[Federal Register Volume 87, Number 71 (Wednesday, April 13, 2022)]
[Notices]
[Pages 21959-21984]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-07843]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94637; File No. SR-NYSEArca-2021-68]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Amendment Nos. 1 and 2 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To Adopt
New Exchange Rule 6.91P-O
April 7, 2022.
I. Introduction
On July 23, 2021, NYSE Arca, Inc. (``NYSE Arca'' or 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 adopt new Exchange Rule 6.91P-O to govern the
trading of Electronic Complex Orders (``ECOs'') on the Exchange's
Pillar technology platform and to make conforming amendments to
Exchange Rule 6.47A-O. The proposed rule change was published for
comment in the Federal Register on August 10, 2021.\3\ The Commission
received no comments regarding the proposal. On September 20, 2021,
pursuant to Section 19(b)(2) of the Act,\4\ the Commission extended the
time for Commission action on the proposal until November 8, 2021.\5\
On October 29, 2021, the Commission issued an order instituting
proceedings pursuant to Section 19(b)(2)(B) of the Act \6\ to determine
whether to approve or disapprove the proposed rule change.\7\ On March
22, 2022, the Exchange filed Amendment No. 1 to the proposal, which
supersedes the original filing in its entirety.\8\ April 4, 2022, the
Exchange filed Amendment No. 2 to the proposal.\9\ The Commission is
publishing this notice to solicit comment on Amendment Nos. 1 and 2 to
the proposed rule change from interested persons and is approving the
proposed rule change, as modified by
[[Page 21960]]
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. 92563 (August 4,
2021), 86 FR 43704 (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 93057 (September 20,
2021), 86 FR 53128 (September 24, 2021).
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 93466 (October 29,
2021), 86 FR 60955 (November 4, 2021).
\8\ Amendment No. 1 makes certain non-substantive clarifying
changes from the original filing (including alphabetizing the
proposed definitions and relocating the description of Complex Only
Orders), and makes the following substantive changes from the
original filing: (1) Adds new definitions of Away Market Deviation
and Leg Ratios; (2) revises the definition of DBBO to add cross-
reference to ABBO, as that term is defined in the Single-Leg Pillar
Filing, and to include details regarding market conditions that
impact the trading of complex strategies; (3) revises the definition
of an ECO to remove reference to Stock/Option Orders and Stock/
Complex Orders; (4) adds Complex QCCs as an ECO order type and
specifies that an ECO designated as FOK must also be designated as a
Complex Only Order; (5) specifies that an ECO will not trade with
leg market orders designated as FOK; (6) specifies circumstances
when an ECO may trade with another ECO at the leg market price and
when an ECO must price improve at least a portion of the leg markets
when there is displayed Customer interest on the Exchange; and (7)
modifies the description of how a COA Order trades on arrival and
prior to initiating a COA. Amendment No. 1 is available on the
Commission's website at: https://www.sec.gov/comments/sr-nysearca-2021-68/srnysearca202168.htm.
\9\ Amendment No. 2 revises proposed Exchange Rule 6.91P-O(c)(4)
to provide that bids and offers for complex strategies may be
expressed in one cent ($0.01) increments regardless of the MPV
otherwise applicable to the individual leg(s) of the ECO. The
Exchange notes that this provision is consistent with the rules of
other options exchanges, including Nasdaq ISE, Options 3, Section 14
(c)(1). In addition, Amendment No. 2 revises proposed Exchange Rule
6.91P-O(d)(1)(B) to delete an erroneous cross-reference to proposed
Exchange Rule 6.91P-O(a)(5)(B). Deleting the erroneous cross-
reference will make clear that the Exchange will not open a complex
strategy in the absence of an Exchange BO or ABO, even if there is
an Exchange BB or an ABB. Amendment No. 2 is available on the
Commission's website at: https://www.sec.gov/comments/sr-nysearca-2021-68/srnysearca202168.htm.
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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 self-regulatory organization
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 those 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 parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
The Exchange plans to transition its options trading platform to
its Pillar technology platform. The Exchange's and its national
securities exchange affiliates' \10\ (together with the Exchange, the
``NYSE Exchanges'') cash equity markets are currently operating on
Pillar. For this transition, the Exchange proposes to use the same
Pillar technology already in operation for its cash equity markets. In
doing so, the Exchange will be able to offer not only common
specifications for connecting to both of its cash equity and equity
options markets, but also common trading functions. The Exchange plans
to roll out the new technology platform over a period of time based on
a range of symbols, anticipated for the second quarter of 2022.
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\10\ The Exchange's national securities exchange affiliates are
the New York Stock Exchange LLC (``NYSE''), NYSE American LLC
(``NYSE American''), NYSE National, Inc. (``NYSE National''), and
NYSE Chicago, Inc. (``NYSE Chicago'').
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In this regard, the Exchange recently filed a proposal to add new
rules to reflect how options, particularly single-leg options, would
trade on the Exchange once Pillar is implemented.\11\ The current
proposal sets forth how Electronic Complex Orders \12\ would trade on
the Exchange once Pillar is implemented. As noted in the Single-Leg
Pillar Filing, as the Exchange transitions to Pillar, certain rules
would continue to be applicable to symbols trading on the current
trading platform, but would not be applicable to symbols that have
transitioned to trading on Pillar.\13\ Consistent with the Single-Leg
Pillar Filing, proposed Rule 6.91P-O would have the same number as the
current Electronic Complex Order Trading rule, but with the modifier
``P'' appended to the rule number. Current Rule 6.91-O, governing
Electronic Complex Order Trading, would remain unchanged and continue
to apply to any trading in symbols on the current system. Proposed Rule
6.91P-O would govern Electronic Complex Orders for trading in options
symbols migrated to the Pillar platform. This Amendment No. 1
supersedes the original filing in its entirety.\14\
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\11\ See Securities Exchange Act Release No. 94072 (January 26,
2022), 87 FR 5592 (February 1, 2022) (Notice of filing Notice of
Filing of Amendment No. 4 and Order Granting Accelerated Approval of
a Proposed Rule Change, as Modified by Amendment No. 4) (SR-
NYSEArca-2021-47) (``Single-Leg Pillar Filing'').
\12\ The term ``Electronic Complex Order'' is currently defined
in the preamble to Rule 6.91-O to mean any Complex Order, as defined
in Rule 6.62-O(e) or any Stock/Option Order or Stock/Complex Order
as defined in Rule 6.62-O(h) that is entered into the NYSE Arca
System (the ``System'').
\13\ See Single-Leg Pillar Filing (providing that, once a symbol
is trading on the Pillar trading platform, a rule with the same
number as a rule with a ``P'' modifier would no longer be operative
for that symbol and the Exchange would announce by Trader Update
when symbols are trading on the Pillar trading platform).
\14\ This Amendment No. 1 makes certain non-substantive
clarifying changes from the original filing (including alphabetizing
the proposed definitions and relocating the description of Complex
Only Orders), and makes the following substantive changes from the
original filing: (1) Adds new definitions of Away Market Deviation
and Leg Ratios; (2) revises the definition of DBBO to add cross-
reference to ABBO, as that term is defined in the Single-Leg Pillar
Filing, and to include details regarding market conditions that
impact the trading of complex strategies; (3) revises the definition
of an ECO to remove reference to Stock/Option Orders and Stock/
Complex Orders; (4) adds Complex QCCs as an ECO order type and
specifies that an ECO designated as FOK must also be designated as a
Complex Only Order; (5) specifies that an ECO will not trade with
leg market orders designated as FOK; (6) specifies circumstances
when an ECO may trade with another ECO at the leg market price and
when an ECO must price improve at least a portion of the leg markets
when there is displayed Customer interest on the Exchange; and (7)
modifies the description of how a COA Order trades on arrival and
prior to initiating a COA.
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Similar to the Single-Leg Pillar Filing, proposed Rule 6.91P-O
would (1) use Pillar terminology based on Pillar terminology that the
Exchange uses for cash equities trading, as described in Exchange Rule
7-E; and (2) introduce new functionality for Electronic Complex Order
trading (e.g., adopting a DBBO and Away Market Deviation price check as
well as enhancing the opening process for ECOs as described below).
Finally, as discussed in the Single-Leg Pillar Filing, the Exchange
will announce by Trader Update when symbols are trading on the Pillar
trading platform. The Exchange intends to transition Electronic Complex
Order trading on Pillar at the same time that single-leg trading is
transitioned to Pillar.
Proposed Rule 6.91P-O: Electronic Complex Order Trading
Current Rule 6.91-O (Electronic Complex Order Trading) specifies
how the Exchange processes Electronic Complex Orders submitted to the
Exchange. The Exchange proposes new Rule 6.91P-O to establish how such
orders would be processed after the transition to Pillar. To promote
clarity and transparency, the Exchange proposes to add a preamble to
current Rule 6.91-O specifying that it would not be applicable to
trading on Pillar.
As discussed in greater detail below and unless otherwise specified
herein, the Exchange is not proposing fundamentally different
functionality regarding how Electronic Complex Orders would trade on
Pillar than is currently available on the Exchange. However, with
Pillar, the Exchange would use Pillar terminology to describe
functionality that is not changing and also introduce certain new or
updated functionality for Electronic Complex Orders (i.e., enhancing
the opening auction process, including introducing the ``ECO Auction
Collars'') that will also be available for outright options trading on
the Pillar platform.
Definitions. Proposed Rule 6.91P-O(a) would set forth the
definitions applicable to trading on Pillar under the new rule.
Proposed Rule 6.91P-O(a)(1) would define the term ``Away
Market Deviation'' as the difference between the Exchange BB (BO) for a
series and the ABB (ABO) for that same series when the Exchange BB (BO)
is lower (higher) than the ABB (ABO).\15\ The maximum allowable Away
Market Deviation is the greater of $0.05 or 5% below (above) the ABB
(ABO) (rounded down to the nearest whole penny). As further proposed,
no ECO on the Exchange would execute at a price that would exceed the
maximum allowable Away Market Deviation on any component of the complex
strategy. The maximum allowable Away Market Deviation is designed to
protect market participants from having their complex strategies
[[Page 21961]]
execute at prices that are significantly outside of (and inferior to)
the market for the individual legs. The proposed functionality provides
the Exchange with flexibility in determining the acceptable execution
range by allowing that it be calculated using either a percentage
amount or a dollar amount. This proposed risk protection is not new or
novel as it is available on other options exchanges.\16\ As discussed
further below, the Exchange proposes that its calculation of the DBBO
(for each leg of a complex strategy) as well as trading of ECOs with
the leg markets would be bound by the maximum allowable Away Market
Deviation as an additional protection against ECOs being executed on
the Exchange at prices too far away from the current market. This
proposed definition is new and would promote clarity and transparency.
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\15\ In the Single-Leg Pillar Filing, the Exchange defines the
(new) term ``Away Market BBO (`ABBO')'' as referring to the best
bid(s) or offer(s) disseminated by Away Markets and calculated by
the Exchange based on market information the Exchange receives from
OPRA and the terms ``ABB'' and ``ABO'' as referring to the best Away
Market bid and best Away Market offer, respectively. See Single-Leg
Pillar Filing (defining Away Market BBO in proposed Rule 1.1).
\16\ See, e.g., BOX Options Exchange LLC (``BOX'') Rule
7240(b)(3)(iii)(A) (providing that each leg of a complex strategy
trade equal to or better than the ``Extended cNBBO,'' which has a
default setting (per Rule 7240(a)(5)) of 5% of the cNBB or cNBO (per
Rule 7240(a)(2) and (4), respectively) as applicable, or $0.05);
Nasdaq ISE, LLC (``Nasdaq ISE''), Options 3, Section 16 (a)
(providing that, in regard to ``Price limits for Complex Orders,
``[n]otwithstanding, the System will not permit any leg of a complex
strategy to trade through the NBBO for the series or any stock
component by a configurable amount calculated as the lesser of (i)
an absolute amount not to exceed $0.10, and (ii) a percentage of the
NBBO not to exceed 500%, as determined by the [ISE] Exchange on a
class, series or underlying basis'').
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Proposed Rule 6.91P-O(a)(2) would define the term
``Complex NBBO'' to mean the derived national best net bid and derived
national best net offer for a complex strategy calculated using the NBB
and NBO for each component leg of a complex strategy. This definition
is based on current Rule 6.1A-O(a)(11)(b), without any substantive
differences.
Proposed Rule 6.91P-O(a)(3) would define ``Complex Order
Auction'' or ``COA'' to mean an auction of an ECO as set forth in
proposed Rule 6.91P-O(f) (discussed below). This definition is based on
the title of paragraph (c) of current Rule 6.91-O, which sets forth the
COA Process for ECOs without any substantive differences. Proposed Rule
6.91P-O(a)(3) would also state that the terms defined in paragraphs
(a)(3)(A)-(D) would be used for purposes of a COA.
Proposed Rule 6.91P-O(a)(3)(A) would define a ``COA Order'' to mean
an ECO that is designated by the OTP Holder as eligible to initiate a
COA. This definition is based on the definition of a ``COA-eligible
order'' as set forth in current Rule 6.91-O(c)(1) and (c)(1)(i), with a
difference that the proposed definition would not require that an
option class be designated as COA-eligible because all option classes
that trade on Pillar would be COA-eligible.
Proposed Rule 6.91P-O(a)(3)(B) would define the term ``Request for
Response'' or ``RFR'' to refer to the message disseminated to the
Exchange's proprietary complex data feed announcing that the Exchange
has received a COA Order and that a COA has begun. As further proposed,
the definition would provide that each RFR message would identify the
component series, the price, the size and side of the market of the COA
Order. This definition is based on the description of RFR in Rule 6.91-
O(c)(3) without any substantive differences. The Exchange proposes a
clarifying difference to make clear that RFR messages would be sent
over the Exchange's proprietary complex data feed, which is based on
current functionality.
Proposed Rule 6.91P-O(a)(3)(C) would define the term ``RFR
Response'' to mean any ECO received during the Response Time Interval
(defined below) that is in the same complex strategy, on the opposite
side of the market of the COA Order that initiated the COA, and
marketable against the COA Order.\17\ This definition is based in part
on the description of RFR Responses in Rule 6.91-O(c)(5). However,
unlike the current definition, an RFR Response would not have a time-
in-force contingency for the duration of the COA. Instead, the Exchange
would consider any ECOs received during the Response Time Interval
(defined below) that are marketable against the COA Order as an RFR
Response. As described below, the Exchange proposes to define
separately the term ``ECO GTX Order,'' which would be more akin to the
current definition of RFR Response. In addition, the proposed
definition omits the current rule description that an RFR Response may
be entered in $0.01 increments or that such responses may be modified
or cancelled because these features are applicable to all ECOs and
therefore not necessary to separately state in connection with RFR
Responses.
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\17\ The term ``marketable'' is defined in proposed Rule 1.1 of
the Single-Leg Pillar Filing.
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Proposed Rule 6.91P-O(a)(3)(D) would define the term ``Response
Time Interval'' to mean the period of time during which RFR Responses
for a COA may be entered and would provide that the Exchange would
determine and announce by Trader Update the length of the Response Time
Interval; provided, however, that the duration of the Response Time
Interval would not be less than 100 milliseconds and would not exceed
one (1) second. This definition is based in part on the description of
Response Time Interval in Rule 6.91-O(c)(4), with a difference that the
Exchange proposes to reduce the minimum time from 500 milliseconds to
100 milliseconds. While other options exchanges do not establish a
minimum duration for a COA, the Exchange notes that the proposed 100
millisecond minimum is consistent with the minimum auction length for
electronic-paired auctions on NYSE American and for auctions on other
markets.\18\ Given that other options exchanges have (for years)
offered electronic auction mechanisms with a Response Time Interval of
at least 100 milliseconds, the Exchange believes that the proposed
Response Time Interval of at least this length would provide OTP
Holders and OTP Firms adequate time to respond to a COA.\19\
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\18\ See, e.g., NYSE American Rules 971.1NY(c)(2)(B) (providing
that for a Customer Best Execution Auction ``[t]he minimum/maximum
parameters for the Response Time Interval will be no less than 100
milliseconds and no more than one (1) second'') and 971.2NY(c)(1)(B)
(same); Cboe Exchange Inc. (``Cboe'') Rule 5.33(d)(3) (providing
that Cboe ``determines the duration of the Response Time Interval on
a class-by-class basis, which may not exceed 3000 milliseconds'').
\19\ See, e.g., Securities Exchange Act Release Nos. 82498
(January 12, 2018), 83 FR 2823 (January 19, 2018) (SR-NYSEAmer-2017-
26) (Notice of filing and immediate effectiveness of proposed rule
change to reduce the response time interval for a CUBE Auction to no
less than 100 milliseconds); 83384 (June 5, 2018), 83 FR 27061 (June
11, 2018) (SR-NYSEAMER-2018-05) (Order approving Complex CUBE
functionality, including Rule 971.2NY(c)(1)(B), providing that
``[t]he minimum/maximum parameters for the Response Time Interval
will be no less than 100 milliseconds and no more than one (1)
second'')).
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Proposed Rule 6.91P-O(a)(4) would define the term
``Complex strategy'' to mean a particular combination of leg components
and their ratios to one another. The proposed definition would further
provide that new complex strategies can be created when the Exchange
receives either a request to create a new complex strategy or an ECO
with a new complex strategy. This proposed definition is new and is
consistent with how this concept is defined on other options exchanges
and would promote clarity and transparency.\20\
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\20\ See, e.g., Cboe Rule 5.33(a) (defining ``complex strategy''
as ``a particular combination of components and their ratios to one
another'' and further providing that ``[n]ew complex strategies can
be created as the result of the receipt of a complex instrument
creation request or complex order for a complex strategy that is not
currently in the System''); MIAX Options Exchange (``MIAX'') Rule
518(a)(6) (same).
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Proposed Rule 6.91P-O(a)(5) would define the term ``DBBO''
to address situations where it is necessary to derive a (theoretical)
bid or offer for a particular complex strategy. As
[[Page 21962]]
proposed, ``DBBO'' would mean the derived best net bid (``DBB'') and
derived best net offer (``DBO'') for a complex strategy. The bid
(offer) price used to calculate the DBBO on each leg would be the
Exchange BB (BO) \21\ (if available), bound by the maximum allowable
Away Market Deviation (as defined above). If a leg of a complex
strategy does not have an Exchange BB (BO), the bid (offer) price used
to calculate the DBBO would be the ABB (ABO) for that leg. Thus, the
``bid (offer)'' prices used to calculate the DBBO would be based on the
Exchange BB (BO) for each leg when available, and, absent an Exchange
BB (BO) for a given leg, the ABB (ABO). The proposed definition would
also provide that the DBBO would be updated as the Exchange BBO or
ABBO, as applicable, is updated.
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\21\ The term BBO when used with respect to options traded on
the Exchange would mean ``the best displayed bid or best displayed
offer on the Exchange.'' See Single-Leg Pillar Filing (defining BBO
in Rule 1.1, which definition is substantially identical to the
current definition of BBO in Rule 6.1A-O(a)(2)(a)).
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Proposed Rule 6.91P-O(a)(5)(A) would provide further detail about
how the DBBO would be derived when, for a leg, there is no Exchange BB
(BO) and no ABB (ABO). As proposed, in such circumstances, the bid
(offer) price used to calculate the DBBO would be the offer (bid) price
for that leg (i.e., Exchange BO (BB), bound by the maximum allowable
Away Market Deviation (or the ABO (ABB) for that leg if no Exchange BO
(BB) is available)), minus (plus) ``one collar value,'' which would be
(i) $0.25 where the offer (bid) is priced $1.00 or lower, or the lesser
of $2.50 or 25% of the offer (bid) where the offer (bid) is priced
above $1.00 (rounded down to the nearest whole penny); or (ii) $0.01,
if the offer is equal to or less than one collar value. The proposed
values used to generate a DBBO in the absence of local or Away Market
interest is consistent with the values used in the Trading Collars for
single-leg orders, per Rule 6.62P-O(a)(4)(C).\22\ In addition, such
values are within the current parameters for determining whether a
trade is an Obvious Error or Catastrophic Error.\23\ This proposed
definition of the DBBO is new and is based, in part, on the current
definition of Complex BBO set forth in Rule 6.1A-O(a)(2)(b), as well as
on how this concept is defined on other options exchanges, including on
NYSE American.\24\ The Exchange believes that providing an alternative
means of calculating the DBBO (i.e., by looking to the contra-side best
bid (offer) in the absence of same-side interest) would benefit market
participants as it should increase opportunities for trading. For
example, absent this proposed functionality, the Exchange would not be
able to trade complex strategies when, for at least one leg of such
strategy, the Exchange has no displayed interest on one or both sides
of such component leg. Allowing the Exchange to look to the ABBO to
calculate the DBBO in such circumstances would increase trading
opportunities for ECOs to the benefit of all market participants. The
Exchange believes that the additional detail about how the DBBO would
be calculated in the absence of an Exchange BB (BO) and ABB (ABO),
including that it would be rounded down to the nearest whole penny,
would promote clarity and transparency. As noted above and herein, the
Exchange believes that binding the DBBO (when calculated using the
Exchange BBO) to the maximum allowable Away Market Deviation would help
prevent ECOs from executing on the Exchange at prices too far away from
the current market.
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\22\ See Single-Leg Pillar Filing (describing the calculation of
Trading Collars, per Rule 6.62P-O(a)(4)(C), which ``for an order to
buy (sell) will be a specified amount above (below) the Reference
Price, as follows: (1) For orders with a Reference Price of $1.00 or
lower, $0.25; or (2) for orders with a Reference Price above $1.00,
the lower of $2.50 or 25%)''). The Reference Price for calculating
the Trading Collar for an order to buy (sell) will be the NBO (NBB),
except in certain enumerated circumstances. See id. (setting forth
the applicable Reference Price, per Rule 6.62P-O(a)(4)(B)).
\23\ See Rules 6.87-O(c)(1) (thresholds for Obvious Errors) and
6.87-O(d)(1) (thresholds for Catastrophic Errors).
