[Federal Register Volume 85, Number 230 (Monday, November 30, 2020)]
[Notices]
[Pages 76642-76645]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26279]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90482; File No. SR-CBOE-2020-110]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change Amending Rule 5.52(d) in Connection 
With a Market-Maker's Electronic Volume Transacted on the Exchange

November 23, 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 November 13, 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 amend Rule 5.52(d) in connection with a Market-Maker's electronic 
volume transacted on the Exchange. 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 Rule 5.52(d) in connection with a 
Market-Maker's electronic volume transacted on the Exchange. Current 
Rule 5.52(d)(1) provides that if a Market-Maker never trades more than 
20% of the Market-Maker's contract volume electronically in an 
appointed class during any calendar quarter, a Market-Maker will not be 
obligated to quote electronically in any designated percentage of 
series within that class pursuant to subparagraph (d)(2) (which governs 
the continuous electronic quoting requirements for Market-Makers in 
their appointed classes). That is, once a Market-Maker surpasses the 
20% electronic volume threshold in an appointed class, the Market-Maker 
is required to provide continuous electronic quotes in that appointed 
classes going forward. Neither Rule 5.52(d)(1) nor (d)(2) permit a 
Market-Maker to reduce its electronic volume after surpassing the 20% 
threshold in order to reset the electronic volume trigger or otherwise 
undo the resulting obligation to stream electronic quotes once the 20% 
threshold is triggered in an appointed class.
    Market-Makers accustomed to executing volume on the trading floor 
have sophisticated and complicated risk modeling associated with their 
floor trading activity, including quoting, monitoring, and responding 
to the trading crowd. However, the Exchange understands that while such 
Market-Makers do have separate systems or third-party platforms for 
quoting, monitoring and responding to electronic markets, because these 
Market-Makers are almost exclusively floor-based, their technology or 
other platforms enabling them to quote electronically do not achieve 
the level of sophistication or complexity as the systems used by 
Market-Makers accustomed to quoting electronically. Indeed, to satisfy 
the continuous electronic quoting requirements, a Market-Maker must 
provide continuous bids and offers for 90% of the time the Market-Maker 
is required to provide electronic quotes in an appointed option class 
on a given trading day and must provide continuous quotes in 60% of the 
series of the Market-Maker's appointed classes. The Exchange determines 
compliance by a Market-Maker with this quoting obligation on a monthly 
basis. In addition to this, a Market-Makers must, among other things, 
compete with other Market-Makers in its appointed classes, update 
quotations in response to changed market conditions in its appointed 
classes, maintain active markets in its appointed classes, and, 
overall, engage in a course of dealings reasonably calculated to 
contribute to the maintenance of a fair and orderly market. Market-
Makers that are predominantly floor-based generally do not have the 
technology or electronic trading sophistication to fully satisfy the 
continuous electronic quoting obligations, as well as other heightened 
standards required of a Market-Maker in its appointed classes 
electronically, once the 20% electronic volume threshold is triggered.
    The Exchange has observed that in the past year, particularly given 
the significant increase in market volatility and unpredictability of 
market conditions in the months leading up to and during the COVID-19 
pandemic,\3\ Market-Makers that almost exclusively execute their volume 
in open outcry and had not prior triggered an electronic quoting 
obligation pursuant to Rule 5.52(d)(2), incidentally breached the 20% 
electronic volume threshold in certain appointed classes during a 
single quarter and were thereby obliged to provide continuous 
electronic quotes in those classes going forward. As stated above, once 
a Market-Maker surpasses the electronic volume threshold in an 
appointed class, and the electronic quoting obligation is triggered, 
Rules 5.52(d)(1) and (d)(2) do not permit a Market-Maker to reset the 
trigger -- a Market-Maker is required to stream electronic quotes in 
that appointed class beginning the next calendar quarter and from there 
on out. As such, once the

[[Page 76643]]

