cause the scenario in Rule 6.11(d)(1)(A)(ii) to occur) then it 
would initiate the opening rotation after a time period determined by 
the Exchange, as it currently does today. Conversely, if the System 
were to observe a disseminated quote (or transaction) in the primary 
market and begin the two minute (or shorter) timer, but then observe a 
disseminated transaction (or quote) in the primary market before the 
passage of two minutes (or shorter), it would then, at the time it 
observed the disseminated transaction (or quote) prior to the passage 
of two minutes (or shorter), initiate the opening rotation after a 
period of time determined by the Exchange.
    The Exchange notes that the proposed rule change in connection with 
initiating the opening rotation upon receipt of a trade and a quote in 
the underlying is consistent with the opening process rules of NYSE 
Arca.\9\ Additionally, the proposed rule change in connection with 
initiating the opening rotation following the receipt of

[[Page 1364]]

either a quote or trade in the underlying and a timed pause is 
consistent with other options exchanges that have similar timers in 
place following the receipt of a transaction or quote in the primary 
market for the underlying security. For example, MIAX's opening process 
rule currently provides that its opening process may begin following a 
pause period (no longer than one half second) that, like the proposed 
rule change, begins upon the dissemination of either a quote or a trade 
in the underlying security.\10\ The Exchange notes that the MIAX 
opening process rule provides that following the dissemination of 
either a quote or a trade in the underlying security and the requisite 
pause period, its opening process will begin upon the occurrence of 
certain Market Maker quotes submitted on MIAX. The Exchange notes, 
however, that this is not consequential to the activity or status of 
the market for the underlying security or the use of an opening quote 
or trade in the underlying to trigger the initiation of an opening 
process on an options exchange. The Exchange further notes that the 
proposed two minute timer (or shorter) is consistent with the timer 
provided pursuant to the opening process rules on PHLX, ISE, GEMX, and 
MRX.\11\
---------------------------------------------------------------------------

    \9\ See NYSE Arca Rule 6.64-O(b).
    \10\ See MIAX Rule 503(e).
    \11\ See PHLX Options Rule 1017(d)(i); ISE Options 3 Section 
8(c)(1); GEMX Options 3 Section 8(c)(1); and MRX Options 3 Section 
8(c)(1), each of which begin their opening processes within two 
minutes (or such shorter time as determined by the Exchange) of the 
opening trade or quote on the market for the underlying security in 
the case of equity options (plus the occurrence of another condition 
as laid out in the exchanges' rules).
---------------------------------------------------------------------------

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.\12\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \13\ 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) \14\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ Id.
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change to include the 
first dissemination of a quote on the primary market for the underlying 
security as an additional opening trigger for equity options would 
serve to remove impediments to and perfect the mechanism of a free and 
open market and national market system by incorporating an additional 
opening trigger into the Exchange's opening process which would help 
ensure that the primary market for the underlying is adequately 
situated with the appropriate liquidity and active price discovery in 
order to open for trading options on the underlying. Additionally, the 
proposed rule change would foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities because it will align the triggers for its equity options 
opening rotation with the triggers used by most other options 
exchanges.\15\ The proposed change will benefit investors, as it will 
create consistency throughout the industry by implementing an 
additional opening rotation trigger already in place across much of the 
industry and, thus, already familiar to market participants.
---------------------------------------------------------------------------

    \15\ See supra note 7.
---------------------------------------------------------------------------

    In addition to this, the Exchange believes that the proposed rule 
change to implement additional timing procedures in connection with the 
System's observation of the first disseminated transaction and/or quote 
in the primary market for the underlying security prior to the 
initiation of the opening rotation would also serve to remove 
impediments to and perfect the mechanism of a free and open market and 
national market system by ensuring that stability is present in the 
underlying markets upon the initiation of the opening rotation to the 
benefits of investors. The proposed rule change is intended to promote 
the maintenance of a fair and orderly market and, in general, to 
protect investors and the public interest by either waiting a requisite 
amount of time after the System observes one opening trigger in order 
to allocate enough time to permit the price of the underlying security 
to stabilize after its opening, or by initiating the opening rotation 
upon the System's observation of both opening triggers (as proposed), 
thus tying the Exchange's open to the existence of liquidity on the 
primary market which generally indicates that sufficient post-opening 
price discovery has occurred prior to the opening of options on the 
underlying security. Additionally, the Exchange does not believe that 
the proposed rule change in connection with initiating trading on the 
Exchange when the System observes a quote and a trade in the underlying 
security, or observes either a quote or a trade in the underlying 
security followed by a pause, which, as proposed would be two minutes 
(or shorter) would significantly impact investors or the public 
interest because, as stated, these conditions are consistent with other 
options exchanges that have substantively the same conditions in place 
in connection with their opening processes.\16\
---------------------------------------------------------------------------

    \16\ See supra notes 7, 9, 10, and 11.
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed changes would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe that the proposed rule changes would impose any burden on 
intramarket competition that is not necessary in furtherance of the 
purposes of the Act, because the proposed additional opening trigger 
and steps in the opening trigger process would apply in the same manner 
to all equity options. The proposed rule change impacts a System 
process that occurs prior to the opening of trading, and merely 
modifies when the System will initiate an opening rotation. The 
Exchange also does not believe that the proposed change would impose 
any burden on intermarket competition that is not necessary in 
furtherance of the purposes of the Act, because use of the first 
disseminated quote from the primary market as a trigger for the opening 
rotation, as well as the combination of both opening triggers, or of 
one opening trigger plus a pause period of a two minutes (or shorter) 
prior to initiating the opening rotation, is consistent with the rules 
of other options exchanges.\17\
---------------------------------------------------------------------------

    \17\ See id.
---------------------------------------------------------------------------

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.

[[Page 1365]]

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the 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 subparagraph (f)(6) of Rule 19b-4 
thereunder.\19\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \20\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \21\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the proposal may become operative upon filing. The Exchange states that 
the waiver of the operative delay would serve to sooner protect 
investors by implementing an additional opening trigger and additional 
timing steps in the Exchange's opening process. Based on the Exchange's 
representations, the Commission believes that waiver of the 30-day 
operative delay is consistent with the protection of investors and the 
public interest. Therefore, the Commission hereby waives the operative 
delay and designates the proposed rule change operative upon 
filing.\22\
---------------------------------------------------------------------------

    \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 also has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    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-C2-2019-028 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-C2-2019-028. 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-C2-2019-028 and should be submitted on 
or before January 31, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
---------------------------------------------------------------------------

    \23\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-00201 Filed 1-9-20; 8:45 am]
 BILLING CODE 8011-01-P