\24\ See, e.g., NYSE American Rule 900.2NY(7)(b) (providing that
the Derived BBO ``is calculated using the BBO from the Consolidated
Book for each of the options series comprising a given complex order
strategy''); Cboe Rule 5.33(a) (defining ``Synthetic Bed Bid or
Offer and SBBO'' for complex orders as ``the best bid and offer on
the Exchange for a complex strategy calculated using'' the ``BBO for
each component (or the NBBO for a component if the BBO for that
component is not available) of a complex strategy from the [Cboe]
Simple Book'').
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Proposed Rule 6.91P-O(a)(5)(B) would provide that, if for a leg of
a complex strategy, there is neither an Exchange BBO nor an ABBO, the
Exchange would not allow the complex strategy to trade until, for that
leg, there is either an Exchange BB or BO, or an ABB or ABO, on at
least one side of the market. The Exchange believes that preventing a
complex strategy from trading when, for a leg, there is no reliable
pricing indication--either on the Exchange or in Away Markets, would
benefit market participants by preventing potentially erroneous
executions. Moreover, including this additional detail in the proposed
rule about when a complex strategy would not trade would benefit market
participants as it would promote clarity and transparency in Exchange
rules regarding ECO trading.
Proposed Rule 6.91P-O(a)(5)(C) would provide that if the best bid
and offer prices (when not based solely on the Exchange BBO) for a
component leg of a complex strategy are locked or crossed, the Exchange
would not allow an ECO for that strategy to execute against another ECO
until the condition resolves. The Exchange notes that, as described
above, the DBBO may be calculated using leg prices derived either
exclusively from, or a combination of, the Exchange BBO, the ABBO, or
the Exchange BBO as adjusted to be priced within the maximum allowable
Away Market Deviation. As such, if the best bid and offer prices (when
not based solely on Exchange BBO) for a component leg of a complex
strategy are locked or crossed, a DBBO calculated when using those
prices could be erroneous.\25\ Accordingly, the Exchange believes that
it is appropriate to not permit an ECO to execute against another ECO
under these circumstances until the locked or crossed market resolves.
The Exchange believes preventing ECO-to-ECO trading in this
circumstance would benefit market participants by preventing
potentially erroneous ECO executions. Moreover, including this
additional detail in the proposed rule about when an ECO would be
prevented from trading with another ECO would benefit market
participants as it would promote clarity and transparency in Exchange
rules regarding ECO trading.
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\25\ The reliability of the Exchange's calculated DBBO is
essential to ECO trading on the Exchange as this concept permeates
all aspects of complex trading, including to determine price
parameters at the opening of each series and in determining when,
and at what price, a COA Order may initiate a COA as well as market
events impacting the DBBO that would result in an early end to a
COA. See, e.g., proposed Rule 6.91P-O(d)(3) (relying on the DBBO to
determine ECO Auction Collars for the ECO Opening Auction Process)
and 6.91P-O(f)(2)(A) and (f)(3) (relying on the DBBO to both
initiate and price a COA Order as well as to terminate a COA early
under certain market conditions)).
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Further, per proposed Rule 6.91P-O(a)(5)(C), if an Away Market
quote updates to lock or cross the current Exchange BB (BO) or ABB
(ABO) for a component leg of a complex strategy, the Exchange would
allow an ECO for that strategy to execute against leg market interest
on the Exchange. Allowing an eligible ECO to execute against leg market
interest in these
[[Page 21963]]
circumstances is consistent with the way single-leg orders trade. In
this regard, the Exchange notes that, to the extent that leg prices are
locked or crossed as a result of updates to the ABBO, such updates do
not prevent resting leg market interest from trading at its resting
price with all eligible contra-side interest, which includes incoming
ECOs in the same complex strategy.\26\
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\26\ See Single-Leg Pillar Filing (discussing Rules 6.76P-
O(b)(3) providing that ``[i]f an Away Market locks or crosses the
Exchange BBO, the Exchange will not change the display price of any
Limit Orders or quotes ranked Priority 2--Display Orders and any
such orders will be eligible to be displayed as the Exchange's
BBO'').
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Moreover, to the extent that an ECO trades with leg market interest
in a complex strategy when interest in the leg markets is crossed, such
executions are not deemed as trade-throughs.\27\ As such, the Exchange
believes that allowing an ECO to trade with leg market interest in this
circumstance would maximize the execution opportunities of such ECO
while respecting price-time priority of the leg markets.
---------------------------------------------------------------------------
\27\ See Rule 6.94-O(b)(3) (exempting from trade-through
liability transactions that occur ``when there was a Crossed
Market''). See also the Options Order Protection And Locked/Crossed
Market Plan, dated April 14, 2009, available here, https://www.theocc.com/getmedia/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/options_order_protection_plan.pdf.
---------------------------------------------------------------------------
Proposed Rule 6.91P-O(a)(6) would define the term ``ECO
Order Instruction'' to mean a request to cancel, cancel and replace, or
modify an ECO. As described further below, this concept relates to
order processing when a series opens or reopens for trading and is
based on the term ``order instruction'' as used in Rule 7.35-E(g) and
proposed to be used in Rules 6.64P-O(e) and (f), which (similarly)
would define an ``order instruction'' for options as a request to
cancel, cancel and replace, or modify an order or quote.\28\
---------------------------------------------------------------------------
\28\ See Single-Leg Pillar Filing (describing opening Auction
Process rule per Rule 6.64P-O).
---------------------------------------------------------------------------
Proposed Rule 6.91P-O(a)(7) would define the term
``Electronic Complex Order'' or ``ECO'' to mean a Complex Order as
defined in Rule 6.62P-O(f) that would be submitted electronically to
the Exchange.\29\ This proposed definition is based on the preamble to
Rule 6.91-O, except that, under Pillar, an ECO would not include Stock/
Option Orders and Stock/Complex Order \30\ and the Exchange proposes to
replace reference to the ``NYSE Arca System'' with the term
``Exchange'' and to update cross-reference to the definition of a
Complex Order as proposed in the Single-Leg Pillar Filing.
---------------------------------------------------------------------------
\29\ The proposed definition of Complex Order under Pillar is
set forth in Rule 6.62P-O(f), as described in the Single-Leg Pillar
Filing, and is substantially identical to the current definition.
\30\ See Single-Leg Pillar Filing (describing Stock/Option
Orders and Stock/Complex Orders, per Rule 6.642-O(H)(6)(A) and (B)
respectively, as open outcry only orders). Although current Rule
6.91-O provides that Stock/Option Orders and Stock/Complex Orders
may trade as ECOs, under current functionality (and consistent with
Pillar) such orders only trade in open outcry.
---------------------------------------------------------------------------
Proposed Rule 6.91P-O(a)(8) would define the term ``leg''
or ``leg market'' to mean each of the component option series that
comprise an ECO. This definition is consistent with the concept of leg
markets as used in current Rule 6.91-O(a), which defines legs as
individual orders and quotes in the Consolidated Book. The Exchange
believes the proposed definition would add clarity regarding how the
terms ``leg'' and ``leg market'' would be used in connection with ECO
trading on Pillar.
Proposed Rule 6.91P-O(a)(9) would define ``Ratio'' or
``leg ratio'' to mean the quantity of each leg of an ECO broken down to
the least common denominator such that the ``smallest leg ratio'' is
the portion of the ratio represented by the leg with the fewest
contracts. The Exchange believes the proposed definition would add
clarity regarding how the terms ``ratio'' and ``leg ratio'' would be
used in connection with ECOs trading on Pillar, which definition is
consistent with how this concept is described on other options
exchanges.\31\
---------------------------------------------------------------------------
\31\ See, e.g., Cboe, US Options Complex Book Process, Complex
Order Basics, Section 2.1, Ratios, available here: https://cdn.batstrading.com/resources/membership/US-Options-Complex-Book-Process.pdf (providing that ``[t]he quantity of each leg of a
complex order broken down to the lowest terms will determine the
ratio of the complex order'').
---------------------------------------------------------------------------
Types of ECOs. Proposed Rule 6.91P-O(b) would set forth the types
of ECOs that would trade on Pillar. Proposed Rule 6.91P-O(b)(1) would
provide that ECOs may be entered as Limit Orders, Limit Orders
designated as Complex Only Orders, or as Complex QCCs.\32\ This
proposed text is based on current Rule 6.91-O(b)(1), with a difference
to provide that the Exchange would offer Complex Only Orders and
Complex QCCs on Pillar. Allowing ECOs to be designated as Complex QCCs
(which order type is described in the Single-Leg Pillar Filing) is
consistent with current functionality not described in the rule and the
Exchange believes that this additional specificity to the proposed rule
would add clarity and transparency. Complex Only Orders (as described
below) are based on existing functionality for PNP Plus orders, with
updated functionality available on Pillar.\33\
---------------------------------------------------------------------------
\32\ See Single-Leg Pillar Filing (describing Limit Orders and
Complex QCC Orders per Rule 6.62P-O(a)(2) and (g)(1)(A), (C) and
(D)).
\33\ See, infra, for discussion of proposed Rule 6.91P-
O(e)(1)(C) (discussing Complex Only Order functionality).
---------------------------------------------------------------------------
Proposed Rule 6.91P-O(b)(2) would set forth the time-in-
force contingencies available to ECOs, which would be Day, IOC, FOK, or
GTC, as those terms are defined in the Single-Leg Pillar Filing in Rule
6.62P-O(b), and GTX (per proposed Rule 6.91P-O(b)(2)(C) as described
below). The proposed text is based on current Rules 6.91-O(b)(2) and
(3), except that it adds GTX (as described below). The proposed text
also omits AON because the Exchange would not offer AONs for ECO
trading on Pillar.
Proposed Rule 6.91P-O(b)(2)(A) would provide that an ECO
designated as IOC or FOK would be rejected if entered during a pre-open
state,\34\ which is consistent with the time-in-force of the order
(because they could not be traded when a complex strategy is not open
for trading) as well as with current functionality.
---------------------------------------------------------------------------
\34\ The term ``pre-open state'' is defined in Rule 6.64P-
O(a)(12), as described in the Single-Leg Pillar Filing, to mean
``the period before a series is opened or reopened.''
---------------------------------------------------------------------------
Proposed Rule 6.91P-O(b)(2)(B) would provide that an ECO
designated as FOK must also be designated as a Complex Only Order (per
proposed Rule 6.91P-O(b)(1) and described further below). This proposed
rule, which is new under Pillar, would simplify the operation of
electronic complex order trading and would add clarity and transparency
that ECOs designated as FOK (i.e., that have conditional size-related
instructions) would not be eligible to trade with the leg markets.
Proposed Rule 6.91P-O(b)(2)(C) would provide that an ECO
designated as GTX would be defined as an ``ECO GTX Order'' and would
have the following features: It would not be displayed; it may be
entered only during the Response Time Interval of a COA; it must be on
the opposite side of the market as the COA Order; and it must specify
the price, size, and side of the market. As further proposed, ECO GTX
Orders may be modified or cancelled during the Response Time Interval
and any remaining size that does not trade with the COA Order would be
cancelled at the end of the COA. This definition is based on the
description of an RFR Response in current Rule 6.91-O(c)(5)(A)-(C),
which likewise are not displayed and expire at the end of the COA.
Priority and Pricing of ECOs. Proposed Rule 6.91P-O(c) would set
[[Page 21964]]
forth how ECOs would be prioritized and priced under Pillar. The
proposed priority scheme for ECOs under Pillar is consistent with
current functionality, with the differences and clarifications noted
below. As proposed, an ECO received by the Exchange that is not
immediately executed (or cancelled), including an ECO that cannot trade
due to conditions described in paragraphs (a)(5)(B)-(C) (above) \35\
and (c)(1)-(2) of this proposed Rule (below) or does not initiate a COA
per paragraph (f)(1) (below), would be ranked in the Consolidated Book
according to price-time priority based on the total net price and the
time of entry of the order. This proposed rule adds cross-references to
new rule text but is otherwise based on Rule 6.91-O(a)(1), without any
substantive differences. The Exchange proposes a non-substantive
difference to refer simply to a ``net price'' rather than a ``net debit
or credit price,'' which streamlined terminology is consistent with the
use of the term ``net price'' on other options exchanges.\36\ The
proposed rule also incorporates the first sentence of Rule 6.91-
O(a)(2)(iii)(A), regarding the ranking and priority of ECOs not
immediately executed, with additional detail regarding the time-in-
force modifier of the ECO, which adds clarity and transparency to the
proposed Rule.\37\
---------------------------------------------------------------------------
\35\ Proposed Rule 6.91P-O(a)(5)(B)-(C) describe conditions
related to the leg markets when complex strategies will not trade.
\36\ See, e.g., Cboe Rule 5.33(f)(2) (setting forth parameters
for the ``net price'' of complex orders traded on Cboe); Nasdaq ISE,
Options 3, Section 14 (c) (providing, in relevant part, that
``[c]omplex strategies will not be executed at prices inferior to
the best net price achievable from the best ISE bids and offers for
the individual legs'').
\37\ For example, an ECO designated as IOC that does not
immediately execute would cancel rather than be ranked on the
Consolidated Book, whereas an ECO designated as Day or GTC that does
not immediately execute would be ranked on the Consolidated Book.
---------------------------------------------------------------------------
Proposed Rule 6.91P-O(c) would further provide that, unless
otherwise specified in this Rule, ECOs would be processed as follows:
Proposed Rule 6.91P-O(c)(1) would provide that when
trading with the leg markets, an ECO would trade at the price(s) of the
leg markets provided the leg markets are priced no more than the
maximum allowable Away Market Deviation (as defined herein). The
proposed rule requiring that when trading with the leg markets, the
components of the ECO would trade at the prices of the leg markets is
consistent with current functionality, per Rule 6.91-O(a)(2)(ii);
requiring that such prices be bound by the Away Market Deviation for an
ECO to trade with the leg markets is new under Pillar, as discussed
further below).\38\
---------------------------------------------------------------------------
\38\ See Rule 6.91-O(a)(2)(ii) (providing that ``[i]f, at a
price, the leg markets can execute against an incoming [ECO] in full
(or in a permissible ratio), the leg markets will have first
priority at that price and will trade with the incoming [ECO]
pursuant to Rule 6.76A before [ECO] resting in the Consolidated Book
can trade at that price'').
---------------------------------------------------------------------------
For example, if there is sell interest in a leg market at $1.00,
and a leg of an ECO to buy could trade up to $1.05, the ECO would trade
with such leg market at $1.00. This would result in the ECO receiving
price improvement and is consistent with the ECO trading as the
Aggressing Order.\39\ The proposed functionality that an ECO would
trade with leg markets only if the prices of the leg markets are within
(and do not exceed the maximum allowable) Away Market Deviation would
be new under Pillar and is designed to operate as an additional
protection against ECOs being executed on the Exchange at prices too
far away from the current market.
---------------------------------------------------------------------------
\39\ The term ``Aggressing Order'' is defined in Rule 1.1, as
described in the Single-Leg Pillar Filing, to mean ``a buy (sell)
order or quote that is or becomes marketable against sell (buy)
interest on the Consolidated Book.''
---------------------------------------------------------------------------
Proposed Rule 6.91P-O(c)(2) would provide that when
trading with another ECO, each component leg of the ECO must trade at a
price at or within the Exchange BBO for that series, and no leg of the
ECO may trade at a price of zero.\40\ This provision is based in part
on current Rule 6.91-O(a)(2), which provides that no leg of an ECO will
be executed outside of the Exchange BBO.\41\ This proposed rule, which
ensures that ECOs would never trade through interest in the leg
markets, is consistent with current functionality and adds clarity and
transparency to the proposed Rule. This proposed rule is also
consistent with how ECOs are processed on other options exchanges.\42\
---------------------------------------------------------------------------
\40\ See, infra, for discussion of proposed Rule 6.91P-O(e)(1)
(discussing ``Execution of ECOs During Core Trading Hours,''
including the treatment of ECOs that have executed, at a price, to
the extent possible with the leg markets and of ECOs designated as
Complex Only).
\41\ As noted herein, no ECO on the Exchange would execute at a
price that would exceed the maximum allowable Away Market Deviation
on any component of the complex strategy. See proposed Rule 6.91P-
O(a)(1) (defining Away Market Deviation).
\42\ See, e.g., BOX Rule 7240(b)(3)(ii). See also Securities
Exchange Act Release Nos. 69027 (March 4, 2013), 78 FR 15093, 15094
(March 8, 2013) (SR-BOX-2013-01) (providing that ``where two Complex
Orders trade against each other, the resulting execution prices will
be at a price equal to or better than NBBO and BOX best bid or offer
(``BBO'') for each of the component Legs,'' per proposed Rule
7240(b)(3)(ii)). See, e.g., Cboe Rule 5.33(f)(2) (providing that
complex orders may not execute at a net price that would cause any
component of the complex strategy to be executed at a price of
zero).
---------------------------------------------------------------------------
Proposed Rule 6.91P-O(c)(3) would provide that an ECO may
trade without consideration of prices of the same complex strategy
available on other exchanges, which is based on the same text as
contained in current Rule 6.91-O(a)(2) without any substantive
differences.
Proposed Rule 6.91P-O(c)(4) would provide that bids and
offers for complex strategies may be expressed in one cent ($0.01)
increments, and the leg(s) of complex strategies may trade in one cent
($0.01) increments regardless of the MPV otherwise applicable to the
individual leg(s) of the ECO, which is based on current Rule 6.91-O,
Commentary .01 without any substantive differences, except that it
provides for bids and offers to be expressed in pennies rather than in
decimals which is consistent with current functionality as well as with
other options exchanges.\43\
---------------------------------------------------------------------------
\43\ See Amendment No. 2 and Nasdaq ISE, Options 3, Section 14
(c)(1) (providing, in relevant part, that ``[b]ids and offers for
Complex Options Strategies may be expressed in one cent ($0.01)
increments, and the options leg of Complex Options Strategies may be
executed in one cent ($0.01) increments, regardless of the minimum
increments otherwise applicable to the individual options legs of
the order'').
---------------------------------------------------------------------------
Execution of ECOs at the Open (or Reopening after a Trading Halt).
Current Rule 6.91-O(a)(2)(i) sets forth how ECOs are executed upon
opening or reopening of trading. Proposed Rule 6.91P-O(d) would set
forth details about how ECOs would be executed at the open or reopen
following a trading halt.
With the transition to Pillar, the Exchange proposes new
functionality regarding the ``ECO Opening Auction Process'' on the
Exchange, which would be applicable both to openings and reopenings
following a trading halt. The Exchange proposes to incorporate into the
ECO Opening Auction Process certain functionality currently available
on the Exchange's cash equity platform, which the Exchange has
similarly proposed to include in the Auction Process for single-leg
options.\44\ Accordingly, proposed Rule 6.91P-O(d) would use Pillar
terminology relating to auctions that is based in part on Pillar
terminology set forth in Rule 7.35-E for cash equity trading and in
part on Rule 6.64P-O for single-leg options.
---------------------------------------------------------------------------
\44\ See Single-Leg Pillar Filing (describing opening Auction
Process rule per Rule 6.64P-O).
---------------------------------------------------------------------------
Proposed Rule 6.91P-O(d)(1) would set forth the conditions
required for the commencement of an ECO Opening Auction Process.
Specifically, as proposed, the Exchange would initiate an ECO Opening
Auction Process for a complex strategy only if all legs of the complex
strategy have opened or
[[Page 21965]]
reopened for trading, which text is based on current Rule 6.91-
O(a)(2)(i)(A) without any substantive differences. Proposed Rule 6.91P-
O(d)(1)(A)-(B) would set forth conditions that would prevent the
opening of a complex strategy, as follows:
[cir] Any leg of the complex strategy has neither an Exchange BO
nor an ABO; or
[cir] The complex strategy cannot trade per proposed Rule 6.91P-
O(a)(5)(C).\45\
---------------------------------------------------------------------------
\45\ See Amendment No. 2.
---------------------------------------------------------------------------
The proposal to detail these conditions for opening (and reopening)
are consistent with current functionality not set forth in the current
rule. The Exchange believes that this added detail would not only add
clarity and transparency to Exchange rules but would also protect
market participants from potentially erroneous executions when there is
a lack of reliable information regarding the price at which a complex
strategy should execute, thereby promoting a fair and orderly ECO
Opening Auction Process.
Proposed Rule 6.91P-O(d)(2) would provide that any ECOs in
a complex strategy with prices that lock or cross one another would be
eligible to trade in the ECO Opening Auction Process. This proposed
rule is based on current Rule 6.91-O(a)(2)(i)(B), which provides than
an opening process will be used if there are ECOs that ``are marketable
against each other.'' The Exchange proposes a difference in Pillar not
to require that such ECOs be ``priced within the Complex NBBO'' because
the proposed ECO Opening Auction Process under Pillar would instead
rely on the DBBO (as described below).\46\ As such, the Exchange may
open a series based on the Exchange BBO, bound by the Away Market
Deviation (or, the ABBO if the Exchange BBO is not available), which is
consistent with ECO handling during Core Trading (per proposed Rule
6.91P-O(e)). The Exchange believes this proposed change would better
align the permissible opening price for a series with the permissible
execution price during Core Trading, which adds consistency to ECO
order handling to the benefit of investors.
---------------------------------------------------------------------------
\46\ See Rule 6.91-O(a)(2)(i)(B) (providing that ``[t]he CME
will use an opening auction process if there are Electronic Complex
Orders in the Consolidated Book that are marketable against each
other and priced within the Complex NBBO''). Per Rule 6.1A-
O(a)(11)(b) (and proposed Rule 6.91P-O(a)(2), the ``Complex NBBO''
for each complex strategy is derived from the national best bid and
national best offer for each leg.
---------------------------------------------------------------------------
Proposed Rule 6.91P-O(d)(2)(A) would provide that an ECO received
during a pre-open state would not participate in the Auction Process
for the leg markets pursuant to Rule 6.64P-O, which is based on the
same text (in the second sentence) of current Rule 6.91-O(a)(2)(i)(A)
without any substantive differences.
Proposed Rule 6.91P-O(d)(2)(B) would provide that a complex
strategy created intra-day when all leg markets are open would not be
subject to an ECO Opening Auction Process and would instead trade
pursuant to paragraph (e) of the proposed Rule (discussed below)
regarding the handling of ECOs during Core Trading Hours.
