[Federal Register Volume 85, Number 41 (Monday, March 2, 2020)]
[Notices]
[Pages 12362-12368]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-04183]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88281; File No. SR-CBOE-2020-013]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Rules 4.13 and 5.31 Concerning the Modified Opening Auction Process

February 25, 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 February 11, 2020, Cboe Exchange, Inc. Inc. (the ``Exchange'' 
or ``Cboe Options'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I 
and II below, which Items have been prepared by the Exchange. The 
Exchange filed the proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 
19b-4(f)(6) thereunder.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend Rules 4.13 and 5.31. The text of the proposed rule change is 
provided below.
(additions are italicized; deletions are [bracketed])
* * * * *

Rules of Cboe Exchange, Inc.

* * * * *

Rule 4.13. Series of Index Options

    (a) General.
    (1)-(4) No change.
    (5) Method of Determining Day that Exercise Settlement Value will 
be Calculated, Special Opening Quotation and Expiration Date and Last 
Trading Day for Options on Volatility Indexes that Measure a 30-Day 
Volatility Period (``Volatility Index options'').
    (A) No change.
    (B) Special Opening Quotation. The exercise settlement value of a 
Volatility Index option for such purposes shall be calculated by the 
Exchange as a Special Opening Quotation (SOQ) of the applicable 
Volatility Index using the sequence of opening prices of the options 
that comprise the Volatility Index[ ]. The opening price for any series 
in which there is no trade shall be the average of that option's bid 
price and ask price (which ask price equals $0.05 if the series opens 
with unexecuted sell market orders) as determined at the opening of 
trading.
* * * * *

Rule 5.31. Opening Auction Process

    (a) Definitions. For purposes of the opening auction process in 
this Rule 5.31, the following terms have the meaning below. A term 
defined elsewhere in the Rules has the same

[[Page 12363]]

meaning with respect to this Rule 5.31, unless otherwise defined below.
* * * * *

Opening Auction Updates

    The term ``opening auction updates'' means Exchange-disseminated 
messages that contain information regarding the expected opening of a 
series based on orders and quotes in the Queuing Book for the 
applicable trading session and, if applicable, the GTH Book, including 
the expected opening price, the then-current cumulative size on each 
side at or more aggressive than the expected opening price, and whether 
the series would open (and any reason it would not open pursuant to 
paragraphs (e) and (j)([5]6) below).
* * * * *
    (b)-(i) No change.
    (j) Modified Opening Auction Process. All provisions set forth 
above in this Rule 5.31 apply to the opening of SPX constituent option 
series for Regular Trading Hours on exercise settlement value 
determination days, except as otherwise provided in this paragraph (j) 
(``modified opening auction process''). The Exchange uses the opening 
trade prices of SPX series that comprise the settlement strip (or the 
average of a series' opening bid and ask (which ask price equals $0.05 
if the series opens with unexecuted sell market orders) if there is no 
opening trade in that series) established by the modified opening 
auction process to calculate the exercise or final settlement value, as 
applicable, of expiring VIX derivatives.
    (1)-(4) No change.
    (5) SPX Option Series Opening Sequence. On exercise settlement 
value determination days, following the opening trigger as set forth in 
subparagraph (d)(1)(B), the System initiates the opening rotation 
process for SPX option series in the following sequence:
    (i) at-the-money (``ATM'') (including series 5.00 above or below, 
as applicable, the then-current index level) and out-of-the-money 
(``OTM'') constituent series in order from closest to furthest away 
from the ATM strike (if a put and call are the same distance away from 
the ATM strike, the System opens them randomly);
    (ii) all other constituent series (i.e., in-the-money constituent 
series) in order from closest to furthest away from the ATM strike (if 
a put and call are the same distance away from the ATM strike, the 
System opens them randomly); and
    (iii) all non-constituent series in a random order.
    (6) Opening Rotation. On exercise settlement value determination 
days, the opening rotation process occurs as set forth in paragraph (e) 
above, except the System performs the Maximum Composite Width Check and 
determines the Opening Trade Price pursuant to this subparagraph 
([5]6), in lieu of subparagraphs (e)(1) and (2), respectively.
    (A) No change.
    (B) Opening Trade Price Determination. After a series satisfies the 
Maximum Composite Width Check in subparagraph (A), if there are orders 
and quotes marketable against each other at a price not outside the 
Opening Collar, the System determines the Opening Trade Price for the 
series. If there are no such orders or quotes, there is no Opening 
Trade Price.
    (i) No change.
    (ii) If (a) the VMIM price is not outside the Opening Collar, (b) 
there would be no unexecuted buy market orders (or remaining portions), 
and (c) there would be no unexecuted sell market orders (or remaining 
portions) unless the low end of the Opening Collar equals $0.05, 
[it]the VMIM price is the Opening Trade Price, and the System opens the 
series pursuant to subparagraph (e)(3) above.
    (iii) If (a) the VMIM price is outside the Opening Collar, [or] (b) 
there would be unexecuted buy market orders (or remaining portions), or 
(c) there would be unexecuted sell market orders (or remaining 
portions) and the low end of the Opening Collar is greater than $0.05, 
the series does not open. The Queuing Period for the series continues 
(including the dissemination of opening auction updates) until [the 
VMIM price is not outside the Opening Collar]none of the conditions in 
clauses (a) through (c) are present, or the Exchange opens the series 
pursuant to paragraph (h).
    ([6]7) Opening Rotation Self-Trades. A User may submit multiple 
orders and quotes in accordance with subparagraph (3) above. If, during 
the opening rotation, the System executes an order or quote of that 
User against another order or quote of that User, the Exchange does not 
deem that fact alone to cause these executions to be considered 
violations of Section 9(a)(1) of the Exchange Act, and instead will 
evaluate other facts and circumstances. The Exchange reviews all 
activity, including these executions, during the modified opening 
auction process for compliance with [the Rules and] the Exchange Act 
and the Rules, including Rule [10]8.6 (which prohibits manipulation).
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend its Rules regarding the modified 
opening auction process in no-bid series. Rule 5.31(j) describes the 
opening auction process for S&P 500 options (``SPX'') that are 
constituent option series \5\ on exercise settlement value 
determination days.\6\ All provisions set forth in Rule 5.31 apply to 
the opening of SPX constituent option series for Regular Trading Hours 
on exercise settlement value determination days, except as otherwise 
provided in Rule 5.31(j) (the ``modified opening auction process''), 
which the Exchange uses in connection with calculating exercise or 
final settlement values for VIX derivatives. The Exchange uses the 
opening trade prices of SPX option series that comprise the settlement 
strip \7\ (or the

