[Federal Register Volume 86, Number 32 (Friday, February 19, 2021)]
[Notices]
[Pages 10381-10386]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-03336]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91119; File No. SR-CBOE-2020-051]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of Amendment No. 2 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To Amend 
the Automated Price Improvement Auction Rules in Connection With Agency 
Order Size Requirements

February 12, 2021.

I. Introduction

    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'') and the Complex Automated Price Improvement Mechanism (``C-
AIM'') 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the proposed rule change, which replaced and superseded the proposed 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,

[[Page 10382]]

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\ On August 
21, 2020, the Commission published notice of Amendment No. 1 and 
instituted proceedings under 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.\8\ On December 8, 2020, pursuant to 
Section 19(b)(2) of the Act,\9\ the Commission designated a longer 
period within which to approve or disapprove the proposed rule change, 
as modified by Amendment No. 1.\10\ On December 11, 2020, the Exchange 
submitted Amendment No. 2 to the proposed rule change.\11\ This order 
approves the proposed rule change, as modified by Amendment Nos. 1 and 
2, on an accelerated basis.
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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).
    \8\ See Securities Exchange Act Release No. 89636, 85 FR 53029 
(August 27, 2020).
    \9\ 15 U.S.C. 78s(b)(2).
    \10\ See Securities Exchange Act Release No. 90594, 85 FR 80853 
(December 14, 2020). The Commission designated February 13, 2021 as 
the date by which the Commission shall approve or disapprove the 
proposed rule change, as modified by Amendment No. 1.
    \11\ In Amendment No. 2, the Exchange amended the proposal to 
specify that it may determine, per trading session, to establish the 
proposed maximum size of ten contracts for AIM and C-AIM agency 
orders in SPX. The full text of Amendment No. 2 is available on the 
Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-051/srcboe2020051-8135058-226517.pdf.
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II. Description of the Proposal, as Modified by Amendment Nos. 1 and 2

    The AIM and C-AIM are electronic auctions intended to provide an 
agency order with the opportunity to receive price improvement (over 
the National Best Bid or Offer in AIM, or the synthetic best bid or 
offer on the Exchange in C-AIM).\12\ Upon submitting an agency order 
into one of these auctions, the initiating Trading Permit Holder 
(``TPH'') must also submit a contra-side second order (the ``initiating 
order'') for the same size as the agency order. The initiating order 
guarantees that the agency order will receive an execution. Upon 
commencement of an auction, market participants submit responses to 
trade against the agency order. At the conclusion of the auction, 
depending on the contra-side interest available, the initiating order 
may be allocated a certain percentage of the agency order.\13\
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    \12\ See Rules 5.38 (AIM) and 5.38 (C-AIM).
    \13\ See Rules 5.37(e) and 5.38(e).
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    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. The Exchange proposes to amend Rule 5.37(a)(3) to 
provide that the Exchange may determine, per trading session,\14\ that 
the maximum size for all agency orders in SPX is ten contracts, and to 
amend Rule 5.38(a)(3) to provide that the Exchange may determine, per 
trading session, that the maximum size for the smallest leg of all 
complex agency orders in SPX is ten contracts.\15\ The Exchange states 
that it will announce any determination it makes in connection with the 
application of the maximum size requirement of ten contracts for agency 
orders in SPX to a trading session via Exchange notice pursuant to Rule 
1.5.\16\ The Exchange further states that it initially intends to 
establish the maximum size requirement of ten contracts for agency 
orders in SPX during RTH and not impose any maximum size requirement 
for agency orders in SPX during GTH.\17\ The Exchange states that the 
proposed maximum size requirement for agency orders in SPX would apply 
to all agency orders in the entire SPX class (including SPX 
Weeklys).\18\
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    \14\ The term ``trading session'' means the hours during which 
the Exchange is open for trading for Regular Trading Hours (``RTH'') 
or Global Trading Hours (``GTH'') (each of which may referred to as 
a trading session), each as set forth in Rule 5.1. See Rule 1.1.
    \15\ Pursuant to Rule 1.5, the Exchange may, to the extent the 
Rules allow the Exchange to make a determination, including on a 
class-by-class basis, make a determination for GTH that differs from 
the determination it makes for RTH. In Amendment No. 2, Cboe 
indicated it would exercise its authority and establish a maximum 
size of ten SPX contracts for AIM during RTH but would continue to 
impose no maximum size during GTH, as it does today and as it did 
prior to the March floor closure, due to differences in the nature 
of the markets.
    \16\ See Amendment No. 2, supra note 11, at 6. The Exchange 
states that this distinction is due to the different trading 
characteristics between RTH and GTH, such as lower trading levels, 
reduced liquidity, fewer participants, higher volatility, and 
changing prices. See id. at 3. The Exchange further states that it 
has historically activated AIM and C-AIM in SPX during GTH (without 
any maximum size requirement for agency orders), but has not 
historically activated AIM and C-AIM in SPX during RTH. See id. at 
4.
    \17\ See id. at 6.
    \18\ See Amendment No. 1, supra note 4, at 4.
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    According to the Exchange, SPX options have a different and more 
complicated market model than other options classes, involve taking on 
greater risk than in other options classes, have a significantly higher 
notional value than options in other classes (e.g., they are ten times 
the notional size of SPY options), trade in much larger size than other 
options classes, have a larger percentage of volume executed in open 
outcry than options in other classes, and effect increasingly more 
complex strategies than executed in other options classes (e.g., SPX 
combo orders are more frequently submitted).\19\ Accordingly, given the 
nature of SPX options the Exchange retail customer participation in SPX 
is concentrated in simpler strategies and smaller-sized orders.\20\ The 
Exchange further states that smaller-sized orders in SPX are not 
commonly executed on the floor and, without an opportunity to execute 
in AIM and C-AIM, are primarily submitted to the book and trade at the 
market, whereas, with AIM and C-AIM, smaller-sized orders may receive 
price improvement.\21\ The Exchange provides data demonstrating that, 
when AIM and C-AIM were activated for SPX, there was a greater number 
of SPX orders (and resulting number of contracts) containing quantities 
of one to ten contracts submitted through the electronic auctions than 
any other order size category.\22\ After its trading floor reopened in 
June 2020 and AIM and C-AIM were again deactivated for SPX, the 
Exchange observed a decreased volume of customer orders in SPX for one 
to ten contracts submitted to the trading floor (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.\23\ In 
further support of its proposal, the Exchange measured price 
improvement statistics for a sample of SPX orders submitted into simple 
AIM auctions during a one-week period of trading in

