[Federal Register Volume 85, Number 46 (Monday, March 9, 2020)]
[Notices]
[Pages 13686-13691]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-04677]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88312; File No. SR-CBOE-2020-014]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change Relating To Adopt a Delta-Adjusted at 
Close (DAC) Order Instruction That a User May Apply to an Order When 
Entering it Into the System for Execution in an Electronic or Open 
Outcry Auction

March 3, 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 18, 2020, Cboe Exchange, Inc. (the ``Exchange'' or 
``Cboe Options'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to adopt a Delta-Adjusted at Close (``DAC'') order instruction that a 
User may apply to an order when entering it into the System \3\ for 
execution in an electronic or open outcry auction. The text of the 
proposed rule change is provided in Exhibit 5.
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    \3\ See Rule 1.1, which defines the System as the Exchange's 
hybrid trading platform that integrates electronic and open outcry 
trading of option contracts on the Exchange, and includes any 
connectivity to the foregoing trading platform that is administered 
by or on behalf of the Exchange, such as a communications hub.
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    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 adopt a Delta-Adjusted at Close or DAC 
order instruction that a User may apply to an order when entering it 
into the System for execution in an electronic or open outcry auction. 
In particular, if a DAC order executes during the trading day, upon 
receipt of the official closing price or value for the underlying from 
the primary listing exchange or index provider, respectively, the 
System will adjust the original execution price of a DAC order based on 
a delta value applied to the change in the underlying reference price 
between the time of execution and the market close. As proposed, DAC 
orders will allow Users the opportunity to incorporate into the pricing 
of their options the closing price or value of the underlying on the 
transaction date based on how much the price or value changed during 
the trading day.
    Near the market close, the Exchange has observed that significant 
numbers of market participants interact in the equity markets, which 
may substantially impact the price or value, as applicable, of the 
underlying at the market close. For example, shares of exchange-traded 
funds (``ETFs'') that track indexes, which are increasingly popular, 
often trade at or near the market close in order to better align with 
the indexes they track and attempt to align the market price of shares 
of the ETF as close to the net asset value (``NAV'') \4\ per share as 
possible. Further, the Exchange understands that market makers and 
other liquidity providers seek to balance their books before the market 
close and contribute to increased price discovery surrounding the 
market close. The Exchange also believes it is common for other market 
participants to seek to offset intraday positions and mitigate exposure 
risks based on their predictions of the closing underlying prices or 
underlying indexes (which represent the settlement prices of options on 
those underylings). The Exchange understands this substantial

[[Page 13687]]