[[Page 12364]]

average of a series' opening bid and ask if there is not opening trade 
in that series) established by the modified opening auction process to 
calculate the exercise or final settlement value, as applicable, of 
expiring VIX derivatives.
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    \5\ The term ``constituent option series'' means all SPX 
(including SPXW) option series listed on the Exchange with the 
expirations the Exchange uses to calculate the exercise or final 
settlement value of the expiring VIX derivative on exercise 
settlement value determination days. The term ``VIX derivatives'' 
means VIX options listed for trading on the Exchange, VIX futures 
listed for trading on an affiliated designated contract market, or 
over-the-counter derivatives overlying VIX whose exercise or final 
settlement values, as applicable, are calculated pursuant to, or by 
reference to, as applicable, the modified opening auction process. 
See Rule 5.31(j)(1).
    \6\ The term ``exercise settlement value determination day'' 
means a day on which the Exchange determines the exercise or final 
settlement value, as applicable, of expiring VIX derivatives. See 
Rule 5.31(j)(1).
    \7\ The term ``settlement strip'' means the constituent option 
series used to calculate the exercise or final settlement value, as 
applicable, of expiring VIX derivatives. See Rule 5.31(j)(1).
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    Current Rule 5.31(j)(5) (proposed Rule 5.31(j)(6)) describes the 
opening rotation process for the modified opening auction process. 
Specifically, on exercise settlement value determination days, the 
opening rotation process occurs in the same manner it does on all other 
days (as set forth in Rule 5.31(e)), except for the Maximum Composite 
Width Check and Opening Trade Price,\8\ which the System performs 
pursuant to current Rule 5.31(j)(5)(A) and (B), respectively. 
Currently, after the opening trigger for SPX options, once a series 
satisfies the Maximum Composite Width \9\ Check in current Rule 
5.31(j)(5)(A), if there are orders and quotes marketable against each 
other at a price not outside the Opening Collar,\10\ the System 
determines the Opening Trade Price for the series. If there are no such 
orders or quotes, there is no Opening Trade Price for the series.
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    \8\ See Rule 5.31(e)(1) and (2) for descriptions of the Maximum 
Composite Width Check and Opening Trade Price determination on non-
exercise settlement value determination days.
    \9\ The term ``Maximum Composite Width'' means the amount that 
the width of the Composite Market (which is the market for a series 
comprised of (1) the higher of the then-current best appointed 
Market-Maker bulk message bid on the Exchange and the away best bid 
(``ABB'') (if there is an ABB) and (2) the lower of the then-current 
best appointed Market-Maker bulk message offer on the Exchange and 
the away best offer (``ABO'') (if there is an ABO)) of a series may 
generally not be greater than for the series to open, subject to 
certain exceptions. See Rule 5.31(a) and (j)(1).
    \10\ The term ``Opening Collar'' means the price range that 
establishes limits at or inside of which the System determines the 
Opening Trade Price (which is the price at which the System executes 
opening trades in a series during the opening rotation) for a 
series. See Rule 5.31(a) and (j)(1).
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    If there will be an opening trade, in order to determine the 
Opening Trade Price, the System determines the volume-maximizing, 
imbalance-minimizing (``VMIM'') price pursuant to Rule 5.31(e)(2)(A) 
through (C) (in the same manner it determines the VMIM price on non-
exercise settlement value determination days). If the VMIM price is not 
outside the Opening Collar, it is the Opening Trade Price, and the 
System opens the series.\11\ If (a) the VMIM price is outside the 