Proposed Rule 6.91P-O(d)(2)(C) would provide that the ECO Opening
Auction Process would be used to reopen trading in ECOs after a trading
halt. This proposed rule is consistent with current Rule 6.64-O(e) and
makes clear that the ECO Opening Auction Process would be applicable to
reopenings, which would add internal consistency to Exchange rules and
promote a fair and orderly ECO Opening Auction Process following a
trading halt.
Proposed Rule 6.91P-O(d)(3) would describe each aspect of
the ECO Opening Auction Process. First, proposed Rule 6.91P-O(d)(3)(A)
would describe the ``ECO Auction Collars,'' which terminology would be
new for ECO trading and is based on the term ``Auction Collars'' used
in Rule 7.35-E for trading cash equity securities as well as in Rule
6.64P-O(a)(2) for single-leg options trading.\47\
---------------------------------------------------------------------------
\47\ See Single-Leg Pillar Filing (defining Auction Collars in
Rule 6.64P-O(a)(2)).
---------------------------------------------------------------------------
As proposed, the upper (lower) price of an ECO Auction Collar for a
complex strategy would be the DBO (DBB); provided, however, that if the
DBO (DBB) is calculated using the Exchange BBO for all legs of the
complex strategy and all such Exchange BBOs have displayed Customer
interest, the upper (lower) price of an ECO Auction Collar would be one
penny ($0.01) times the smallest leg ratio inside the DBO (DBB). This
new functionality on Pillar would ensure that if there is displayed
Customer interest on the Exchange on all legs of the strategy, the
opening price for the complex strategy would price improve the DBBO,
which the Exchange believes is consistent with fair and orderly markets
and investor protection.
Next, proposed Rule 6.91P-O(d)(3)(B) would describe the
``ECO Auction Price.'' As proposed, the ECO Auction Price would be the
price at which the maximum volume of ECOs can be traded in an ECO
Opening Auction, subject to the proposed ECO Auction Collar. As further
proposed, if there is more than one price at which the maximum volume
of ECOs can be traded within the ECO Auction Collar, the ECO Auction
Price would be the price closest to the midpoint of the ECO Auction
Collar, or, if the midpoint falls within such prices, the ECO Auction
Price would be the midpoint, provided that the ECO Auction Price would
not be lower (higher) than the highest (lowest) price of an ECO to buy
(sell) that is eligible to trade in the ECO Opening (or Reopening)
Auction Process. The concept of an ECO Auction Price is consistent with
the concept of ``single market clearing price'' set forth in current
Rule 6.91-O(a)(2)(i)(B). For Pillar, the Exchange proposes to determine
the ECO Auction Price in a manner that is based in part on how an
Indicative Match Price is determined for trading of cash equity
securities, as set forth in Rule 7.35-E(a)(8)(A), and how the Exchange
proposes to determine the price for Auctions on Pillar for single-leg
options trading.\48\
---------------------------------------------------------------------------
\48\ See Single-Leg Pillar Filing (describing Rule 6.64P-
O(a)(9)).
---------------------------------------------------------------------------
Finally, as proposed, if the ECO Auction Price would be a sub-penny
price, it would be rounded to the nearest whole penny, which text is
based on current Rule 6.91-O(a)(2)(i)(B), with a difference that the
current rule refers to the midpoint of the Complex NBBO (which could be
a sub-penny price and if so, is rounded down to the nearest penny) as
opposed to referring to the ECO Auction Price, which would be a new
Pillar term for trading ECOs, which price, if in sub-pennies, would be
rounded (up or down) to the nearest MPV.
Proposed Rule 6.91P-O(d)(3)(B)(i) would provide that an ECO to buy
(sell) with a limit price at or above (below) the upper (lower) ECO
Auction Collar would be included in the ECO Auction Price calculation
at the price of the upper (lower) ECO Auction Collar, but ranked for
participation in the ECO Opening (or Reopening) Auction Process in
price-time priority based on its limit price. This proposed text is
based in part on current Rule 6.91-O(a)(2)(i)(B). The proposed rule is
also based on how the Exchange processes auctions for cash equity
trading, as described in Rules 7.35-E(a)(10)(B) and (a)(6) and how the
Exchange proposes to process Auctions on Pillar for single-leg options
trading.\49\
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\49\ See Single-Leg Pillar Filing (describing Rules 6.64P-
O(a)(9)(B)(i) and 6.64P-O(b)).
---------------------------------------------------------------------------
Proposed Rule 6.91P-O(d)(3)(B)(ii) would provide that locking and
crossing ECOs in a complex strategy would trade at the ECO Auction
Price. As further proposed, if there are no locking or crossing ECOs in
a complex strategy at
[[Page 21966]]
or within the ECO Auction Collars, the Exchange would open the complex
strategy without a trade. This proposed text would be new and is based
in part on Rule 6.64P-O(d)(2)(B) for single-leg options, which
describes when an option series could open without a trade.\50\
---------------------------------------------------------------------------
\50\ See Single-Leg Pillar Filing (describing Rule 6.64P-
O(d)(2)(B)).
---------------------------------------------------------------------------
Proposed Rule 6.91P-O(d)(4) would describe the ``ECO Order
Processing during ECO Opening Auction Process.'' Because the Exchange
would be using the same Pillar auction functionality for ECO trading
that is used for its cash equity market and that the Exchange is
proposing for single-leg options trading, the Exchange proposes to
apply existing Pillar auction functionality regarding how to process
ECOs that may be received during the period when an ECO Auction Process
is ongoing.
Accordingly, as proposed, new ECOs and ECO Order Instructions (as
defined in proposed Rule 6.91P-O(a)(6), described above) that are
received when the Exchange is conducting the ECO Opening Auction
Process for the complex strategy would be accepted but would not be
processed until after the conclusion of this process. As further
proposed, when the Exchange is conducting the ECO Opening Auction
Process, ECO Order Instructions would be processed as follows:
[cir] Proposed Rule 6.91P-O(d)(4)(A) would provide that an ECO
Order Instruction received during the ECO Opening Auction Process would
not be processed until after this process concludes if it relates to an
ECO that was received before the process begins and that any subsequent
ECO Order Instruction(s) relating to such ECO would be rejected if
received during the ECO Opening Auction Process when a prior ECO Order
Instruction is pending.
[cir] Proposed Rule 6.91P-O(d)(4)(B) would provide that an ECO
Order Instruction received during the ECO Opening Auction Process would
be processed on arrival if it relates to an order that was received
during this process.
Proposed Rule 6.91P-O(d)(4) and sub-paragraphs (A) and (B) are
based on both current Rule 7.35-E(g) and its sub-paragraphs (1) and (2)
and Rule 6.64P-O(e) and its sub-paragraphs (1) and (2) (as described in
the Single-Leg Pillar Filing) with differences only to reference the
defined term ECO Order Instruction and to refer to the ECO Opening
Auction Process. The Exchange believes that the proposed rule text
would provide transparency regarding how ECO Order Instructions that
arrived during the ECO Opening Auction Process would be processed.
Proposed Rule 6.91P-O(d)(5) would describe the
``Transition to continuous trading'' after the ECO Opening Auction
Process. As proposed, after the ECO Opening Auction, ECOs would be
subject to ECO Price Protection, per proposed Rule 6.91P-O(g)(2) (as
described below) and, if eligible to trade, would trade as follows:
[cir] Proposed Rule 6.91P-O(d)(5)(A) would provide that ECOs
received before the complex strategy was opened that did not trade in
whole in the ECO Opening Auction Process and that lock or cross other
ECOs or leg markets in the Consolidated Book would trade pursuant to
proposed Rule 6.91P-O(e) (discussed below) regarding the handling of
ECOs during Core Trading Hours; otherwise, such ECOs would be added to
the Consolidated Book. This provision is based on the (last sentence)
of current Rule 6.91-O(a)(2)(i)(B) and (C), with non-substantive
differences to use Pillar terminology.
[cir] Proposed Rule 6.91P-O(d)(5)(B) would provide that ECOs
received during the ECO Opening Auction Process would be processed in
time sequence relative to one another based on original entry time.
This proposed rule is based on both current functionality and how the
Exchange proposes to process orders in an option series that were
received during an Auction Processing Period, as described in the
Single-Leg Pillar Filing for Rule 6.64P-O(a)(6).
Execution of ECOs During Core Trading Hours. Proposed Rule 6.91P-
O(e) would describe how ECOs would be processed during Core Trading
Hours.
Proposed Rule 6.91P-O(e)(1) would provide that once a complex
strategy is open for trading, an ECO would trade with the best-priced
contra-side interest as follows:
Proposed Rule 6.91P-O(e)(1)(A) relates to ECOs that are
permitted to trade with the leg markets and would provide that if, at a
price, the leg markets can trade with an eligible ECO,\51\ in full or
in a permissible ratio, the leg markets would trade first at that
price, pursuant to proposed Rule 6.76AP-O,\52\ until the quantities on
the leg markets are insufficient to trade with the ECO, at which time
such ECO would trade with contra-side ECOs resting in the Consolidated
Book at that price, which is based on Rule 6.91-O(a)(2)(ii).\53\
Although the current rule makes clear that the leg markets have first
priority, at a price, to trade with an ECO in full or in a permissible
ratio, the proposed rule would add text to specify that an ECO may
trade with another ECO at the leg market price only after such ECO has
executed to the extent possible with the leg markets at that price. In
other words, such ECO must first exhaust any available interest in the
leg markets at that price that can satisfy the ECO, in full or in a
permissible ratio, before it may trade with another ECO at that price.
---------------------------------------------------------------------------
\51\ See proposed Rule 6.91P-O(e)(1)(C) and (D) (for description
of ECOs that are not eligible to trade with the leg markets).
\52\ See Single-Leg Pillar Filing (describing Rule 6.76AP-O,
Order Execution and Routing, which is the substantively identical
Pillar version of current Rule 6.76AP-O).
\53\ See Rule 6.91-O(a)(2)(ii) (providing that ``[i]f, at a
price, the leg markets can execute against an incoming [ECO] in full
(or in a permissible ratio), the leg markets will have first
priority at that price and will trade with the incoming
[ECO]pursuant to Rule 6.76A before [ECO] resting in the Consolidated
Book can trade at that price'').
---------------------------------------------------------------------------
This proposed description regarding how ECOs would trade with other
ECOs is consistent with the rules of the BOX, and is therefore not new
or novel.\54\ Per BOX Rule 7240(b)(2)(ii), ``[a] Complex Order for
which a leg of such Complex Orders' underlying Strategy is not in a
one-to-one ratio with each other leg of such Strategy'' must first
trade with all eligible interest in the leg markets, i.e., ``for all of
the quantity available at the best price in a permissible ratio until
the quantities remaining on the BOX Book are insufficient to execute
against the Complex Order while respecting the ratio.'' \55\ And, after
such execution on the BOX Book, ``the remaining quantity of the Complex
Order may execute against other Complex Orders and the component Legs
of the Complex Order may trade at prices equal to the corresponding
prices on the BOX Book.'' \56\
---------------------------------------------------------------------------
\54\ See BOX Rule 7240(b)(2)(ii). See also Securities Exchange
Act Release Nos. 69027 (March 4, 2013) 78 FR 15093 (March 8, 2013)
(Notice of Proposed Rule Change, as Modified by Amendment No. 1,
regarding, among other things, allowing the execution of certain
Complex Orders to trading at the same price as best-priced interest
in the BOX Book after such eligible leg interest has been exhausted)
(``BOX Notice''); 69419 (April 19, 2013) 78 FR 24449 (April 25,
2013) (Order Approving BOX Notice) (``BOX Approval Order'') (SR-BOX-
2013-01).
\55\ See BOX Rule 7240(b)(2)(ii). The ``BOX Book'' is
conceptually the same as the leg markets and are defined as ``the
electronic book of orders on each single series of options
maintained by the BOX Trading Host.'' See BOX Rule 100(a)(10).
\56\ See BOX Rule 7240(b)(2)(ii).
---------------------------------------------------------------------------
Consistent with BOX Rule 7240(b)(2)(ii), proposed Rule 6.91P-
O(e)(1)(A) would provide that an ECO that is eligible to trade with the
leg markets must first trade with the leg markets, at a price, to the
extent possible (i.e., in full or in a permissible
[[Page 21967]]
ratio) before that ECO can trade at the same price with another
ECO.\57\ As proposed, such ECO would never trade ahead of interest
(Customer or otherwise) in the leg markets if that interest is
sufficient to satisfy the ECO in full or in a permissible ratio.
However, such ECO may execute with another ECO, at a price, after
exhausting eligible leg market interest--Customer or otherwise--at that
price if the leg markets cannot satisfy the ratio spread of the
ECO).\58\ Thus, per proposed Rule 6.91P-O(e)(1)(A), such ECO would be
eligible to trade with contra-side ECOs resting in the Consolidated
Book at the same price, which is consistent with BOX's rules.\59\
---------------------------------------------------------------------------
\57\ See proposed Rule 6.91P-O(e)(1)(A).
\58\ See id. Unlike BOX, the Exchange has deemed it unnecessary
to refer to ECOs with other than one-to-one ratios and believes the
proposed rule text is clear and concise in stating that if the leg
markets have sufficient quantity to satisfy an ECO in full or in a
permissible ratio, such leg markets have first priority to trade
with such ECO (ahead of any ECOs resting in the Consolidated Book at
that price) unless or until the leg market interest cannot satisfy
the ECO ratio spread.
\59\ The Exchange does not propose to copy into Rule 6.91P-
O(e)(1)(A) the requirement of current Commentary .02 to Rule 6.91-O
that at least one leg of an ECO must execute at a price better than
the corresponding leg market price containing Customer interest
because this requirement would be incorporated into how Complex Only
Orders would function on the Exchange, and therefore the Exchange no
longer needs to separately specify that requirement. See proposed
Rule 6.91P-O(a)(1)(C) (requiring of Complex Only Order that, when
there is displayed Customer interest on all legs of the complex
strategy, such Complex Only Order must price improve at least a
portion of such displayed Customer interest).
---------------------------------------------------------------------------
The Exchange believes this proposed Rule makes clear that the
priority of the leg markets remains primary--as such interest is
afforded the opportunity to trade at the best price, but also ensures
that ECO trading opportunities are maximized. As noted by BOX, the
Exchange proposes to apply the ``straightforward principle'' of
allowing the execution of an ECO against another ECO once any eligible
interest on the leg markets at the same net price has already been
executed.\60\
---------------------------------------------------------------------------
\60\ See BOX Notice, 78 FR, at 15093.
---------------------------------------------------------------------------
The following example illustrates how proposed Rule 6.91P-
O(e)(1)(A) would be applied.
Example: Assume an ECO consisting of the simultaneous purchase of
one Option A instrument and two Option B instruments (A+2B).
The interest in the leg markets is initially as follows:
Leg market for Option A is:
Order to buy 2 at $1.00................... Order to sell 20 at $1.06.
Order to buy 5 at $0.99................... Order to sell 2 at $1.10.
Leg market for Option B is:
Order to buy 3 at $1.00................... Order to sell 3 at $1.10.
Complex Order Book for Strategy A+2B:
ECO to buy 2 at $3.00..................... ECO to sell 10 at $3.20.
ECO to buy 5 at $2.90.....................
The DBBO is $3.00 bid, $3.26 offered.
In this example, an ECO is received to sell 2 A+2B at $3.00. This
order can match with either the existing $3.00 bid on A+2B in the
Complex Order Book or with the interest on the leg markets for $3.00.
However, as the Exchange proposes to give priority to interest on the
leg markets over executable ECOs, 1 unit of the incoming order to sell
A+2B at $3.00 will execute against the orders on the respective legs
(selling 1 A and 2 B at $1.00 each ($1.00 + 2($1.00) = $3.00)).
After this initial execution against the leg markets, the leg
markets are as follows:
Leg Market for Option A is:
Order to buy 1 at $1.00................... Order to sell 20 at $1.06.
Order to buy 5 at $0.99................... Order to sell 2 at $1.10.
Leg Market for Option B is:
Order to buy 1 at $1.00................... Order to sell 3 at $1.10.
Complex Order Book for Strategy A+2B:
ECO to buy 2 at $3.00..................... ECO to sell 10 at $3.20.
ECO to buy 5 at $2.90.....................
One ECO to sell A+2B at $3.00 remains.....
Because insufficient quantity remains on the bid of B at $1.00 to
combine with the bid on A (of $1.00) to respect the ECO ratio (i.e.,
the incoming ECO seeks to sell 2B, but the remaining leg market bid is
for 1B), the remaining order to sell 1 A+2B at $3.00 would be executed
against the resting ECO to buy at $3.00. In the above scenario,
consistent with proposed Rule (e)(1)(A), the Exchange may trade two
ECOs without at least one leg having a price better than the best
prices on the leg markets.\61\
---------------------------------------------------------------------------
\61\ See proposed Rule 6.91P-O(e)(1)(A); see also BOX Rule
7240(b)(2)(ii)).
---------------------------------------------------------------------------
The Exchange believes that proposed Rule 6.91P-O(e)(1)(A) would
benefit market participants because it is designed to protect the
priority of orders on the leg markets by requiring an ECO to execute
first against interest on the leg markets at the best price to the
extent possible, i.e., in full or in a permissible ratio, and only then
permitting an ECO to execute against another ECO at that price. Thus,
following the executions against the best-priced interest on the leg
markets, an ECO would no longer be executable against interest on the
leg markets at the best price because the leg markets would lack
sufficient quantity to fill the ECO in a permissible ratio at that
price. Absent this provision in Rule 6.91P-O(e)(1)(A), the Exchange
believes that otherwise executable ECOs at the leg market price would
lose execution opportunities without any benefit to interest on the leg
markets, which is unable to trade with the ECO at that price.\62\
Because ``orders are executable against each other only when both the
price and the quantity of the orders match,'' the Exchange believes it
is appropriate (and does not deny leg markets priority) to allow ECOs
to trade with other ECOs at the leg market price when such eligible leg
market interest at that price has been exhausted.\63\
---------------------------------------------------------------------------
\62\ See BOX Notice, 78 FR at 15093.
\63\ See BOX Approval Order, 78 FR at 24449.
---------------------------------------------------------------------------
Proposed Rule 6.91P-O(e)(1)(B) would provide that an ECO
would not trade with orders in the leg markets designated as AON, FOK,
or with an MTS modifier. This proposed text would be new and is based
in part on existing functionality (for AON and FOK) and also reflects
the Exchange's proposed treatment under Pillar of its new MTS modifier
for orders in the leg markets.\64\ Consistent with current
functionality, orders with an AON, FOK, or (new) MTS modifier are
conditional and, by design, will miss certain execution opportunities.
The Exchange believes that this proposed rule would simplify the
operation of electronic complex order trading and would add clarity and
transparency that ECOs would not trade with orders that have
conditional size-related instructions.
---------------------------------------------------------------------------
\64\ See Single-Leg Pillar Filing (describing Minimum Trade Size
or MTS Modifier in Rule 6.62P-O(i)(3)(B)).
---------------------------------------------------------------------------
Proposed Rule 6.91P-O(e)(1)(C) would provide that an ECO
designated as Complex Only would be eligible to trade solely with
another ECO and would not trade with the leg markets. The proposed
Complex Only Orders are based on existing functionality for PNP Plus
orders, with updated functionality available on Pillar.\65\ The
Exchange
[[Page 21968]]
proposes on Pillar not to use the term ``PNP Plus Order'' and instead
rename this order type as a Complex Only Order, which is more aptly
named, and is consistent with similar order types available on other
options exchanges.\66\
As further proposed, an ECO designated as Complex Only must trade
at a price at or within the DBBO; provided that, if the DBB (DBO) is
calculated using the Exchange BBO for all legs of the complex strategy
and all such Exchange BBOs have displayed Customer interest, the
Complex Only Order would not trade below (above) one penny ($0.01)
times the smallest leg ratio inside the DBB (DBO), regardless of
whether there is sufficient quantity on such leg markets to satisfy the
ECO.\67\ This proposed requirement is designed to ensure that, if there
is displayed Customer interest on all legs of the strategy on the
Exchange, a Complex Only Order would price improve at least some
portion of such interest making up the DBBO. Thus, a Complex Only Order
does not get the benefit of the priority treatment set out in proposed
Rule 6.91P-O(e)(1)(A). If a Complex Only Order is unable to trade
within the aforementioned price parameters, it would remain on the
Consolidated Book until it can trade with another ECO per the
requirements of proposed Rule 6.91P-O(e)(1)(C).
---------------------------------------------------------------------------
\65\ See Rule 6.91-O(b)(1) (providing that ECOs may be
designated as Limit Orders designated as PNP Plus); Rule 6.62-O(y)
(describing PNP Plus orders as ECOs that may only trade with other
ECOs, but which will continuously be repriced if locking or crossing
the Complex BBO). Unlike the PNP Plus Order, which trades inside the
Complex BBO (conceptual equivalent to the DBBO), the Complex Only
Order may trade with another ECO at the DBBO, unless there is
certain displayed Customer interest on the Exchange (as described
herein), in which case the Complex Only Order must trade inside the
DBBO.
\66\ See proposed Rule 6.91P-O(e)(1)(C). Other options exchanges
likewise offer Complex Orders that trade only with Complex Orders.
See, e.g., Cboe Rule 5.33(a) (defining ``Complex Only'' order as an
ECO ``that a [Cboe] Market-Maker may designate to execute only
against complex orders in the COB and not Leg into the Simple
Book''). The proposed Complex Only Order (like its predecessor PNP
Plus Order) would be available to all market participants.
\67\ See proposed Rule 6.91P-O(e)(1)(C). Because Complex Only
Orders would never trade with the leg markets, whether or not there
is sufficient quantity at the displayed Customer price is irrelevant
to the operation of this order type.
---------------------------------------------------------------------------
As noted above, the (renamed) Complex Only Order type is based on
existing PNP Plus Order functionality, with updated functionality for
trading on Pillar. Specifically, unlike the operation of the PNP Plus
Order, the Exchange would not reprice a resting Complex Only Order and
instead would restrict a Complex Only Order from trading until such
order could trade at a price at or inside the DBBO, as described above.
The Exchange believes that allowing Complex Only Orders to trade up to
the DBBO unless there is displayed Customer interest on all legs of the
strategy on the Exchange at the DBBO (as described above), provides
market participants additional trading opportunities while still
protecting displayed Customer interest on the Exchange.