activity near the market close may create wider spreads and increased 
price volatility, which may attract further trading activity from those 
participants seeking arbitrage opportunities and further drive prices. 
In light of the significant liquidity and price/value movements in 
equity shares that can occur near the market close, option closing and 
settlement prices may deviate significantly from option execution 
prices earlier that trading day. The proposed DAC order instruction is 
designed to allow investors to incorporate any upside market moves that 
may occur following execution of the order up to the market close while 
limiting downside risk. Additionally, the Exchange has noted that there 
have been a number of managed funds that recognize the benefits to 
their investors in employing certain strategies that allow for their 
investors to mitigate risk at the market close while also participating 
in beneficial market moves at the close. The proposed DAC order would 
provide such funds with an additional method to attempt to meet their 
objectives through options strategies, thereby benefitting their 
investors.
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    \4\ The NAV is an ETF's total assets minus its total 
liabilities. ETFs generally must calculate their NAV at least once 
every business day, and typically do so after market close. See 17 
CFR 270.2a-4.
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    As stated, the System will adjust the original execution price of a 
DAC order based on a delta value applied to the change in the price of 
the underlying from the time of order execution to the market close. 
Delta is the measure of the change in the option price as it relates to 
a change in the price of the underlying security or value of the 
underlying index, as applicable. For example, an option with a 50 delta 
(which is generally represented as 0.50) would result in the option 
moving $0.50 per $1.00 move in the underlying (i.e., price move in the 
underlying x delta value = anticipated price move in the option). Delta 
changes as the price or value of the underlying stock or index changes 
and as time changes, thus giving a User an estimate of how an option 
will behave if the price of the underlying moves in either direction. 
Call option deltas are positive (ranging from 0 to 1), because as the 
underlying increases in price so does a call option. Conversely, put 
option deltas are negative (ranging from -1 to 0), because as the 
underlying increases in price the put option decreases in price. The 
Exchange understands that investors use delta as an important hedging 
and risk management tool in options trading. For example, by trading an 
option with a lower delta, an investor's underlying position will be 
exposed to more downside risk if price or value of the underlying fall. 
Therefore, the Exchange believes the proposed DAC order instruction 
will allow a market participant to maintain a full hedge of its 
position taken upon intraday execution of a DAC order throughout the 
remainder of the trading day, which ultimately reduces the market 
participant's portfolio risk.
    The Exchange proposes to make the DAC pricing instruction available 
for simple orders in Rule 5.30(a)(2), for complex orders in Rule 
5.33(b)(5), for orders submitted in FLEX Options in Rule 5.70(a)(2), 
and, as indicated above, for orders submitted for open outcry trading 
pursuant to Rule 5.83(a)(2) (simple orders) and Rule 5.83(b)(2) 
(complex orders). As proposed, Rule 5.6(c) (Order Types, Order 
Instructions, and Times-in-Force) provides that a DAC order is an order 
for which the System delta-adjusts its execution price after the market 
close. Specifically, the delta-adjusted execution price equals the 
original execution price plus the delta value times the difference 
between the official closing price or value of the underlying on the 
transaction date and the reference price or index value of the 
underlying (``reference price''). Upon order entry for electronic 
execution, a User must designate a delta value and may designate a 
reference price. If no reference price is designated, the System will 
include the price or value, as applicable, of the underlying at the 