Opening Collar or (b) there would be unexecuted market orders (or 
remaining portions), the series does not open.\12\
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    \11\ Rule 5.31(e)(3) describes how the System opens a series on 
all days.
    \12\ In this case, the Queuing Period (the time period prior to 
the initiation of an opening rotation during which the System 
accepts orders and quotes in the electronic book for participation 
in the opening rotation) for the series continues (including the 
dissemination of opening auction updates) until the VMIM price is 
not outside the Opening Collar, or the Exchange opens the series 
pursuant to Rule 5.31(h) (which permits the Exchange to deviate from 
the standard manner of the opening auction process when it believes 
it is necessary in the interests of a fair and orderly market).
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    The proposed rule change first adopts a sequence in which the 
System will open SPX option series on exercise settlement value 
determination days. Currently, the System initiates the opening 
rotation process in all classes each day in no particular order.\13\ 
Prior to the Exchange's System migration, which was effective on 
October 7, 2019, the System opened series in a specific sequence. While 
the System opened series in all classes in accordance with that 
sequence on all trading days, the purpose of opening series in that 
order was to enhance the modified opening auction process on exercise 
settlement value determination days.\14\ In connection with the System 
migration, the Exchange determined to not maintain this functionality 
due to other enhancements implemented at the time of migration.\15\ The 
Exchange believes those enhancements have had a positive impact on the 
modified opening auction process on exercise settlement value 
determination days. However, the Exchange has determined 
reimplementation of the functionality to open constituent series on 
exercise settlement value determination days in a specified sequence 
(in a slightly different manner) may further enhance the modified 
opening auction process.
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    \13\ See Securities Exchange Act Release No. 86387 (July 16, 
2019), 84 FR 35147, 35152 (July 22, 2019) (SR-CBOE-2019-034) (notice 
of filing of proposed rule change to amend the Exchange's opening 
process).
    \14\ See Securities Exchange Act Release No. 83505 (June 25, 
2018), 83 FR 30787, 30790 (June 29, 2018) (SR-CBOE-2018-046) (notice 
of filing and immediate effectiveness of proposed rule change to 
amend the hybrid opening process, which was the name of the former 
opening auction process on the Exchange).
    \15\ See supra note 14.
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    Specifically, the proposed rule change adopts Rule 5.31(j)(5),\16\ 
which provides that on exercise settlement value determination days, 
following the opening trigger as set forth in Rule 5.31(d)(1)(B),\17\ 
the System initiates the opening rotation process for SPX option series 
in the following sequence:
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    \16\ The proposed rule change renumbers current subparagraphs 
(j)(5) and (6) to be subparagraphs (j)(6) and (7), respectively. 
There are no substantive changes to current subparagraph (j)(6) 
(proposed subparagraph (j)(7)). Proposed changes to current 
subparagraph (j)(5) (proposed subparagraph (j)(6)) are described 
below.
    \17\ Rule 5.31(d)(1)(B) provides that for index options 
(including SPX options, but excluding VIX options), the System 
initiates the opening rotation after a time period (which the 
Exchange determines for all classes) following the System's 
observation after 9:30 a.m. Eastern time of the first disseminated 
index value for the index underlying an index option. This applies 
on exercise settlement value determination days.