The proposed operation of the Complex Only Order, insofar as it
protects displayed Customer interest in the leg markets when an ECO
trades with another ECO, is consistent with the rules of NYSE American
and is therefore not new or novel.\68\
---------------------------------------------------------------------------
\68\ See NYSE American Rule 980NY, Commentary .02(i) (providing
that, when executing an ECO, if each leg of the contra-side Derived
BBO--calculated using the BBO from the Consolidated Book for each of
the options series comprising a given complex order strategy per
Rule 900.2NY(7)(a)(b)--for the components of the ECO includes
Customer interest, the price of at least one leg of the order must
``trade at a price that is better than the corresponding price of
all customer bids or offers in the Consolidated Book for the same
series, by at least one standard trading increment as defined in
Rule 960NY,'' which minimum trading increment is one cent ($0.01).
See NYSE American Rule 960NY(b).
---------------------------------------------------------------------------
Proposed Rule 6.91P-O(e)(1)(D) would provide that ECOs
with any one of the following complex strategies would be ineligible to
trade with the leg markets and would be processed as a Complex Only
Order:
[cir] A complex strategy with more than five legs;
[cir] a complex strategy with two legs and both legs are buying or
both legs are selling, and both legs are calls or both legs are puts;
or
[cir] a complex strategy with three or more legs and all legs are
buying or all legs are selling.
The proposal to restrict ECOs with more than five legs from trading
with the leg markets (and being treated as Complex Only Orders), per
proposed Rule 6.91P-O(e)(1)(D)(i), would be new functionality under
Pillar and is designed to help Market Makers manage risk. The Exchange
currently requires Market Makers to utilize certain risk controls for
quoting to help mitigate risk particularly during periods of market
volatility, and would require Market Makers to continue to use risk
controls on Pillar.\69\ Because the execution of a multi-legged ECO is
a single transaction, comprising discrete legs that must all trade
simultaneously, allowing ECOs with more than five legs to trade with
the leg markets may allow a multi-legged transaction to occur before a
Market Maker's risk settings would be triggered. This proposed
limitation is designed to prevent such multi-legged transactions, which
would help ensure that Market Makers continue to provide liquidity and
do not trade above their established risk tolerance levels. The
Exchange notes that this restriction is consistent with similar limits
established on other options exchanges.\70\
---------------------------------------------------------------------------
\69\ See Single-Leg Pillar Filing (describing the activity-based
controls with updated functionality under Pillar that Market Makers
would be required to use to manage risk in connection with their
quotes, per Rule 6.40P-O(a)(3) and (b)(2)). The proposed Pillar risk
controls are substantively identical to the existing risk controls
set forth in Rules 6.40-O(b)(2), (c)(2) and (d)(2) and Commentary
.04 to Rule 6.40-O.
\70\ See, e.g., Cboe Rule 5.33(g) (providing the ECOs may be
restricted from trading with the leg markets if such ECO has more
than a maximum number of legs, which maximum the Exchange determines
on a class-by-class basis and may be two, three, or four).
---------------------------------------------------------------------------
Proposed Rule 6.91P-O(e)(1)(D)(ii)-(iii), which treats ECOs with
certain complex strategies as Complex Only Orders, is based in part on
current Rule 6.91-O(b)(4)(i)-(ii), with a difference that currently,
such so-called ``directional strategies'' are rejected. The proposed
handling under Pillar would be less restrictive than the current rule
because such strategies would not be rejected and is consistent with
the treatment of such complex strategies on other options
exchanges.\71\ As with the proposal to restrict ECOs with more than
five legs trading with the leg markets, this proposed restriction is
also designed to ensure that Market Maker risk settings would not be
bypassed. Because ECOs with directional strategies are typically geared
towards an aggressive directional capture of volatility, such ECOs can
represent significantly more risk than trading any one of the legs in
isolation. As such, because Market Maker risk settings are only
triggered after the entire ECO package has traded, the Exchange
believes this proposed rule change would help ensure fair and orderly
markets by preventing such orders from trading with the leg markets,
which would minimize risk to Market Makers.
---------------------------------------------------------------------------
\71\ See, e.g., Nasdaq ISE Options 3, Section 14 (d)(3)(A)-(B)
(providing that ECOs with these complex strategies may trade only
with other ECOs).
---------------------------------------------------------------------------
Proposed Rule 6.91P-O(e)(2) would provide that the Exchange would
evaluate trading opportunities for a resting ECO when the leg markets
comprising a complex strategy update, provided that during periods of
high message volumes, such evaluation may be done less frequently. The
Exchange believes that this proposed rule promotes transparency of the
frequency with which the Exchange would be evaluating the leg markets
for updates.
The Exchange believes the proposed handling of ECOs during Core
Trading
[[Page 21969]]
is reasonably designed to facilitate increased interaction between
orders on the leg markets and ECOs, and to do so in such a manner as to
ensure a dynamic, real-time trading mechanism that maximizes the
opportunity for trade executions for both ECOs and orders on single
option series.
Execution of ECOs During a COA. Proposed Rule 6.91P-O(f) would
describe how ECOs would trade during a COA. The COA Process is
currently described in Rule 6.91-O(c). Under Pillar, the Exchange
proposes to modify the COA process, including by relying on the DBBO
(as described above) for pricing, allowing a COA Order to initiate a
COA only on arrival, and streamlining the rule text describing the
circumstances that would cause an early end to a COA.
As proposed, a COA Order received when a complex strategy is open
for trading and that satisfies the requirements of paragraph (f)(1) of
the proposed Rule would initiate a COA only on arrival after trading
with eligible interest per proposed Rule 6.91P-O(f)(2)(A) (described
below). As further proposed, a COA Order would be rejected if entered
during a pre-open state or if entered during Core Trading Hours with a
time-in-force of FOK or GTX. This proposed order handling is based in
part on current Rule 6.91-O(c)(1)(ii), which requires that COA Orders
be submitted during Core Trading Hours. The proposed rejection of such
orders during a pre-open state would be new under Pillar and is
consistent with the Exchange's proposed functionality that a COA Order
would initiate a COA only on arrival. In addition, the proposal would
clarify that COA Orders designated as FOK or GTX would be rejected,
even if submitted during Core Trading Hours, is based on current
functionality and this addition would add further detail and
clarification to the rule text. Finally, as further proposed, only one
COA may be conducted at a time in a complex strategy, which is
identical to text in current Rule 6.91-O(c)(3).
Proposed Rule 6.91P-O(f)(1) would describe the conditions required
for the ``Initiation of a COA.'' As proposed, to initiate a COA, the
limit price of the COA Order to buy (sell) must be higher (lower) than
the best-priced, same-side ECOs resting on the Consolidated Book and
equal to or higher (lower) than the midpoint of the DBBO, which is
designed to encourage aggressively-priced COA Orders and, in turn, to
attract a meaningful number of RFR Responses to potentially provide
price improvement of the COA Order's limit price. This proposed text is
based in part on current Rule 6.91-O(c)(3)(i), with a difference to add
a new ``midpoint of the DBBO'' requirement to reflect this new concept
under Pillar. As further proposed, a COA Order that does not satisfy
these pricing parameters would not initiate a COA and, unless it is
cancelled (i.e., if an IOC), such order would be ranked in Consolidated
Book and processed as an ECO, per proposed Rule 6.91P-O(e) (described
above). This would be new under Pillar, as current Rule 6.91-O(c)(3)
allows an order designated for COA to reside on the Consolidated Book
unless or until such order meets the requisite pricing conditions to
initiate a COA. The Exchange believes this proposed change would
simplify the COA process and promote the orderly initiation of COAs,
which is essential to maintaining a fair and orderly market for ECOs.
Finally, as proposed, once a COA is initiated, the Exchange would
disseminate a Request for Response message, the Response Time Interval
would begin and, during such interval, the Exchange would accept RFR
Responses, including ECO GTX Orders. This proposed text is based on
current functionality set forth in Rule 6.91-O(c), with non-substantive
differences to use Pillar terminology, including using the new Pillar
term for ECO GTX Orders.
Proposed Rule 6.91P-O(f)(2) would describe the ``Pricing of a
COA.'' As proposed, a COA Order to buy (sell) would initiate a COA at
its limit price, unless its limit price locks or crosses the DBO (DBB),
in which case it would initiate a COA at a price equal to one penny
($0.01) times the smallest leg ratio inside the DBO (DBB) (the ``COA
initiation price''). This proposed functionality utilizes the new
concept of a DBBO, is consistent with current functionality (that
relies on substantively similar concept of Complex BBO), and ensures
(consistent with current functionality) that interest on the leg
markets maintain priority.
Proposed Rule 6.91P-O(f)(2)(A) would provide that prior to
initiating a COA, a COA Order to buy (sell) would trade with any ECO to
sell (buy) resting in the Consolidated Book that is priced equal to or
lower (higher) than the DBO (DBB), unless the DBO (DBB) is calculated
using the Exchange BBO for all legs of the complex strategy and all
such Exchange BBOs have displayed Customer interest, in which case the
COA Order will trade up (down) to one penny ($0.01) times the smallest
leg ratio inside the DBO (DBB) (i.e., priced better than the leg
markets) and any unexecuted portion of such COA Order would initiate a
COA. This proposed rule is based on current Rule 6.91-O(c)(2) with a
difference to use the Pillar concept of DBBO rather than refer to the
contra-side Complex BBO and to specify that the COA Order must price
improve the DBBO when there is displayed Customer interest on the
Exchange leg markets, as noted above.
Proposed Rule 6.91P-O(f)(2)(B) would provide that a COA
Order would not be eligible to trade with the leg markets until after
the COA ends, which added detail, while not explicitly stated in the
current rule, is consistent with current functionality described in
Rules 6.91-O(c)(7)(A) and (B) that only RFR Responses (i.e., GTX
orders) and ECOs will be allocated in a COA and that the COA Order
would not trade with the leg markets until after the COA allocations.
Proposed Rule 6.91P-O(f)(3) would set forth the conditions
that would result in the ``Early End to a COA'' (i.e., a COA ending
prior to the expiration of the Response Time Interval), which
conditions are consistent with current Rule 6.91-O(c)(6) as described
below. Currently, as described in Rule 6.91-O(c)(3), the Exchange takes
a snapshot of the Complex BBO at the start of a COA and uses that
snapshot as the basis for determining whether to end a COA early. Under
Pillar, the Exchange would no longer use a snapshot of the Complex BBO
as the basis for determining whether to end a COA early but would
instead rely on the DBBO (calculated per proposed Rule 6.91P-O(a)(5)),
which is updated as market conditions change (including during the
Response Time Interval).\72\ The Exchange believes relying on the DBBO
is appropriate and would benefit investors as it would provide real-
time trading information that includes an additional layer of price
protection for ECO trading as the DBBO is based on Exchange BBOs, when
available, or the ABBO. The Exchange proposes a COA would end early
under the following conditions:
---------------------------------------------------------------------------
\72\ As discussed infra regarding proposed Rule 6.91P-O(a)(5)
and the definition of the Derived BBO, ``the DBBO will be updated as
the Exchange BBO or ABBO, as applicable, is updated'').
---------------------------------------------------------------------------
[cir] Proposed Rule 6.91P-O(f)(3)(A) would provide that a COA would
end early if the Exchange receives an incoming ECO or COA Order to buy
(sell) in the same complex strategy that is priced higher (lower) than
the initiating COA Order to buy (sell), which proposed text is based on
current Rule 6.91-O(c)(6)(B)(i) without any substantive differences.
[cir] Proposed Rule 6.91P-O(f)(3)(B) would provide that a COA would
end early if the Exchange receives an RFR Response that locks or
crosses the DBBO on the same-side as the COA Order,
[[Page 21970]]
which proposed text is based on current Rule 6.91-O(c)(6)(A)(i), except
(as noted above) it refers to the DBBO rather than the ``initial
Complex BBO.''
[cir] Proposed Rule 6.91P-O(f)(3)(C) would provide that a COA would
end early if the leg markets update causing the DBBO on the same-side
as the COA Order to lock or cross (i) any RFR Response(s) or (ii) if no
RFR Responses have been received, the best-priced, contra-side ECOs.
This proposed rule is based in part on current Rule 6.91-O(c)(6)(C)(i),
with differences to use Pillar terminology, including reference to the
DBBO.
[cir] Proposed Rule 6.91P-O(f)(3)(D) would provide that a COA would
end early if the leg markets update causing the contra-side DBBO to
lock or cross the COA initiation price. This proposed rule is based in
part on current Rule 6.91-O(c)(6)(C)(ii), except that it would refer to
the DBBO and the COA initiation price, which would be new concepts
under Pillar.
Because the DBBO may be calculated using the ABBO for a given leg,
the Exchange notes that it would be new under Pillar to have a COA end
early based on (locking or crossing) market conditions outside of the
Exchange. The Exchange believes this proposed functionality would
benefit market participants by preventing COA Orders from executing at
prices too far away from the prevailing market for that complex
strategy. In addition, the Exchange believes this proposed
functionality would promote internal consistency and benefit market
participants because, as proposed, the execution of ECOs on the
Exchange, including whether such ECO may initiate a COA as a COA Order,
is based on the DBBO. As such, the Exchange believes it is appropriate
and to the benefit of market participants that the early termination of
a COA likewise be based on the DBBO--regardless of whether the prices
used to calculate such DBBO include (or consist entirely of) ABBO
prices.
Proposed Rule 6.91P-O(f)(4) would set forth the
``Allocation of COA Orders'' after a COA either ends early or after the
expiration of the Response Time Interval. Current Rule 6.91-O(c)(7)(A)
sets forth that the COA-eligible orders are allocated against the best-
priced interest received in the COA at each price on a ``Size Pro Rata
Basis,'' as that concept is defined in Rule 6.75-O(f)(6). Under Pillar,
the allocation of the COA Order would be based on price-time priority,
rather than Size Pro Rata, which would align the allocation of ECOs in
a COA with standard processing of ECOs on the Exchange, which adds
transparency and consistency to ECO processing on the Exchange as well
as internal consistency to Exchange rules, all to the benefit of market
participants.
Proposed Rule 6.91P-O(f)(4)(A) would provide that RFR Responses to
sell (buy) that are priced lower (higher) than a COA Order to buy
(sell) would trade in price-time priority up (down) to the DBBO;
provided, however, that if all legs of the DBB (DBO) are calculated
using Exchange BBOs and all such Exchange BBOs have displayed Customer
interest, RFR Responses to sell (buy) would not trade below (above) one
penny ($0.01) times the smallest leg ratio inside the DBB (DBO). This
proposed rule would ensure that the COA Order would not trade at a
worse price than the leg markets and would price improve the DBBO where
there is displayed Customer interest on all legs of the complex
strategy on the Exchange. The proposed text is based in part on current
Rule 6.91-O(c)(7)(A) insofar as it ensures that the COA Order would
trade with the best-priced RFR Responses received in the COA and
differs substantively because the COA Order would not trade ahead of
certain displayed Customer interest and, as discussed above, the COA
Order would trade with RFR Responses in price-time priority (and not
Size Pro Rata).
Proposed Rule 6.91P-O(f)(4)(B) would provide that after COA
allocations pursuant to paragraph (f)(4)(A) of this proposed Rule, any
unexecuted balance of a COA Order (including COA Orders designated as
IOC) would be eligible to trade with any contra-side interest,
including the leg markets unless the COA Order is designated or treated
as a Complex Only Order. This proposed text is based on existing
functionality and makes explicit that a COA Order would trade solely
with complex interest (and not the leg markets) during a COA. This
proposed rule is designed to provide clarity and transparency that the
remaining balance of a COA Order would be eligible to trade with the
leg markets after the COA ends.
Proposed Rule 6.91P-O(f)(4)(C) would provide that after a COA Order
trades pursuant to proposed Rule 6.91P-O(f)(4)(B), any unexecuted
balance of a COA Order that is not cancelled (i.e., if an IOC) would be
ranked in the Consolidated Book and processed as an ECO pursuant to
paragraph (e) of this Rule. The proposed text is based on current Rule
6.91-O(c)(7)(B) without any substantive differences.
Proposed Rule 6.91P-O(f)(5) would set forth ``Prohibited Conduct
related to COAs,'' and is based on the first sentence of current
Commentary .04 to Rule 6.91-O with one substantive differences: To add
reference to quotes, and would provide that a pattern or practice of
submitting ``unrelated quotes or orders that cause a COA to conclude
early would be deemed conduct inconsistent with just and equitable
principles of trade,'' \73\ which addition would broaden the scope of
``Prohibited Conduct'' to the benefit of market participants and would
also add clarity and transparency to Exchange rules.
---------------------------------------------------------------------------
\73\ See proposed Rule 6.91P-O(f)(5) (emphasis added). In
addition, rather than copy into proposed Rule 6.91P-O the second
sentence of current Rule 6.91-O, Commentary .04, which provides that
dissemination of information related to COA Orders to third parties
would also be deemed as conduct inconsistent with just and equitable
principles of trade, the Exchange proposes to add more expansive
language regarding this prohibited conduct to the order exposure
rule. See infra for discussion of proposed change to Rule 6.47A-O.
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ECO Risk Checks. Proposed Rule 6.91P-O(g) would describe the ``ECO
Risk Checks,'' which are designed to help OTP Holders and OTP Firms to
effectively manage risk when trading ECOs. Current Commentaries .03,
.05, and .06 of Rule 6.91-O set forth the existing risk checks for
ECOs. With the transition to Pillar, the Exchange proposes to modify
and enhance its existing risk checks for ECOs, as follows:
Proposed Rule 6.91P-O(g)(1) would set forth the ``Complex
Strategy Limit.'' As proposed, the Exchange would establish a limit on
the maximum number of new complex strategies that may be requested to
be created per MPID, which limit would be announced by Trader
Update.\74\ As further proposed, when an MPID reaches the limit on the
maximum number of new complex strategies, the Exchange would reject all
requests to create new complex strategies from that MPID for the rest
of the trading day. In addition, and notwithstanding the established
Complex Strategy Limit, the Exchange proposes that it may reject a
request to create a new complex strategy from any MPID whenever the
Exchange determines it is necessary in the interests of a fair and
orderly market.
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\74\ The Exchange has proposed to add the definition of MPID to
proposed Rule 1.1, which would refer to ``the identification
number(s) assigned to the orders and quotes of a single ETP Holder,
OTP Holder, or OTP Firm for the execution and clearing of trades on
the Exchange by that permit holder. An ETP Holder, OTP Holder, or
OTP Firm may obtain multiple MPIDs and each such MPID may be
associated with one or more sub-identifiers of that MPID.'' See
Single-Leg Pillar Filing.
---------------------------------------------------------------------------
This is new functionality proposed under Pillar but is conceptually
similar to the Complex Order Table Cap (the ``Cap''), set forth in
Commentary .03 to Rule 6.91-O, which Cap (like the
[[Page 21971]]
Complex Strategy Limit), would help maintain a fair and orderly market
because it would operate as a system protection tool that enables the
Exchange to prevent any single MPID from creating more than a limited
number of complex strategies during the trading day. The Exchange also
notes that other options exchanges likewise impose a limit on new
complex order strategies.\75\
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\75\ See, e.g., Cboe Rule 5.33(a) (providing, in its definition
of ``complex strategy'' that Cboe ``may limit the number of new
complex strategies that may be in the [Cboe] System at a particular
time'') and MIAX Rule 518(a)(6) (providing, in its definition of
``complex strategy'' that MIAX ``may limit the number of new complex
strategies that may be in the System at a particular time and will
communicate this limitation to Members via Regulatory Circular'').
---------------------------------------------------------------------------
Proposed Rule 6.91P-O(g)(2) would set forth the ECO Price
Protection. The existing ECO ``Price Protection Filter'' is set forth
in Commentary .05 to current Rule 6.91-O (the ``ECO Filter''). The
proposed ``ECO Price Protection'' on Pillar would work similarly to how
the current ECO price protection mechanism functions on the Exchange
because an ECO would be rejected if it is priced a specified percentage
away from the contra-side Complex NBB or NBO.\76\ However, on Pillar,
the Exchange proposes to use new thresholds and reference prices, which
would not only simplify the existing price check, but it would also
align the proposed functionality with the proposed ``Limit Order Price
Protection'' for single-leg interest, thus adding uniformity to
Exchange rules.\77\ Although the mechanics of the ECO Price Protection
would vary slightly from the existing Price Protection Filter, the goal
of this feature would remain the same: To prevent the execution of ECOs
that are priced too far away from the prevailing market for the same
strategy and therefore potentially erroneous. Whereas the Away Market
Deviation (vis a vis a DBBO based on an Exchange BBO) is designed to
make sure that ECOs do not trade too far away from the prevailing
market, the ECO Order Protection as proposed (and as is the case today)
is to prevent the execution of ECOs that were potentially
(inadvertently) entered at prices too far away from the prevailing
market and, as such, this mechanism protects the order sender from
itself.
---------------------------------------------------------------------------
\76\ As noted above, the Exchange proposes to define the Complex
NBBO as the derived national best bid and derived national best
offer for a complex strategy calculated using the NBB and NBO for
each component leg of a complex strategy. See proposed Rule 6.91P-
O(a)(2).
\77\ See Single-Leg Pillar Filing (Rule 6.62P-O(a)(3) sets forth
the Limit Order Price Protection applicable to Limit Orders and
quotes).
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Proposed Rule 6.91P-O(g)(2)(A) would provide that each trading day,
an ECO to buy (sell) would be rejected or cancelled (if resting) if it
is priced a Specified Threshold amount or more above (below) the
Reference Price (as described below), subject to proposed paragraphs
(g)(2)(A)(i)-(v) of the Rule as described below. Because ECO Price
Protection would be applied each trading day, an ECO designated GTC
would be re-evaluated for ECO Price Protection on each day that it is
eligible to trade and would be cancelled if the limit price is equal to
or through the Specified Threshold.
[cir] Proposed Rule 6.91P-O(g)(2)(A)(i) would provide that an ECO
that arrives when a complex strategy is open for trading would be
evaluated for ECO Price Protection on arrival. The Exchange has
proposed similar functionality for single-leg options.\78\
---------------------------------------------------------------------------
\78\ See Single-Leg Pillar Filing (discussion regarding Rule
6.62P-O(a)(3)(A)(i)).