time of order entry as the reference price. Upon order entry for open 
outcry execution, a User may designate a delta value and/or a reference 
price. During the open outcry auction, in-crowd market participants 
will determine the final delta value and/or reference price, which may 
differ from any delta value or reference price designated by the 
submitting User. The final delta value and reference price would be 
reflected in the final terms of the execution.
    Likewise, the proposed definition in Rule 5.33(b)(5) (Types of 
Complex Orders) provides for essentially the same definition, differing 
only in that: It applies to complex orders; upon order entry for 
electronic execution a User must designate a delta value per leg, and 
for open outcry execution may designate a delta value for one or more 
legs; a DAC complex order may only be submitted for execution in a 
complex electronic auction pursuant to Rules 5.33(d), 5.38, and 5.40 or 
in open outcry trading on the Exchange's trading floor pursuant to Rule 
5.85; and a DAC complex order is not eligible to rest in the Complex 
Order Book (``COB'').
    Users will enter into the System all DAC orders as they would any 
other order pursuant to Rule 5.7 (governing the order entry of simple 
and complex orders) or 5.72(b) (governing the order entry of FLEX 
orders), as applicable, and the applicable auction rules. As defined 
above, a User may designate the reference price of the underlying upon 
submitting a DAC order. Proposed Rule 5.34(c)(12) (Order and Quote 
Price Protection Mechanisms and Risk Controls) provides that a User-
designated reference price will be subject to a reasonability check. 
Specifically, if a User submits a DAC order to the System with a 
reference price more than an Exchange-determined amount away from the 
underlying price or value at the time of submission of the DAC order, 
the System cancels or rejects the order.\5\ Moreover, if a User chooses 
to submit a DAC order without a reference price, the System will 
automatically input the price or value of the underlying at the time of 
order entry as the reference price.
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    \5\ The System will use the most recent last sale (or 
disseminated index value) as the reference price.
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    For a DAC order submitted for electronic execution, a User will be 
required to designate a delta value upon order entry (including for 
each leg of a DAC complex order as set forth in proposed Rule 
5.33(b)(5)).\6\ A User may designate a delta value upon entry of a DAC 
order submitted for open outcry execution. As noted above, delta are 
either between 0 and 1 for calls, and 0 and -1 for puts.\7\ The 
Exchange notes that 1.0000 is the equivalent of a 100 delta. Pursuant 
to the general principles by which deltas function, the delta for a 
call leg(s) must be greater than zero and the delta for a put option 
leg(s) must be less than zero. Additionally, the delta for call (put) 
legs must be less (greater) than or equal to the delta for the adjacent 
call (put) leg (i.e., the leg with the next largest strike price) of 
the same expiration as the strike price increases. This is also 
consistent with the general manner in which deltas function, and 
ensures that the deltas on the same leg type within the same expiration 
trend away from zero as the strike value increases.
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    \6\ The same requirement would apply for a FLEX DAC complex 
order. See proposed Rule 5.72(b)(2)(A).
    \7\ Note the Exchange will permit delta values to be input up to 
four decimals, as prices for the underlying securities and index 
values may be expressed in four decimals. However, bids and offers 
may only be input in accordance with Rule 5.4, which bids and offers 
the System will use to rank and allocate orders and auction 
responses.
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    Typically, a User submits an electronic complex order (including a 
DAC complex order, as proposed) with a net price, and the System then 
uses the Book and the NBBO as a benchmark in determining leg prices 
based on the

