[Federal Register Volume 86, Number 45 (Wednesday, March 10, 2021)]
[Notices]
[Pages 13769-13772]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-04911]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91257; File No. SR-CBOE-2020-106]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change, as Modified by Amendment No. 1, To Amend its 
Rules Regarding the Minimum Increments for Electronic Bids and Offers 
and Exercise Prices of Certain FLEX Options and Clarify in the Rules 
How the System Ranks FLEX Option Bids and Offers for Allocation 
Purposes

March 4, 2021.
    On November 16, 2020, Cboe Exchange, Inc. filed with the Securities 
and Exchange Commission (``Commission''), pursuant to Section 19(b)(1) 
of the Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change to amend its rules 
regarding the minimum increments for electronic bids and offers and 
exercise prices of certain FLEX options and clarify how the system 
ranks FLEX option bids and offers for allocation purposes. On November 
30, 2020, the Exchange filed Amendment No. 1 to the proposed rule 
change, which amended and replaced the proposed rule change in its 
entirety. The Commission published notice of the proposed rule change, 
as modified by Amendment No. 1, in the Federal Register on December 4, 
2020.\3\ On January 14, 2021, pursuant to Section 19(b)(2) of the 
Exchange Act,\4\ 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.\5\ The Commission has received no comments on the 
proposal. This order institutes proceedings under Section 19(b)(2)(B) 
of the Exchange Act \6\ to determine whether to approve or disapprove 
the proposed rule change.
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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. 90536 (November 30, 
2020), 85 FR 78381.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 90926, 86 FR 6710 
(January 22, 2021). The Commission designated March 4, 2021, as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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I. Description of the Proposal

    The Exchange has proposed to amend the minimum increments for bids 
and offers and exercise prices of flexible exchange options (``FLEX 
Options'') \7\ submitted to an electronic FLEX auction and make related 
changes to its rules.
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    \7\ See CBOE Rule 1.1.
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    The Exchange is proposing to change the permissible minimum 
increment for exercise price. The Exchange's rules provide that, when 
submitting a FLEX Order,\8\ the submitting FLEX trader must include all 
the required terms of a FLEX Options series, including an exercise (or 
strike) price.\9\ According to the Exchange, the exercise price of a 
FLEX Option may currently be expressed as either (1) a fixed price 
expressed in terms of dollars and decimals or a specific index value, 
as applicable (which may not be smaller than $0.01), or (2) a 
percentage of the closing value of the underlying equity security or 
index, as applicable, on the trade date (which may not be smaller than 
0.01%).\10\ The Exchange is proposing to amend CBOE Rule 4.21(b)(6)(A) 
to provide that, for FLEX Orders submitted to an electronic FLEX 
auction: (1) An exercise price expressed as a fixed price may be in 
increments no smaller than $0.001; and (2) an exercise price expressed 
as a percentage of the closing value of the underlying equity security 
or index, as applicable, on the trade date may be in increments no 
smaller than 0.0001%.\11\
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    \8\ A ``FLEX Order'' is an order submitted in a FLEX Option. See 
CBOE Rule 5.70.
    \9\ See CBOE Rule 4.21(b) for a description of the terms of a 
FLEX Option series that a submitting FLEX trader must include in a 
FLEX Order.
    \10\ See CBOE Rule 4.21(b)(6). The Exchange states that, while 
the specific minimums for the exercise price are not currently 
included in CBOE Rule 4.21(b)(6), that rule indicates that the 