---------------------------------------------------------------------------
[cir] Proposed Rule 6.91P-O(g)(2)(A)(ii) would provide that an ECO
received during a pre-open state would be evaluated for ECO Price
Protection after the ECO Opening Auction Process concludes.\79\ The
Exchange has proposed similar functionality for single-leg options.\80\
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\79\ See discussion infra regarding proposed Rule 6.91P-O(d),
which describes the ECO Opening Auction Process (or Reopening after
a Trading Halt) as well as the concepts of ECO Auction Collars and
ECO Auction Price.
\80\ See Single-Leg Pillar Filing (discussion regarding Rule
6.62P-O(a)(3)(A)(ii)).
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[cir] Proposed Rule 6.91P-O(g)(2)(A)(iii) would provide that an ECO
resting on the Consolidated Book before a trading halt would be
reevaluated for ECO Price Protection after the ECO Opening Auction
Process concludes. The Exchange has proposed similar functionality for
single-leg options.\81\
---------------------------------------------------------------------------
\81\ See Single-Leg Pillar Filing (discussion regarding Rule
6.62P-O(a)(3)(A)(iii)).
---------------------------------------------------------------------------
[cir] Proposed Rule 6.91P-O(g)(2)(A)(iv) would provide that QCC
Orders (per Rule 6.62P-O(g)(1)) would not be subject to ECO Price
Protection, as the Exchange subjects such paired orders to distinct
price validations.\82\ The Exchange has proposed similar functionality
for single-leg options.\83\
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\82\ See Single-Leg Pillar Filing (discussion regarding Rule
6.62P-O(g)(1)(C) and (D) regarding price requirements for execution
of QCC Orders and Complex QCC Orders, respectively).
\83\ See Single-Leg Pillar Filing (discussion regarding Rule
6.62P-O(a)(3)(A) excluding Cross Orders).
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[cir] Proposed Rule 6.91P-O(g)(2)(A)(v) would provide that ECO
Price Protection would not be applied if there is no Reference Price
for an ECO. The Exchange has proposed similar functionality for single-
leg options.\84\
---------------------------------------------------------------------------
\84\ See Single-Leg Pillar Filing (discussion regarding Rule
6.62P-O(a)(3)(A)).
---------------------------------------------------------------------------
Proposed Rule 6.91P-O(g)(2)(B) would specify the ``Reference
Price'' used in connection with the ECO Price Protection. As proposed,
the Reference Price for calculating ECO Price Protection for an ECO to
buy (sell) would be the Complex NBO (NBB), provided that, immediately
following an ECO Opening Auction Process, the Reference Price would be
the ECO Auction Price or, if none, the Complex NBO (NBB). The Exchange
believes that adjusting the Reference Price for ECO Price Protection
immediately following an ECO Opening Auction would ensure that the most
up-to-date price would be used to assess whether to cancel an ECO that
was received during a pre-open state, including during a Trading Halt.
The Exchange notes this functionality is consistent with the proposed
operation of the Limit Order Price Protection for single-leg
options.\85\
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\85\ See Single-Leg Pillar Filing (discussion regarding Rule
6.62P-O(a)(3)(B) describing that the Reference Price for Limit Order
Price Protection would be adjusted immediately following an Auction
would ensure that the most up-to-date price would be used to assess
whether to cancel a Limit Order that was received during a pre-open
state or would be reevaluated after a Trading Halt Auction).
---------------------------------------------------------------------------
As further proposed, there would be no Reference Price for an ECO
if there is no NBBO for any leg of such ECO (i.e., the Exchange would
not calculate a Complex NBB (NBO)), which text is based on current Rule
6.91-O, Commentary .05(c), except that the proposed rule would not
reference OPRA because, as further proposed, for purposes of
determining a Reference Price, the Exchange would not use an adjusted
NBBO (i.e., such NBBO is implicitly reliant on information from
OPRA).\86\ The Exchange notes that using an unadjusted NBBO to
calculate the Reference Price is based on how Limit Order Price
Protection currently functions on the Exchange's cash equity market, as
described in Rule 7.31-E(a)(2)(B) and is also consistent with the
proposed operation of the Limit Order Price Protection for single-leg
options.\87\
[[Page 21972]]
Proposed Rule 6.91P-O(g)(2)(C) would set forth the ``Specified
Threshold'' used in connection with the ECO Price Protection. As
proposed, the Specified Threshold for calculating ECO Price Protection
would be $1.00, unless determined otherwise by the Exchange and
announced to OTP Holders and OTP Firms by Trader Update.
---------------------------------------------------------------------------
\86\ See Single-Leg Pillar Filing (discussion regarding the
definition of ``NBBO'' in Rule 1.1 describing that the ``NBBO'' for
purposes of options trading as referring to the national best bid or
offer and that ``[u]nless otherwise specified, the Exchange may
adjust its calculation of the NBBO based on information about orders
it sends to Away Markets, execution reports received from those Away
Markets, and certain orders received by the Exchange'').
\87\ References to the NBBO, NBB, and NBO in Rule 7.31-E refer
to using a determination of the national best bid and offer that has
not been adjusted. See Single-Leg Pillar Filing (describing use of
unadjusted NBBO for single-leg Limit Order Price Protection in Rule
6.62P-O(a)(3)(B)).
---------------------------------------------------------------------------
The Exchange believes that the proposed Specified Threshold of
$1.00 simplifies how the Reference Price would be calculated as
compared to the calculations currently specified in Commentary .05 to
Rule 6.91-O. In addition, consistent with Commentary .05(d), the
Exchange proposes that the Specified Threshold could change, subject to
announcing the changes by Trader Update. Providing flexibility in
Exchange rules regarding how the Specified Threshold would be set is
consistent with the rules of other options exchanges as well as the
proposed functionality for the single-leg Limit Order Price Protection
feature.\88\
---------------------------------------------------------------------------
\88\ See, e.g., Cboe Rule 5.34(b)(6) (describing the ``Drill-
Through Protection'' and that Cboe ``determines a default buffer
amount on a class-by-class basis). See Single-Leg Pillar Filing
(describing use of Trader Update to modify Specified Thresholds in
Rule 6.62P-O (a)(3)(C)).
---------------------------------------------------------------------------
Proposed Rule 6.91P-O(g)(3) would set forth the ``Complex
Strategy Protections.'' The proposed protections are based on current
Rule 6.91-O, Commentary .06, which are referred to as the ``Debit/
Credit Reasonability Checks.'' The Exchange believes this name change
is appropriate because it more accurately conveys that the check
applies solely to certain complex strategies and because (as discussed
above), the Exchange proposes to refer simply to a ``net price'' as
opposed to the ``total net debit or credit price.'' The proposed Pillar
Complex Strategy Protections would function similarly to the current
Debit/Credit Reasonability Checks because potentially erroneously
priced incoming ECOs would be rejected. However, rather than to refer
to specified debit or credit amounts as a way to determine whether a
given strategy is erroneously priced, the proposed rule would instead
focus on the expectation of the order sender and what would result if
the ECO were not rejected. Consistent with current functionality, the
proposed Complex Strategy Protections are designed to prevent the
execution of ECOs at prices that are inconsistent with/not aligned with
their strategies.
As proposed, to protect an OTP Holder or OTP Firm that sends an ECO
(each an ``ECO sender'') with the expectation that it would receive (or
pay) a net premium but has priced the ECO such that the ECO sender
would instead pay (or receive) a net premium, the Exchange would reject
any ECO that is comprised of the erroneously-priced complex strategies
as set forth in proposed Rule 6.91P-O(g)(3)(A)-(C) and described below.
Proposed Rule 6.91P-O(g)(3)(A) would provide that `` `All buy' or
`all sell' strategies'' would be rejected as erroneously-priced if it
is an ECO for a complex strategy where all legs are to buy (sell) and
it is entered at a price less than one penny ($0.01) times the sum of
the number of options in the ratio of each leg of such strategy (e.g.,
a complex strategy to buy (sell) 2 calls and buy (sell) 1 put with a
price less than $0.03). The proposed text is based on Rule 6.91-O,
Commentary .06(a)(1), with no substantive differences, except that the
Exchange has streamlined the text and set forth the minimum price
(i.e., $0.03) for any ``all buy'' or ``all sell'' strategies.
Proposed Rule 6.91P-O(g)(3)(B) would provide for the rejection of
erroneously-priced ``Vertical spreads,'' which are defined as complex
strategies that consists of a leg to sell a call (put) option and a leg
to buy a call (put) option in the same option class with the same
expiration but at different strike prices. As proposed, the Exchange
would reject as erroneously-priced: (i) An ECO for a vertical spread to
buy a lower (higher) strike call and sell a higher (lower) strike call
and the ECO sender would receive (pay) a net premium (proposed Rule
6.91P-O(g)(3)(B)(i)); and (ii) an ECO for a vertical spread to buy a
higher (lower) strike put and sell a lower (higher) strike put and the
ECO sender would receive (pay) a net premium (proposed Rule 6.91P-
O(g)(3)(B)(ii)). The proposed strategy protections for vertical spreads
are based on current Rule 6.91-O, Commentary .06(a)(2), except that, as
noted above, the proposed Rule is written from the standpoint of the
expectation of the ECO sender as opposed to reviewing total net debit
or credit price of the strategy.
Proposed Rule 6.91P-O(g)(3)(C) would provide for the rejection of
erroneously-priced ``Calendar spreads,'' which are defined as
consisting of a leg to sell a call (put) option and a leg to buy a call
(put) option in the same option class at the same strike price but with
different expirations. As proposed, the Exchange would reject as
erroneously-priced: (i) An ECO for a calendar spread to buy a call leg
with a shorter (longer) expiration while selling a call leg with a
longer (shorter) expiration and the ECO sender would pay (receive) a
net premium (proposed Rule 6.91P-O(g)(3)(C)(i)); and (ii) an ECO for a
calendar spread to buy a put leg with a shorter (longer) expiration
while selling a put leg with a longer (shorter) expiration and the ECO
sender would pay (receive) a net premium (proposed Rule 6.91P-
O(g)(3)(C)(ii)). The proposed strategy protections for calendar spreads
are based on current Rule 6.91-O, Commentary .06(a)(3), except that, as
noted above, the proposed Rule is written from the standpoint of the
expectation of the ECO sender as opposed to reviewing the total net
debit or credit price of the strategy. The Exchange has also not
retained discretion to disable the strategy protections for calendar
spreads (as contained in Commentary .06(a)(3)(i) of the current Rule)
because since adopting this provision in 2017, the Exchange has never
exercised this discretion and therefore has determined that such
discretion is no longer needed.
Proposed Rule 6.91P-O(g)(3)(D) would provide that any ECO that is
not rejected by the complex strategy protections would still be subject
to the ECO Price Protection, per paragraph (g)(2) of this Rule, which
proposed text is based on Rule 6.91-O, Commentary .06(b) without any
substantive difference.
Rule 6.47A-O: Order Exposure Requirements--OX
The Exchange also proposes conforming, non-substantive amendments
to Rule 6.47A-O, regarding order exposure, to add a cross-reference to
new Pillar Rule 6.91P-O. Current Rule 6.47A-O(iii) exempts orders
submitted to the COA Process, (per current Rule 6.91-O) from its one-
second order exposure requirements. This proposed amendment would
extend the exemption from the order exposure requirements to orders
submitted to a COA on Pillar.\89\ The Exchange also proposes to modify
the reference to ``Complex Order Auction Process (`COA')'' to simply
``Complex Order Auction (`COA')'' (i.e., removing the word Process)
consistent with how this concept is defined in proposed Rule 6.91P-
O(a)(3). As previously stated, the Exchange believes that the proposed
Response Time Interval for a COA (with a duration of no less than 100
milliseconds) is of sufficient length to allow OTP Holders and OTP
Firms time to respond to a COA. As such, the
[[Page 21973]]
proposal is designed to promote timely execution of the COA Order,
while ensuring adequate exposure of such orders. Accordingly, the
Exchange proposes to amend Rule 6.47A-O(iii) to extend the exemption
from the one-second exposure requirement to COA Orders under Pillar,
which exemption is consistent with the treatment of similar orders on
other options exchanges.\90\ Consistent with Rule 6.47A-O, Commentary
.01, OTP Holders and OTP Firms would only utilize the COA where there
is a genuine intention to execute a bona fide transaction.\91\
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\89\ See proposed Rule 6.47A-O(iii). Consistent with the Single-
Leg Pillar Filing, the Exchange also proposes to replace reference
to ``OX'' with ``the Exchange.'' See id. (preamble).
\90\ See, e.g., NYSE American Rule 935NY(iii) (exempting from
the one-second order exposure requirement orders submitted to the
Customer Best Execution Auction (or CUBE) process per Rules 971.1NY
(for single-leg CUBE) and 971.2NY (for Complex CUBE)).
\91\ See Rule 6.47A-O, Commentary .01 (``Rule 6.47A-O prevents a
User from executing agency orders to increase its economic gain from
trading against the order without first giving other trading
interest on the Exchange an opportunity to either trade with the
agency order or to trade at the execution price when the User was
already bidding or offering on the book'').
---------------------------------------------------------------------------
The Exchange also proposes to modify Commentary .03 to Rule 6.47A-
O, which is currently Reserved, to provide that ``[p]rior to or after
submitting an order to the Exchange, an OTP Holder or OTP Firm cannot
inform another OTP Holder or OTP Firm or any other third party of any
of the terms of the order.'' The proposed provision is designed to
prevent OTP Holders or OTP Firms from providing material, non-public
information to third parties and is consistent with similar provisions
on other options exchanges.\92\
---------------------------------------------------------------------------
\92\ See, e.g., NYSE American Rule 935NY, Commentary .04
(providing that ``[p]rior to or after submitting an order to the
System, an ATP Holder cannot inform another ATP Holder or any other
third party of any of the terms of the order'').
---------------------------------------------------------------------------
* * * * *
As discussed above, because of the technology changes associated
with the migration to the Pillar trading platform, subject to approval
of this proposed rule change, the Exchange will announce by Trader
Update when rules with a ``P'' modifier will become operative and for
which symbols. The Exchange believes that keeping existing rules on the
rulebook pending the full migration of Pillar will reduce confusion
because it will ensure that the rules governing trading on the
Exchange's current system will continue to be available pending the
full migration to Pillar.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the
Securities Exchange Act of 1934 (the ``Act''),\93\ in general, and
furthers the objectives of Section 6(b)(5),\94\ in particular, because
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. The Exchange
believes that proposed Rule 6.91P-O to support electronic complex
trading on Pillar would remove impediments to and perfect the mechanism
of a free and open market and a national market system because the
proposed rule would promote transparency in Exchange rules by using
consistent terminology governing trading on both the Exchange's cash
equity and options Pillar trading platforms, thereby ensuring that
members, regulators, and the public can more easily navigate the
Exchange's rulebook and better understand how options trading is
conducted on the Exchange.
---------------------------------------------------------------------------
\93\ 15 U.S.C. 78f(b).
\94\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that adding new Rule 6.91P-O with the
modifier ``P'' to denote that this rule would be operative for the
Pillar trading platform would remove impediments to and perfect the
mechanism of a free and open market and a national market system by
providing transparency of which rules would govern trading once a
symbol has been migrated to the Pillar platform. The Exchange similarly
believes that adding a preamble to current Rule 6.91-O stating that it
would not be applicable to trading on Pillar would remove impediments
to and perfect the mechanism of a free and open market and a national
market system because it would promote transparency regarding which
rules would govern trading on the Exchange during and after the
transition to Pillar.
The Exchange believes that incorporating Pillar functionality
currently available on the Exchange's cash equity market (and recently
proposed for single-leg options),\95\ for trading of electronic complex
orders on its options market in proposed Rule 6.91P-O would remove
impediments to and perfect the mechanism of a free and open market and
a national market system because the Exchange would be able to offer
consistent functionality across both its options and cash equity
trading platforms, adapted as applicable for trading of electronic
complex orders. As discussed herein, and unless otherwise specified
herein, the Exchange is not proposing fundamentally different
functionality regarding how ECOs would trade on Pillar than is
currently available on the Exchange. Accordingly, with the transition
to Pillar, the Exchange would use Pillar terminology to describe
functionality that is not changing and also introduce certain new or
updated functionality for Electronic Complex Orders (i.e., enhancing
the opening auction process, including introducing the ``ECO Auction
Collars'') that will also be available for outright options trading on
the Pillar platform. As such, the Exchange believes that using Pillar
terminology and incorporating updated functionality for the proposed
new rule would remove impediments to and perfect the mechanism of a
free and open market and a national market system because it would
promote consistency in the Exchange's rules across both its options and
cash equity platforms.
---------------------------------------------------------------------------
\95\ See generally the Single-Leg Pillar Filing.
---------------------------------------------------------------------------
Definitions, Types of ECOs and Priority and Pricing of ECOs
The Exchange believes that the proposed definitions in Rule 6.91P-
O(a) would remove impediments to and perfect the mechanism of a free
and open market and a national market system because the proposed
changes are designed to promote clarity and transparency by
consolidating existing defined terms related to electronic complex
trading into one section of the proposed rule. The Exchange believes
that the proposed non-substantive amendments to those terms currently
defined in Rule 6.91-O would promote clarity and transparency by using
Pillar terminology. The Exchange further believes consolidating defined
terms in proposed Rule 6.91P-O(a) (including alphabetizing the proposed
terms) would make the proposed rule more transparent and easier to
navigate.
The Exchange believes that the proposed new definition of Away
Market Deviation would further remove impediments to and perfect the
mechanism of a free and open market and a national market system
because it would promote clarity and transparency to market
participants regarding how the Exchange would calculate this additional
protection against ECOs being executed on the Exchange at prices too
far away from the current market.
The Exchange believes that the proposed new definition of DBBO (and
related terms of DBB and DBO) would further remove impediments to and
perfect the mechanism of a free and open market and a national market
[[Page 21974]]
system because it would promote clarity and transparency to market
participants regarding how the DBBO would be calculated under Pillar.
The proposed definition is not novel and is based in part on similarly
defined terms used on NYSE American and Cboe. The Exchange believes
that providing an alternative means of calculating the DBBO (i.e., by
looking to the contra-side best bid (offer) in the absence of same-side
interest) would remove impediments to and perfect the mechanism of a
free and open market and a national market system thereby benefitting
as it should increase opportunities for trading. This proposed
definition of Away Market Derivation is new and would promote clarity
and transparency In addition, the proposal to use the Away Market
Deviation as a means of binding the Exchange's calculation of the DBBO
as well as trading of ECOs with the leg markets would remove
impediments to and perfect the mechanism of a free and open market and
a national market system because such limitation would benefit market
participants by providing an additional protection against ECOs being
executed on the Exchange at prices too far away from the current
market.
In addition, the Exchange believes that setting forth additional
definitions in proposed Rule 6.91P-O(a), including those that are used
on other options exchanges (e.g., ``complex strategy'' and ``ratio'')
and clarifying terms (e.g., ``leg'' and ``leg markets''), would remove
impediments to and perfect the mechanism of a free and open market and
a national market system because it would promote clarity and
transparency to market participants regarding electronic complex
trading under Pillar. Finally, the proposed definition of ``ECO Order
Instruction'' would remove impediments to and perfect the mechanism of
a free and open market and a national market system because it would
incorporate for ECOs existing Pillar order handling functionality in an
auction that is currently available on the Exchange's cash equity
platform, as described in Rule 7.35-E(g) and is proposed for options
trading in Rule 6.64P-O(e) and its sub-paragraphs (1) and (2) (as
described in the Single-Leg Pillar Filing). The Exchange similarly
proposes this functionality for the ECO Opening Auction Process, with
non-substantive differences only to use an ECO-specific defined term
and to refer to the ECO Opening Auction Process.
The Exchange believes that the proposed types of ECOs available per
Rule 6.91P-O(b) would remove impediments to and perfect the mechanism
of a free and open market and a national market system because it would
describe the ECOs and time-in-force modifiers that would be available
on Pillar, as well as specifying additional ECO types. The Exchange is
not proposing any new ECO order types or time-in-force modifiers on
Pillar and believes that the non-substantive differences to use Pillar
terminology to describe the available ECO order types would promote
transparency and clarity in Exchange rules. The Exchange believes that
the proposed Complex Only Order is not novel because it is based in
part on the existing PNP Plus order functionality as both order types
only interact with other ECOs. In addition, the proposed ECO GTX Order
uses Pillar terminology to describe what is referred to as an ``RFR
Response'' in the current rules, and therefore is not novel.
The Exchange believes that proposed new Rule 6.91P-O(c), and
subparagraphs (2), (3), and (4), would remove impediments to and
perfect the mechanism of a free and open market and a national market
system because the proposed rules would set forth a price-time priority
model for Pillar and pricing requirements for ECO trading that are
substantively the same as the Exchange's current price-time priority
model and pricing requirements as set forth in Rule 6.91-O(a)(1) and
Commentaries .01 and .02(i) to Rule 6.91-O. The Exchange proposes
certain modified functionality, including the Complex Only Order as
noted above, and regarding ECO trading vis a vis the DBBO (and binding
such DBBO by the maximum allowable Away Market Deviation when the
Exchange BBO is used to calculate the DBBO for a leg), which would
benefit market participants as the proposes features would provide
additional price protection in ECO trading and would add clarity and
transparency to the rules. The Exchange believes that proposed Rule
6.91P-O(c)(1)-(4) would remove impediments to and perfect the mechanism
of a free and open market and a national market system because they
would promote transparency and clarity in Exchange rules regarding how
ECOs would trade with the leg markets and with other ECOs.