[[Page 13688]]

net execution price of a complex order (which leg prices may not be 
outside of the best prices of orders and quotes in the book for those 
legs).\8\ However, as the delta value will be applied at market close 
as part of the calculation to adjust the DAC order, that is, after the 
System has already determined and populated the leg prices intraday 
based on the net execution price of a complex order, the System will 
need to be able to apply a delta value per each of the leg prices to 
properly calculate the DAC by adjusting the execution price of each 
leg.
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    \8\ There is no requirement to systematize leg prices upon 
submission of a complex order. See generally Rule 5.7(f).
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    In line with its proposed definition, a User may apply the DAC 
order instruction to:
     A simple order submitted into the Automated Improvement 
Mechanism (``AIM'' or ``AIM Auction'') \9\ or the Solicitation Auction 
Mechanism (``SAM'' or ``SAM Auction''); \10\
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    \9\ See Rule 5.37.
    \10\ See Rule 5.39.
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     a complex order submitted into a Complex Order Auction 
(``COA''),\11\ the Complex Automated Improvement Auction (``C-AIM'' or 
``C-AIM Auction''),\12\ or the Complex Solicitation Auction Mechanism 
(``C-SAM'' or ``C-SAM Auction''); \13\
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    \11\ See Rule 5.33(d).
    \12\ See Rule 5.38.
    \13\ See Rule 5.40.
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     a FLEX order submitted into an electronic FLEX 
auction,\14\ the FLEX Automated Improvement Auction (``FLEX AIM'' or 
FLEX AIM Auction'') \15\ or the FLEX Solicitation Auction Mechanism 
(``FLEX SAM'' or ``FLEX SAM Auction''); \16\ or
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    \14\ See Rule 5.72(c).
    \15\ See Rule 5.73.
    \16\ See Rule 5.74.
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     a simple, complex, or FLEX order submitted for manual 
handling in an open outcry auction on the Exchange's trading floor.\17\
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    \17\ See Rules 5.72(d) and 5.85.
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    A DAC order will be handled and executed in all of these auctions 
in the same manner as any other order pursuant to the applicable 
auction rules, including pricing, priority, and allocation rules.\18\ 
Similarly, a DAC order submitted for open outcry trading will execute 
in the same manner as any other order executed in open outcry pursuant 
to Chapter 5, Section G of the Rules (and Rule 5.72(d) with respect to 
FLEX Options).
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    \18\ See id.
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    As proposed, a DAC order submitted for electronic execution will 
not be eligible to rest in the Book, and may only execute in an 
electronic auction. The delta and reference price appended to a DAC 
order would be based on data regarding the underlying at the time of 
order entry. As those values change as the price or value of the 
underlying change, the reference price and delta at the time of 
submission would achieve the desired delta-adjusted price result only 
if the DAC order executes almost immediately upon submission. To allow 
a DAC order to rest on the Book and potentially execute after a 
significant amount of time has passed since entry, underlying price and 
related delta at the time a DAC order would eventually execute would be 
different and thus not achieve the User's desired result. By only 
permitting a DAC order to execute in an electronic auction, the 
proposed rule ensures that, if a DAC orders executes, it will do so 
within a short time following submission. Indeed, the Exchange's 
electronic auctions last for a brief, defined period, the length of 
which is currently 100 milliseconds for non-FLEX electronic auctions 
\19\ and, for FLEX electronic auctions, between three seconds to five 
minutes as designated by the Submitting/Initiating FLEX Trader.\20\ As 
such, the Exchange believes that permitting DAC orders submitted for 
electronic execution to execute only in electronic auctions is 
consistent with the intended purpose of a DAC order.
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    \19\ See Cboe Tradedesk Updates, No. C2019102100 (October 21, 
2019), available at: https://cdn.cboe.com/resources/release_notes/2019/Update-to-Auction-Response-Time-Interval-for-Cboe-Options-Exchanges.pdf. See also Rules 5.37(c); 5.38(c); 5.39(c); and 
5.40(c), which provide that an auction period is a period of time 
determined by the Exchange, which may be no less than 100 
milliseconds and no more than one second, for AIM, C-AIM, SAM, and 
C-SAM, respectively; and Rule 5.33(d)(3), which provides that for a 
COA the Exchange determines the duration of the Response Time 
Interval, which may not exceed 500 milliseconds.
    \20\ See Rules 5.72(c), 5.73(c)(3) and 5.74(c)(3).
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    Pursuant to the proposed definitions in Rules 5.6(c) and 5.33(b)(5) 
(as well as proposed Rule 5.72(b)(2)(B) for FLEX DAC orders), for DAC 
orders submitted for execution in open outcry, a User has the option to 
designate a delta value (per one or more legs for DAC complex orders) 
and/or a reference price. In-crowd market participants then determine 
the final delta value(s) \21\ and/or reference price during the open 
outcry auction. That is, they would negotiate the delta value(s)/
reference price as terms of the order (in conjunction with their 
negotiation of the price of the order) and reflect the ultimately 
agreed upon delta value(s)/reference price in the final terms of the 
DAC order. This is consistent with the manner that the terms (including 
execution price) of any other order are currently negotiated and 
ultimately reflected for open outcry executions. For similar reasons 
why the proposed rule change will not permit DAC orders to rest in the 
Book, the proposed rule change does not require a User to include a 
delta value or reference price when submitting a DAC order for open 
outcry execution. A floor broker may be unable to execute an order 
until well after it received the order for manual handling. Given that 
the delta and reference price may move during that time, the proposed 
rule provides the ability of market participants to agree to 
appropriate terms given the then-current underlying price or value at 
the time of execution. Unlike in the electronic market, in-crowd market 
participants are able to negotiate and agree to these terms as part of 
open outcry trading. As a result, the delta-adjusted price may achieve 
the desired result of the broker's customer.
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    \21\ The Exchange notes that in-crowd participants currently 
have delta values built into their own analytics and pricing tools 
and that generally such values only slightly differ across 
participants.
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    For any DAC order that executes during a trading day, upon receipt 
of the official closing price for the underlying from the primary 
listing exchange or index provider, the System will adjust the original 
execution price based on the delta applied to the absolute change in 
the underlying between the time of execution and the market close. The 
Exchange notes that, like the execution price of any option, a delta-
adjusted price may never be zero or negative. If this occurs as a 
result of the DAC calculation, the System will set the delta-adjusted 
price to the minimum permissible increment.
    The delta adjustment formula that will be applied at the close will 
be as follows:
    The delta-adjusted price = the original execution price + (the 
change in the underlying price x delta) or P2 = P1 + (U-R) * D, where:

 P1 = Original execution price
 P2 = Delta-adjusted price calculated at the close
 R = Reference price
 U = price of the underlying at the market close
 D = Delta
    Example 1: A DAC call order is submitted for execution in an 
electronic auction or PAR and the price of the underlying increases 
from the time of execution to the market close.

 P1 = $1.00
 R = $100.00
 U = $101.00
 D = .4000
    Therefore, P2 = ($1.00 + (($101-$100) * .4000) = $1.40.

[[Page 13689]]

    Example 2: A DAC put order in a penny class is submitted for 
execution in an electronic auction or PAR and the price of the 
underlying increases from the time of execution to the market close.

 P1 = $1.00
 R = $100.00
 U = $103.00
 D =-.4000
    Therefore, P2 = ($1.00 + ((103 - $100) * -.4000) = -$0.20. However, 
because an execution price, including a delta-adjusted execution price, 
may not be negative, the System would adjust P2 = $0.01 (the minimum 
permissible increment).
    The Exchange notes a User may only apply the DAC order instruction 
to a FLEX Order for a FLEX Option series with an exercise price 
expressed as a fixed price in dollars and decimals. The proposed change 
to Rule 5.83(a)(2) and (b)(2) specifies that a User may not apply the 
DAC order instruction to a FLEX Order for a FLEX Option series with an 
exercise price formatted as a percentage of the closing value of the 
underlying on the trade date, as this functionality is not compatible 
with the DAC order instruction.\22\ The System will need a fixed 
execution price at the time of order execution that will be delta-
adjusted (which delta value is based on dollar price movements in the 
underlying) following the market close. However, a FLEX order for a 
series with an exercise price formatted as a percentage of the closing 
value will execute at a percentage rather than a fixed price, which 
would not be determined until the market close. Therefore, execution 
price of such a FLEX order will incorporate the closing price or value 
of the underlying in a different manner, and the System would not have 
an execution price to adjust. Similarly, the proposed change to Rule 
5.83(a)(2) and (b)(2) specifies a User will not be able to designate a 
FLEX Order in a FLEX Option series that is Asian- or Cliquet-settled. 
The settlement prices for these options are determined by averaging a 
pre-set number of closing index values or summing the monthly returns, 
respectively, on specified monthly observation dates.\23\ The 
transaction prices for these options reflect these terms, and delta-
adjustment of those transaction prices would be based on the movement 
of the underlying on only the transaction date. These settlement types 
are, as a result, inconsistent with the DAC order instruction.
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    \22\ See Rule 4.21(b)(6)(A).
    \23\ See Rule 4.21(b)(5)(B).
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    The proposed definition of DAC orders in Rule 5.6(c) also states 
that a DAC order submitted through PAR has a Time-in-Force of Day.\24\ 
A Time-in-force of Day for an order so designated means that the order, 
if not executed, expires at RTH market close. Thus, this proposed Time-
in-Force for DAC orders submitted for execution in open outcry ensures 
that such orders will execute in line with their intended purpose--
intraday and as close in time as possible to the time in which it was 
submitted to achieve the desired result of the broker's customer. 
Moreover, the proposed DAC definition provides that a User may not 
designate a DAC order as All Sessions (i.e., eligible for Regular 
Trading Hours (``RTH'') and Global Trading Hours (``GTH'')),\25\ as the 
adjustment calculation for DAC orders is linked to the RTH market close 
for the underlying securities and indexes. Additionally, equities are 
not traded during the entire GTH session, and not all indexes have 
values disseminated during GTH, so there would not be a then-current 
reference price for DAC orders outside of RTH. Finally, the proposed 
definition provides that a User may not designate bulk messages as DAC. 
A bulk message is a bid or offer included in a single electronic 
message a User submits to the Exchange in which the User may enter, 
modify, or cancel up to an Exchange-specified number of bids and 
offers.\26\ The Exchange notes that the purpose of bulk messages is to 
encourage market-maker quoting and the provision of liquidity on the 
exchange throughout the trading day. As a DAC order will not be 
eligible to rest in the Book and, instead, execute almost immediately, 
allowing Users to designate their bulk messages as a DAC order would 
conflict with the intended purpose of a bulk message.\27\
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    \24\ The Exchange again notes that electronically submitted DAC 
orders will be submitted through the electronic auctions, and either 
executed or cancelled upon the conclusion of an auction, making an 
instruction regarding the time the System will hold an order 
unnecessary. Therefore, a requirement to apply a Time-in-Force of 
Day is not necessary for electronic DAC orders.
    \25\ See Rule 1.1.
    \26\ See id.
    \27\ The Exchange also notes that bulk messages are not 
currently available for complex orders (thus, not eligible to trade 
in the complex electronic auctions), not currently eligible to 
submit to any of the auctions.
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    The reference price and delta value, as well as the execution 
price, will be provided to all transaction parties on all fill reports 
at the time of the execution of a DAC order (i.e., an ``unadjusted DAC 
trade''). Unadjusted DAC trade information will also be sent to the 
Options Clearing Corporation (``OCC'') and disseminated to Options 
Price Reporting Agency (``OPRA''). Upon conclusion of the delta-
adjustment of the execution price following the market close, fill 
restatements will be sent to all transaction parties. Matched trades 
will be sent to the OCC and OPRA once the restatement process is 
complete with the delta-adjusted price. The prior unadjusted trade 
reported to the OCC and disseminated to OPRA will be cancelled and 
replaced with a trade report with all of the same information, except 
the original execution price will be replaced with the delta-adjusted 
price.\28\ The Exchange has discussed with both the OCC and OPRA of its 
plans to adopt DAC orders and confirmed that adopting the proposed 
restatement process is acceptable. Additionally, the Exchange has 
analyzed its capacity and represents that it believes the Exchange and 
OPRA have the necessary systems capacity to handle additional any 
additional order traffic, and the associated restatements, that may 
result from the adoption of DAC orders. Further, the Exchange 
represents it has an adequate surveillance program in place to monitor 
orders with DAC pricing and that the proposed pricing instruction will 
not have an adverse impact on surveillance capacity. Finally, the 
proposed order instruction will not have any impact on pricing or price 
discovery at or near the market close. A DAC order will execute 
intraday in the same manner as any other order, and its price will 
merely be automatically adjusted following determination of the final 
closing price or value of the underlying security or index, 
respectively.
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    \28\ The Exchange notes that this restatement process is the 
same for an order that has been adjusted or nullified and 
subsequently restated pursuant to the Exchange's obvious error 
rules. See Rule 6.5.
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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.\29\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \30\ 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,

