[Federal Register Volume 85, Number 167 (Thursday, August 27, 2020)]
[Notices]
[Pages 53029-53034]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18828]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89636; File No. SR-CBOE-2020-051]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of Amendment No. 1 and Order Instituting Proceedings To
Determine Whether To Approve or Disapprove a Proposed Rule Change, as
Modified by Amendment No. 1, To Amend Its Automated Price Improvement
Auction Rules in Connection With Agency Order Size Requirements
August 21, 2020.
I. Introduction
[[Page 53030]]
On June 11, 2020, Cboe Exchange, Inc. (``Exchange'' or ``Cboe'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change
permitting the Exchange to impose a maximum size requirement for an
agency order submitted into the Automated Price Improvement Mechanism
(``AIM'' or ``AIM Auction'') and the Complex Automated Price
Improvement Mechanism (``C-AIM'' or ``C-AIM Auction'') in S&P
500[supreg] Index Options (``SPX''). The proposed rule change was
published for comment in the Federal Register on June 18, 2020.\3\ On
July 23, 2020, the Exchange submitted Amendment No. 1 to the proposed
rule change, which replaced and superseded the proposed rule change in
its entirety.\4\ On July 27, 2020, pursuant to Section 19(b)(2) of the
Act,\5\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\6\ The Commission is publishing this notice and
order to solicit comment on the proposed rule change, as modified by
Amendment No. 1, from interested persons and to institute proceedings
pursuant to Section 19(b)(2)(B) of the Act \7\ to determine whether to
approve or disapprove the proposed rule change, as modified by
Amendment No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 89058 (June 12,
2020), 85 FR 36918. Comments received on the proposed rule change
are available on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-051/srcboe2020051.htm.
\4\ In Amendment No. 1, the Exchange: (1) Amended its proposal
to modify the proposed maximum size requirement for AIM and C-AIM
agency orders in SPX to ten contracts rather than a size determined
by the Exchange of up to 100 contracts, specify that this size
requirement would apply to all agency orders in SPX, and make
related conforming changes to its proposed rule text; and (2)
provided additional data, justification, and support for its
modified proposal. The full text of Amendment No. 1 is available on
the Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-051/srcboe2020051-7470738-221292.pdf.
\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 89399, 85 FR 46202
(July 31, 2020). The Commission designated September 16, 2020 as the
date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\7\ 15 U.S.C. 78s(b)(2)(B).
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II. Exchange's Description of the Proposed Rule Change, as Modified by
Amendment No. 1
The Exchange proposes to amend Rule 5.37(a)(3) and Rule 5.38(a)(8)
to adopt a maximum size of 10 contracts for Agency Orders in SPX
submitted through the Automated Price Improvement Mechanism (``AIM'' or
``AIM Auction'') and the Complex Automated Price Improvement Mechanism
(``C-AIM'' or ``C-AIM Auction'').\8\
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\8\ Amendment No. 1 adopts a fixed maximum size requirement of
10 contracts for SPX Agency Orders submitted to AIM and C-AIM and
amends the Initial Rule Filing to reflect this fixed maximum.
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Currently, Rules 5.37(a)(3) and 5.38(a)(3), which govern the size
requirements for AIM and C-AIM Agency and Initiating Orders, provide
that there is no minimum size for orders submitted into AIM and C-AIM
Auctions, respectively, and that the Initiating Order must be for the
same size as the Agency Order. As such, an Agency Order of any size may
currently be submitted in an AIM or C-AIM Auction.
The Exchange now proposes to amend Rule 5.37(a)(3) to provide the
maximum size for all Agency Orders in SPX is 10 contracts, and by
amending Rule 5.38(a)(3) to provide that the maximum size for the
smallest leg of all Agency Orders in SPX is 10 contracts.\9\ The
proposed maximum size limit for SPX Agency Orders submitted in an AIM
or C-AIM Auction is designed to address the specific trading
characteristics, market model, and investor basis of SPX. The Exchange
notes that the maximum size requirement for Agency Orders in SPX would
apply to all Agency Orders in the entire SPX class (including SPX
Weeklys (``SPXW'')).