Execution of ECOs at the Open (or Reopening After a Trading Halt)
The Exchange believes that proposed Rule 6.91P-O(d) regarding the
ECO Opening Auction Process would remove impediments to and perfect the
mechanism of a free and open market and a national market system
because the proposed rule maintains the fundamentals of an auction
process that the Exchange currently uses for ECOs, as described in Rule
6.91-O(a)(2)(i)(B), while at the same time enhancing the process by
incorporating Pillar auction functionality that is currently available
on the Exchange's cash equity platform, as described in Rule 7.35-E as
well as proposed for single-leg options in Rule 6.64P-O. For example,
the Exchange proposes to use Pillar functionality to determine how to
price an ECO Opening Auction Process, as described in proposed Rule
6.91P-O(d)(3), including using proposed ``ECO Auction Collars'' and an
``ECO Auction Price,'' which are consistent with the core functionality
for opening ECOs, with additional detail that would promote clarity and
transparency to market participants regarding this process. The
Exchange believes it is appropriate to refrain from opening a series
when there is a lack of reliable pricing indication(s) regarding the
price at which a complex strategy should execute because doing so would
protect market participants from potentially erroneous executions,
thereby promoting a fair and orderly ECO Opening Auction Process.
Moreover, the Exchange believes that the proposal to use the DBBO
(as opposed to the currently used Complex NBBO) for the ECO Opening
Process would allow the Exchange to open a series based on the Exchange
BBO, bound by the Away Market Deviation (or, the ABBO if the Exchange
BBO is not available), which is consistent with ECO handling during
Core Trading (per proposed Rule 6.91P-O(e)). The Exchange believes this
proposed change would better align the permissible opening price for a
series with the permissible execution price during Core Trading, which
adds consistency to ECO order handling (as well as internal consistency
to Exchange rules) to the benefit of investors. As such, this proposed
change would remove impediments to and perfect the mechanism of a free
and open market and a national market system.
In addition, the Exchange believes that requiring that the opening
price for a complex strategy must improve the DBBO if there is
displayed Customer interest on all legs of the strategy on the Exchange
would protect displayed Customer interest, and protect investors in
general, while ensuring a fair and orderly ECO Opening Process.
The Exchange also proposes to process ECOs received during an ECO
Opening Auction Process, as described in proposed Rule 6.91P-O(d)(4),
and transition to continuous trading following an ECO Opening Auction
Process, as described in proposed Rule
[[Page 21975]]
6.91P-O(d)(5), in a manner similar to how the Exchange's cash equity
market processes orders that are received during an Auction Processing
Period and transitions to continuous trading following a cash equity
Trading Halt Auction, which the Exchange also proposes for single-leg
options in Rule 6.64P-O. The Exchange believes that using similar
functionality for different types of auctions would promote consistency
across the Exchange's options and cash equity trading platforms.
Because the Exchange would be harnessing Pillar technology to support
the ECO Opening Auction Process for electronic complex options trading,
the Exchange believes that structuring proposed Rule 6.91P-O(d) based
on Rule 7.35-E and Rule 6.64P-O would promote transparency in the
Exchange's trading rules.
The Exchange further believes that the proposed Rules 6.91P-O(d)(1)
and (2), which describe when the Exchange would initiate an ECO Opening
Auction Process and which ECOs would be eligible to trade in that
process, would remove impediments to and perfect the mechanism of a
free and open market and a national market system because they would
provide clarity and transparency of the conditions required before the
Exchange would initiate an ECO Opening Auction Process. The Exchange
further believes that those conditions are not novel and are based on
existing conditions specified in Rule 6.91-O(a)(2)(i)(A) and (B), with
additional specificity designed to promote clarity and transparency.
Accordingly, the Exchange believes that the ECO Opening Auction Process
for ECOs trading on Pillar would remove impediments to and perfect the
mechanism of a free and open market and a national market system
because the proposed process is based on the current opening process,
including that orders would be matched based on price-time priority at
a price at which the maximum volume can be traded.
Execution of ECOs During Core Trading Hours
The Exchange believes that proposed Rule 6.91P-O(e), setting forth
the execution of ECOs during Core Trading Hours, would remove
impediments to and perfect the mechanism of a free and open market and
a national market system because the proposed functionality would
incorporate the Exchange's existing price-time priority model for
trading ECOs, including providing that the leg markets would have
priority at a price. The Exchange believes that the proposed rule
change to add text to specify that an ECO may trade with another ECO at
the leg market price if the interest in the leg markets is insufficient
to trade at that price (i.e., the leg markets cannot trade at that
price in full or in a permissible ratio), would continue to respect the
priority of the leg markets at a price, but would also ensures that ECO
trading opportunities are maximized after eligible interest in the leg
markets is exhausted at that price resulting in more efficient
executions. The Exchange note that this proposed functionality is
consistent with the rule of at least one options exchange and is
therefore not new or novel.\96\ Once interest in the leg markets is
exhausted at a price, such interest is no longer executable as ``orders
are executable against each other only when both the price and the
quantity of the orders match.'' \97\
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\96\ See BOX Rule 7240(b)(2)(ii); see also BOX Notice, 78 FR at
15093 and BOX Approval, 78 FR, at 24449.
\97\ See BOX Approval Order, 78 FR, at 24449.
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In addition, the Exchange believes that allowing Complex Only
Orders to trade up to the DBBO unless there is displayed Customer
interest on each leg on the Exchange at the DBBO (as described above)
would provide market participants additional trading opportunities
while still protecting Customer interest on the Exchange, which would,
in turn, remove impediments to and perfect the mechanism of a free and
open market and national market system.
The Exchange believes that it would remove impediments to and
perfect the mechanism of a free and open market and national market
system to specify that ECOs will not trade with orders in the leg
markets designated AON, FOK or with an MTS modifier (as described in
the Single-Leg Pillar Filing) because it would add clarity and
transparency to the proposed Rule regarding the handling of ECO vis a
vis these single-leg order types that are conditional based on order
size. The Exchange further believes that it would remove impediments to
and perfect the mechanism of a free and open market and a national
market system for ECOs to trade as Complex Only Orders (rather than be
rejected as they would under current rules) if they have a complex
strategy that could result in a Market Maker breaching their
established risk settings.\98\ This proposed process is also consistent
with the treatment of similar ECOs on other options markets.\99\ The
Exchange further believes that it would remove impediments to and
perfect the mechanism of a free and open market and a national market
system to specify the frequency with which the Exchange would evaluate
trading opportunities for an ECO with the leg markets update because it
would promote clarity and transparency in Exchange rules.
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\98\ See discussion infra regarding rationale for proposed Rule
6.91P-O(e) to restrict certain ECOs from executing as a package and
bypassing Market Maker risk settings.
\99\ See supra notes 62 and 63 (citing to Cboe Rule 5.33(g) and
Nasdaq ISE Options 3, Section 14 (d)(3)(A)-(B) regarding similar
functionality).
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Overall, the Exchange believes the proposal for ECO trading during
Core Trading would help maintain a fair and orderly market and would
benefit investors by facilitating increased interaction between ECOs
(not designated as Complex Only) and leg markets interest. In
particular, such ECOs would execute against interest in the leg markets
for all of the quantity available at the best price in a permissible
ratio until the quantities remaining on such leg markets are
insufficient to execute against the ECO while respecting the spread
ratio. The Exchange believes that requiring Complex Only Orders to
improve at least a portion of the displayed Customer interest on the
leg markets when all legs of a complex strategy contain displayed
Customer interest would provide market participants with additional
trading opportunities while still protecting displayed Customer
interest on the Exchange. To the extent that this proposed handling of
ECOs on the Exchange during Core Trading results in greater liquidity
(because of increased opportunity for order execution) this increased
liquidity should, in turn, enhance execution quality.
Execution of ECOs During a COA
The Exchange believes that proposed Rule 6.91P-O(f), setting forth
the execution of ECOs during a COA, would remove impediments to and
perfect the mechanism of a free and open market and a national market
system and promote just and equitable principles of trade because the
proposed functionality would both incorporate existing functionality to
provide that COA Orders would trade solely with other ECOs (and not the
leg markets) during the auction and that a COA Order would be allocated
on price-time priority, which is consistent with the Exchange's
priority scheme. The Exchange believes that relying on the DBBO (and
binding such DBBO by the maximum allowable Away Market Deviation when
the Exchange BBO is used to calculate the DBBO for a leg) as
[[Page 21976]]
opposed to an initial snapshot of the Complex BBO (as is currently the
case), would benefit market participants as the proposed operation of
the DBBO would provide additional price protection in ECO trading,
including during a COA, and would add clarity and transparency to the
rules. The Exchange also believes that the proposed change to add
reference to quotes (in addition to orders) to Rule 6.91P-O(f)(5)
(Prohibited Conduct) regarding the COA Process, would benefit market
participants as it would broaden the scope of such the prohibition.
Overall, the Exchange believes the proposed rule would add clarity and
transparency to OTP Holders and OTP Firms utilizing the COA process.
In addition, the Exchange further believes that the proposed
changes to the COA process on Pillar that either differ from current
functionality or that would be new would remove impediments to and
perfect the mechanism of a free and open market and national market
system because:
Requiring that a COA Order initiate a COA on arrival, else
be treated as a standard ECO, is new under Pillar as, per the current
Rule, a COA Order may sit on the Consolidated Book until market
conditions change such that it may initiate a COA. The Exchange
believes the proposed change would provide OTP Holders and OTP Firms
with a higher level of transparency and determinism of when a COA Order
could initiate a COA and would also encourage market participants to
submit aggressively-priced orders in order to qualify for initiation of
a COA, which better-priced interest benefits all investors and improves
market quality.
Making explicit that COA Orders may only execute with ECOs
(and not the leg markets) until after the COA ends is consistent with
current functionality, per Rule 6.91-O(c)(2), but is designed to make
clear that ECOs have priority during a COA.
Streamlining the rule text that would describe the market
events that, under Pillar, would cause an early end to a COA would
simplify the COA process and would provide OTP Holders and OTP Firms
with a higher level of transparency and determinism regarding the
handling of COA Orders.
Allowing a COA to end early based on the DBBO, which may
be calculated using ABBO leg prices, would benefit market participants
and promote internal consistency because, as proposed, such early
termination would prevent COA Orders from executing at prices too far
away from the prevailing market for that complex strategy. In addition,
the DBBO is used to determine the execution of ECOs on the Exchange,
including whether such ECO may initiate a COA as a COA Order. As such,
the Exchange believes it is appropriate and to the benefit of market
participants that the early termination of a COA likewise be based on
the DBBO--regardless of whether the prices used to calculate such DBBO
include (or consist entirely of) ABBO prices.
ECO Risk Checks
The Exchange believes that proposed Rule 6.91P-O(g), setting forth
ECO Risk Checks, would remove impediments to and perfect the mechanism
of a free and open market and a national market system and promote just
and equitable principles of trade because the proposed functionality
would incorporate existing risk controls, without any substantive
differences. The Exchange further believes that the proposed changes to
ECO Risk Checks on Pillar that either differ from current functionality
or would be new would remove impediments to and perfect the mechanism
of a free and open market and national market system because:
The Exchange believes that the new Complex Strategy Limit
(which is conceptually similar to the Complex Order Table Cap under the
current Rule) would help maintain a fair and orderly market because it
would operate as a system protection tool that enables the Exchange to
prevent any single MPID from creating more than a limited number of
complex strategies during the trading day. The proposed limits are not
novel and are based on limits imposed by other options exchanges on new
complex order strategies.\100\
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\100\ See supra note 67 (citing Cboe Rule 5.33(a) and MIAX Rule
518(a)(6) regarding each exchange's ability to limit the number of
new complex strategies in their systems at any particular time).
---------------------------------------------------------------------------
The proposed ECO Price Protection on Pillar would work
similarly to how the current ECO price protection mechanism functions
on the Exchange because an ECO would be rejected if it is priced a
specified percentage away from the contra-side Complex NBB or NBO.\101\
The Exchange believes that the proposed differences on Pillar, to use
new thresholds and reference prices, would not only simplify the
existing price check, but it would also align the proposed
functionality with the proposed ``Limit Order Price Protection'' for
single-leg interest, thus adding uniformity to Exchange rules.\102\
Although the mechanics of the ECO Price Protection would vary slightly
from the existing Price Protection Filter, the goal of this feature
would remain the same: Prevent the execution of ECOs that are priced
too far away from the prevailing market for the same strategy and
therefore potentially erroneous to be benefit of market participants.
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\101\ As noted above, the Exchange proposes to define the
Complex NBBO as the derived national best bid and derived national
best offer for a complex strategy calculated using the NBB and NBO
for each component leg of a complex strategy. See proposed Rule
6.91P-O(a)(2).
\102\ See Single-Leg Pillar Filing (Rule 6.62P-O(a)(3) sets
forth the Limit Order Price Protection Filter applicable to Limit
Orders and quotes).
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The proposed Pillar Complex Strategy Protections would
function similarly to the current Debit/Credit Reasonability Checks
because erroneously priced incoming ECOs would be rejected. Consistent
with current functionality, the proposed Complex Strategy Protections
are designed to prevent the execution of ECOs at prices that are
inconsistent with/not aligned with their strategies to the benefit of
market participants. The Exchange believes that the non-substantive
differences to focus on the expectation of the ECO sender and what
would result if the ECO were not rejected rather than refer to
specified debit or credit amounts as a way to determine whether a given
strategy is erroneously priced would remove impediments to and perfect
the mechanism of a free and open market system because it would promote
clarity and transparency in Exchange rules.
Rule 6.47A-O
The Exchange believes that the proposed non-substantive change to
Rule 6.47A-O to update references to ``COA'' (versus COA Process) and
``the Exchange,'' to delete reference to ``OX,'' and add the reference
to Rule 6.91P-O would remove impediments to and perfect the mechanism
of a free and open market and a national market system and, in general,
protect investors and the public interest because the proposed
conforming changes would add clarity, transparency and consistency to
the Exchange's rules. The Exchange believes that market participants
would benefit from the increased clarity, thereby reducing potential
confusion. Similarly, the Exchange believes that adding a cross-
reference to proposed Rule 6.91P-O(f) and extending the exemption from
the one-second order exposure requirement of Rule 6.47A-O would remove
impediments to and perfect the mechanism of a free and open market and
a national market system because it would promote clarity and
transparency of which Pillar rules would be eligible for the exception
specified in that Rule.
[[Page 21977]]
As previously stated, the Exchange believes that the proposed
Response Time Interval for a COA (i.e. no less than 100 milliseconds)
is of sufficient length so as to permit OTP Holders and OTP Firms time
to respond to a COA. As such, the Exchange believes the proposed rule
change would provide the order sender with a timely execution of its
COA Order, while ensuring that there is an adequate exposure of such
order. Accordingly, the Exchange proposes to amend Rule 6.47A-O(iii) to
extend the exemption from the one-second order exposure requirement to
COA Orders under Pillar, which exemption is consistent with the
treatment of similar orders on other options exchanges.\103\ Consistent
with Rule 6.47A-O, Commentary .01, OTP Holders and OTP Firms would only
utilize the COA where there is a genuine intention to execute a bona
fide transaction.\104\
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\103\ See supra note 82 (regarding NYSE American Rule
935NY(iii)).
\104\ See supra note 83 (regarding Rule 6.47A-O, Commentary
.01).
---------------------------------------------------------------------------
The Exchange believes that the proposed prohibition that OTP Holder
and OTP Firms not inform another OTP Holder or OTP Firm or any other
third party of any of the terms of the order, per proposed Commentary
.03 to Rule 6.47A-O, would remove impediments to and perfect the
mechanism of a free and open market and a national market system and,
in general, protect investors and the public interest because the
proposed change is designed to prevent OTP Holders or OTP Firms from
providing material, non-public information to third parties and
consistent with similar provisions on other options exchanges.\105\
---------------------------------------------------------------------------
\105\ See supra note 84 (regarding similarly provision contained
in NYSE American Rule 935NY, Commentary .04).
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* * * * *
For the reasons set forth above, the Exchange believes proposed
Rule 6.91P-O, regarding ECO trading, including the priority and
execution of such ECOs vis a vis the leg markets, is consistent with
the goals of the Act to remove impediments to and to perfect the
mechanism of a free and open market and a national market system, and
to protect investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange operates in a
competitive market and regularly competes with other options exchanges
for order flow. The Exchange believes that the transition to Pillar for
trading of ECOs on its options trading platform would promote
competition among options exchanges by offering a low-latency platform
that offers more deterministic outcomes for trading interest, which, in
turn, facilities ECO trading on a continuous and real-time basis on the
Exchange.
The proposed rule changes would support that inter-market
competition by allowing the Exchange to offer additional functionality
to its OTP Holders and OTP Firms, thereby potentially attracting
additional order flow to the Exchange. Otherwise, the proposed changes
are not designed to address any competitive issues, but rather to amend
the Exchange's rules relating to trading of ECOs to support the
transition to Pillar. As discussed in detail above, with this rule
filing, the Exchange is not proposing to change its core functionality
regarding the treatment of ECOs. Rather, the Exchange believes that the
proposed rule changes would promote consistent use of terminology to
support options (both single-leg and complex) and cash equity trading
on the Exchange, making the Exchange's rules easier to navigate. The
Exchange does not believe that the proposed rule changes would raise
any intra-market competition as the proposed rule changes would be
applicable to all OTP Holders and OTP Firms, and reflects the
Exchange's existing treatment of ECOs, without proposing any material
substantive changes.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Discussion and Commission Findings
After careful review, 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.\106\ In particular, for
the reasons discussed below, the Commission finds that the proposed
rule change, as amended, is consistent with Section 6(b)(5) of the
Act,\107\ 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. This order
approves the proposed rule change in its entirety, although only
certain more significant aspects of the proposed rules are discussed
below.
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\106\ 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).
\107\ 15 U.S.C. 78f(b)(5).
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A. Definitions
Several defined terms in proposed Exchange Rule 6.91P-O(a) are
consistent with defined terms in the Exchange's rules or in the rules
of other options exchanges. The definition of Complex NBBO in proposed
Exchange Rule 6.91P-O(a)(2) is consistent with defined terms used on
other options exchanges.\108\ Similarly, the definition of complex
strategy in proposed Exchange Rule 6.91P-O(a)(4) is consistent with
definitions in the rules of other options exchanges.\109\ The
definition of ECO Order Instruction in proposed Exchange Rule 6.90P-
O(a)(6) is based on the term ``order instruction'' used in Exchange
Rules 7.35-E(g) and 6.64P-O(e), which the Commission has previously
approved.\110\ The Commission believes that the definitions of ``leg''
or ``leg market,'' and ``ratio'' or ``leg ratio'' in proposed Exchange
Rules 6.91P-O(a)(8) and (9), respectively, should help to clarify the
[[Page 21978]]
terminology used to describe the trading of ECOs.
---------------------------------------------------------------------------
\108\ See, e.g., BOX Rule 7240(a)(3) (stating that the term
``cNBBO'' means the best net bid and offer price for a Complex Order
Strategy based on the NBBO for the individual options components of
such Strategy); and MIAX Rule 518(a)(2)) (stating, in part, that the
cNBBO is calculated using the NBBO for each component of a complex
strategy to establish the best net bid and offer for a complex
strategy).
\109\ See, e.g., BOX Rule 7240(a)(9) (stating that the term
Complex Order Strategy or Strategy means a particular combination of
components of a Complex Order and their ratios to one another. BOX
will assign a strategy identifier to each Strategy); and MIAX Rule
518(a)(6) (stating that the term ``complex strategy'' means a
particular combination of components and their ratios to one
another. New complex strategies can be created as the result of the
receipt of a complex order or by the Exchange for a complex strategy
that is not currently in the System. The Exchange may limit the
number of new complex strategies that may be in the System at a
particular time and will communicate this limitation to Members via
Regulatory Circular).
\110\ Exchange Rule 7.35E(g) states that, for purposes of
paragraphs (g) and (h) of Exchange Rule 7.35E, an ``order
instruction'' refers to a request to cancel, cancel and replace, or
modify an order. Exchange Rule 6.64P-O(e), which the Commission
approved in the Single-Leg Pillar Proposal, states that, for
purposes of paragraphs (e) and (f) of Exchange Rule 6.64P-O, an
``order instruction'' refers to a request to cancel, cancel and
replace, or modify an order or quote.
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Currently, Exchange Rule 6.91-O defines Electronic Complex Order to
mean any Complex Order as defined in Exchange Rule 6.62-O(e) or any
Stock/Option Order or Stock/Complex Order as defined in Exchange Rule
6.62-O(h) that is entered into the NYSE Arca System. Proposed Exchange
Rule 6.91P-O(a)(7) eliminates the references to Stock/Option and Stock/
Complex Orders and defines an Electronic Complex Order or ECO to mean a
Complex Order as defined in Exchange Rule 6.62P-O(f) that is submitted
electronically to the Exchange.\111\ The definition of Complex Order in
Exchange Rule 6.62P-O(f) is consistent with the definition of complex
order used on other options exchanges.\112\ In addition, the
elimination of references to Stock/Option and Stock/Complex Orders
helps to ensure that the definition of ECO accurately reflects the
Exchange's functionality because the Exchange does not permit trading
of such orders electronically.\113\
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\111\ Exchange Rule 6.62P-O(f), which the Commission approved in
the Single-Leg Pillar Proposal, defines a Complex Order as any order
involving the simultaneous purchase and/or sale of two or more
option series in the same underlying security (the ``legs'' or
``components'' of the Complex Order), for the same account, in a
ratio that is equal to or greater than one-to-three (.333) and less
than or equal to three-to-one (3.00) and for the purpose of
executing a particular investment strategy.
\112\ See, e.g., BOX rule 7240(a)(7); EDGX Rule 21.20(a); ISE
Options 3, Section 14(a)(1); and MIAX Rule 518(a)(5).
\113\ Stock/Option Orders and Stock/Complex Orders are available
only for open outcry trading on the Exchange. See Exchange Rule
6.62P-O(h)(6). See also Amendment No. 1 at n. 23.
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Proposed Exchange Rule 6.91P-O(a)(1) defines the Away Market
Deviation to mean the difference between the Exchange BB(BO) for a
series and the ABB(ABO) for that same series when the Exchange BB(BO)
is lower (higher) than the ABB(ABO). The maximum allowable Away Market
Deviation is the greater of $0.05 or 5% below (above) the ABB(ABO)
(rounded down to the nearest whole penny). No ECO on the Exchange will
execute at a price that would exceed the maximum allowable Away Market
Deviation on any component of the complex strategy.\114\ The Exchange
states that the Away Market Deviation will provide additional
protection against ECOs being executed on the Exchange at prices too
far away from the current market.\115\ The Commission notes that other
options exchanges have adopted similar protections for complex
orders.\116\
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\114\ See proposed Exchange Rules 6.91P-O(a)(1).