[[Page 13690]]

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) \31\ requirement that the rules 
of an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \29\ 15 U.S.C. 78f(b).
    \30\ 15 U.S.C. 78f(b)(5).
    \31\ Id.
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    The Exchange believes that the proposed DAC order will promote just 
and equitable principles of trade and will remove impediments to and 
perfect the mechanism of a free and open market and national market 
system, as it will allow market participants to incorporate into the 
pricing of their options the closing price of the underlying on the 
transaction date based on the amount in which the price or value of the 
underlying change intraday, thus, allowing investors to incorporate 
potential upside market moves that may occur following the execution of 
an order up to the market close while limiting downside risk. As 
described above, the market close is a time in which maximum 
significant numbers of participants interact on the equity markets. 
This activity may contribute to substantially increased liquidity and 
significant price volatility near the close of the equity markets, 
which can potentially cause the closing prices of the underlyings and, 
therefore, the settlement prices of options on those underlyings to 
greatly deviate from the average option execution prices traded earlier 
that trading day. The Exchange believes DAC orders will serve to 
protect investors by allowing them, through use of the underlying 
reference prices and delta, to fully hedge their options positions 
taken during the trading day through the market close and potentially 
benefit from price movements at the close. Also, as managed funds have 
recently begun utilizing strategies at the close in order to mitigate 
risk at the close and participate in beneficial market moves at the 
same time, the Exchange believes that DAC orders will offer an 
additional method by which these funds will be able meet these 
objectives through the execution of options strategies, thereby 
benefiting investors that hold shares of these funds.
    The Exchange further believes that the adoption of DAC orders on 
the Exchange will promote just and equitable principles of trade, 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system because DAC orders will be entered, 
priced, prioritized, allocated and execute as any other order would 
when submitted into any of the applicable electronic auctions or for 
open outcry trading. As such, market participants would not be subject 
to any new or novel order entry, pricing, allocation, and execution 
processes in relation to their DAC orders as such orders will be 
handled pursuant to the Exchange Rules governing the applicable auction 
processes or execution in open outcry, which have been previously 
approved by the Commission.
    The Exchange believes the proposed differences regarding the 
requirements to enter DAC-specific pricing information for electronic 
and open outcry trading reflect the differences in those types of 
trading, and as a result, may assist investors in achieving the goals 
of DAC orders. The general delta value requirements are in line with 
just and equitable principles or trading and with the protection of 
investors because they are consistent with the manner in which a delta 
is commonly known to function and generally used in options trading. 
Further, the Exchange believes that proposed Rule 5.34(c)(12) provides 
System controls in connection with DAC orders that are designed to 
protect investors. The Exchange believes the proposed reference price 
reasonability check will mitigate risks associated submitting a DAC 
order with a reference price unintended by the User as a likely result 
of human or operational error. The Exchange also notes that similar 
mechanisms and controls are currently in place on the Exchange for 
various types of orders.\32\
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    \32\ See generally Rule 5.34, which provides for additional 
order and quote price protection mechanisms and risk controls for 
simple and complex orders, including similar reasonability checks 
set at Exchange-determined amounts.
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    In addition to this, the Exchange believes that permitting a DAC 
order submitted for electronic execution to execute only in an 
electronic auction will protect investors and serve to remove 
impediments to and perfect the mechanism of a free and open market and 
national market system, because it is consistent with the intended 
purpose of DAC orders. This would ensure that DAC orders that can 
execute would do so within a short time following submission and 
therefore in a manner that achieves a User's desired delta-adjusted 
price. As described above, the goal of a DAC order is to adjust the 
execution price based on a delta value applied to the change in the 
underlying price between the market close and the time of the trade. 
Therefore, a DAC order must be able to execute as close in time as 
possible to the time of order submission (i.e., the point in time a 
User designates a reference price and delta) so as to allow the 
reference price and related delta to remain in line with the underlying 
price information at the time of submission and achieve the User's 
desired result. This result may not occur for a DAC order resting in 
the Book for a significant amount of time. As such, a DAC order 
submitted through an electronic auction, like any order submitted in an 
auction, will be executed within a short time following submission. 
Thus, the Exchange believes that the proposed limitation to electronic 
auctions would protect investors by allowing DAC orders to execute in 
line with Users' expectations and a DAC order's intended purpose.
    The Exchange believes that by providing that a User may not apply 
the DAC order instruction to a FLEX Order for a FLEX Option series with 
an exercise price formatted as a percentage of the closing value of the 
underlying on the trade date or in options that are Asian-or Cliquet-
settled will remove impediments to and perfect the mechanism of a free 
and open market and national market system and generally protect 
investors because these FLEX terms are inconsistent with the DAC order 
instruction and would conflict with the manner in which the System 
calculates the delta-adjusted price upon the market close. Similarly, 
the Exchange believes that the proposed rule designating DAC orders 
submitted for execution in open outcry with a Time-in-Force of Day, as 
well as not permitting a User to designate a DAC order as All Sessions 
will also protect investors because, execution on the following trading 
day, or during the GTH session would prevent achievement of the desired 
result of a DAC order. As discussed above, such executions would be 
inconsistent with the intended purpose of a DAC order. Also, the 
proposed provision that a User may not designate bulk messages as DAC 
will remove impediments to and perfect the mechanism of a free and open 
market and national market system because it will ensure bulk messages 
do not contain an instruction that would conflict with their intended 
purpose in encouraging the provision of liquidity on the Exchange 
throughout the trading day.
    The Exchange notes that it has discussed with the OCC and OPRA its 
plan to adopt DAC orders, including the proposal to apply the 
restatement process described above to DAC orders. Moreover, the 
Exchange represents that the Exchange itself and OPRA have the