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\9\ Application of the maximum size to the smallest leg of
complex orders is consistent with the application of a size
requirement for the Exchange's Complex Solicitation Auction
Mechanism, which is a similar price improvement auction mechanism on
the Exchange. See Rule 5.40(a)(3).
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In particular, SPX has a different and more complicated market
model, involves taking on greater risk, has a significantly higher
notional value (e.g., they are ten times the notional size of SPY
options), tends to trade in much larger size, tends to have a larger
percentage of volume executed in open outcry than other classes, and
tends to execute increasingly more complex strategies (e.g., SPX Combo
orders) than in other options classes. The Exchange understands these
factors may limit retail customer participation in SPX to simpler
strategies and smaller-sized orders. While AIM and C-AIM have
historically been activated for all other options classes, the unique
and more complex characteristics of SPX have contributed to the
Exchange's historical determination to not activate AIM and C-AIM in
SPX when the floor is open so to encourage liquidity on the trading
floor as well as in the electronic book to accommodate these large and
complex trades.\10\ Therefore, the Exchange believes the application of
an Agency Order size ceiling may provide more price improvement
opportunities in SPX geared towards retail customers when AIM and C-AIM
are activated in SPX.\11\ The Exchange believes this may incentivize
increased retail customer auction participation in SPX and provide
retail customers with execution and price improvement opportunities in
SPX while incentivizing continued liquidity in the electronic book and
on the trading floor for larger and more complex orders.
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\10\ The Exchange notes that, due to the Covid-19 pandemic, the
trading floor was inoperable from March 16, 2020 through June 12,
2020 and, as a result, AIM and C-AIM were activated for SPX for the
duration of the floor closure.
\11\ Amendment No. 1 adds additional clarification regarding the
differences between SPX and other classes and the role of such
differences in the Exchange's historical determination not to
activate AIM and C-AIM for SPX.
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The Exchange has observed that smaller size order flow tends to
attract liquidity provider responses, as such orders are generally
easier to hedge than larger orders, which may encourage market
participants to compete to provide price improvement in an electronic
competitive auction process. This, in turn, may contribute to a deeper,
more liquid auction process with additional price improvement
opportunities for market participants that submit smaller size orders,
particularly retail customers.
The Exchange notes that smaller orders in SPX are not commonly
executed on the floor, and, without an opportunity to execute in AIM
and C-AIM, smaller orders are primarily submitted into to the Book and
trade at the market, whereas, with AIM and C-AIM, smaller orders may
receive price improvement.\12\ For example, the Exchange observed that
during April and May 2020, while the trading floor was inoperable and
AIM and C-AIM were activated for SPX, the average daily statistics for
Agency Orders
[[Page 53031]]
containing various quantities was as follows:
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\12\ Amendment No. 1 provides additional detail regarding the
typical order flow of smaller, retail-sized orders when the Exchange
is operating in its historically normal environment (i.e., when the
trading floor is operable and AIM/C-AIM is not activated in SPX).
The Exchange notes, too, that Rule 5.37(b)(1)(A) guarantees price
improvement for smaller order submitted to AIM. It provides that if
a buy (sell) Agency Order is for less than 50 standard option
contracts (or 500 mini-option contracts), the stop price of the
Initiating Order must be at least one minimum increment better than
the then-current NBO (NBB) or the Agency Order's limit price (if the
order is a limit order), whichever is better.
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AIM C-AIM
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Order size category Number of Number of Number of Number of
Agency orders contracts Agency orders contracts
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1 to 10......................................... 1,668 4,229 2,123 17,231
11 to 50........................................ 103 2,759 189 17,226
51 to 100....................................... 19 1,654 30 12,696
101 to 250...................................... 5 977 21 16,373
251 to 500 \13\................................. 3 1,335 12 19,144
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The Exchange then observed that since the re-opening of the trading
floor on June 15, 2020,\14\ the average daily statistics for customer
orders for various quantities has been as follows:
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\13\ The Exchange also notes that orders for over 500 contracts
did not exceed a daily average of 2 orders (for up to an average
daily total of 3,425 contracts) in AIM nor over a daily average of 4
orders (for up to an average daily total of 50,971 contracts) in C-
AIM.