    (i) at-the-money (``ATM'') (including series 5.00 above or 
below, as applicable, the then-current index level) and out-of-the-
money (``OTM'') constituent series in order from closest to furthest 
away from the ATM strike (if a put and call are the same distance 
away from the ATM strike, the System opens them randomly);
    (ii) all other constituent series (i.e., in-the-money 
constituent series) in order from closest to furthest away from the 
ATM strike (if a put and call are the same distance away from the 
ATM strike, the System opens them randomly); and
    (iii) all non-constituent series in a random order.

    For purposes of this proposed rule change, a series is ATM if its 
strike price equals the last disseminated index value on the same 
trading day. The proposed 5.00 buffer ensures that the ATM series at 
the time the opening rotation process is initiated is included in the 
first grouping of series to be opened. For example, assume for an 
exercise settlement value determination day that the ATM strike value 
for SPX series is 3300. The System will first initiate the opening 
rotation for SPX constituent series with strike prices equal to 3300, 
and then any series with strike prices of 3305 and 3295.\18\ The System 
then initiates the opening rotation for OTM SPX constituent series 
(which would consist of any SPX constituent put series with strike 
prices below 3300 and SPX constituent call series with strike prices 
above 3300) in order from series with strike prices closest to 3300 to 
those with strike prices further away from 3300 until there are no more 
OTM constituent series. For example, if there were constituent series 
puts with strike prices of 3290, 3285, 3275, and 3270, and constituent 
series calls with strike prices of 3310, 3315, 3320, and 3330, the 
System would initiate the opening rotation process first for the 3290 
put and 3310 call (in a random order), then the 3285 put and 3315 call 
(in a random order), then the 3320 call, then the 3725 put, and finally 
the 3270 put and 3330 call (in a random order). The System then 
initiates the opening rotation for ITM SPX constituent series in order 
from series with strike prices closest to 3300 to those with strike 
prices further away from 3300 until there are no more constituent 
series (in other words, in the same manner it initiated the opening 
rotation for the OTM SPX constituent

[[Page 12365]]