\115\ See Amendment No. 1 at 43.
\116\ See, e.g., ISE Options 3, Section 16(a) (providing that
ISE's system ``will not permit any leg of a complex strategy to
trade through the NBBO for the series or any stock component by a
configurable amount calculated as the lesser of (i) an absolute
amount not to exceed $0.10, and (ii) a percentage of the NBBO not to
exceed 500%, as determined by the Exchange on a class, series or
underlying basis. A Member can also include an instruction on a
Complex Order that each leg of the Complex Order is to be executed
only at a price that is equal to or better than the NBBO for the
options series or any stock component, as applicable''); and BOX
Rule 7240(a)(5) (providing that the ``'Extended cNBBO' means the
maximum permissible net bid and offer execution price for a Complex
Order Strategy. The Extended cNBBO is calculated by subtracting the
Extended cNBBO Limit from the cNBB and adding the Extended cNBBO
Limit to the cNBO. In calculating the Extended cNBBO, each side of
the Extended cNBBO is rounded to the nearest penny within the
Extended cNBBO (i.e., the cNBB is rounded up to the nearest penny
and the cNBO is rounded down to the nearest penny'')).
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The definitions in proposed Exchange Rule 6.91P-O(a)(3) related to
the COA are substantially similar to the current COA definitions in
Exchange Rule 6.91-O(c), with certain differences.\117\ The definition
of RFR Response in proposed Exchange Rule 6.91-O(a)(3)(C) eliminates
the time-in-force contingency in the current definition of RFR Response
and would include as an RFR Response any ECO received during the
Response Time Interval that is on the opposite side of the market of,
and marketable against, the COA Order.\118\ By treating any ECO
received during the Response Time Interval that is marketable against
the COA Order as an RFR Response, the Commission believes that the
proposed definition of RFR Response could help to increase competition
in the COA, thereby potentially increasing price improvement
opportunities for the COA Order.
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\117\ For example, the definition of COA Order in proposed
Exchange Rule 6.91P-O(a)(3)(A), unlike the current definition of
COA-eligible order, will not require that an option class be
designated as COA-eligible because all option classes that trade on
Pillar will be COA-eligible. The definition of RFR in proposed
Exchange Rule 6.91P-O(a)(3)(B) will indicate that the Exchange
disseminates RFR messages through its proprietary data feed.
\118\ The Exchange also proposes to adopt an ECO GTX Order that
is similar to the current RFR Response. See Amendment No. 1 at 7-8
and proposed Exchange Rule 6.91P-O(b)(2)(C).
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The definition of Response Time Interval in proposed Exchange Rule
6.91P-O(a)(3)(D) will reduce the minimum duration of the Response Time
Interval from no less than 500 milliseconds, as provided in Exchange
Rule 6.91-O(c)(4), to no less than 100 milliseconds. The Exchange also
proposes to amend Exchange Rule 6.47A-O to provide that orders
submitted to the proposed COA will satisfy the order exposure
requirements of Exchange Rule 6.47A-O. The Exchange states that the
proposed Response Time Interval will provide OTP Holders and OTP Firms
with adequate time to respond to a COA, given that other options
exchanges have for several years offered electronic paired auctions
with a Response Time Interval of at least 100 milliseconds.\119\ The
Exchange further states that the proposal is designed to provide the
order sender with a timely execution of the COA Order while ensuring
adequate exposure of the order.\120\ Based on the Exchange's
representations, the Commission believes that the proposed Response
Time Interval is designed to provide market participants with adequate
time to respond to a COA, which should continue to assure competition
for the auctioned orders. Accordingly, the Commission also believes
that it is consistent with the Act to allow Users to utilize the
proposed COA to satisfy the order exposure requirements of Exchange
Rule 6.47A-O.
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\119\ See Amendment No. 1 at 8, citing NYSE American Rule
971.1NY(c)(2)(B) (providing that for a Customer Best Execution
Auction ``[t]he minimum/maximum parameters for the Response Time
Interval will be no less than 100 milliseconds and no more than one
(1) second''); and 971.2NY(c)(1)(B) (same); Cboe Exchange Inc.
(``Cboe'') Rule 5.33(d)(3) (providing that Cboe ``determines the
duration of the Response Time Interval on a class-by-class basis,
which may not exceed 3000 milliseconds''). See also BOX Rule
7245(f)(1) (providing for a Complex Order Price Improvement Period
of 100 milliseconds); and ISE Options 3, Section 13(e)(4)(i)
(providing an exposure period for the Complex Price Improvement
Mechanism of no less than 100 milliseconds and no more than one
second). The Exchange states that other options exchanges do not
establish a minimum duration for a COA. See Amendment No. 1 at 8.
\120\ See Amendment No. 1 at 50.
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As described more fully above, proposed Exchange Rule 6.91P-O(a)(5)
defines the DBBO as the derived best net bid (``DBB'') and derived best
net offer (``DBO'') for a complex strategy, calculated using the
Exchange BB(BO) for each leg of the strategy (if available) or the ABB
(ABO) for a leg if the Exchange has no BB(BO) for that leg.\121\ The
proposed definition states that when the Exchange uses the Exchange
[[Page 21979]]
BB(BO) to calculate the DBBO, the Exchange BB(BO) will be bound by the
maximum allowable Away Market Deviation, which the Exchange believes
will help to prevent ECOs from executing on the Exchange at prices that
are too far away from the current market.\122\ The proposed definition
of DBBO further provides that the Exchange will calculate the DBBO by
adding or subtracting one ``collar value'' from a quote on one side of
the market when there is no quote available on the other side of the
market. The Exchange notes that the proposed values used to generate a
DBBO in the absence of local or Away Market interest are consistent
with the values used in the Trading Collars for single-leg orders.\123\
The Exchange states that providing alternative means for calculating
the DBBO will benefit market participants by providing increased
trading opportunities for ECOs.\124\
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\121\ The Commission notes that another options exchange also
uses away market prices to calculate the synthetic best bid and
offer for a strategy when the exchange has no bid or offer for a
component leg of the strategy. See Cboe Rule 5.33(a) (defining the
Synthetic Best Bid or Offer or SBBO to mean the best net bid and net
offer on the Exchange for a complex strategy calculated using: (1)
For complex orders, the BBO for each component (or the NBBO for a
component if the BBO for that component is not available) of a
complex strategy from the Simple Book; and (2) for stock-option
orders, the BBO for each option component (or the NBBO for a
component if the BBO for that component is not available) and the
NBBO of the stock component of a complex strategy).
\122\ See proposed Exchange Rule 6.91P-O(a)(5) and Amendment No.
1 at 10.
\123\ See Amendment No. 1 at 9.
\124\ See id. at 10.
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The proposed definition of DBBO provides that the Exchange will not
allow a strategy to trade if there is neither an Exchange BBO nor an
ABBO for a component leg of a strategy, which could help to protect
investors by preventing a strategy from trading when reliable pricing
for a component leg of the strategy is unavailable.\125\ ECOs for a
strategy will not be permitted to execute against each other when the
bids and offers (when not based solely on the Exchange BBO) are locked
or crossed.\126\ The Exchange states that preventing ECO-to-ECO trading
in this circumstance would benefit market participants by preventing
potentially erroneous ECO executions.\127\ If an Away Market quote
updates to lock or cross the current Exchange BB (BO) or ABB (ABO) for
a component leg of a complex strategy, the Exchange will allow an ECO
for that strategy to execute against leg market interest on the
Exchange.\128\ The Exchange states that allowing an eligible ECO to
execute against leg market interest in these circumstances is
consistent with the trading of single-leg orders because updates to the
ABBO that lock or cross leg market prices do not prevent resting leg
market interest from trading at its resting price with eligible contra-
side interest.\129\ The Exchange further notes that if an ECO trades
with leg market interest in a complex strategy when the leg markets are
crossed, such an execution would not be deemed a trade-through.\130\
The Exchange states that allowing these executions against leg market
interest will maximize the execution opportunities for ECO while
respecting the price-time priority of the leg markets.\131\
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\125\ See proposed Exchange Rule 6.91P-O(a)(5)(B).
\126\ See proposed Exchange Rule 6.91P-O(a)(5)(C).
\127\ See Amendment No. 1 at 11.
\128\ See proposed Exchange Rule 6.91P-O(a)(5)(C).
\129\ See Amendment No. 1 at 11-12 (citing Exchange Rule 6.76P-
O(b)(3), which provides that ``[i]f an Away Market locks or crosses
the Exchange BBO, the Exchange will not change the display price of
any Limit Orders or quotes ranked Priority 2--Display Orders and any
such orders will be eligible to be displayed as the Exchange's
BBO'').
\130\ See Amendment No. 1 at 12 and Exchange Rule 6.94-O(b)(3)
(providing an exception from trade-through liability for trade-
throughs that occur when there was a Crossed Market). See also the
Options Order Protection And Locked/Crossed Market Plan, dated April
14, 2009, available here, https://www.theocc.com/getmedia/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/options_order_protection_plan.pdf.
\131\ See Amendment No. 1 at 12.
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B. Order Types and Times-in-Force
The ECO order types and times-in-force in proposed Exchange Rule
6.91P-O(b) are similar to the order types and times-in-force currently
available for Electronic Complex Orders on the Exchange or on other
options markets. Current Exchange Rule 6.91-O(b)(1) provides that
Electronic Complex Orders may be entered as Limit Orders or as Limit
Orders designated as PNP Plus. Proposed Exchange Rule 6.91P-O(b)(1)
states that ECOs may be entered as Limit Orders, Limit Orders
designated as Complex Only Orders, or Complex QCCs.\132\ The Exchange
states that Complex Only Orders are based on the existing functionality
for PNP Plus Orders, and, like PNP Plus Orders, will trade only with
another ECO and not with leg market interest.\133\ As discussed more
fully below, a Complex Only Order will be required to execute at a
price that is better than the DBB(DBO) if the DBB(DBO) is calculated
using the Exchange BBO for all of the legs of the complex strategy and
all of the Exchange BBOs for those legs have displayed Customer
interest.\134\
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\132\ The Commission approved the Exchange's Complex QCC Orders
in the Single-Leg Pillar Proposal. See Single-Leg Pillar Approval
Order, supra note 11. The Exchange states that allowing ECOs to be
designated as Complex QCCs is consistent with current functionality.
See Amendment No. 1 at 13.
\133\ See proposed Exchange Rule 6.91P-O(c)(1)(C) and Amendment
No. 1 at 26. See also Exchange Rule 6.62-O(y) (stating that an
Electronic Complex Order designated as PNP Plus will be
automatically re-priced by the Exchange as an MPV greater than the
Complex BBO bid (for sell orders) or an MPV lower than the Complex
BBO offer (for buy orders) for any or all of the order that remains
unexecuted and would otherwise lock or cross the Complex BBO should
it be displayed in the Consolidated Book. The re-priced order will
then be posted in the Consolidated Book. The PNP Plus order will
continue to be repriced at an MPV greater than the Complex BBO bid
(for sell orders) or an MPV lower than the Complex BBO offer (for
buy orders) and re-posted in the Consolidated Book, with each change
in the Complex BBO, until such time as the Complex BBO has moved to
a price where the original limit price of the PNP Plus Order no
longer locks or crosses the Complex BBO, at which time the PNP Plus
Order will revert to the original limit price of such order.
Electronic Complex Orders designated as PNP Plus shall be ranked in
the Consolidated Book pursuant to Rule 6.91-O(a)(1) and assigned a
new price time priority as of the time of each reposting). Unlike
PNP Plus Orders, the Exchange will not reprice a resting Complex
Only Order and instead will restrict a Complex Only Order from
trading with leg market interest. See Amendment No. 1 at 27.
\134\ See proposed Exchange Rule 6.91P-O(e)(1)(C).
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Proposed Exchange Rule 6.91P-O(b)(2) states that ECOs may be
designated with a time-in-force of Day, IOC, FOK, or GTC, as those
terms are defined in Exchange Rule 6.62P-O(b), or GTX.\135\ The
Exchange's current rules allow Electronic Complex Orders to be
designated as FOK or AON and to be entered with a time-in-force of IOC,
Day, or GTC.\136\ The Commission notes that other options exchanges
offer similar order types and times-in-force for complex orders.\137\
Under the proposal, an ECO designated as FOK must also be designated as
a Complex Only Order.\138\ Similarly, an ECO will not trade with orders
in the leg markets designated as AON, FOK, or with an MTS
Modifier.\139\ The Commission notes that other options exchanges have
adopted similar restrictions with respect to the execution of AON
orders.\140\
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\135\ As noted above, ECO GTX Orders are similar to the RFR
Responses provided in current Exchange Rule 6.91O-(c)(5). See
Amendment No. 1 at 8 and 14.
\136\ See Exchange Rules 6.91-O(b)(2) and (3).
\137\ See, e.g., BOX Rule 7240(b)(4)(i) (allowing complex orders
to be entered as Fill-and-Kill orders, Limit Orders, Market Orders,
or Session Orders); ISE Options 3, Section 14(b) (allowing complex
orders to be entered as, among others, market orders, limit orders,
AON orders, Day orders, FOK orders, IOC orders, and GTC orders; and
MIAX Rule 518(b)(1) (permitting the entry of complex orders that are
limit orders, market orders, GTC, or day limit orders, among
others).
\138\ See proposed Exchange Rule 6.91P-O(b)(2)(B). In addition,
an ECO designated as IOC or FOK will be rejected if entered during a
pre-open state. See proposed Exchange Rule 6.91P-O(b)(2)(A). The
Exchange notes that this is consistent with the time-in-force of
these orders, which could not be traded when a complex strategy is
not open for trading. See Amendment No. 1 at 14.
\139\ See proposed Exchange Rule 6.91P-O(e)(1)(B).
\140\ See Cboe Rules 5.33(d)(5) (stating that an AON complex
order may only execute against COA Responses and unrelated orders
resting in the COB in price-time priority if there is sufficient
size to satisfy the AON complex order (and may not execute against
orders resting in the Simple Book)); and 5.33(g)(4) (stating that
Post Only complex orders and AON complex orders may not Leg into the
Simple Book); and EDGX Rules 21.20(d)(5)(A) and 21.20(g)(4) (same).
See also NYSE American Rule 900.3NY(d)(4) (providing that an All-or-
None Order is a Market or Limit Order that is to be executed on the
Exchange in its entirety or not at all. AON Orders that do not
execute on arrival will not have standing in any Order Process in
the Consolidated Book and will not be routed or displayed. AON
Orders will not be eligible to execute against incoming interest and
may execute solely against interest resting in the Consolidated Book
when sufficient size is available. The System monitors the
Consolidated Book for AON Order execution opportunities).
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[[Page 21980]]
C. Priority and Pricing of ECOs
The Exchange states that proposed Exchange Rule 6.91P-O(c) sets
forth a price-time priority model and ECO pricing requirements that are
substantively the same as the price-time priority model and pricing
requirements currently forth in Exchange Rules 6.91-O(a)(1) and 6.91-O,
Commentaries .01 and .02(i).\141\ Proposed Exchange Rule 6.91P-O(c)(1)
states that when trading with the leg markets, an ECO will trade at the
price(s) of the leg markets unless the leg markets are priced more than
the maximum allowable Away Market Deviation. The requirement that an
ECO trading with the leg markets trade at the price(s) of the leg
markets is consistent with current Exchange Rule 6.91-O(a)(2)(ii).\142\
The The Commission believes that the proposed limitation on the
execution prices to within the maximum allowable Away Market Deviation
for the component legs of an ECO is designed to protect investors by
helping to prevent ECOs from executing at prices that do not reflect
the current market. The Commission notes that other options exchanges
have adopted similar protections for complex orders.\143\
---------------------------------------------------------------------------
\141\ See Amendment No. 1 at 44. Proposed Exchange Rule 6.91P-
O(c) states that an ECO that is not executed immediately (or
cancelled), including if it cannot trade under proposed Exchange
Rules 6.91(a)(5)(B)-(C) and 6.91(c)(1)-(2), or does not initiate a
COA, as provided in proposed Exchange Rule 6.91(f)(1), will be
ranked in the Consolidated Book according to price-time priority
based on the total net price and time of entry of the order. Current
Exchange Rule 6.91-O(a)(1) provides that Electronic Complex Orders
in the Consolidated Book will be ranked according to price/time
priority based on the total or net debit or credit and the time of
entry of the order.
\142\ See Amendment No. 1 at 15. Exchange Rule 6.91-O(a)(2)(ii)
states that ``[i]f, at a price, the leg markets can execute against
an incoming Electronic Complex Order in full (or in a permissible
ratio), the leg markets will have first priority at that price and
will trade with the incoming Electronic Complex Order pursuant to
Rule 6.76A before Electronic Complex Orders resting in the
Consolidated Book can trade at that price.''
\143\ See note 116, supra.
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The Commission believes that proposed Exchange Rules 6.91P-O(c)(2),
(3), and (4) are consistent with the Exchange's current rules and with
the rules of other options exchanges. The requirement that each
component leg of an ECO that executes against another ECO trade at a
price at or within the Exchange BBO for that series is consistent with
current Exchange Rule 6.91-O(a)(2) and the rules of other options
exchanges, and ensures that ECOs will never trade through leg market
interest.\144\ Similarly, the provisions in proposed Exchange Rule
6.91P-O(c)(2) (stating that no leg of an ECO may trade at a price of
zero), proposed Exchange Rule 6.91P-O(c)(3) (stating that ECOs may
trade without consideration of prices of the same complex strategy
available on other exchanges), and proposed Exchange Rule 6.91P-O(c)(4)
(allowing complex strategies to be quoted and traded in $0.01
increments regardless of the MPV otherwise applicable to the individual
leg(s) of the ECO) are consistent with the existing rules of other
options exchanges.\145\
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\144\ See proposed Exchange Rule 6.91P-O(c)(2) and Amendment No.
1 at 16. Exchange Rule 6.91(a)(2) states that no leg of an
Electronic Complex Order will be executed at a price outside the
Exchange best bid/offer for that leg. See also BOX Rule
7240(b)(3)(iii) (stating that the exchange will filter inbound
Complex Orders to ensure that each leg of a Complex Order will be
executed at a price that is equal to or better than the BOX BBO for
each of the component series); and Cboe Rule 5.33(f)(2)(A)(iii)
(stating that the System does not execute a complex order at a price
that would cause any component of the complex strategy to be
executed at a price worse than the individual component prices on
the Simple Book).
\145\ See, e.g., Cboe Rule 5.33(f)(2)(A)(i) and MIAX Rule
518(c)(1)(iii) (prohibiting any component leg of a complex strategy
from executing at a price of zero); Exchange Rule 6.91O-(a)(2)
(stating that Electronic Complex Orders submitted to the System may
be executed without consideration of prices of either single-legged
orders or the same complex order strategy that might be available on
other exchanges) and BOX Rule 7420(b)(3) (stating that Complex
Orders will be executed without consideration of any prices on the
same Strategy that might be available on other exchanges); and ISE,
Options 3, Section 14(c)(1) (stating that bids and offers for
Complex Options Strategies may be expressed in one cent ($0.01)
increments, and the options leg of Complex Options Strategies may be
executed in one cent ($0.01) increments, regardless of the minimum
increments otherwise applicable to the individual options legs of
the order) and MIAX Rule 518(c)(1)(i) (stating that bids and offers
on complex orders and quotes may be expressed in $0.01 increments,
and the component(s) of a complex order may be executed in $0.01
increments, regardless of the minimum increments otherwise
applicable to individual components of the complex order). See also
Amendment No. 2 (revising proposed Exchange Rule 6.91P-O(c)(4) to
state that bids and offers for complex strategies may be expressed
in one cent ($0.01) increments).
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D. Execution of ECOs at the Opening or Reopening After a Trading Halt
The Commission believes that the ECO opening auction process in
proposed Exchange Rule 6.91P-O(d) is designed to provide for the
orderly opening, or re-opening after a trading halt, of ECOs on the
Exchange.\146\ As discussed below, the proposed ECO opening auction
process is similar to the Exchange's current opening process for
Electronic Complex Orders and incorporates Pillar auction functionality
that is currently available for single-leg options and on the
Exchange's cash equity platform. The Commission notes that the proposed
ECO Auction Collar, which establishes the boundaries for the ECO
Auction Price, protects the priority of resting displayed Customer leg
market interest by providing that when the DBO (DBB) used to determine
the ECO Auction Collar is calculated using the Exchange BBO for all
legs of the complex strategy and all the Exchange BBOs have displayed
Customer interest, the upper (lower) price of the ECO Auction Collar
will be one penny ($0.01) times the smallest leg ratio inside the DBO
(DBB).\147\ The Exchange states that this requirement will protect
displayed Customer interest, and protect investors in general, while
ensuring a fair and orderly ECO Opening Process.\148\
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\146\ See proposed Exchange Rule 6.91P-O(d)(2)(C) (stating that
the ECO Opening Auction Process will be used to reopen trading in
ECOs after a trading halt). The Exchange notes that this is
consistent with current Rule 6.64-O(e). See Amendment No. 1 at 18.
\147\ See proposed Exchange Rule 6.91P-O(d)(3)(A).
\148\ See Amendment No. 1 at 45.
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The Exchange states that proposed Exchange Rule 6.91P-O(d)
maintains the fundamentals of the opening auction process for
Electronic Complex Orders in current Exchange Rule 6.91-
O(a)(2)(i)(B).\149\ The Exchange notes that the proposed ECO Auction
Price--the price at which the maximum volume of ECOs can be traded in
an ECO Opening Auction, subject to the ECO Auction Collar--is
consistent with the ``single market clearing price'' in current
Exchange Rule 6.91-O(a)(2)(i)(B) and will be determined in a manner
that is based, in part, on how an Indicative Match Price is determined
for the trading of cash equity securities and how the Exchange will
determine the price for auctions on Pillar for single-leg options.\150\
The Exchange believes that proposed Exchange Rule 6.91P-O(d)(1), which
provides that the Exchange will not open a complex strategy under
certain circumstances when pricing information for a component leg of
the strategy is unavailable or when the market for the component leg is
locked or crossed, could protect market participants from potentially
erroneous executions.\151\
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\149\ See Amendment No. 1 at 44.