\14\ Through July 16, 2020, when this data was compiled.
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Simple orders on floor Complex orders on floor
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Order size category Number of Number of
customer Number of customer Number of
orders contracts orders contracts
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1 to 10......................................... 11 50 12 1,481
11 to 50........................................ 11 376 41 11,894
51 to 100....................................... 8 688 44 16,305
101 to 250...................................... 9 1,487 30 20,635
251 to 500 \15\................................. 6 2,240 19 22,489
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The Exchange has observed that brokers generally cross customer
orders on the trading floor, which is currently the only way to cross
orders on the Exchange. Overall, as demonstrated in the tables above,
the Exchange has observed that, when AIM and C-AIM were activated for
SPX, there was a significant number of SPX orders (and resulting number
of contracts) containing quantities of one to ten contracts submitted
through the electronic auctions over any other order size category.
However, once the trading floor was again operable in June 2020, and
AIM and C-AIM consequently switched off for SPX, the volume of customer
orders in SPX for one to ten contracts submitted to the trading floor
decreased significantly (approximately a 99% decrease in number of
simple orders, total number of simple order contracts and number of
complex orders, and approximately a 91% decrease in total number of
complex order contracts) from the volume that had previously been
submitted to the electronic auctions, whereas, larger order sizes
experienced a notable increase in volume once the trading floor was
again operable. Thus, the data demonstrates that when AIM is not
available, brokers do not take advantage of the ability to cross
smaller-sized orders on the trading floor, but when AIM is available,
brokers use the electronic auction to cross these smaller-sized orders.
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\15\ The Exchange also notes that orders for over 500 contracts
have had up to a daily average of 4 orders (for up to an average
daily total of 9,120 contracts) in AIM and up to 10 orders (for up
to an average daily total of 60,091 contracts) in C-AIM.
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In addition to this, the Exchange observed that, in a sample of SPX
orders submitted into simple AIM during a week of trading in April
2020,\16\ orders containing quantities from one to ten contracts
submitted through AIM received an average price improvement of
approximately $0.34 over their limit prices, whereas orders containing
quantities from 11 to 50 contracts received an average price
improvement of approximately $0.22, and orders for 51 to 250 contracts
received an average price improvement of $0.08 and orders containing
quantities of between 251 and 500 received an average of $0.15. That is
approximately a 55% larger average price improvement that orders for
one to ten contracts received than orders for 11 to 50 contracts, a
325% larger average price improvement than orders for 51 to 250
contracts and approximately 127% larger average price improvement than
orders for 251 to 500 contracts. While the Exchange did not observe
such a significant increase in price improvement for complex orders
from one to ten contracts in the sample of SPX orders submitted to C-
AIM, it notes that greater price improvement generally did occur for
smaller sized complex orders as compared to larger sized orders. The
Exchange notes, however, that it is simultaneously submitting a rule
filing to amend the manner in which price improvement occurs for
certain complex SPX orders submitted to C-AIM so that price improvement
received through the C-AIM Auction is better aligned with pricing that
typically occurs on the trading floor. The Exchange believes that this,
paired with the proposed maximum quantity, will greatly incentivize
more retail-sized order flow through C-AIM. Overall, as this data
demonstrates, price improvement on smaller orders (particularly for one
to ten contracts) in SPX, a class which generally exhibits more
complicated trading characteristics and complex market factors, is
generally more beneficial than price improvement on larger orders
submitted through AIM and C-AIM, and customers are more inclined to
submit smaller orders (1-10 contracts) in SPX into the electronic
auctions when activated for SPX, rather
[[Page 53032]]
than to the trading floor, when operable. As a result, if the Exchange
is able to implement a maximum size requirement of up to 10 contracts
for SPX as proposed,\17\ it may determine to activate AIM and C-AIM
when the trading floor is open. The Exchange believes this could
provide incentive for the submission of smaller size SPX orders to the
Exchange and into the electronic auction. As a result, the Exchange
believes the proposed rule change will provide retail customers with
additional price improvement opportunities overall when the trading
floor is open while preserving liquidity available in the market,
particularly on the trading floor, for larger and more complicated
orders.