series). After the System has initiated the opening rotation process 
for all constituent series, the System initiates the opening rotation 
process for all other SPX series (i.e., SPX non-constituent series) in 
no particular order (as they are opened today).
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    \18\ If there is a put series and call series with strike prices 
the same distance away from the ATM strike, the System opens them 
randomly. In other words, sometimes the put will open first, and 
other times the call will open first.
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    The order in which the System initiates the opening rotation 
process for trading is generally immaterial; however, on exercise 
settlement value determination days, certain ATM and OTM constituent 
series comprise the settlement strip, and thus their the opening trade 
prices are used to calculate the exercise or settlement value, as 
applicable, of expiring VIX derivatives. The Exchange has observed 
enhanced liquidity in the modified opening auction process since 
enhancements were implemented in connection with the System migration. 
At this time, the Exchange believes opening these series first may 
further enhance liquidity in constituent series on exercise settlement 
value determination days.
    Specifically, Market-Makers are the primary liquidity providers in 
the Exchange's market, and, pursuant to Rule 5.31, Market-Maker quotes 
on the Exchange comprise the Composite Market for a class exclusively 
listed on the Exchange (such as SPX options). The Exchange provides 
Users, including Market-Makers, with a tool, the Risk Monitor Mechanism 
(``RMM''), they use to control risk of multiple, automatic executions. 
An RMM event in a class will cause a Market-Makers' quotes in all 
series in the class to be rejected or cancelled (certain events may 
cause a User's quotes in all classes to be cancelled).\19\ As a result, 
a Market-Maker's opening transactions in series not used to calculate 
an exercise or settlement value, as applicable, may cause an RMM event, 
cancelling the Market-Makers' orders or quotes in all other series in 
the class, including series used to calculate an exercise settlement 
value. This reduces liquidity in constituent series, and may contribute 
to delayed openings of these series, which could ultimately delay 
calculation of the exercise or settlement value, as applicable, of 
expiring VIX derivatives. Additionally, the Exchange has observed 
larger Market-Maker quote sizes in further OTM puts and calls compared 
to sizes in less OTM puts and calls and ATM puts and calls, which have 
higher weightings in the formula used to determine the exercise or 
final settlement value, as applicable, of expiring VIX derivatives in 
accordance with the VIX Index methodology.\20\ If the further OTM puts 
and calls open prior to the less OTM puts and calls and ATM puts and 
calls, similarly reduced liquidity in those ATM and less OTM puts and 
calls from RMM events may occur. The Exchange believes the proposed 
rule change may increase liquidity in constituent series, which is 
desirable to ensure these series open at competitive prices on exercise 
settlement value determination days. While liquidity is important to 
open all series on the Exchange, given the potential impact on the 
exercise settlement value determined for expiring VIX derivatives, the 
Exchange believes it is appropriate to ensure a fair and orderly 
opening of the series used to calculate the exercise settlement value.
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    \19\ See Rule 5.34(c)(5).
    \20\ See, e.g., the VIX methodology at http://www.cboe.com/vix/.
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    The proposed rule change clarifies in proposed Rule 
5.31(j)(6)(B)(ii) and (iii) that having no unexecuted market orders (or 
remaining portions) is a condition for a series to open, as implied by 
current Rule 5.31(j)(5)(B)(iii), which states a series does not open if 
there would be unexecuted market orders (or remaining portions). The 
Exchange believes this proposed clarification enhances the description 
of when a series is eligible to open pursuant to the modified opening 
auction process by listing the complete list of opening criteria in all 
relevant provisions within the rule.
    The proposed rule change also amends the modified opening auction 
process to permit a series to open when there would be unexecuted sell 
market orders \21\ (or remaining portions) if the low end of the 
Opening Collar equals $0.05.\22\ A sell market order may only fully 
execute during the opening rotation (at the Opening Trade Price) if 
there is sufficient buy interest to satisfy the size of the market 
order. Currently, if there is a sell market order but no buy interest, 
or insufficient buy interest to satisfy the size of the sell market 
order, the series would not open pursuant to current Rule 
5.31(j)(5)(B)(iii).
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    \21\ A market order is an order to buy or sell a stated number 
of option contracts at the best price available at the time of 
execution. See Rule 5.6(b).
    \22\ The minimum increment applicable to SPX options is $0.05 if 
the series trading price is lower than $3.00 and $0.10 if the series 
trading price is $3.00 or higher. See Rule 5.4(a). A series will 
continue to not be eligible to open if there would be unexecuted buy 
market orders (or remaining portions) or unexecuted sell market 
orders (or remaining portions) if the low end of the Opening Collar 
equals anything other than $0.05.
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    The proposed rule change will permit series to open with unexecuted 
sell market orders (or remaining portions) if the lower end of the 
Opening Collar equals $0.05 (the minimum increment for the series). If 
a series opens with any unexecuted sell market orders (or remaining 
portions), the System will handle those orders as it would any other 
orders that are unexecuted at the open.\23\ The current prohibition on 
opening a series if there would be unexecuted sell market orders is 
intended to protect those orders from executing at potentially 
erroneous prices following the conclusion of the opening rotation in 
series that may not be truly zero-bid options. The Exchange does not 
believe a low-value series should not open because there is no (or 
minimal) interest from investors purchase contracts in that series, as 
that is consistent with the value (or lack of value) of the series. The 
Exchange believes series for which the lower end of the Opening Collar 
equals $0.05 are likely true no-bid series, or series with minimal 
value. The following table demonstrates that when the Composite Market 
is no-bid \24\ with an offer of 0.40 or less, the lower end of the 
Opening Collar is $0.05 (which is the minimum increment in SPX series 
trading less than $3.00).\25\ The lower end of the Opening Collar will 
be greater than $0.05 in a series with a Composite Market offer greater 
than 0.40.
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    \23\ Pursuant to Rule 5.31(f), following the conclusion of the 
opening rotation, the System enters any unexecuted orders and quotes 
(or remaining portions) from the Queuing Book into the Book in time 
sequence (subject to a User's instructions), where they may be 
processed in accordance with Rule 5.32. The System cancels any 
unexecuted opening only orders (or remaining portions) following the 
conclusion of the opening rotation.
    \24\ While it is possible for the lower end of the Opening 
Collar to equal $0.05 in a series with a Composite Market bid of 
0.05, if a series will open with unexecuted sell market orders, that 
means it would open with no Market-Maker bid in the series. 
Therefore, the proposed rule change focuses on no-bid Composite 
Markets.
    \25\ See Rule 5.4(a).