[[Page 10383]]

April 2020. Specifically, the Exchange observed that orders for one to 
ten contracts received an average price improvement of approximately 
$0.34 over their limit prices, whereas orders for 11 to 50 contracts 
received an average price improvement of approximately $0.22, orders 
for 51 to 250 contracts received an average price improvement of $0.08, 
and orders for 251 to 500 contracts received an average price 
improvement of approximately $0.15.\24\
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    \19\ See id. at 5.
    \20\ See id. at 5.
    \21\ See id. at 6.
    \22\ See id. at 6-7 (providing more detailed data showing the 
number of SPX agency orders and contracts for various order sizes in 
AIM and C-AIM observed by the Exchange during April 2020 and May 
2020 while the trading floor was inoperable and AIM and C-AIM were 
activated for SPX, as compared to the number of simple and complex 
customer orders and contracts executed on the reopened trading floor 
from June 15, 2020 to July 16, 2020).
    \23\ See id.
    \24\ See id. at 8. The Exchange states that, although it did not 
observe as significant an increase in price improvement for complex 
orders from one to ten contracts in the sample it collected of SPX 
orders submitted to C-AIM, it did generally observe greater price 
improvement for smaller-sized complex orders as compared to larger-
sized complex orders. See id.
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    Finally, the Exchange states that, pursuant to Rules 5.37.02 and 
5.38.02, it is deemed conduct inconsistent with just and equitable 
principles of trade and a violation of 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 connection with the proposed maximum 
quantity requirements, 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 Rules 
5.37(a)(3) and 5.38(a)(3), as applicable. The Exchange represents that 
its surveillance program will monitor for such violations in the same 
manner in which it currently monitors for allocation-related break-up 
violations.\25\
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    \25\ See id. at 11.
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III. Discussion and Commission Findings