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\16\ Amendment No. 1 amends the data sample presented by
expanding the time frame in which the sample was taken for average
price improvement over the limit price of Agency Orders submitted
into AIM and C-AIM from through.
\17\ The proposed rule change to designate a maximum size of 10
contracts is based on this data, which demonstrates that orders with
size up to 10 contracts generally experience the most volume when
AIM and C-AIM are activated for SPX and generally receive the most
beneficial price improvement (and are considered to be ``retail''
sized orders).
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The Exchange notes that the trading floor is generally better
suited for the larger complex orders typical in SPX. Therefore, while
permitting retail-sized orders in SPX to execute in AIM and C-AIM will
provide additional price improvement opportunities for smaller orders,
it is also designed to maintain SPX liquidity, and incentive Market-
Maker activity in SPX, on the trading floor and in the electronic book
when AIM and C-AIM is activated for SPX, creating a liquid hybrid
environment for orders in this class. Indeed, the Exchange has observed
that open outcry trading is the generally preferred execution mechanism
for orders in such a complex and nuanced class as SPX, which has been
indicated, among other observations, by a significant decrease in SPX
executions while the Exchange operated in an all-electronic
environment. Data from February 3, 2020 through March 13, 2020 (the
last trading day prior to the temporary close of the trading floor)
shows that a total of 2,717,383 contracts for simple orders in SPX and
27,242,625 contracts for complex orders in SPX were executed in open
outcry auctions, whereas data for approximately the same timeframe,
from March 16, 2020 through April 21, 2020, shows that 534,790
contracts were executed in AIM in SPX and 13,059,041 contracts were
executed in C-AIM in SPX. The Exchange notes, too, that the Exchange's
trading floor may be better suited for crosses in SPX with more complex
orders, complicated strategies and larger size. Such orders are more
commonly executed on the trading floor as Trading Permit Holders
(``TPHs'') are able to negotiate and fine-tune the terms of a trade on
the trading floor and are permitted to submit complex orders with a
ratio less than one-to-three (.333) or greater than three-to-one (3.00)
for execution on the trading floor.\18\ TPHs are not currently
permitted to submit complex orders with such ratios for electronic
processing. In addition to this, the trading crowd in open outcry is
able to provide markets that are more tailored to the complexity and
size of orders typically submitted in SPX. Greater execution and price
improvement opportunities for SPX orders may result from the markets
given by the trading crowd that better define the nuanced complexity
and size of such orders than if the same orders were submitted via AIM
or C-AIM -which, instead, may provide greater price improvement
opportunities for simpler and smaller orders (as demonstrated in the
data sample explained above).\19\
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\18\ See Rule 5.83(b).
\19\ Amendment No. 1 adds additional detail and bolsters the
explanation regarding the reasons why the trading floor is better
suited for the execution of the generally larger, more complicated
orders in SPX, including providing additional data regarding SPX
order flow to the floor when operable and to AIM/C-AIM when the
floor was not operable.
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Finally, pursuant to current Rule 5.37.02 and Rule 5.38.02, it is
deemed conduct inconsistent with just and equitable principles of trade
and a violation of Exchange Rule 8.1 to engage in a pattern of conduct
where the Initiating Member breaks up an Agency Order into separate
orders for the purpose of gaining a higher allocation percentage than
the Initiating TPH would have otherwise received in accordance with the
allocation procedures contained in the AIM and C-AIM Rules,
respectively. In light of the proposed rule change, the Exchange also
proposes to amend Rules 5.37.02 and 5.38.02 to make it clear that
Initiating TPHs also may not break up an Agency Order into separate
orders for the purpose of circumventing the maximum quantity
requirement pursuant to subparagraph(s) (a)(3). The Exchange notes that
its surveillance program will monitor for such violations in the same
manner in which it currently monitors for allocation-related break up
violations.