----------------------------------------------------------------------------------------------------------------
                                                                                                  Opening collar
                      Composite market (CM)                         CM midpoint      OC width        (OC) \26\
----------------------------------------------------------------------------------------------------------------
0-.05...........................................................            .025             .25         .05-.15
0-.10...........................................................             .05             .25         .05-.20

[[Page 12366]]

 
0-.15...........................................................            .075             .25         .05-.20
0-.20...........................................................             .10             .25         .05-.25
0-.25...........................................................            .125             .25         .05-.25
0-.30...........................................................             .15             .25         .05-.30
0-.35...........................................................            .175             .25         .05-.30
0-.40...........................................................             .20             .25         .05-.35
0-.45...........................................................            .225             .25         .10-.35
----------------------------------------------------------------------------------------------------------------

    The Exchange believes it will contribute to a fair and orderly 
opening and settlement process to open lower-value constituent series 
on exercise settlement value determination days even if there would be 
unexecuted sell market order interest. In order for the Exchange to 
calculate the exercise or settlement value for expiring VIX 
derivatives, in its role as index calculator for the VIX Index, all 
constituent series that comprise the settlement strip must be open 
(with or without an opening trade) on exercise settlement value 
determination days. As set forth in Rules 4.13(a)(5)(B) and 5.31(j), 
the Exchange uses the opening trade prices of SPX constituent series 
that comprise the settlement strip (or the average of a series' opening 
bid and ask if there is no opening trade in that series) established by 
the modified opening auction process to calculate the exercise or final 
settlement value, as applicable, of expiring VIX derivatives. This will 
permit these constituent series (which may be truly no-bid series) that 
may be part of the settlement strip to open sooner, and thus permit 
calculation of the exercise or settlement value, as applicable, for VIX 
derivatives sooner. This may also provide unexecuted sell market orders 
in low-value series with additional execution opportunities, which may 
be limited in such series. The Exchange believes the benefit of opening 
these series earlier to permit calculation of the exercise or 
settlement value of expiring VIX derivatives outweighs the minimal risk 
(if any) of executing sell market orders at anomalous execution prices 
following the opening rotation given the low-value of these series.
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    \26\ Because the Opening Collar establishes the limits for the 
opening trade price, the minimum amount for the lower end of the 
range collar is 0.05 in a nickel class, as that is the lowest 
eligible opening trade price.
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    If an option series has a larger offer, it is less likely to be 
worthless but may just not have any bids for a brief time.\27\ The 
Exchange believes options in series with a Composite Market bid of zero 
but a larger Composite Market offer \28\ are less likely to be 
worthless, and therefore believes it is appropriate to not open such a 
series if there would be unexecuted sell market orders to prevent a 
potentially anomalous execution price, since the next bid entered in 
that series is likely to be much higher than $0.05. It would be unfair 
to an investor to let its sell market order trade at a price of $0.05 
because, for example, the firm submitted its order during the Queuing 
Period on a day when there was insufficient buy interest to satisfy all 
sell market orders, even though the bids present during that Queuing 
Period were significantly higher than $0.05.
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    \27\ For similar reasons, the System currently converts a sell 
market order to a limit order with a price equal to the minimum 
trading increment for the series if it is no-bid and the national 
best offer is less than or equal to $0.50, but will cancel the order 
if the national best offer is greater than $0.50. See Rule 
5.34(a)(1)(A).
    \28\ The Composite Market threshold of $0.40 is similar to the 
threshold the Exchange currently has in place to protect sell market 
orders in no-bid series after the opening of trading. See id.
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    As noted above, the Exchange uses the average of a series' opening 
bid and ask if there is no opening trade in that series when 
calculating the exercise or final settlement value, as applicable, of 
expiring VIX derivatives on exercise settlement value determination 
days. If a series opens with unexecuted sell market orders, that could 
only occur if there was an opening bid of zero.\29\ In connection with 
the proposed rule change that creates the possibility that a series may 
open with no opening bid and unexecuted sell market orders, the 
proposed rule change amends Rules 4.13(a)(5)(B) and 5.31(j) to provide 
that, in series in which there is no opening trade, the ask price will 
equal $0.05 (the minimum increment of the series) if the series opens 
with unexecuted sell market orders. The Exchange believes it is 
reasonable to use such an ask price, as it is consistent with currently 
functionality that converts a sell market order to a limit order with a 
price equal to the minimum trading increment for the series if it is 
no-bid and the national best offer is less than or equal to $0.50.\30\
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    \29\ As set forth in Rule 5.31(e)(3)(A), market orders have 
first priority to trade at the Opening Trade Price. Therefore, if 
there are unexecuted sell market orders (or remaining portions) at 
the open, there was either no buy interest or any buy interest 
executed against part of the sell market orders but there was an 
insufficient amount to satisfy the size of the sell market order 
interest.
    \30\ See Rule 5.34(a)(1)(A).
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    The proposed rule change also amends proposed Rule 5.31(j)(7) 
(current Rule 5.31(j)(6)) to make a clarifying change and correct a 
cross-reference. Currently, that subparagraph regarding self-trades 
that may occur during an opening rotation states that the Exchange 
reviews all activity, including these types of executions, during the 
modified opening auction process for compliance with the Rules and the 
Exchange Act, including Rule 10.6 (which prohibits manipulation). 
First, the proposed rule change rephrases this sentence so that it 
references the Exchange Act and the Rules, including Rule 10.6, to make 
clear that the rule cross-reference refers to an Exchange Rule rather 
than a Rule under the Exchange Act. Second, the proposed rule change 
corrects to the rule cross-reference to say Rule 8.6, rather than Rule 
10.6. Rule 8.6 describes the Exchange's prohibition on manipulative 
activity.
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.\31\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \32\ 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.