    The Commission finds that the proposed rule change, as modified by 
Amendment Nos. 1 and 2, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange.\26\ In particular, the Commission finds that the 
proposed rule change, as modified by Amendment Nos. 1 and 2, is 
consistent with Section 6(b)(5) of the Act,\27\ which requires, among 
other things, that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, 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. The Commission also finds that the proposed rule change, as 
modified by Amendment Nos. 1 and 2, is consistent with Section 6(b)(8) 
of the Act,\28\ which requires that the rules of a national securities 
exchange do not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.
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    \26\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f). Please see the 
discussion at infra notes 49-66 and accompanying text.
    \27\ 15 U.S.C. 78f(b)(5).
    \28\ 15 U.S.C. 78f(b)(8).
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    As described above, to support its proposal, Cboe provided the 
Commission with data demonstrating that, during the time period when 
AIM and C-AIM were temporarily activated for SPX, a greater number of 
SPX orders containing quantities of one to ten contracts were executed 
through the electronic auctions than were executed on the trading floor 
when the auctions were again deactivated for SPX.\29\ The Exchange also 
provided data demonstrating that SPX orders containing quantities of 
one to ten contracts received higher levels of price improvement than 
other order size categories submitted to the electronic auctions.\30\ 
Based on these observations, the Exchange believes AIM and C-AIM would 
provide opportunities for smaller-sized orders that are not being 
traded on the floor to be crossed in the electronic auction mechanisms 
and, specifically, that orders with sizes up to ten contracts generally 
represent the most volume and receive the most beneficial price 
improvement when AIM and C-AIM are activated for SPX.\31\
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    \29\ See supra note 23 and accompanying text.
    \30\ See supra note 24 and accompanying text.
    \31\ See Amendment No. 1, supra note 4, at 7, 9 n.10.
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    Two commenters supported the imposition of 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.\32\ 
One of these commenters stated 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.\33\ In contrast, two commenters questioned whether a maximum 
size limitation on orders in SPX entered in AIM and C-AIM auctions is 
necessary.\34\ In its response to these comments, Cboe stated that the 
proposed maximum size for SPX orders in AIM and C-AIM is necessary to 
provide limited electronic auction functionality that customers found 
beneficial during the period when open outcry trading on the floor was 
closed and AIM and C-AIM auctions for orders in SPX were available.\35\ 
Cboe stated that if market participants could submit SPX orders of all 
sizes into electronic crossing auctions, it could have a significant 
negative impact on the quality of the SPX market, which could reduce 
overall liquidity in the SPX market and harm all SPX investors.\36\ 
Cboe further stated that it sought a balance between preserving open 
outcry liquidity while offering limited electronic auction 
functionality that some customers found beneficial.\37\
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    \32\ See letters to Vanessa Countryman, Secretary, Commission, 
dated July 9, 2020 from Ellen Greene, Managing Director, Equities & 
Options Market Structure, The Securities Industry and Financial 
Markets Association, at 2 (``SIFMA Letter''); John S. Markle, 
Interim General Counsel, TD Ameritrade, Inc., at 1 (``TD Ameritrade 
Letter''). 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.
    \33\ See TD Ameritrade Letter, supra note 32, at 1.
    \34\ See letters to Vanessa Countryman, Secretary, Commission, 
from Richard J. McDonald, Susquehanna International Group, LLP, 
dated July 8, 2020, at 3-4 (``SIG Letter''); Stephen John Berger, 
Managing Director and Global Head of Government & Regulatory Policy, 
Citadel Securities, dated July 9, 2020, at 1 (``Citadel Letter I''); 
and Stephen John Berger, Managing Director and Global Head of 
Government & Regulatory Policy, Citadel Securities, dated August 12, 
2020, at 1 (``Citadel Letter II'').
    \35\ See letter to Vanessa Countryman, Secretary, Commission, 
from Rebecca Tenuta, Counsel, Cboe Global Markets, dated July 31, 
2020, at 2-3 (``Cboe Response Letter'').
    \36\ See id. at 2-3.
    \37\ See id. at 3.
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    These commenters also suggested that Cboe's data analysis may be 
insufficient to support Cboe's proposal to impose a maximum size on 
agency orders in SPX.\38\ Commenters stated that the data does not 
measure a time period during which both electronic auctions and floor-
based liquidity are available,\39\ and

[[Page 10384]]