[[Page 13691]]

necessary systems capacity to handle any additional order traffic and 
the related restatements that may result from the adoption of DAC 
orders, thereby ensuring the protection of investors. The Exchange also 
believes the additional restatements and adjustments for DAC orders 
would be manageable and that its existing surveillances are adequate to 
monitor trading of DAC orders thereby helping to ensure the maintenance 
of a fair and orderly market.

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 proposed rule change 
will not impose any burden on intramarket competition that is not 
necessary or appropriate in furtherance of the purposes of the Act, 
because use of the DAC order instruction will be optional and available 
to all Users. Any User may determine whether to apply a DAC order 
instruction to the orders it submits to the Exchange, and the System 
will handle all DAC orders submitted by all Users to the Exchange in 
the same manner according to the proposed rule change. Users will not 
be required to apply a DAC order instruction to any orders, and may 
continue to apply any other currently available order instructions to 
their orders.
    The proposed rule change will not impose any burden on intermarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act, as it is intended to provide market participants 
with an additional means to manage risks in connection with potential 
volatility and downside price swings that may occur near the market 
close, while allowing them to receive potential benefits associated 
with any upside market moves near the market close. The Exchange 
believes the proposed rule change may foster competition, as other 
options exchanges in their discretion may pursue the adoption of orders 
with similar purposes, which will result in additional choices for 
investors. Moreover, the Commission has repeatedly expressed its 
preference for competition over regulatory intervention in determining 
prices, products, and services in the securities markets. Specifically, 
in Regulation NMS, the Commission highlighted the importance of market 
forces in determining prices and SRO revenues and, also, recognized 
that current regulation of the market system ``has been remarkably 
successful in promoting market competition in its broader forms that 
are most important to investors and listed companies.'' \33\
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    \33\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37499 (June 29, 2005).
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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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be 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-2020-014 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-2020-014. 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-2020-014, and should be submitted 
on or before March 30, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-04677 Filed 3-6-20; 8:45 am]
 BILLING CODE 8011-01-P