III. Summary of Comment Letters Received
To date the Commission has received six comment letters on the
proposal.\20\ The Exchange also submitted a letter responding to the
comments.\21\ Two commenters supported imposing a maximum size
limitation on SPX agency orders in AIM and C-AIM auctions, agreeing
with Cboe's assertions that it would incentivize increased retail
customer participation in SPX auctions and provide increased execution
and price improvement opportunities for retail customers in SPX.\22\
One of these commenters further agreed with Cboe's assertions that
allowing Cboe to determine a maximum size for SPX orders in AIM and C-
AIM auctions would enhance execution quality for smaller orders while
maintaining liquidity on the trading floor for larger complex
orders.\23\ The other commenter claimed its clients recognized
significant price improvement opportunities in AIM auctions of SPX
orders from 1-100 contracts, but saw mixed results on orders greater
than 100 contracts.\24\
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\20\ See letters to Vanessa Countryman, Secretary, Commission,
from Michael Golding, Head of Trading, Optiver US LLC, and Rutger
Brinkhuis, Head of Trading, AMS Derivatives B.V., dated July 8, 2020
(``Optiver Letter''); Richard J. McDonald, Susquehanna International
Group, LLP, dated July 8, 2020 (``SIG Letter''); Ellen Greene,
Managing Director, Equities & Options Market Structure, The
Securities Industry and Financial Markets Association, dated July 9,
2020 (``SIFMA Letter''); John S. Markle, Interim General Counsel, TD
Ameritrade, Inc., dated July 9, 2020 (``TD Ameritrade Letter'');
Stephen John Berger, Managing Director and Global Head of Government
& Regulatory Policy, Citadel Securities, dated July 9, 2020
(``Citadel Letter I''); and Stephen John Berger, Managing Director
and Global Head of Government & Regulatory Policy, Citadel
Securities, dated August 12, 2020 (``Citadel Letter II'').
\21\ See letter to Vanessa Countryman, Secretary, Commission,
from Rebecca Tenuta, Counsel, Cboe Global Markets, dated July 31,
2020 (``Cboe Response Letter'').
\22\ See SIFMA Letter, supra note 20, at 2; TD Ameritrade
Letter, supra note 20, at 1. The SIFMA Letter and TD Ameritrade
Letter commented on Cboe's original proposal, which would have given
Cboe the ability to determine a maximum size of up to 100 contracts,
prior to Amendment No. 1, which proposed a set maximum size of ten
contracts.
\23\ See SIFMA Letter, supra note 20, at 2.
\24\ See TD Ameritrade Letter, supra note 20, at 1.
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Three commenters opposed Cboe's proposal.\25\ One of these
commenters opposed activating AIM and C-AIM auctions for orders in SPX
generally, regardless of size,\26\ while the other two commenters
opposed Cboe's proposal to impose any degree of maximum size limitation
on these orders, arguing instead that the auctions should be made
available in SPX for agency orders of all sizes.\27\ One of these
commenters argued that if retail order flow in SPX is in fact limited
to smaller-sized orders, there is no need to impose a size
[[Page 53033]]
limitation in order to provide increased price improvement
opportunities in the AIM and C-AIM mechanisms for these orders.\28\
This commenter further argued that, if larger-sized orders are better
suited for the trading floor, as Cboe suggests, such orders would
naturally gravitate towards the floor and obviate the need for any size
limitations in the electronic mechanisms.\29\ Two commenters argued
that market participants should have the choice of whether to direct
their orders to the trading floor or an electronic auction, with one
suggesting that brokers would have best execution obligations to
monitor price improvement and route their orders in the most favorable
manner.\30\ Three commenters suggested that Cboe's data analysis may be
insufficient to support its proposal.\31\ Two of these commenters noted
that the data does not measure a time period during which both
electronic auctions and floor-based liquidity are available.\32\ One of
these commenters and a separate commenter noted that Cboe's own data
demonstrated that price improvement opportunities were observed for
orders of all sizes in the electronic auction mechanisms during the
trading floor closure.\33\ One commenter argued that allowing SPX
market makers to provide electronic price improvement for SPX orders of
all sizes would not discourage market makers from also providing price
improvement for open outcry orders in SPX.\34\
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\25\ See Optiver Letter, supra note 20, at 1-2; SIG Letter,
supra note 20, at 3-4; Citadel Letter I, supra note 20, at 1;
Citadel Letter II, supra note 20, at 1.
\26\ See Optiver Letter, supra note 20, at 1-2.
