[Federal Register Volume 87, Number 43 (Friday, March 4, 2022)]
[Notices]
[Pages 12510-12512]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-04565]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94328; File No. SR-CboeBZX-2022-009]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Relating 
To Modify How Drill-Through Price Protection Applies to Users' Orders 
When Multiple Stop Order and Stop-Limit Orders Are Triggered by the 
Same Price

February 28, 2022.

    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 February 17, 2022, Cboe BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. The Exchange 
filed the proposal as a ``non-controversial'' proposed rule change 
pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-
4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe BZX Exchange, Inc. (``BZX'' or the ``Exchange'') is filing 
with the Securities and Exchange Commission (the ``Commission'') a 
proposal to modify how drill-through price protection applies to Users' 
\5\ orders when multiple Stop Order and Stop-Limit Orders are triggered 
by the same price. The text of the proposed rule change is provided in 
Exhibit 5.
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    \5\ The term ``User'' shall mean any Member or Sponsored 
Participant who is authorized to obtain access to the System 
pursuant to Rule 11.3. See Rule 1.5(cc).
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    The text of the proposed rule change is also available on the 
Exchange's website (https://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), 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 purpose of this rule filing is to amend current Rule 21.17, 
Additional Price Protection Mechanisms and Risk Controls, to add new 
Rule 21.17(d)(3), which modifies what the drill-through price will be 
for Stop Orders \6\ and Stop-Limit Orders \7\ when multiple Stop Orders 
and Stop-Limit Orders are triggered by the same stop price specified by 
Users.
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    \6\ A ``Stop Order'' is an order that becomes a BZX market order 
when the stop price is elected. A Stop Order to buy is elected when 
the consolidated last sale in the security occurs at, or above, the 
specified stop price. A Stop Order to sell becomes a limit order 
when the consolidated last sale in the security occurs at, or below, 
the specified stop price. See Rule 11.9(c)(16).
    \7\ A ``Stop-Limit Order'' is an order that becomes a limit 
order when the stop price is elected. A Stop Limit Order to buy is 
elected when the consolidated last sale in the security occurs at, 
or above, the specified stop price. A Stop Limit Order to sell 
becomes a sell limit order when the consolidated last sale in the 
security occurs at, or below, the specified stop price. See Rule 
11.9(c)(17).
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    Drill-through price protection is currently described in Exchange 
Rule 21.17(d). Rule 21.17(d) provides that if a buy (sell) order enters 
the BZX Options Book at the conclusion of the opening auction process 
or would execute or post to the BZX Book at the time of order entry, 
the System executes the orders up to a buffer amount (the Exchange 
determines the buffer amount on a class and premium basis) above 
(below) the offer (bid) limit of the Opening Collar or the NBO (NBB) 
that existed at the time of order entry, respective (the, ``Drill 
Through Price'').\8\
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    \8\ See Rule 21.17(d).
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    Currently, when multiple Stop Orders or Stop-Limit Orders are 
triggered by the same price, the System \9\ considers them separate 
orders received in sequence and enters them sequentially into the BZX 
Book.\10\ As such, when determining the Drill-Through Price for each 
order, the System uses the contra side NBBO that existed at the time 
each of the orders was entered into the BZX Book.\11\ By applying 
drill-through price protection in this manner, the Exchange has 
observed, particularly in thinly traded markets, that the first order 
triggered will trade with the best priced contra-side order, while the 
second triggered order can trade at prices that may be multiple price 
levels away, as it is using the NBBO that existed after the first 
triggered order executed. Accordingly, the Exchange seeks to enhance 
the drill-through price functionality as it relates to Stop Orders and 
Stop Limit Orders, through the addition of proposed Rule 21.17(d)(3). 
Under proposed Rule 21.17(d)(3), rather than using separate Drill-
Through Prices for each individual Stop Order and Stop-Limit Order, the 
System will instead use the contra-side NBBO that existed at the time 
the first order in

[[Page 12511]]

sequence was entered into the BZX Book as the Drill-Through Price, for 
all orders. This is the Drill-Through Price that would apply to each 
Stop Order or Stop-Limit Order if it was the only one triggered at that 
price. By way of illustration, consider the following examples:
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    \9\ ``System'' means the electronic communications and trading 
facility designated by the Board through which securities orders of 
Users are consolidated for ranking, execution and, when applicable, 
routing away. See Rule 1.5(aa).
    \10\ ``BZX Book'' means the System's electronic file of orders. 
See Rule 1.5.(e).
    \11\ See Rule 5.34(a)(4)(A).
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    Example 1--Current Functionality
    Assume that the Drill-Through Price buffer \12\ for a certain 
option series is $0.25, and that the following quotes are in the BZX 
Book: Quote 1 (NBBO): 5.00 x 7.00; Quote 2: 4.00 x 8.00. Each quote has 
a size of 1. Additionally, the following Stop Orders/Stop Limit Orders 
are being held in the System when the Quote 1 offer is updated to $6.50 
(they were received by the System in sequence):
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    \12\ The Exchange determines the buffer amount on a premium and 
class basis.