pointed out that Cboe's own data demonstrated that orders of all sizes 
in the electronic auction mechanisms received price improvement during 
the trading floor closure.\40\ In response, Cboe stated that it 
provided sufficient additional data in the amended proposal to justify 
the proposed maximum size of ten contracts.\41\ Cboe stated that the 
sample data was from a randomly selected time period when SPX AIM and 
C-AIM were activated \42\ and further argued that all order sizes 
submitted into AIM and C-AIM during that time period would have been 
similarly impacted by any then-existing volatility, making the data 
sample an accurate comparison of price improvement opportunities for 
orders of all sizes executed in those auctions during that time.\43\ 
While acknowledging that it could not provide an ``apples-to-apples'' 
comparison of price improvement for SPX orders executed on the trading 
floor versus orders executed in the AIM auction,\44\ Cboe argued that 
smaller orders in general received more improvement when AIM and C-AIM 
were activated than when they are not activated.\45\ Cboe also argued 
that its data \46\ showed that once the trading floor became operable 
on June 15, 2020, and the Exchange disabled AIM and C-AIM for SPX, the 
volume of customer orders in SPX for ten or fewer contracts submitted 
into crossing auctions (on the trading floor) decreased significantly 
compared to the volume previously submitted into the electronic 
auctions, while larger order sizes experienced a notable increase in 
crossed volume compared to volume submitted into electronic 
auctions.\47\ Cboe stated that when the electronic auctions are not 
available, brokers do not cross smaller-sized orders on the trading 
floor, but instead submit these orders for electronic execution in the 
book.\48\
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    \38\ See SIG Letter, supra note 34, at 3; Citadel Letter I, 
supra note 34, at 1. See also letter 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, at 2 (``Optiver Letter'').
    \39\ See SIG Letter, supra note 34, at 3; Optiver Letter, supra 
note 38, at 2. SIG argued that Cboe's assertion that the trading 
floor may be better for larger-sized orders could not be proven 
because there has been no side-by-side comparison with AIM and C-
AIM, adding that if larger-sized orders are better suited for the 
trading floor, such orders would naturally gravitate towards the 
floor and obviate the need for any size limitations in the 
electronic mechanisms. See SIG Letter, supra note 34, at 3. Optiver 
questioned the validity of the data given the extreme volatility 
observed during the time period of the data. See Optiver Letter, 
supra note 38, at 2.
    \40\ See SIG Letter, supra note 34, at 3 & n.9; Citadel Letter 
I, supra note 34, 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 32, at 1.
    \41\ See Cboe Response Letter, supra note 35, at 6.
    \42\ See id.
    \43\ See id.
    \44\ See id.
    \45\ See id. See also TD Ameritrade Letter, supra note 32, at 1; 
SIFMA Letter, supra note 32, at 2.
    \46\ Cboe's data covered the period from June 15, 2020 through 
July 16, 2020. See Amendment No. 1, supra note 4, at 7.
    \47\ See Cboe Response Letter, supra note 35, at 6. See also 
Amendment No. 1, supra note 4, at 7-8.
    \48\ See Amendment No. 1, supra note 4, at 8. See also CBOE 
Response Letter, supra note 35, at 5.
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    The Commission believes that the data provided by the Exchange, 
including the data provided in Amendment No. 1, support the Exchange's 
conclusion that the proposal could provide additional execution and 
price improvement opportunities for smaller-sized customer orders in 
SPX options submitted through the Exchange's AIM or C-AIM auctions. 
With respect to commenters that favored allowing all SPX orders into 
AIM and C-AIM auctions, the Commission believes it is reasonable for 
the Exchange to set a maximum size for SPX orders in AIM and C-AIM 
auctions. Specifically, smaller-sized orders, as demonstrated in Cboe's 
data, are not regularly crossed on the trading floor and are sent to 