\27\ See SIG Letter, supra note 20, at 3-4; Citadel Letter I,
supra note 20, at 1; Citadel Letter II, supra note 20, at 1.
\28\ See SIG Letter, supra note 20, at 3.
\29\ See id.
\30\ See id. at 3; Citadel Letter I, supra note 20, at 1.
\31\ See SIG Letter, supra note 20, at 3; Optiver Letter, supra
note 20, at 2; Citadel Letter I, supra note 20, at 1.
\32\ See SIG Letter, supra note 20, at 3; Optiver Letter, supra
note 20, at 2. One of these commenters further questioned the
validity of the data given the extreme volatility observed during
the time period of the data. See Optiver Letter, supra note 20, at
2.
\33\ See SIG Letter, supra note 20, at 3 & n.9; Citadel Letter
I, supra note 20, at 1. As noted above, however, a separate
commenter suggested price improvement opportunities were mixed for
SPX orders greater than 100 contracts. See TD Ameritrade Letter,
supra note 20, at 1.
\34\ See SIG Letter, supra note 20, at 4.
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In its response to comments, Cboe noted that its current rules
already allow it to use AIM and C-AIM for all options classes, and
therefore it may activate AIM and C-AIM in SPX without a proposed rule
change.\35\ Cboe further stated that the proposed maximum size for SPX
orders in AIM and C-AIM is necessary in order to provide limited
electronic auction functionality that some customers found beneficial
when available, while mitigating any negative impact on the larger SPX
market that Cboe claimed may result from the auctions, including
decreased quoting liquidity on the book, wider quotes, and reduced
participation by options market makers.\36\ In addition, Cboe
reiterated its argument that the unique characteristics of SPX options
warrant imposing a maximum size to SPX orders submitted through the AIM
and C-AIM auctions.\37\ Cboe also argued that the proposal would not
unfairly discriminate against any market participants, as it imposes no
restrictions on any market participant's ability to utilize the AIM and
C-AIM auctions for SPX options (i.e., any market participant would
retain the ability to submit an SPX agency order of ten contracts or
fewer in an AIM or C-AIM auction, respond to an AIM or C-AIM auction,
and, to the extent permitted by Exchange Rules, be solicited for the
initiating order).\38\ Finally, Cboe stated that it has provided
sufficient additional data in the amended proposal to support the
proposed maximum size of ten contracts, and argued that its data
measuring price improvement for AIM and C-AIM SPX orders of various
sizes is sufficiently representative because all order sizes reflected
in the data sample were subject to the same market conditions.\39\ Cboe
also stated that it is unable to provide comparable price improvement
statistics for orders executed on the trading floor due to the nature
of their execution as compared to electronically executed orders.\40\
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\35\ See Cboe Response Letter, supra note 21, at 2 n.9.
\36\ See id. at 2-3. Cboe also argued in its response to
comments that the trading floor may be better for crosses in SPX,
based on Cboe's observation that the number of larger and more
complicated orders that are crossed on the Exchange was
significantly lower when the trading floor was closed than when it
was open. See id. at 3 & n.13 (finding that, from January 2, 2020
through March 13, 2020, complex orders for SPX options with more
than six legs represented approximately 5.3% of the total SPX
complex order average daily volume, whereas from March 16, 2020
through April 30, 2020 while the floor was closed and C-AIM was
activated in SPX, complex orders for SPX options with more than six
legs represented only approximately 2.2% of the total SPX complex
order average daily volume).
\37\ See id. at 3-4.
\38\ See id. at 5.
\39\ See id. at 6.
\40\ See id.