Order 1: Sell 1 @ Market, Stop Price = $6.50
Order 2: Sell 1 @ Market, Stop Price = $6.55
Order 3: Sell 1 @ Market, Stop Price = $6.50

    Per current Rule 21.17(d), the following will occur:
    1. Orders 1, 2 and 3 are held in the System, and handled as 
separate orders received in sequence. Each have stop prices less than 
the NBO, and are therefore triggered by the 6.50 quote, and enter the 
BZX Book for execution or posting. Under today's functionality, the 
System assigns each order a separate Drill-Through Price, equal to the 
contra-side NBBO in existence at the time each order separately entered 
the BZX Book for execution.
    2. Order 1 will execute against Quote 1 @ $5.00. Using the NBB of 
$5.00 as the Drill-Through Price, the System would prevent execution 
beyond $4.75.
    3. When Order 1 executes against Quote 1 @ 5.00, that NBB will no 
longer be in the BZX Book. Instead Order 2 will execute against Quote 2 
@ 4.00 and use the NBB of 4.00 as the Drill-Through Price and prevent 
execution beyond $3.75.
    4. Order 3 will cancel due to no liquidity left at the drill-
through price of $3.75.
    Example 2--Proposed Functionality
    Again, assume that the drill-through price buffer for a certain 
option series is $0.25, and that the following quotes are in the BZX 
Book: Quote 1 (NBBO): 5.00 x 7.00; Quote 2: 4.00 x 8.00. Each quote has 
a size of 1. Additionally, the following Stop Orders/Stop Limit Orders 
are being held in the System when the Quote 1 offer is updated to $6.50 
(they were received by the System in sequence):

Order 1: Sell 1 @ Market, Stop Price = $6.50
Order 2: Sell 1 @ Market, Stop Price = $6.55
Order 3: Sell 1 @ Market, Stop Price = $6.50

    Per proposed Rule 21.17(d), the following will occur:
    1. Orders 1, 2 and 3 each have stop prices less than the NBO, and 
will therefore be triggered by the $6.50 quote, and enter the BZX Book 
for execution or posting. A Drill-Through Price for all three orders is 
set at the contra-side NBB of 5.00.
    2. Order 1 will execute against Quote 1 @ $5.00.
    3. Orders 2 and 3 will cancel due to no liquidity left at the 
drill-through price of $4.75.
    The Exchange notes that aside from the difference in Drill-Through 
Price, the drill-through mechanism will apply in the same manner to 
these orders. The Exchange is not proposing wholly new drill-through 
protection behavior, but rather only seeks to modify the reference 
price utilized by the drill-through price protection for Stop Orders 
and Stop Limit Orders if multiple such orders are triggered and entered 
into the BZX Book for execution due to the same price event. By using 
the same Drill-Through Price for all triggered orders eligible for 
execution, the proposed modification will help the drill-through 
protection prevent executions too far away from the NBBO when multiple 
Stop Orders and Stop Limit Orders become eligible for execution. In 
doing so, Stop Orders and Stop Limit Orders will receive executions at 
prices more closely aligned to the stop prices specified by Exchange 
Users.
2. Statutory Basis
    The Exchange believes the proposed rule amendment is consistent 
with the requirements of Section 6(b) of the Act,\13\ in general, and 
Section 6(b)(5) of the Act,\14\ in particular, in that it is 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 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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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange believes that proposed Rule 21.17(d)(3) 
does not unfairly discriminate amongst Users. Under proposed Rule 
21.17(d)(3), all Users with Stop Orders and Stop-Limit Orders triggered 
by the same price event will have the same drill-through reference 
price. The primary purpose of the drill-through price protection is to 
prevent orders from executing at prices ``too far away'' from the 
market when they enter the BZX Book for potential execution. The 
Exchange believes the proposed rule change is consistent with this 
purpose, and thus will promote just and equitable principles of trade 
and protect investors, because Users who submit Stop Orders and Stop-
Limit Orders will receive the same level of drill-through price 
protection against execution at potentially erroneous prices, 
regardless of the sequence in which they enter the BZX Book. As a 
result of the proposed rule change, all Users' Stop Orders and Stop-
Limit Orders will receive protection based on the NBBO at the time 
those orders were triggered to enter the BZX Book for potential 
execution, which is consistent with the drill-through protection as 
well as Stop Order functionality.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change imposes 
any burden on intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. Under the 
current drill-through price protection functionality, the System's use 
of separate Drill-Through Prices can result in Stop Orders executed 
later in sequence being filled at prices several levels away from the 
NBBO in existence at the time they are triggered and entered into the 
BZX Book for execution merely because those orders were submitted after 
another Stop Order. As discussed above, the proposed rule change will 
apply the same Drill-Through Price (and thus the same level of drill-
through price protection) to Stop Orders and Stop-Limit Orders that 
become eligible for potential execution at the same time due to the 
same price triggering event.
    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 it 
relates solely to how an Exchange price protection applies to Stop 
Orders and Stop Limit Orders. The proposed enhancement to the drill-
through protection is consistent with the current protection and 
provides orders subject to drill-through price protection with improved 
protection against execution at potentially erroneous prices.

[[Page 12512]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposal. No written comments were solicited or 
received on the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to Section 19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6) 
\16\ thereunder.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    The Exchange has asked the Commission to waive the 30-day operative 
delay such that Exchange Users will be able to more quickly benefit 
from the proposed Drill through protections that are designed to: (1) 
Prevent potentially erroneous executions and (2) more closely align the 
execution prices of Stop Orders and Stop Limit Orders that become 
eligible for potential execution at the same time due to the same price 
triggering event.\17\ The Commission finds that waiving the 30-day 
operative delay is consistent with the protection of investors and the 
public interest. Specifically, waiver of the operative delay should 
allow Exchange Users to utilize Stop Orders and Stop Limit Orders with 
an increased likelihood that the execution price of such orders will be 
more closely related to the market at the time the order is triggered 
for entry onto the BZX Book. Accordingly, the Commission designates the 
proposal operative upon filing.\18\
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    \17\ 17 CFR 240.19b-4(f)(6)(iii).
    \18\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule change's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CboeBZX-2022-009 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-CboeBZX-2022-009. 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 (https://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; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CboeBZX-2022-009 and should 
be submitted on or before March 25, 2022.
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    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-04565 Filed 3-3-22; 8:45 am]
BILLING CODE 8011-01-P