\150\ See Amendment No. 1 at 19 and Exchange Rule 6.64P-O(a)(9).
\151\ See Amendment No. 1 at 17. Proposed Exchange Rule 6.91P-
O(d)(1) provides, in part, that a complex strategy will not be
opened if any leg of the complex strategy has neither an Exchange BO
nor an ABO; or the complex strategy cannot trade per proposed
Exchange Rule 6.91P-O(a)(5)(C). See Amendment No. 2.
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[[Page 21981]]
The Exchange states that proposed Exchange Rule 6.91P-O(d)(3)(B)(i)
regarding the ranking and pricing of orders in the ECO opening auction
is based in part on current Exchange Rule 6.91-O(a)(2)(i)(B) and on the
Exchange's auction processes for cash equity trading and single-leg
options trading.\152\ Similarly, proposed Exchange Rule 6.91P-
O(d)(3)(B)(ii), which provides that locking and crossing ECOs in a
complex strategy will trade at the ECO Auction Price, and that the
Exchange will open a complex strategy without a trade if there are no
locking or crossing ECOs in the complex strategy at or within the ECO
Auction Collars, is based in part on Exchange Rule 6.64P-O(d)(2)(B) for
single-leg options.\153\ Proposed Exchange Rule 6.91P-O(d)(4) regarding
the processing of new ECOs and ECO Order Instructions received when the
Exchange is conducting the ECO Opening Auction Process for a strategy
is based on Exchange Rules 7.35-E(g)(1) and (2) and 6.64P-O(e)(1) and
(2).\154\ Proposed Rule 6.91P-O(d)(5)(A) and (B), which describe the
processing of ECOs during the transition to continuous trading after
the ECO Opening Auction Process, are based, respectively, on current
Exchange Rules 6.91-O(a)(2)(i)(B) and (C) and Exchange Rule 6.64P-
O(a)(6) for single-leg options.\155\
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\152\ See Amendment No. 1 at 20.
\153\ See Amendment No. 1 at 20.
\154\ See Amendment No. 1 at 21.
\155\ See Amendment No. 1 at 21-22.
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E. Execution of ECOs During Core Trading Hours
The Commission believes that proposed Exchange Rule 6.91P-
O(e)(1)(A) is designed to provide for the execution of complex orders
while protecting the priority of established leg market interest. Under
proposed Exchange Rule 6.91P-O(e)(1)(A), after a complex strategy is
open for trading, an ECO will trade with the best-priced contra-side
interest and if, at a price, the leg markets can trade with an eligible
ECO, in full or in a permissible ratio, the leg markets will trade
first at that price, pursuant to Exchange Rule 6.76AP-O, until the
quantities on the leg markets are insufficient to trade with the ECO,
at which time the ECO will trade with contra-side ECOs resting in the
Consolidated Book at that price. The Exchange notes that under the
proposed rule an ECO would never trade ahead of resting leg market
interest (Customer or otherwise) if the leg market interest is
sufficient to satisfy the ECO in full or in a permissible ratio.\156\
The Exchange further states that the proposed rule makes clear that the
priority of the leg markets remains primary, but also ensures that ECO
trading opportunities are maximized after eligible interest in the leg
markets at a price is exhausted.\157\ The Commission notes that the
execution priority in proposed Exchange Rule 6.91P-O(e)(1)(A) is
consistent with the rules of another options exchange.\158\ The
Commission further notes, however, that unlike ECOs that are eligible
to execute against leg market interest, Complex Only Orders will not be
able to trade at the DBB(DBO) for a strategy when the DBB(DBO) is
calculated using Exchange BBOs and all of those Exchange BBOs have
displayed Customer interest.\159\
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\156\ See Amendment No. 1 at 23.
\157\ See Amendment No. 1 at 24 and 46.
\158\ See BOX Rule 7240(b)(2)(ii). See also BOX Rules
7240(b)(3)(i) and (ii). BOX Rule 7240(b)(2)(ii) provides that ``A
Complex Order for which a leg of such Complex Order's underlying
Strategy is not in a one-to-one ratio with each other leg of such
Strategy will execute against the bids and offers on the BOX Book
for the individual legs of the Strategy for all of the quantity
available at the best price in a permissible ratio until the
quantities remaining on the BOX Book are insufficient to execute
against the Complex Order. Following such execution, a Complex Order
may execute against another Complex Order and the component legs of
the Complex Orders may trade at prices equal to the corresponding
prices on the BOX Book.'' BOX Rule 7240(b)(3)(i) states that
``Complex Orders will be automatically executed against bids and
offers on the Complex Order book in price/time priority; provided,
however, that Complex Orders will execute against Complex Orders
only after bids and offers at the same net price on the BOX Book for
the individual legs have been executed.'' BOX Rule 7240(b)(3)(ii)
states that ``Complex Orders will be automatically executed against
bids and offers on the BOX Book for the individual legs of the
Complex Order to the extent that the Complex Order can be executed
in full or in a permissible ratio by such bids and offers.''
\159\ See proposed Exchange Rule 6.91P-O(e)(1)(C).
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The Commission believes that proposed Exchange Rule 6.91O(e)(1)(C)
is designed to provide for the execution of Complex Only Orders while
protecting the priority of resting leg market interest, including
Customer interest. Under the proposed rule, a Complex Only Order will
not be able to trade at a price that is worse than the Exchange BB(BO)
when the DBBO is calculated using the Exchange's BB(BO) for the
component legs of the order. In addition, if the DBB(DBO) is calculated
using the Exchange BBOs for all legs of the strategy and all of the
Exchange BBOs have displayed Customer interest, the Complex Only Order
will be required to trade at a price that is better than the
DBB(DBO).\160\ The Exchange states that this requirement is designed to
ensure that a Complex Only Order would price improve at least some
portion of the interest making up the DBBO if there is displayed
Customer interest on all legs of the strategy on the Exchange.\161\ The
Commission notes that this requirement is consistent with the
Exchange's current rules and with the rules of other options
exchanges.\162\
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\160\ See proposed Exchange Rule 6.91P-O(e)(1)(C) (stating that
a Complex Only Order must trade at a price at or within the DBBO,
provided that if the DBB (DBO) is calculated using the Exchange BBOs
for all legs of the complex strategy and all such Exchange BBOs have
displayed Customer interest, the Complex Only Order will not trade
below (above) one penny ($0.01) times the smallest leg ratio inside
the DBB (DBO), regardless of whether there is sufficient quantity on
such leg markets to satisfy the ECO).
\161\ See Amendment No. 1 at 27. If a Complex Only Order is
unable to trade within these parameters, it will remain on the
Consolidated Book until it can trade with another ECO as provided in
proposed Exchange Rule 6.91P-O(e)(1)(C). See id.
\162\ See Exchange Rule 6.91-O, Interpretation and Policy .02(i)
(stating that, when executing an ECO, the price of at least one leg
of the order must trade at a price that is better than the
corresponding price of all the customer bids or offers in the
Consolidated Book for the same series, by at least one standard
trading increment as defined in Exchange Rule 6.72-O) and Amendment
No. 1 at n. 50. See also ISE Options 3, Section 14(c)(2)(i); MIAX
Rule 518(c)(3)(i); NYSE American Rule 980NY, Commentary .02(i).
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Proposed Exchange Rule 6.91P-O(e)(1)(D) provides that an ECO will
be processed as a Complex Only Order if the ECO has a complex strategy
with (i) more than five legs; (ii) two legs and both legs are buying or
both legs are selling, and both legs are calls or both legs are puts;
or (iii) three or more legs and all legs are buying or all legs are
selling. The Exchange states that requiring these ECOs to be processed
as Complex Only Orders is designed to help Market Makers manage
risk.\163\ The Commission notes that other options exchanges have
similar rules.\164\
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\163\ See Amendment No. 1 at 28-9.
\164\ See, e.g., Cboe Rule 5.33(g)(2) (stating that complex
orders for any capacity other than customer with two option legs
that are both buy or both sell and that are both calls or both puts
may not leg into the simple book and may execute against other
complex orders in the COB); Cboe Rule 5.33(g)(3) (stating that all
complex orders with three or four option legs that are all buy or
all sell (regardless of whether the option legs are calls or puts)
may not leg into the Simple Book and may execute against other
complex orders in the COB); ISE Options 3, Sections 14(d)(3)(A)
(stating that Complex Orders with two option legs where both legs
are buying or both legs are selling and both legs are calls or both
legs are puts may only trade against other Complex Orders in the
Complex Order Book); ISE Options 3, Section 14(d)(3)(B) (stating
that complex orders with three or four option legs where all legs
are buying or all legs are selling may only trade against other
Complex Orders in the Complex Order Book; and MIAX Rule 518(c)(iii)
(stating that complex orders with two option legs where both legs
are buying or both legs are selling and both legs are calls or both
legs are puts may only trade against other complex orders on the
Strategy Book and will not be permitted to leg into the Simple Order
Book. Complex orders with three option legs where all legs are
buying or all legs are selling may only trade against other complex
orders on the Strategy Book, regardless of whether the option leg is
a call or a put).
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[[Page 21982]]
Proposed Exchange Rule 6.91P-O(e)(2) provides that the Exchange
will evaluate trading opportunities for a resting ECO when the leg
markets comprising a complex strategy update, provided that during
periods of high message volumes, such evaluation may be done less
frequently. The Commission believes that these evaluations could result
in additional executions of resting ECOs.
F. Execution of ECOs During a COA
The Commission believes the COA in proposed Exchange Rule 6.91P-
O(f) is designed to provide COA Orders \165\ submitted to the auction
with execution and price improvement opportunities while preserving the
priority of resting interest on the Exchange's limit order book. As
described more fully above, the COA in proposed Exchange Rule 6.91P-
O(f) would modify the current COA process set forth in Exchange Rule
6.91-O(c) by, among other things, relying on the DBBO for pricing,
streamlining the rule text specifying the circumstances that would
cause a COA to end early, and providing that a COA Order will initiate
a COA only upon arrival.\166\ The Exchange states that allowing a COA
order to initiate a COA only upon arrival could simplify the COA
process, provide OTP Holders with greater certainty regarding when a
COA Order would initiate a COA, and encourage market participants to
submit aggressively-priced orders to qualify for the initiation of a
COA.\167\ In addition, the Exchange states that the proposed pricing
requirements that an order would be required to satisfy to initiate a
COA are designed to encourage aggressively-priced COA Orders, which
could help to attract a meaningful number of RFR Responses to
potentially provide price improvement to the COA Order.\168\ The
Commission believes that these requirements could result in more
competitive COA auctions, which could make it more likely that COA
Orders will receive price improvement.
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\165\ A COA Order is an ECO that is designated by OTP Holder as
eligible to initiate a COA. See proposed Exchange Rule 6.91P-
O(a)(3)(A).
\166\ See Amendment No. 1 at 48. As discussed above, the
proposal also reduces the minimum duration of the Response Time
Interval for submitting COA Responses from not less than 500
milliseconds to not less than 100 milliseconds.
\167\ See Amendment No. 1 at 48.
\168\ See Amendment No. 1 at 30. Proposed Exchange Rule 6.91P-
O(f)(1) provides that, to initiate a COA, the limit price of the COA
Order to buy (sell) must be higher (lower) than the best-priced,
same-side ECOs resting on the Consolidated Book and equal to or
higher (lower) than the midpoint of the DBBO. A COA Order that does
not satisfy these pricing parameters will not initiate a COA and,
unless it is cancelled, will be ranked in the Consolidated Book and
processed as an ECO pursuant to proposed Exchange Rule 6.91P-O(e).
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The Commission believes that proposed Exchange Rule 6.91P-
O(f)(2)(A) will help to preserve the priority of resting ECO and leg
market interest, including displayed Customer leg market interest, by
providing that prior to initiating a COA, a COA Order to buy (sell)
will trade with any ECO to sell (buy) resting in the Consolidated Book
that is priced equal to or lower (higher) than the DBO (DBB). If the
DBO (DBB) is calculated using the Exchange BBO for all legs of the
complex strategy and all such Exchange BBOs have displayed Customer
interest, the COA Order will trade up (down) to one penny ($0.01) times
the smallest leg ratio inside the DBO (DBB) (i.e., priced better than
the leg markets) and any unexecuted portion of the COA Order will
initiate a COA.\169\ Similarly, the Commission believes that proposed
Exchange Rule 6.91P-O(f)(2) will help to maintain the priority of leg
market interest (when the Exchange uses the Exchange BB(BO) to
calculate the DBB(DBO)) by requiring the COA Order to initiate a COA at
a price equal to one penny ($0.01) times the smallest leg ratio inside
the DBO (DBB), rather than at the COA Order's limit price, when the COA
Order's limit price locks or crosses the DBO (DBB). Likewise, the
Commission believes that proposed Exchange Rule 6.91P-O(f)(4)(A) will
help to protect the priority of resting leg market interest at the
conclusion of a COA by providing that RFR Responses to sell (buy) that
are priced lower (higher) than a COA Order to buy (sell) will trade in
price-time priority up (down) to the DBBO. If all legs of the DBB (DBO)
are calculated using Exchange BBOs and all such Exchange BBOs have
displayed Customer interest, RFR Responses to sell (buy) will not trade
below (above) one penny ($0.01) times the smallest leg ratio inside the
DBB (DBO) on the Exchange.\170\
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\169\ See proposed Exchange Rule 6.91P-O(f)(2)(A).
\170\ See proposed Exchange Rule 6.91P-O(f)(4)(A).
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The Exchange states that proposed Rule 6.91P-O(f)(3), which would
identify the conditions that would cause a COA to end prior to the
expiration of the Response Time Interval, is consistent current
Exchange Rule 6.91-O(c)(6).\171\ The Exchange states that rather than
using a snapshot of the Complex BBO taken at the start of a COA as the
basis for determining whether to end a COA early, the Exchange will
instead rely on the DBBO, which is updated as market conditions change,
to determine whether to end the COA early.\172\ The Exchange notes that
because the DBBO could be calculated using the ABBO for a leg(s) of a
complex strategy, it would be new under Pillar to have a COA end early
based on interest on the Exchange that locks or crosses interest on an
Away Market, rather than interest on the Exchange.\173\ The Commission
believes that ending a COA early under these circumstances would
benefit market participants by preventing COA Orders from executing at
prices too far away from the prevailing market for the complex
strategy.
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\171\ See Amendment No. 1 at 31.
\172\ See Amendment No. 1 at 31 and proposed Exchange Rule
6.91P-O(a)(5) (stating that the DBBO will be updated as the Exchange
BBO or ABBO, as applicable, is updated).
\173\ See Amendment No. 1 at 32.
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Unlike current Exchange Rule 6.91O-(c)(7)(A), which provides for
the allocation of COA-eligible orders against the best-priced interest
received in the COA on a size pro rata basis, proposed Exchange Rule
6.91P-O(f)(4)(A) would provide for the allocation of RFR Responses
against the COA Order based on price-time priority. The Exchange states
that this allocation would align the allocation of ECOs in a COA with
standard processing of ECOs on the Exchange, which would add
consistency to the Exchange's processing of ECOs.\174\
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\174\ See Amendment No. 1 at 33.
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Proposed Exchange Rule 6.91P-O(f)(5) would provide that a pattern
or practice of submitting unrelated quotes or orders that cause a COA
to conclude early would be deemed conduct inconsistent with just and
equitable principles of trade. The Exchange states that the proposed
rule is based on current Exchange Rule 6.91-O, Commentary .04, except
that it adds a reference to quotes, in addition to orders, thereby
broadening the scope of the prohibited conduct, to the benefit of
market participants.\175\ The Commission notes that other options
exchanges have similar rules.\176\
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\175\ See Amendment No. 1 at 34.
\176\ See, e.g., Cboe Rule 5.33, Interpretation and Policy .03
(stating that a pattern or practice of submitting orders that cause
a COA to conclude early will be deemed conduct inconsistent with
just and equitable principles of trade and a violation of Rule 8.1);
and ISE Options 3, Section 13, Supplementary Material .01 (stating,
in part, that it shall be considered conduct inconsistent with just
and equitable principles of trade for any Member to enter orders,
quotes, Agency Orders, Counter-Side Orders or Improvement Orders for
the purpose of disrupting or manipulating the Price Improvement
Mechanism).
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The proposal also adds Commentary .03 to Exchange Rule 6.47A-O,
which is designed to prevent OTP Holders or OTP Firms from providing
material,
[[Page 21983]]
non-public information to third parties.\177\ The Commission notes that
other options exchanges have similar rules.\178\
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\177\ See Amendment No. 1 at 41.
\178\ See, e.g., EDGX Rule 22.12, Interpretation and Policy .04
(stating that, prior to or after submitting an order to EDGX
Options, an Options Member cannot inform another Options Member or
any other third party of any of the terms of the order); and NYSE
American Rule 935NY, Commentary .04 (same).
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G. ECO Risk Checks
The Exchange states that the complex strategy limit in proposed
Exchange Rule 6.91P-O(g)(1), which limits the maximum number of new
complex strategies that may be requested to be created per MPID, will
operate as a system protection tool that enables the Exchange to
prevent any single MPID from creating more than a limited number of
complex strategies during a trading day, thereby helping to maintain a
fair and orderly market.\179\ The Commission notes that other options
exchanges have similar strategy limits.\180\
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\179\ See Amendment No. 1 at 49.
\180\ See, e.g., Cboe Rule 5.33(a) (stating, in the definition
of Complex Strategy, that Cboe may limit the number of new complex
strategies that may be in [Cboe's] System or entered for any EFID
(which EFID limit would be the same for all Users) at a particular
time; and MIAX Rule 518(a)(6) (stating that MIAX may limit the
number of new complex strategies that may be in [MIAX's] System at a
particular time and will communicate this limitation to Members via
Regulatory Circular).
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The Commission believes that the ECO price and strategy protections
in proposed Exchange Rule 6.91P-O(g)(2) and (3) are designed to protect
investors by preventing the entry and execution of ECOs at potentially
erroneous prices. The Exchange states that the ECO Price Protection in
proposed Exchange Rule 6.91P-O(g)(2) will work in a manner that is
similar to the existing electronic complex order Price Protection
Filter in current Exchange Rule 6.91-O, Commentary .05, although the
proposed ECO Price Protection will use new thresholds and reference
prices that are designed to simplify the price check and to align it
with the Limit Order Price Protection for single-leg interest.\181\ The
Exchange states that the Complex Strategy Protections in proposed
Exchange Rule 6.91P-O(g)(3) will function in a manner similar to the
Debit/Credit Reasonability Checks in current Exchange Rule 6.91-O,
Commentary .06.\182\ The Exchange further states that, consistent with
the current functionality, the proposed Complex Strategy Protections
are designed to prevent the execution of ECOs at prices that are
inconsistent with or not aligned with their strategies.\183\ The
Commission notes that other options exchanges have adopted price
protections for complex strategies.\184\
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\181\ See Amendment No. 1 at 35 and proposed Exchange Rule
6.62P-O(a)(3).
\182\ See Amendment No. 1 at 38.
\183\ See id.
\184\ See, e.g., Cboe Rule 5.34(b)(3); ISE Options 3, Section
16(b); and MIAX Rule 532(b)(2), (3), and (4).
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IV. Solicitation of Comments on Amendment Nos. 1 and 2
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment Nos. 1 and 2 are 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-NYSEArca-2021-68 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-NYSEArca-2021-68. 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 such 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-NYSEArca-2021-68, and should
be submitted on or before May 4, 2022.
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 the notice of Amendment No. 1 in
the Federal Register. Amendment No. 1 revises the Exchange's original
proposal to make the changes discussed in detail above. Notably, in
Amendment No. 1 the Exchange revises the proposal to delete from the
definition of ECO references to Stock/Option and Stock/Complex Orders,
which trade only on the Exchange's floor. In addition, Amendment No. 1
revises proposed Exchange Rule 6.91P-O(c) to indicate that each
component leg of an ECO that executes against another ECO must trade at
a price that is at or within the Exchange BBO for the series, which
makes clear that an ECO may not trade through resting leg market
interest on the Exchange and aligns the Exchange's rule with the rules
of other options exchanges. Similarly, Amendment No. 1 revises the
execution priority provisions in proposed Exchange Rule 6.91P-O(e) to
more closely align them with the rules of another options exchange and
to describe the operation of, and price improvement requirements
associated with, Complex Only Orders, which do not execute against leg
market interest and must trade at a price that is better than resting
displayed Customer leg market interest under certain circumstances.
Amendment No. 1 revises proposed Exchange Rule 6.91P-O(f) to describe
the price improvement requirements that apply to executions that occur
prior to the initiation of a COA and in the allocation of orders at the
conclusion of a COA when the DBBO includes displayed Customer interest.
In addition, Amendment No. 1 modifies proposed Exchange Rule 6.91P-
O(f)(5) to indicate that the rule's prohibition on submitting unrelated
interest that causes a COA to end early applies to quotes as well as
orders, which should provide additional protection to investors.
Amendment No. 1 also provides additional analysis of several aspects of
the proposal, thus facilitating the Commission's ability to make the
findings set forth above to approve the proposal. The Commission
believes that Amendment No. 2 does not raise any novel regulatory
issues. As described above, Amendment No. 2 eliminates an incorrect
cross-reference
[[Page 21984]]
in the rules describing the ECO opening process, which should help to
assure that the proposed rules accurately describe the Exchange's ECO
opening process. In addition, Amendment No. 2 revises the proposal to
state that bids and offers for complex strategies may be expressed in
$0.01 increments regardless of the MPV otherwise applicable to the
individual leg(s) of the ECO, which is consistent with the rules of
other options exchanges. Accordingly, the Commission finds good cause
for approving the proposed rule change, as modified by Amendment No. 1,
on an accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\185\ that the proposed rule change (SR-NYSEArca-2021-68), as
modified by Amendment Nos. 1 and 2, is approved on an accelerated
basis.
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\185\ 15 U.S.C. 78s(b)(2).
\186\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\186\
J. Matthew De LesDernier,
Assistant Secretary.
[FR Doc. 2022-07843 Filed 4-12-22; 8:45 am]
BILLING CODE 8011-01-P