20% threshold was surpassed by Market-Makers accustomed to quoting on 
the trading floor, these Market-Makers had to be equipped to uphold 
continuous electronic quoting obligations by just the next calendar 
quarter, production of which was exacerbated by the volatile and 
unusual market conditions present in the markets over the past year. As 
a result, the Exchange has observed that at least one Market-Maker \4\ 
has been unable to successfully fulfill its new continuous electronic 
quoting obligations in subsequent months. The Exchange understands this 
is due to the Market-Maker not having the appropriate technology to 
successfully provide continuous electronic quotes. The Exchange 
believes requiring a Market-Maker not accustomed to and lacking the 
appropriate technology to provide continuous electronic quotes may 
potentially pose risk to the maintenance of fair and order markets as 
well as risk to the Market-Makers themselves as they are not able to 
compete in the electronic markets.
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    \3\ The Exchange notes that after volatility and unusual market 
conditions beginning at the end of 2019 and continuously increasing 
through 2020 as a result of the impact of COVID19 and related 
factors, some market participants may have experienced significant 
trading losses, resulting in their limiting their trading behavior 
and risk exposure. The Exchange understands that firms, not 
otherwise highly active in the electronic markets, may have executed 
electronically in order to close positions, reduce exposure, and 
otherwise mitigate losses and reduce risk in light of market 
conditions experienced at various points throughout the year. These 
firms may have also reduced open outcry activity as part of the same 
risk-reducing strategy, resulting in a coincidental change in the 
mix of electronic versus open outcry volume for such generally 
floor-based Market-Makers.
    \4\ The Exchange is aware of at least two Market-Makers which 
have (1) triggered the 20% electronic volume threshold in the 
proposed timeframe and (2) have subsequently been unable to satisfy 
the continuous electronic quoting obligations for at least two 
consecutive months within the same timeframe. One such Market-Maker 
has been registered as a Market-Maker on the Exchange since 1997 
(however, such firm has recently been dissolved) and one has been 
registered as a Market-Maker on the Exchange since 2001. The 
Exchange also notes that there are other Market-Makers that are not 
currently subject to the continuous electronic quoting requirements 
in their appointed classes. For example, the Exchange is aware of at 
least three Market-Makers that are not currently obligated to 
provide continuous electronic quotes in SPX.
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    Therefore, the Exchange proposes to amend Rule 5.52(d)(1) in a 
manner that allows Market-Makers that, up until recently, have not 
before been obliged to provide continuous electronic quotes in their 
appointed classes to essentially reset the trigger on their electronic 
volume threshold in Rule 5.52(d)(1). Specifically, the proposed rule 
change adopts Rule 5.52(d)(1)(B) \5\ which provides that if, between 
October 1, 2019 and December 31, 2020, a Market-Maker (i) has, for the 
first time, traded more than 20% of the Market-Maker's contract volume 
electronically in an appointed class during any calendar quarter and, 
subsequently, (ii) has not provided electronic continuous quotes 
pursuant to subparagraph (d)(2) below for any two consecutive months, 
then, beginning January 1, 2021, the Market-Maker will be subject to 
subparagraph (d)(1)(A) above. Proposed Rule 5.52(d)(1)(A) amends the 
current language in Rule 5.52(d)(1) to provide that if a Market-Maker 
never trades more than 20% of the Market-Maker's contract volume 
electronically in an appointed class during any two consecutive 
calendar quarters, a Market-Maker will not be obligated to quote 
electronically in any designated percentage of series within that class 
pursuant to subparagraph (d)(2).\6\ In this way, the proposed rule 
change allows those Market-Makers that predominantly provide liquidity 
on the trading floor and surpassed the electronic volume threshold only 
in the past year due to extraordinary and extreme volatility, and, 
subsequently, are not able to satisfy the continuous electronic quoting 
requirement on a monthly basis going forward, to again be subject only 
to open outcry quoting requirements so they may focus on providing 
liquidity in open outcry in accordance with their business models.\7\