Exchange's system rounds the exercise price to the nearest minimum 
increment as set forth in CBOE Rule 5.4, and the Exchange has 
interpreted the rule to mean that the minimum increment for the 
exercise price of FLEX Options is the same as the minimum increment 
for bids and offers of FLEX Options. The term ``trade date'' as used 
herein refers to the date on which the FLEX Option was bought or 
sold (i.e., the date on which the FLEX Option trade occurs).
    \11\ The Exchange states that the proposed rule change will have 
no impact on the smallest increment for exercise prices for open 
outcry FLEX Orders and auction responses, which may be no smaller 
than $0.01 (if the exercise price for the FLEX Option series is a 
fixed price) or 0.01% (if the exercise price for the FLEX Option 
series is a percentage of the closing value of the underlying equity 
security or index on the trade date). The proposed rule change adds 
language to clarify that these minimum increments for bids and 
offers will continue to apply to FLEX Orders and auction responses 
submitted to an open outcry auction. See proposed CBOE Rule 
4.21(b)(6)(A).
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    The Exchange also proposes to amend CBOE Rule 4.21(b)(6) to state 
that the Exchange may determine the smallest increment for exercise 
prices of FLEX Options on a class-by-class basis. The Exchange states 
that this codifies its longstanding interpretation of the current rule, 
which references the minimum increment for bids and offers as set forth 
in CBOE Rule 5.4. CBOE Rule 5.4(c)(4) provides that the Exchange may 
determine the minimum increment for bids and offers on FLEX Options on 
a class-by-class basis, which may be no smaller than the amounts 
specified in that rule. The Exchange states that it has therefore 
interpreted CBOE Rule 4.21(b)(6) to mean that those same provisions 
apply to the minimum increments for exercise prices for FLEX Options. 
The proposed rule change also adds to CBOE Rule 4.21(b)(6)(A)(ii) that 
the Exchange's system rounds the actual exercise price to the nearest 
fixed price minimum increment for bids and offers in the class (as set 
forth in CBOE Rule 5.4).
    The Exchange is also proposing to amend the permissible minimum 
increment for bids and offers. The Exchange proposes to amend CBOE Rule 
5.4(c)(4)(B), which currently provides that the minimum increment for 
bids and offers on FLEX Options with (1) an exercise price expressed as 
a fixed price may not be smaller than $0.01 and (2) an exercise price 
expressed as a percentage of the closing value of the underlying equity 
security or index on the trade date may not be smaller than 0.01%.\12\ 
As proposed, CBOE Rule 5.4(c)(4) would provide that the minimum 
increment for bids and offers, for FLEX Orders and auction responses 
submitted to an electronic FLEX auction, with (1) an exercise price 
expressed as a fixed price may not be smaller than $0.001; and (2) an 
exercise price expressed as a percentage of the closing value of the 
underlying equity security or index on the trade date may not be 
smaller than 0.0001%.\13\
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    \12\ The Exchange determines the minimum increment for bids and 
offers on FLEX Options on a class-by-class basis. See CBOE Rule 
5.4(c)(4).
    \13\ The Exchange states that the proposed rule change will have 
no impact on the minimum increment for bids and offers for open 
outcry FLEX Orders and auction responses, which minimum increment 
for bids and offers will continue to be $0.01 (if the exercise price 
for the FLEX Option series is a fixed price) or 0.01% (if the 
exercise price for the FLEX Option series is a percentage of the 
closing value of the underlying equity security or index on the 
trade date). The proposed rule change adds language to clarify that 
these minimum increments for bids and offers will continue to apply 
to FLEX Orders and auction responses submitted to an open outcry 
auction. See proposed CBOE Rule 5.4(c)(4)(B).