[[Page 12367]]

Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \33\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \31\ 15 U.S.C. 78f(b).
    \32\ 15 U.S.C. 78f(b)(5).
    \33\ Id.
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    In particular, the Exchange believes the proposed rule change will 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, protect investors 
and the public interest, as it may permit an earlier opening of 
constituent series on exercise settlement value determination days. As 
a result, the Exchange may be able to calculate the exercise or 
settlement value, as applicable, of expiring VIX derivatives, at an 
earlier time.
    The proposed rule change regarding the sequence in which 
constituent series will open merely modifies the order in which the 
System opens select series in one class for trading on the Exchange on 
certain days. The System will continue to open all non-constituent 
series on all trading days, and all constituent series on non-exercise 
settlement value determination days, in no particular order. With 
respect to constituent series, the proposed rule change will permit the 
System to initiate the opening rotation process for series with higher 
weightings in the formula used to determine the exercise or final 
settlement value prior to the series with lower weightings (or not SPX 
option series that are not part of the exercise settlement value 
calculation). While the order in which the System opens series is 
generally immaterial (and thus why the Exchange has opened them in no 
particular order, and will continue to do so for all non-constituent 
series on all trading days, and for constituent series on all trading 
days other than exercise settlement value determination days), the 
Exchange believes opening ATM and OTM constituent series prior to all 
other series on expiration settlement value determination days will 
permit series used to calculate exercise or final settlement values, as 
applicable, for expiring VIX Index derivatives to open at an earlier 
time. As discussed above, the Exchange also believes this proposed rule 
change may enhance liquidity in these series on exercise settlement 
value determination days, which benefits investors that hold expiring 
VIX derivatives.
    The proposed rule change regarding the opening of constituent 
series when there are unexecuted sell market orders in certain 
circumstances will further remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, protect investors and the public interest. This proposed 
rule change will permit these constituent series (which may be truly 
no-bid series) that may be part of the settlement strip to open sooner, 
and thus permit calculation of the settlement value for VIX derivatives 
sooner. This may also provide unexecuted sell market orders in low-
value series with additional execution opportunities, which may be 
limited in such series, and may be individuals seeking to close out a 
worthless position. The Exchange believes the benefit of opening these 
series earlier to permit calculation of the exercise or settlement 
value of expiring VIX derivatives outweighs the minimal risk (if any) 
of executing sell market orders at anomalous execution prices following 
the opening rotation given the low-value of these series. By continuing 
to not open series with higher offers if there would be unexecuted sell 
market orders, the Exchange believes the modified opening auction 
process will continue to protect these orders from executing at 
potentially erroneous prices following the opening rotation in series 
that are not truly low-value/no-bid.
    The Exchange believes the proposed threshold of series for which 
the lower end of the Opening Collar is $0.05 (and thus has a Composite 
Market offer of no more than $0.40) appropriately reflects the 
interests of investors, as options in series with offers higher than 
$0.40 are less likely to be worthless, and not permitting a series to 
open in these conditions may prevent execution of these orders at 
unfavorable prices. The Exchange also believes the threshold promotes 
fair and orderly markets, because sell market orders in low-bid/no-bid 
series with offers of $0.40 or less are likely to be individuals 
seeking to close out worthless positions. The proposed rule change 
provides these orders with additional execution opportunities by making 
these series eligible to open earlier. The Exchange notes the proposed 
rule change is consistent with other current functionality that 
converts sell market orders in no-bid series to limit orders with a 
price equal to the minimum increment in the series if the offer is 
$0.50 or less.\34\ Additionally, other options exchanges will open 
series if there are unexecuted sell market orders.\35\