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    \5\ The proposed rule change also updates the format of Rule 
5.51(d)(1) by adopting the title ``Electronic Volume Threshold'' and 
Rule 5.51(d)(1)(A) to govern the provision under current Rule 
5.51(d)(1), and adopts the title ``Continuous Electronic Quotes'' 
for Rule 5.52(d)(2).
    \6\ The proposed rule change also updates Rule 5.52(d)(2) to 
reflect the proposed two consecutive quarter language where the Rule 
refers to the electronic volume threshold.
    \7\ The Exchange notes that the proposed rule change does not 
preclude the application of Rule 13.15(g)(14)(A), which, as part of 
the Minor Rule Violation Plan (``MRVP''), allows the Exchange to 
impose a fine on Market-Makers for failure to meet their continuous 
quoting obligations, including on any Market-Maker that is able to 
``reset'' on January 1, 2021. The Exchange additionally notes that 
the proposed rule change also does not preclude the Exchange from 
referring matters covered under the MRVP for formal disciplinary 
action, pursuant to Rule 13.15(f), whenever it determines that any 
violation is intentional, egregious or otherwise not minor in 
nature.
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    The proposed rule change to change the electronic volume threshold 
trigger from one calendar quarter to two consecutive calendar quarters 
is designed to mitigate any potential future risk that Market-Makers 
accustomed to providing liquidity on the trading floor that 
incidentally trigger the threshold as market volatility and unusual 
market conditions arise have to quote electronically. The proposed rule 
change provides a grace period for such Market-Makers to reduce their 
electronic volume in the subsequent quarter, thus not automatically 
subjecting them to the continuous electronic quoting requirements and 
providing them the opportunity to continue to focus on providing liquid 
markets in open outcry in accordance with their business models. As 
such, the proposed rule change is designed to maintain fair and orderly 
markets, in that, it reduces the likelihood that Market-Makers not 
equipped to compete and stream quotes in the electronic markets at 
competitive prices because their business models apply primarily to 
open outcry trading are not compelled to attempt do so. The Exchange 
believes imposing continuous electronic quoting obligations on such 
Market-Makers may result in their inability to consistently stream 
electronic quotes on a monthly basis going forward and to comply with 
their other Market-Maker responsibilities, including engaging in a 
course of dealings that must be reasonably calculated to contribute to 
the maintenance of a fair and orderly market, refraining from making 
bids or offers that are inconsistent with such course of dealings, and 
updating quotations in response to changed market conditions. The 
proposed rule change instead allows those Market-Makers to continue to 
provide liquidity to their appointed classes in open outcry. By 
allowing for a grace period for a Market-Maker to reduce their 
electronic volume if the electronic volume threshold is triggered in a 
preceding quarter, the proposed rule change is intended to support the 
overall purpose of the rule in providing open outcry Market-Makers the 
opportunity to continue to provide liquid markets on the Exchange's 
trading floor without having to quote electronically in accordance with 
their intended business model. The Exchange notes that the proposed 
rule change would not impact streaming quotes and liquidity in the 
electronic markets, as any Market-Maker subject to the continuous 
electronic quoting obligation prior to October 1, 2019 will continue to 
be subject this obligation.
    Finally, the proposed rule change also removes the rollout period 
for new classes in Rule 5.52(d)(1), which currently provides that for a 
period of 90 days commencing immediately after a class begins trading 
on the System, this subparagraph (d)(1) governs trading in that class. 
The rollout period was implemented in connection with the transition of 
certain classes to the Exchange's former Hybrid System.\8\ As of 2018, 
all classes listed for trading on the Exchange now trade on the same 
platform, the Exchange's System. Therefore, a rollout period is no 
longer necessary. All Market-Makers in new classes and likewise all new 
Market-Makers will be equally subject to the electronic volume 
threshold pursuant to Rule 5.52(d)(1) and (d)(2) upon starting out.
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    \8\ See Securities Exchange Act Release No. 47959 (May 30, 
2003), 68 FR 34441 (June 9, 2003) (SR-CBOE-2002-05).