the electronic order book.\49\ Thus, these smaller-sized orders may 
experience the most benefit from participation in the AIM and C-AIM 
auction mechanisms.\50\ In addition, an agency order for less than 50 
contracts is guaranteed price improvement in the AIM auction of at 
least one minimum increment better than the then-current National Best 
Bid or National Best Offer.\51\ The Commission believes this 
requirement is based on an underlying assumption that price improvement 
auctions for multi-list options of fewer than 50 contracts are more 
likely to be retail customer orders. Although, as discussed below, the 
Exchange is proposing to adopt a maximum size for SPX AIM and C-AIM 
auctions of ten contracts rather than 50, the average notional size of 
SPX options is much greater than that of the average multi-list options 
contract, which thereby implies that a retail customer order in SPX is 
more likely to be fewer than 50 contracts.\52\
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    \49\ See Amendment No. 1, supra note 4, at 8. See also CBOE 
Response Letter, supra note 35, at 5.
    \50\ In Amendment No. 1, the Exchange stated that it observed a 
decreased volume of customer orders in SPX for one to ten contracts 
submitted to the trading floor compared to the volume that had 
previously been submitted to the electronic auctions while the 
trading floor was closed. See Amendment No. 1, supra note 4, at 7-8.
    \51\ See Rule 5.37(b).
    \52\ For example, on January 28, 2021, an SPX options expiring 
on January 29, 2021 was valued at $31.00. Thus, purchasing 10 SPX 
options contracts would require a $31,000 investment ($31.00 per 
option contract x 100 x 10 contracts = $31,000). In comparison, a 
similar SPY option would require a $3,120 investment ($3.12 per 
option contract x 100 x 10 contracts = $3,120).
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    Because SPX has not traded concurrently on the trading floor and in 
the AIM and C-AIM electronic auctions during RTH, the data provided by 
the Exchange does not provide a comparison of price improvement between 
the electronic auctions and the trading floor in simultaneous 
operation. Nevertheless, the data does indicate that price improvement 
opportunities were available to orders in SPX submitted to the 
electronic auctions. The data provided by the Exchange shows that price 
improvement opportunities were observed for orders of all sizes in the 
electronic auction mechanisms during the trading floor closure. 
However, according to data provided by Cboe, significantly more orders 
for 1-10 contracts were entered into the AIM and C-AIM than larger-
sized orders,\53\ and orders for 1-10 contracts received greater 
average price improvement than larger-sized orders.\54\ For example, 
Cboe stated that the average price improvement of approximately $0.34 
for orders for 1-10 contracts submitted through AIM was approximately a 
55% larger average price improvement than orders for 11-50 contracts, a 
325% larger average price improvement than orders for 51-250 contracts 
and approximately 127% larger average price improvement than orders for 
251-500 contracts.\55\ The Commission believes that it is reasonable 
for Cboe to conclude from its data that a maximum size of ten contracts 
is appropriate.
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    \53\ See Amendment No. 1, supra note 4, at 6.
    \54\ See id. at 8.
    \55\ 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.\56\ In response to these comments, and as described above, Cboe 
amended its 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.\57\
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    \56\ See TD Ameritrade Letter, supra note 32, at 2; Citadel 
Letter I, supra note 34, at 2; Optiver Letter, supra note 38, 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 32, at 2; Citadel Letter I, 
supra note 34, at 2.
    \57\ See Cboe Response Letter, supra note 35, at 2.
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    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 investors.\58\ This 
commenter provided

