[Federal Register Volume 85, Number 164 (Monday, August 24, 2020)]
[Notices]
[Pages 52168-52170]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18501]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89596; File No. SR-CBOE-2020-078]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Its Fees Schedule To Adopt a New Fee Code Related to the Execution of 
an Equity Leg of a Stock-Option Order

August 18, 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 August 10, 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'') is filing with 
the Securities and Exchange Commission (``Commission'') a proposal to 
amend its Fees Schedule to adopt a new fee code related to the 
execution of an equity leg of a stock-option order. The text of the 
proposed rule change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://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 fee schedule to adopt a new fee 
code for the equity leg of a stock-option order, which orders would 
yield fee code ``EP'', effective August 10, 2020. The Exchange also 
proposes to amend the description of the existing fee for the equity 
leg of a stock-option order, which yields fee code ``EQ'' and the notes 
sections applicable to both fee codes EP and EQ noted in the fees 
schedule.
    The Exchange first notes that it operates in a highly competitive 
market in which market participants can readily direct order flow to 
competing venues if they deem fee levels at a particular venue to be 
excessive or incentives to be insufficient. More specifically, the 
Exchange is only one of 16 options venues to which market participants 
may direct their order flow. Based on publicly available information, 
no single options exchange has more than 17% of the market share.\3\ 
Thus, in such a low-concentrated and highly competitive market, no 
single options exchange possesses significant pricing power in the 
execution of option order flow. The Exchange believes that the ever-
shifting market share among the exchanges from month to month 
demonstrates that market participants can shift order flow, or 
discontinue to reduce use of certain categories of products, in 
response to fee changes. Accordingly, competitive forces constrain the 
Exchange's transaction fees, and market participants can readily trade 
on competing venues if they deem pricing levels at those other venues 
to be more favorable. In response to competitive pricing, the Exchange, 
like

[[Page 52169]]

other options exchanges, offers rebates and assesses fees for certain 
order types executed on or routed through the Exchange.
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    \3\ See Cboe Global Markets U.S. Options Market Volume Summary 
(August 7, 2020), available at https://markets.cboe.com/us/options/market_statistics/.
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    Stock-option orders are complex instruments that constitute the 
purchase or sale of a stated number of units of an underlying stock or 
a security convertible into the underlying stock coupled with the 
purchase or sale of an option contract(s) on the opposite side of the 
market and execute in the same manner as complex orders. Through this 
functionality, the stock portions of stock-option strategy orders are 
electronically communicated by the Exchange to a designated broker-
dealer (currently, Cowen is the only broker-dealer that may be 
designated for this service), who then manages the execution of such 
stock portions. In connection with the functionality, the Exchange 
adopted a stock handling fee of $0.0010 per share for the processing 
and routing by the Exchange of the stock portion of stock-option 
strategy orders executed through those mechanisms.\4\ The purpose of 
the stock handling fee is to cover the fees charges by the outside 
venue that prints the trade, as well as assist in covering the 
Exchange's costs in matching these stock-option orders against other 
stock option orders on the complex book. Additionally, the Exchange 
also largely passes through to Trading Permit Holders (``TPHs'') the 
fees assessed to the Exchange by the designated broker (i.e., Cowen) 
that manages the execution of these stock portions of stock-option 
strategy orders. The fee schedule also provides for a cap of $50 per 
execution for orders yielding fee code EQ, which aligns with how the 
Exchange's only current designated broker-dealer (i.e., Cowen) applies 
a cap to the execution management of the stock portion of stock-option 
strategy orders.
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    \4\ See Securities Exchange Act Release No. 67383 (July 10, 
2012), 77 FR 41841 (July 16, 2012) (SR-CBOE-2012-063) (stating the 
stock portions of stock-option strategy orders will be 
electronically communicated by the Exchange to a designated broker-
dealer, who will then manage the execution of such stock portions).
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    Now, the Exchange proposes to amend its fee schedule to reflect the 
option of an additional designated broker-dealer, Penserra, to manage 
the execution of the stock portion of a stock-option strategy order. 
Specifically, the Exchange proposes to adopt fee code EP, which would 
be applicable to equity leg orders whose executions are managed by 
Penserra. Unlike Cowen, Penserra will not assess the Exchange fees for 
managing the stock-portion of a stock-option order, but rather will 
assess and bill its customers directly.\5\ Therefore, the Exchange does 
not wish to assess the current stock handling fee which was adopted in 
part to recoup the fees assessed to the Exchange by the Exchange's 
current designated broker-dealer, Cowen. As such, the Exchange proposes 
to make clear that stock-portions of stock-option strategy orders 
managed by Penserra and yielding fee code EP will not be subject to a 
fee.
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    \5\ The Exchange notes it is possible Cowen directly charges 
fees to customers in addition to the stock handling fee the Exchange 
charges.
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    The Exchange next proposes to modify the current notes section of 
the Stock-Portion of Stock-Options Strategy Orders table. Particularly, 
the notes section currently provides that the Exchange shall assess a 
fee of $0.0010 per share for the stock portion, which Cboe Options must 
route to an outside venue, of stock-option orders executed via the 
Complex Order Auction (``COA''), the Complex Order Book (``COB''), AIM, 
and SAM. The Exchange proposes to now clarify that this fee also 
applies to the stock-component of a QCC with Stock Orders. The Exchange 
notes that it made it clear that such fee would apply to these orders 
when it adopted QCC with Stock Orders, but that it inadvertently did 
not update the corresponding fees schedule and intends to do so now to 
avoid potential confusion.\6\ The Exchange lastly proposes to modify 
the description of existing fee code EQ to specify that it is 
applicable to equity leg orders whose executions are managed by Cowen.
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    \6\ See also Securities Exchange Act Release No. 83891 (August 
20, 2018) 83 FR 42949 (August 24, 2018) (SR-CBOE-2018-058).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act,\7\ in general, and furthers the requirements 
of Section 6(b)(4),\8\ in particular, as it is designed to provide for 
the equitable allocation of reasonable dues, fees and other charges 
among its facilities and does not unfairly discriminate between 
customers, issuers, brokers or dealers. The Exchange also believes that 
the proposed rule change is consistent with the objectives of Section 
6(b)(5) 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, and, particularly, is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that its proposed change to adopt fee code 
EP, which will assess no fee for stock portions of stock-option 
strategy order executions managed by Penserra, is consistent with 
Section 6(b)(4) of the Act in that the proposal is reasonable, 
equitable and not unfairly discriminatory. Specifically, the Exchange 
believes the proposal is reasonable as market participants will not be 
subject to a fee for the execution of the stock-portion of a stock-
option order handled by one of the Exchange's designated broker-
dealers, Penserra. The Exchange believes it's appropriate to not assess 
a fee for orders managed by Penserra as compared to those managed by 
Cowen, as Penserra will directly charge is customers for the stock 
portion of stock-option strategy orders and not charge the Exchange, 
unlike Cowen who does not directly charge market participants, but 
rather charges the Exchange, which passes that fee through to 
customers. Further, the Exchange believes the proposal is equitable and 
not unfairly discriminatory because the proposed change applies to all 
TPHs and all TPHs that execute stock-option orders in the complex book 
will have the option to utilize Penserra to manage the execution of the 
stock portion of its stock-option strategy orders.
    Additionally, the Exchange believes that the proposed description 
modification to existing fee code EQ will clarify that such executions 
yielding fee code EQ are managed by Cowen. The Exchange believes the 
amendment to the current notes section clarifies that the stock 
handling fee also applies to the stock-portion of QCC with Stock 
Orders, which reduces potential confusion and maintains clarity in the 
rules, thereby removing impediments to and perfecting the mechanism of 
a free and open market and a national market system, and, in general, 
protecting investors and the public interest.