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[[Page 76644]]

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.\9\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \10\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \11\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ Id.
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    In particular, the proposed rule change is consistent with the Act 
in that it removes impediments to and perfects the mechanism of a free 
and open market and in general protects investors by allowing Market-
Makers accustomed to quoting on the trading floor and, therefore, not 
readily equipped to successfully stream electronic quotes on a 
continuous basis going forward, to essentially reset the trigger on 
their electronic volume threshold. As described above, the Exchange 
understands that certain Market-Makers who primarily operate on the 
trading floor do not support systems with the level of sophistication 
and complexity that would allow them to compete in the electronic 
markets or satisfy the continuous electronic quoting obligations month-
to-month pursuant to the Exchange Rules. Therefore, the Exchange 
believes the proposed rule change to essentially reset the electronic 
volume threshold for any Market-Maker that breached the threshold since 
October 1, 2019 (in which the markets regularly experienced periods of 
high volatility and overall unusual market conditions) and to implement 
two consecutive quarters in connection with the 20% electronic volume 
threshold will assist in the maintenance of a fair and orderly market, 
and the protection of investors generally, by reducing the likelihood 
that Market-Makers without sufficient equipment to stream competitive 
electronic quotes on an ongoing basis that may incidentally trigger the 
electronic volume threshold, especially in light of market volatility 
and unusual market conditions that continue to arise as a result of the 
ongoing COVID-19 pandemic, are not necessarily required to do so. In 
turn, the Exchange believes the proposed rule change will provide these 
Market-Makers with the opportunity to continue to focus on providing 
liquidity on the trading floor and satisfy their obligation to engage 
in a course of dealings reasonably calculated to contribute to the 
maintenance of a fair and orderly market and their other Market-Maker 
obligations. Therefore, the Exchange also believes the proposed rule 
change furthers the objectives of Section 6(c)(3) of the Act,\12\ which 
authorizes the Exchange to, among other things, prescribe standards of 
financial responsibility or operational capability and standards of 
training, experience and competence for its Trading Permit Holders and 
person associated with Trading Permit Holders.
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    \12\ 15 U.S.C. 78f(c)(3).
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    In addition to this, the Exchange believe that the proposed rule 
change is reasonably designed to apply to those Market-Makers that 
incidentally breached the electronic volume threshold during a specific 
timeframe in which the Exchange observed regular periods of volatility 
and overall unusual market conditions, which led to higher volume that 
the Exchange believes resulted in certain Market-Makers triggering the 
continuous electronic quoting requirement threshold. The Exchange also 
believes that the specific timeframe and application of proposed rule 
does not affect Market-Makers that fall outside the scope of the 
proposed rule, as such Market-Makers were, prior to the proposed 
timeframe, already obliged to provide continuous electronic quotes in 
their appointed classes and will continue to be obligated to satisfy 
such monthly quoting requirements. The Exchange believes that the 
proposed rule change will generally protect investors as it is designed 
to support the overall purpose of the rule in permitting open outcry 
Market-Makers to continue to conduct their business as intended--
providing liquid markets on the Exchange's trading floor without having 
to quote electronically.
    Finally, the Exchange believes that the proposed rule change to 
remove the rollout provision for new classes will remove impediments to 
and perfect the mechanism of a free and open market and national market 
system because it removes a provision that is no longer necessary as a 
result of the full transition of all classes listed on the Exchange to 
trading on the Exchange's System. All Market-Makers in new classes, and 
likewise all new Market-Makers, will continue to have the opportunity 
to acclimate to their market making obligations in newly appointed 
classes as they will be equally subject to the electronic volume 
threshold pursuant to Rule 5.52(d)(1) and (d)(2) upon starting out.

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 
intramarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, because the proposed rule 
change will apply in the same manner to all Market-Makers that, for the 
first time ever, reached the electronic volume threshold between 
October 1, 2019 and December 31, 2020. The proposed 20% threshold will 
continue to apply equally to all Market-Makers, yet Market-Makers that 
incidentally reach the threshold may have a grace period to realign 
their volume in accordance with their intended business model--
providing liquid markets on the Exchange's trading floor without having 
to quote electronically. The Exchange also does not believe that the 
proposed rule change would impose any significant burden on those 
Market-Makers that do not fall within the scope of the proposed rule 
because all such Market-Makers will continue to be obligated to provide 
continuous electronic volume in their appointed classes as they do 
today. In addition to this, the proposed deletion of the new class 
rollout period would not impose any burden on competition as it merely 
removes a rollout period related to the Exchange's prior transition of 
classes to its former Hybrid System that is no longer necessary. All 
new classes and all new Market-Makers will be equally subject to the 
electronic volume threshold pursuant to Rule 5.52(d)(1) and (d)(2) upon 
starting out.
    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 because the 
electronic volume threshold applies only for the purposes of

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determining when a Market-Maker is subject to certain quoting 
obligations on the Exchange.

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-2020-110 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-2020-110. 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-2020-110 and should be submitted on 
or before December 21, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-26279 Filed 11-27-20; 8:45 am]
BILLING CODE 8011-01-P