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[[Page 13770]]

    In addition, the Exchange proposes to amend CBOE Rule 5.3(e)(3), 
which currently states that bids and offers for FLEX Options must be 
expressed in (a) U.S. dollars and decimals, if the exercise price for 
the FLEX Option series is a fixed price, or (b) a percentage, if the 
exercise price for the FLEX Option series is a percentage of the 
closing value of the underlying equity security or index on the trade 
date, per unit of the underlying security or index, as applicable. The 
Exchange's system rounds bids and offers to the nearest minimum 
increment. The proposed rule change states that bids and offers would 
be in the applicable minimum increment as set forth in CBOE Rule 5.4. 
As proposed, CBOE Rule 5.3(e)(3) would also state that the system 
rounds the final transaction prices to the nearest minimum fixed price 
increment for the class as set forth in CBOE Rule 5.4(c)(4)(A).
    The Exchange also proposes to amend CBOE Rules 5.72(c)(3)(A) and 
(d)(2), 5.73(e), and 5.74(e) to state how FLEX auction response bids 
and offers (as well as Initiating Orders and Solicitation Orders with 
respect to FLEX AIM Auctions and FLEX SAM Auctions, respectively) are 
ranked during the allocation process following each type of FLEX 
auction (i.e., electronic FLEX Auction, open outcry FLEX Auction, FLEX 
AIM Auction, and FLEX SAM Auction, respectively). The Exchange proposes 
to state that, for purposes of ranking responses, when determining how 
to allocate an order and responses, the term ``price'' refers to (1) 
the dollar and decimal amount of the order or response bid or offer or 
(2) the percentage value of the order or response bid or offer, as 
applicable. According to the Exchange, FLEX Orders will always first be 
allocated to responses at the best price, as applicable.\14\ With 
respect to responses to all types of FLEX auctions for a FLEX Option 
series with an exercise price expressed as a dollar and decimal, the 
``prices'' at which FLEX traders submitting responses are competing are 
the dollar and decimal amounts of the response bids and offers entered 
as fixed amounts (as is the case with all non-FLEX options), and the 
Exchange states that the proposed rule change codifies this in the 
Exchange's rules. With respect to responses to all types of FLEX 
auctions for a FLEX Option series with an exercise price expressed as a 
percentage, the ``prices'' at which FLEX traders submitting responses 
are competing are the percentage values of the response bids and offers 
entered as percentages (which ultimately become a dollar value after 
the closing value for the underlying security or index, as applicable, 
is available), and according to the Exchange, the proposed rule change 
codifies this in its rules.
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    \14\ The Exchange states that the proposed rule change also 
clarifies this in CBOE Rule 5.72(d)(2) by adding a cross-reference 
to CBOE Rule 5.85(a)(1), which states that, with respect to open 
outcry trading on the Exchange's trading floor, bids and offers with 
the highest bid and lowest offer have priority. The Exchange states 
that this is a nonsubstantive change that is currently true for open 
outcry FLEX auctions, and the proposed rule change merely makes this 
explicit in CBOE Rule 5.72(d)(2), which cross-reference was 
previously inadvertently omitted from the Exchange's rules.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2020-106 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act \15\ 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, as discussed below. 
Institution of proceedings does not indicate that the 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 comments on the proposed rule change to inform the 
Commission's analysis of whether to approve or disapprove the proposal.
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    \15\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\16\ 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 the 
Exchange Act, and, in particular, with Section 6(b)(5) of the Exchange 
Act, 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.\17\
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    \16\ Id.
    \17\ 15 U.S.C. 78f(b)(5).
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    FLEX Options allow market participants certain flexibility in 
setting specific terms of a FLEX Options contract consistent with 
Exchange rules.\18\ The proposal would permit traders to establish 
exercise prices for FLEX Options that are in smaller increments than 
those available on the non-FLEX options market.\19\ As a result, the 
proposal would permit trading of FLEX and non-FLEX options that are in 
all terms the same, but for a differentiation of $0.001 or 0.0001% of 
the exercise price. Therefore, under the proposal, FLEX Options, with 
no meaningful economic difference from non-FLEX options that overly the 
same underlying security or index, could avoid the priority and price 
protections provided to customer orders that exist in the non-FLEX 
options market by permitting such FLEX Option orders to trade ahead of 
customers on the Exchange's order book and/or trade through the 
national best bid or offer (``NBBO'') in the non-FLEX options market. 
Accordingly, the proposal could allow FLEX Options, with decimal 
exercise price differences that, for all practical purposes, are 
insignificant as compared to the exercise price of a non-FLEX option, 
to gain priority over economically equivalent non-FLEX option customer 
orders on the book and/or trade through the NBBO. As a result, there 
are questions as to whether the proposal is consistent with Section 
6(b)(5) of the Exchange Act and the requirements that the rules of the 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, promote just and equitable principles of trade, and in 
general, to protect investors and the public interest.
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    \18\ See CBOE Rules 4.20-4.22.
    \19\ See, e.g., Interpretations and Policies to CBOE Rule 4.5.
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    While the Exchange states that there is demand from customers for 
the additional precision the proposal would allow and that the proposal 
would encourage trading of customized options that is currently 
available on the OTC market, the Exchange does not address the impact 
on customers and market quality in the Exchange's non-FLEX options 
market. Accordingly, the proposal raises questions as to whether any 
potential benefit of order flow migrating from the OTC market to the 
Exchange would outweigh the potential costs of orders moving from the 
non-FLEX options market to the less transparent FLEX Options market and 
the impact on market quality and customer orders in the non-FLEX 
options market.

[[Page 13771]]