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    \34\ See Rule 5.34(a)(1)(A).
    \35\ See, e.g., NYSE Arca, Inc. (``Arca'') Rule 6.64-O.
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    The Exchange believes the proposed rule change to clarify opening 
conditions on exercise settlement value determination days enhances the 
description of when a series is eligible to open pursuant to the 
modified opening auction process, which promotes transparency in the 
Exchange's Rules and ultimately benefits investors. As noted above, 
this is not a change in the modified opening auction process, but 
merely a clarification.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe the proposed rule change will impose any burden on intramarket 
competition, because it will apply in the same manner to all 
constituent series on exercise settlement value determination days. The 
proposed rule change regarding the opening sequence of constituent 
series only modified the order in which the System will open these 
series for trading, and only those days. The proposed rule change has 
no impact on the sequence in which the System will open non-constituent 
series on all trading days, or constituent series on all trading days 
other than exercise settlement value determination days. The proposed 
rule change regarding opening constituent series with unexecuted sell 
market orders will only impact low-value constituent series in a narrow 
set of circumstances. The proposed rule change has no impact on 
constituent series in which there would be unexecuted sell market 
orders and the lower end of the Opening Collar is greater than $0.05, 
which series will continue to not be eligible to open until that 
condition is resolved.
    The Exchange does not believe the proposed rule change will impose 
any burden on intermarket competition, as it solely impacts the timing 
of the opening of certain series in one class listed for trading on the 
Exchange on certain days. The proposed rule change will permit 
constituent series with higher weightings in the calculation of the 
exercise or settlement value, as applicable, of expiring VIX 
derivatives, as well as low-value/no-bid constituent series that may be 
part of the settlement strip, to open sooner, and thus permit an 
earlier calculation of the exercise or settlement value, as applicable, 
for VIX derivatives. As discussed above, the Exchange believes the 
proposed rule change regarding the opening sequence of constituent 
series may enhance liquidity in these series on exercise settlement 
value determination days.

[[Page 12368]]

Additionally, the proposed rule change regarding opening constituent 
series with unexecuted sell market orders may also provide unexecuted 
sell market orders in low-value series with additional execution 
opportunities, which may be limited in such series. The Exchange 
believes the benefit of opening these series earlier to permit 
calculation of the exercise or settlement value, as applicable, of 
expiring VIX derivatives outweighs the minimal risk (if any) of 
executing sell market orders at anomalous execution prices following 
the opening rotation given the low-value of these series. By continuing 
to not open series with higher Composite Market offers if there would 
be unexecuted sell market orders, the Exchange believes the modified 
opening auction process will continue to protect these orders from 
executing at potentially erroneous prices following the opening 
rotation in series that are not truly low-value/no-bid. As noted above, 
the proposed rule change is consistent with current Exchange 
functionality regarding the handling of sell market orders in no-bid 
series.\36\ Additionally, other options exchanges will open series if 
there are unexecuted sell market orders.\37\
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    \36\ See Rule 5.34(a)(1)(A).
    \37\ See, e.g., Arca Rule 6.64-O.
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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 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 \38\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\39\
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    \38\ 15 U.S.C. 78s(b)(3)(A).
    \39\ 17 CFR 240.19b-4(f)(6). In addition, Rule19b-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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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2020-013 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-2020-013. 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-2020-013 and should be submitted on 
or before March 23, 2020.
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    \40\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-04183 Filed 2-28-20; 8:45 am]
 BILLING CODE 8011-01-P