[Federal Register Volume 86, Number 80 (Wednesday, April 28, 2021)]
[Notices]
[Pages 22498-22500]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-08860]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91637; File No. SR-CBOE-2021-013]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Approving a Proposed Rule Change To Amend Rule 5.52(d) in Connection 
With a Market-Maker's Electronic Volume Transacted on the Exchange

April 22, 2021.

I. Introduction

    On February 22, 2021, Cboe Exchange, Inc. (the ``Exchange'') 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 to amend Rule 
5.52(d) in connection with a Market-Maker's electronic volume 
transacted on the Exchange. The proposed rule change was published for 
comment in the Federal Register on March 12, 2021.\3\ The Commission 
received no comment letters on the proposed rule change. This order 
approves 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. 91275 (March 8, 
2021), 86 FR 14166 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to amend Rule 5.52(d) in connection with a 
Market-Maker's electronic volume transacted on the Exchange. 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 (``Electronic Volume Threshold''),\4\ 
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 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 Electronic Volume Threshold in order to 
reset the electronic volume trigger or otherwise undo the resulting 
obligation to stream electronic quotes once the Electronic Volume 
Threshold is triggered in an appointed class.
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    \4\ The proposed rule change provides additional clarity within 
Rule 5.52(d)(1) by defining this threshold and adding the defined 
term throughout Rule 5.52(d)(1).
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    According to the Exchange, 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-Maker 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

[[Page 22499]]

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 Electronic Volume Threshold is triggered.
    The Exchange has observed that, around the end of calendar year 
2019, 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,\5\ Market-Makers that almost 
exclusively executed their volume in open outcry and had not previously 
triggered an electronic quoting obligation pursuant to Rule 5.52(d)(2), 
incidentally breached the Electronic Volume Threshold in certain 
appointed classes 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 Electronic Volume 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 \6\ 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. Therefore, the Exchange proposes to amend Rule 
5.52(d)(1) in a manner that provides a potential path of recourse for 
Market-Makers that incidentally exceed the Electronic Volume Threshold, 
due, for example, to extraordinary or extreme volatility as experienced 
in the markets in the last year, but that may not be able to satisfy 
the continuous electronic quoting requirement on a monthly basis going 
forward given their primarily floor-based operation. Specifically, the 
proposed rule change adopts Rule 5.52(d)(1)(B) \7\ which provides that 
the Exchange may, in exceptional cases and where good cause is shown, 
grant a Market-Maker a reset of the Electronic Volume Threshold in 
subparagraph (d)(1)(A). If a Market-Maker trades more than 20% of the 
Market-Maker's contract volume electronically in an appointed class 
during a calendar quarter, the Market-Maker may submit to the Exchange 
a request that the Exchange consider a reset of the Electronic Volume 
Threshold in the appointed class. If the Exchange determines that a 
Market-Maker qualifies for a reset of the 20% threshold in an appointed 
class, then the Market-Maker will not become subject to the continuous 
electronic quoting requirements pursuant to subparagraph (d)(2) in the 
appointed class in the next calendar quarter, and will again become 
subject to subparagraph (d)(1)(A) in the appointed class. In order to 
determine if a Market-Maker qualifies for a reset of the Electronic 
Volume Threshold in an appointed class, the Exchange may consider: (i) 
A Market-Maker's trading activity and business model in the appointed 
class; (ii) any previous requests for a reset of the Electronic Volume 
Threshold in the appointed class, including previously granted 
requests; (iii) market conditions and general trading activity in the 
appointed class; and (iv) any other factors as the Exchange deems 
appropriate in determining whether to approve a Market-Maker's request 
for an Electronic Volume Threshold reset. In this way, the proposed 
rule change allows those Market-Makers that predominantly provide 
liquidity on the trading floor and incidentally surpass (or have 
incidentally surpassed) the electronic volume threshold, and, 
subsequently, are not able to satisfy the continuous electronic quoting 
requirement on a monthly basis going forward, an opportunity to submit 
a request to the Exchange that they again be subject only to open 
outcry quoting requirements and continue to focus on providing 
liquidity in open outcry in accordance with their business models.\8\
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    \5\ 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.
    \6\ The Exchange is aware of at least two Market-Makers that 
triggered the Electronic Volume Threshold in the last months of 2019 
and were subsequently unable to satisfy the continuous electronic 
quoting obligations. One such Market-Maker had 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.
    \7\ 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).
    \8\ 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'' upon Commission approval of this proposal. 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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    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.\9\ 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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    \9\ See Securities Exchange Act Release No. 47959 (May 30, 
2003), 68 FR 34441 (June 9, 2003) (SR-CBOE-2002-05).
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\10\ In particular, the

[[Page 22500]]

Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\11\ 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 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.
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    \10\ 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).
    \11\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal to allow the Exchange, in 
exceptional cases and where good cause is shown, to grant a Market-
Maker's request for a reset of the Electronic Volume Threshold in 
subparagraph (d)(1)(A) of Rule 5.52 should promote just and equitable 
principles of trade by not requiring a Market-Maker that is accustomed 
to floor trading, and potentially lacking the appropriate technology, 
to provide continuous electronic quotes. The Commission notes that in 
determining whether to grant a Market-Maker's request for a reset of 
the Electronic Volume Threshold, the Exchange may consider, among other 
things: (i) A Market-Maker's trading activity and business model in the 
appointed class; (ii) any previous requests for a reset of the 
Electronic Volume Threshold in the appointed class, including 
previously granted requests; and (iii) market conditions and general 
trading activity in the appointed class. The Commission believes that 
the proposed rule is reasonably designed to limit application of the 
reset to only those firms who incidentally breached the Electronic 
Volume Threshold in certain appointed classes due to extraordinary or 
extreme market volatility or other circumstances outside of the Market-
Maker's control.
    In addition, the Commission believes that the proposal to remove 
the rollout period for new classes in Rule 5.52(d)(1) is consistent 
with the Act. The Commission notes that the rollout period was 
implemented in connection with the transition of certain classes to the 
Exchange's former Hybrid System and that all classes listed for trading 
on the Exchange now trade on the same platform. The Commission believes 
the proposal will help to protect investors and the public interest by 
removing outdated and potentially confusing language from the 
Exchange's rules.
    Based on the foregoing, the Commission finds that the proposed rule 
change is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-CBOE-2021-013) be, and 
hereby is, approved.
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    \12\ 15 U.S.C. 78s(b)(2).
    \13\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-08860 Filed 4-27-21; 8:45 am]
BILLING CODE 8011-01-P