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Three commenters recommended that, to the extent any maximum size
is established for SPX orders in AIM and C-AIM auctions, the level of
the maximum size should be clearly stated in the proposed rule, with
any future modifications subject to a separate proposed rule
change.\41\ Two of these commenters suggested that, when proposing any
modification to the maximum size threshold, Cboe should provide
sufficient supporting information, including, for example, data showing
price improvement and internalization statistics, and any information
necessary to clearly demonstrate how the threshold amount accurately
captures retail investor activity in SPX and does not exclude a
significant amount of retail activity.\42\ In response to these
comments, as described above, Cboe amended its initial proposal to
establish a set maximum size of ten contracts for AIM and C-AIM agency
orders in SPX and provided additional data and analysis to support this
proposed threshold.\43\ In response to the amended proposal, one
commenter argued that the proposed ten contract maximum size is without
a rational basis and will result in unfair discrimination that would
deny significant price improvement to many retail investors.\44\ This
commenter claimed that retail investors commonly submit orders of more
than ten contracts and provided data showing that more than fifty
percent of the AIM-eligible retail simple marketable SPX orders that it
routed to Cboe from mid-March 2020 to mid-May 2020 were larger than ten
contracts.\45\ This commenter also argues that its data demonstrates
that retail orders of up to 100 contracts received significant price
improvement in the AIM auction and requests that Cboe either eliminate
the proposed maximum size threshold or, at a minimum, set the threshold
at 100 contracts.\46\
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\41\ See TD Ameritrade Letter, supra note 20, at 2; Citadel
Letter I, supra note 20, at 2; Optiver Letter, supra note 20, at 2.
The TD Ameritrade Letter and Citadel Letter I, commenting on Cboe's
initial proposal, both suggested that Cboe commit to allowing orders
of up to 100 contracts to participate in the electronic auctions.
See TD Ameritrade Letter, supra note 20, at 2; Citadel Letter I,
supra note 20, at 2.
\42\ See Citadel Letter I, supra note 20, at 2; Optiver Letter,
supra note 20, at 2.
\43\ See Cboe Response Letter, supra note 21, at 2.
\44\ See Citadel Letter II, supra note 20, at 1.
\45\ See id. at 1-2.
\46\ See id. at 2.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2020-051, as Modified by Amendment No. 1, and Grounds for Disapproval
Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \47\ to determine whether the proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. Institution of proceedings
does not indicate that the
[[Page 53034]]
Commission has reached any conclusions with respect to any of the
issues involved. Rather, as stated below, the Commission seeks and
encourages interested persons to provide additional comment on the
proposed rule change, as modified by Amendment No. 1, to inform the
Commission's analysis of whether to approve or disapprove the proposed
rule change.
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\47\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\48\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act, which requires, among other things, that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulate 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 to protect investors and the public interest, and
not be designed to permit unfair discrimination between customers,
issuers, brokers, or dealers; \49\ and Section 6(b)(8) of the Act,
which requires that the rules of the Exchange do not impose any burden
on competition that is not necessary or appropriate in furtherance of
the purposes of the Act.\50\
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\48\ 15 U.S.C. 78s(b)(2)(B).
\49\ 15 U.S.C. 78f(b)(5).
\50\ 15 U.S.C. 89f(b)(8).
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Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the [Act]
and the rules and regulations issued thereunder . . . is on the self-
regulatory organization that proposed the rule change.'' \51\ The
description of a proposed rule change, its purpose and operation, its
effect, and a legal analysis of its consistency with applicable
requirements must all be sufficiently detailed and specific to support
an affirmative Commission finding,\52\ and any failure of a self-
regulatory organization to provide this information may result in the
Commission not having a sufficient basis to make an affirmative finding
that a proposed rule change is consistent with the Act and the
applicable rules and regulations.\53\
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\51\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\52\ See id.
\53\ See id.
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The Commission is instituting proceedings to allow for additional
consideration and comment on the issues raised herein, including as to
whether the proposal is consistent with the Act.
V. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Sections 6(b)(5) and 6(b)(8), or any other provision of
the Act, or the rules and regulations thereunder. Although there do not
appear to be any issues relevant to approval or disapproval that would
be facilitated by an oral presentation of views, data, and arguments,
the Commission will consider, pursuant to Rule 19b-4 under the Act,\54\
any request for an opportunity to make an oral presentation.\55\
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\54\ 17 CFR 240.19b-4.
\55\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by September 17, 2020. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
October 1, 2020. Commission 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-2020-051 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-2020-051. 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-2020-051, and should be submitted
on or before September 17, 2020. Rebuttal comments should be submitted
by October 1, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\56\
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\56\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-18828 Filed 8-26-20; 8:45 am]
BILLING CODE 8011-01-P