    The proposal would also permit FLEX traders to submit bids and 
offers, and therefore trade at prices, that are in smaller increments 
than those available on the non-FLEX options market. The Exchange 
asserts that, because the electronic auction responses are generally 
not visible to other FLEX traders, and there is no displayed liquidity 
to step ahead of, traders will be unable to purposefully increase bids 
and offers by trivial amounts and step ahead of other traders' prices. 
The Exchange also states that auction prices are not intended to serve 
as a price-setting function. The Exchange states it believes that, as a 
result of these factors, sub-increment bids and offers for electronic 
FLEX auctions will not diminish liquidity in FLEX auctions. Auction 
prices for FLEX SAM Auctions, however, are disseminated. With respect 
to FLEX SAM Auctions, the proposal could increase the risk that traders 
can step ahead of other traders by amounts that are economically 
insignificant. In its proposal, the Exchange did not address this risk 
and the potential impact of the proposal on FLEX SAM Auctions and its 
consistency with Section 6(b)(5) of the Exchange Act including, among 
others, investor protection.
    Moreover, the Exchange does not explain how it will ensure that, 
under the proposed decimal pricing, bids and offers are being improved 
at increments that are meaningful to market participants.\20\ There is 
potential that the increased complexity created by the proposed pricing 
increments could have the effect of reducing participation in FLEX 
auctions and thereby lead to less competitive prices. The Exchange 
itself has acknowledged in a different context in another proposal that 
de minimis price improvement may discourage market participants from 
providing contra-side interest at the best prices and liquidity 
providers from joining or improving at meaningful increments.\21\ In 
its proposal, the Exchange did not address if the increased pricing 
options could similarly have the potential to make it harder for market 
participants to anticipate auction prices, which could affect market 
quality and decrease FLEX Options market participation.\22\
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    \20\ For example, it is possible traders could use open outcry 
on the trading floor to obtain a quote, and then use this 
information to enter an economically equivalent option in a FLEX 
auction at a de minimis price difference.
    \21\ See Securities Exchange Act Release No. 89638 (August 21, 
2020), 85 FR 53045 (August 21, 2020) (SR-CBOE-2020-052) at 36925 
stating, among other things, that ``. . . . the Exchange believes 
that the current manner in which de minimis price improvement may 
occur via C-AIM, as well as FLEX C-AIM, Auctions in connection with 
Index Combo Orders in SPX (i.e., potentially only improved in sub-
penny increments) may discourage market participants from providing 
contra-side interest at the best prices and liquidity providers from 
joining or improving at meaningful increments.''
    \22\ Id. at 30348 stating, among other things, that ``The 
Exchange believes that lack of an indication of where an auction is 
set to begin, like the ballpark figure provided by the trading crowd 
when crossing on the trading floor, may cause apprehension in 
pricing competitive responses during the electronic auctions in SPX, 
which may reduce liquidity and price improvement during such 
auctions.''
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    Finally, the Exchange states that it is codifying its policy to 
rank exercise prices based on percentages prior to converting them to 
dollar amounts once the closing price is available. The Exchange states 
it has always ranked percentage orders this way. The Exchange does not 
discuss, however, that if the order had been ranked at the close, some 
percentage responses would be rounded to the same price as other 
percentage responses, and therefore, be able to participate in the 
order. The Exchange does not address that, in the example it provided 
in its filing, a percentage sell response of 7.02% would currently 
round to the same two decimals as the sell response of 7.01%, but given 
the ranking at the end of the auction before rounding, only the 7.01% 
response would receive the execution. While there may be a reasonable 
rationale for ranking prior to rounding, the Exchange should address 
why it believes ranking as proposed is consistent with the Exchange 
Act.
    The Commission notes that, under the Commission's Rules of 
Practice, the ``burden to demonstrate that a proposed rule change is 
consistent with the Exchange Act and the rules and regulations 
thereunder . . . is on the self-regulatory organization [``SRO''] that 
proposed the rule change.\23\ 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,\24\ 
and any failure of an SRO to provide this information may result in the 
Commission not having sufficient basis to make an affirmative finding 
that a proposed rule change is consistent with the Exchange Act and the 
applicable rule and regulations.\25\
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    \23\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \24\ See id.
    \25\ See id.
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    For these reasons, the Commission believes it is appropriate to 
institute proceedings pursuant to Section 19(b)(2)(B) of the Exchange 
Act \26\ to determine whether the proposal should be approved or 
disapproved.
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    \26\ 15 U.S.C. 78s(b)(2)(B).
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III. 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 Section 6(b)(5) or any other provision of the Exchange 
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, any request for 
an opportunity to make an oral presentation.\27\
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    \27\ Section 19(b)(2) of the Exchange 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 March 31, 2021. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by April 14, 
2021.
    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in the Notice,\28\ in addition to any other comments they may wish to 
submit about the proposed rule change.
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    \28\ See supra note 3.
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    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-2020-106 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.


[[Page 13772]]


All submissions should refer to File Number SR-CBOE-2020-106. 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-2020-106 and should be submitted on 
or before March 31, 2021. Rebuttal comments should be submitted by 
April 14, 2021.
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    \29\ 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-04911 Filed 3-9-21; 8:45 am]
BILLING CODE 8011-01-P