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 that the proposed rule change will impose any burden on 
competition that is not

[[Page 52170]]

necessary or appropriate in furtherance of the purposes of the Act. 
Specifically, the Exchange does not believe that the proposed change 
will impose any burden on intramarket competition that is not necessary 
or appropriate in furtherance of the purposes of the Act because the 
proposed change will apply uniformly to the stock portions of all 
market participants' stock-option strategy orders that are handled by 
Penserra, a newly designated broker-dealer. The proposed rule change 
provides TPHs with additional options regarding the Exchange's handling 
of their stock-option orders.
    The Exchange does not believe that the proposed rule change will 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. As previously 
discussed, the Exchange operates in a highly competitive market. TPHs 
have numerous alternative venues that they may participate on and 
direct their order flow, including 15 other options exchanges. Based on 
publicly available information, no single options exchange has more 
than 17% of the market share.\9\ Therefore, no exchange possesses 
significant pricing power in the execution of option order flow. In 
such an environment, the Exchange must continually adjust its fees to 
remain competitive with other exchanges and to attract order flow to 
the Exchange. Indeed, participants can readily choose to send their 
orders to other exchange, and, additionally off-exchange venues, if 
they deem fee levels at those other venues to be more favorable. 
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.'' \10\ The fact 
that this market is competitive has also long been recognized by the 
courts. In NetCoalition v. Securities and Exchange Commission, the D.C. 
Circuit stated as follows: ``[n]o one disputes that competition for 
order flow is `fierce.' . . . As the SEC explained, `[i]n the U.S. 
national market system, buyers and sellers of securities, and the 
broker-dealers that act as their order-routing agents, have a wide 
range of choices of where to route orders for execution'; [and] `no 
exchange can afford to take its market share percentages for granted' 
because `no exchange possesses a monopoly, regulatory or otherwise, in 
the execution of order flow from broker dealers'. . . .''.\11\ 
Accordingly, the Exchange does not believe its proposed fee change 
imposes any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.
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    \9\ See supra note 3.
    \10\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37499 (June 29, 2005).
    \11\ NetCoalition v. SEC, 615 F.3d 525, 539 (DC Cir. 2010) 
(quoting Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \12\ and paragraph (f) of Rule 19b-4 \13\ 
thereunder. 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.
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f).
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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-2020-078 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-2020-078. 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-2020-078 and should be submitted on 
or before September 14, 2020.
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    \14\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-18501 Filed 8-21-20; 8:45 am]
BILLING CODE 8011-01-P