[[Page 10385]]

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.\59\ This commenter also 
argued that its data demonstrates that retail orders of more than ten 
contracts and up to 100 contracts received price improvement in the AIM 
auction and requested that Cboe either eliminate the proposed maximum 
size threshold or increase the threshold from ten to 100 contracts.\60\
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    \58\ See Citadel Letter I, supra note 34, at 2; Citadel Letter 
II, supra note 34, at 1.
    \59\ See Citadel Letter II, supra note 34, at 1-2.
    \60\ See id. at 2.
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    Based on the Exchange's data, as specifically discussed above, the 
Commission believes that Cboe has reasonably set a maximum size for SPX 
orders in AIM or C-AIM auctions and that ten contracts is a reasonable 
maximum, as an initial step to benefit investors, because this level is 
commensurate with the greatest amount of volume representative of 
retail investors and corresponding price improvement.\61\ The 
Commission also believes that the proposal is not unfairly 
discriminatory, because market participants may execute agency orders 
in SPX of greater than ten contracts on the trading floor and the 
electronic order book, as they do today.
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    \61\ See supra notes 49-55 and accompanying text.
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    The Commission acknowledges a commenter that supports allowing SPX 
options in AIM auctions has provided data indicating that there also 
was price improvement for SPX orders of more than ten contracts and up 
to 100 contracts in the AIM auction during the period of Cboe's floor 
closure. As described above, however, Cboe's data compiled during a 
week of trading in April 2020 showed that SPX orders containing 
quantities of one to ten contracts represented more executed volume and 
received higher levels of price improvement than other order size 
categories submitted to the electronic auctions.\62\ This is consistent 
with the data provided by the commenter, which finds greater executed 
volume and price improvement for SPX orders containing quantities of 
one to ten contracts than for other order size categories.\63\ In 
addition, as stated above, a retail customer order in SPX is more 
likely to be a smaller-sized order because the notional size of an SPX 
options contract is much greater than that of other contracts, 
including the average multi-list options contract. Furthermore, 
smaller-sized SPX orders, as demonstrated in Cboe's data, are not 
regularly crossed on the trading floor and may therefore experience the 
most benefit from participation in the electronic auction 
mechanisms.\64\ The Commission believes if Cboe were to activate these 
auctions for SPX orders of one to ten contracts following approval of 
this proposal, it would provide a substantial benefit to the smaller-
sized orders, which are more likely to be retail orders.\65\ The 
Commission therefore believes Cboe's proposed maximum size of ten 
contracts is consistent with the requirements of the Act. While Cboe 
could have proposed a different maximum size limit, Cboe's decision not 
to propose a different or higher maximum size limit does not render the 
proposed rule change unfairly discriminatory or without a rational 
basis.\66\
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    \62\ See supra note 24 and accompanying text.
    \63\ See Citadel Letter II, supra note 34, at 1-2.
    \64\ See supra note 47.
    \65\ See supra note 20.
    \66\ The Commission expects Cboe to monitor trading in SPX and 
after gaining experience, including a review of relevant data, to 
consider whether any adjustments such as increasing the maximum 
order size may be necessary to maximize the benefit to investors 
that trade SPX options. During discussions with Cboe staff, Cboe 
staff communicated its intention to review and evaluate, in the 
ordinary course, the trading of SPX options in AIM and C-AIM, and to 
consider proposing any changes as may be appropriate in the future.
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    Another commenter opposed activating AIM and C-AIM auctions for 
orders in SPX, regardless of size, arguing that price discovery is best 
served when orders are exposed to all market participants 
simultaneously, such that no one participant has a distinct advantage 
over another.\67\ The commenter argued that firms initiating an AIM 
auction have a competitive advantage. First, the initiator is able to 
gain insight into the order prior to the auction and then determine its 
participation level based on characteristics that are not known to the 
rest of the market. The commenter also argued that only an initiator 
can use AIM's auto-match functionality \68\ to match a competitor's 
best price.\69\ Although the initiator's use of auto-match may result 
in a responder sharing a percentage of the execution with the 
initiator, the Commission believes that this allocation process is very 
similar to the pro rata allocation for orders on the Cboe floor,\70\ 
except that in the AIM and C-AIM, the customer may receive price 
improvement relative to the displayed market. Finally, the commenter is 
concerned that after the proposed rule change is implemented, too much 
order flow will be controlled by too few market participants, to the 
detriment of market makers who do not have client order flow.\71\ Based 
on its knowledge of the relevant market, the Commission believes that 
these initiators already control this order flow. Under the proposed 
rule change, these initiators will now have a new venue to execute 
orders with a maximum size of ten contracts, where other market 
participants can compete to try to provide price improvement.
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    \67\ See Optiver Letter, supra note 38, at 1.
    \68\ See Rules 5.37(b)(5) (AIM) and 5.38(b)(4) (C-AIM). An 
initiating TPH that utilizes auto-match will automatically match the 
price and size of all AIM or C-AIM responses and other contra-side 
trading interest at each price up to a designated limit price (or 
match all prices).
    \69\ See Optiver Letter, supra note 38, at 2.
    \70\ See Rule 5.85(a).
    \71\ See Optiver Letter, supra note 38, at 2.
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    Accordingly, the Commission finds that the proposed rule change, as 
modified by Amendment Nos. 1 and 2, is consistent with the requirements 
of the Act.

IV. Solicitation of Comments on Amendment No. 2 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 2 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-2020-051 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

[[Page 10386]]

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 March 12, 2021.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment Nos. 1 and 2

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment Nos. 1 and 2, prior to the thirtieth 
day after the date of publication of notice of the filing of Amendment 
No. 2 in the Federal Register. As discussed above, in Amendment No. 2, 
the Exchange amended the proposal to specify that it may determine, per 
trading session, to establish the proposed maximum size of ten 
contracts for AIM and C-AIM agency orders in SPX. The Commission 
believes that Amendment No. 2 provides additional specificity to the 
proposal that would allow the Exchange to make a determination, 
pursuant to Rule 1.5, to establish the proposed maximum size 
requirement of ten contracts for agency orders in SPX during RTH, while 
not imposing any maximum size requirement for agency orders in SPX 
during GTH, as it does today. Consequently, the Commission believes 
Amendment No. 2 does not raise any novel regulatory issues. 
Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\72\ to approve the proposed rule change, as 
modified by Amendment Nos. 1 and 2, on an accelerated basis.
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    \72\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\73\ that the proposed rule change, as modified by Amendment Nos. 1 
and 2 (SR-CBOE-2020-051), be, and hereby is, approved on an accelerated 
basis.
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    \73\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\74\
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    \74\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-03336 Filed 2-18-21; 8:45 am]
BILLING CODE 8011-01-P