[Federal Register Volume 87, Number 142 (Tuesday, July 26, 2022)]
[Notices]
[Pages 44438-44440]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-15921]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95328; File No. SR-CBOE-2022-038]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Amend Rule 5.32

July 20, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 7, 2022, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend Rule 5.32. The text of the proposed rule change is provided 
below.

(additions are Italicized; deletions are [bracketed])
* * * * *
    Rules of Cboe Exchange, Inc.
* * * * *

Rule 5.32. Order and Quote Book Processing, Display, Priority, and 
Execution

    (a)-(d) No change.
    (e) Cancel/Replace. If a User submits a cancel/replace message 
for a resting order, regardless of whether the cancel/replace 
message modifies any terms of the resting order, the order loses its 
priority position and is placed in a priority position based on the 
time the System receives the cancel/replace message, unless the User 
only (1) decreases the quantity of an order, (2) modifies the Max 
Floor (if a Reserve Order), or (3) modifies the stop price (if a 
Stop or Stop-Limit order), in which case the order retains its 
priority position. [Depending on how an order is modified, the order 
may change priority position as follows:
    (1) If the price of an order is changed, the order loses 
position and is placed in a priority position as if the System 
received the order at the time the order was changed.
    (2) If the quantity of an order is decreased, it retains its 
priority position.
    (3) If the quantity of an order is increased, it loses its 
priority position and is placed in a priority position as if the 
System received the order at the time the quantity of the order is 
increased.]
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Rule 5.32(e) to describe the impact 
on priority of a ``no-change'' order \3\ (i.e., an order submitted to 
cancel or replace a resting order that does not change any

[[Page 44439]]

terms of an order) and of a cancel/replace message that does not change 
the price or size of a resting order but changes another term of an 
order. Current Rule 5.32(e) describes whether a resting order's 
priority position may change if it is modified with a cancel/replace 
message. Specifically, current Rule 5.32(e) states if the price of an 
order is changed, the order loses position and is placed in a priority 
position as if the System received the order at the time the order was 
changed. If the quantity of an order is decreased, it retains its 
priority position. If the quantity of an order is increased, it loses 
its priority position and is placed in a priority position as if the 
System received the order at the time the quantity of the order is 
increased.
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    \3\ In this context, the term ``order'' includes bids and offers 
submitted in bulk messages. A bulk message means a single electronic 
message a user submits with an M (Market-Maker) capacity to the 
Exchange in which the User may enter, modify, or cancel up to an 
Exchange-specified number of bids and offers. See Rule 1.1 
(definition of bulk message, which provides that the System handles 
a bulk message bid or offer in the same manner as it handles an 
order or quote, unless the Rules specify otherwise).
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    Rule 5.32(e), however, is currently silent regarding how the System 
handles a cancel-replace message comprised of a no-change order or an 
order that changes terms other than price and size. The Exchange 
recently determined that if the System receives a no-change order, the 
resting order would lose its priority position; however, if the System 
receives a ``no-change'' bid or offer in a bulk message, the resting 
bid or offer would not lose its priority position. The Exchange 
proposes to harmonize the handling of all no-change orders and quotes 
so that any ``no-change'' order or bulk message bid or offer will lose 
priority, as well as add to the Rules how the System handles no-change 
orders. Additionally, the Exchange proposes to codify current System 
functionality that causes a resting order to lose its priority position 
if any cancel/replace message is submitted if any term other than the 
Max Floor (if a Reserve Order) \4\ or the stop price (if a Stop or 
Stop-Limit order \5\) is modified. Therefore, the proposed rule change 
amends Rule 5.32(e) to state if a User submits a cancel/replace message 
for a resting order, regardless of whether the cancel/replace message 
modifies any terms of the resting order, the order loses its priority 
position and is placed in a priority position based on the time the 
System receives the cancel/replace message, unless the User only (1) 
decreases the quantity of an order (as is currently set forth in the 
Rules), (2) modifies the Max Floor (if a Reserve Order), or (3) 
modifies the stop price (if a Stop or Stop-Limit order), in which case 
the order retains its priority position.
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    \4\ A ``Reserve Order'' is a limit order with both a portion of 
the quantity displayed (``Display Quantity'') and a reserve portion 
of the quantity (``Reserve Quantity'') not displayed. Both the 
Display Quantity and Reserve Quantity of the Reserve Order are 
available for potential execution against incoming orders. When 
entering a Reserve Order, a User must instruct the Exchange as to 
the quantity of the order to be initially displayed by the System 
(``Max Floor''). If the Display Quantity of a Reserve Order is fully 
executed, the System will, in accordance with the User's 
instruction, replenish the Display Quantity from the Reserve 
Quantity using one of the below replenishment instructions. If the 
remainder of an order is less than the replenishment amount, the 
System will display the entire remainder of the order. The System 
creates a new timestamp for both the Display Quantity and Reserve 
Quantity of the order each time it is replenished from reserve. A 
User may attach an instruction for random replenishment (where the 
System randomly replenishes the Display Quantity for the order with 
a number of contracts not outside a replenishment range, which 
equals the Max Floor plus and minus a replenishment value 
established by the User when entering a Reserve Order with a Random 
Replenishment instruction) or fixed replenishment (the System will 
replenish the Display Quantity of an order with the number of 
contracts equal to the Max Floor).
    \5\ A ``Stop (Stop-Loss)'' order is an order to buy (sell) that 
becomes a market order when the consolidated last sale price 
(excluding prices from complex order trades if outside of the NBBO) 
or NBB (NBO) for a particular option contract is equal to or above 
(below) the stop price specified by the User. A ``Stop-Limit'' order 
is an order to buy (sell) that becomes a limit order when the 
consolidated last sale price (excluding prices from complex order 
trades if outside the NBBO) or NBB (NBO) for a particular option 
contract is equal to or above (below) the stop price specified by 
the User.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\6\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \7\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \8\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
    \8\ Id.
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    In particular, the Exchange believes the proposed rule change will 
remove impediments to and perfect the mechanism of a free and open 
market as well as protect investors by adding transparency to the Rules 
regarding how the System handles cancel/replace messages that change no 
order terms or change order terms other than price and size. The 
Exchange believes consistency in handling of all no-change orders and 
quotes will simplify order handling and thus further benefit investors. 
The Exchange believes it is reasonable for a user's resting order to 
lose priority if that user submits a cancel/replace order, including a 
no-change order, to replace that resting order (other than the three 
exceptions). Ultimately, the purpose of a cancel and replace message is 
to replace a resting order with a new order; therefore, it is 
appropriate for the System to treat that replacement order as a new 
order for purposes of priority. Despite the fact that a cancel/replace 
message that does not modify the price or size of a resting order (and 
thus has no investment purpose), a user elected to send that new order 
to the Exchange despite having an identical order resting on the 
Exchange's book and use System capacity to do so. Therefore, the 
Exchange believes it promotes just and equitable principles of trade to 
treat that replacement order as a new order for priority purposes. The 
Exchange believes the proposed rule change encourages users to submit 
to the Exchange only bona fide cancel/replace orders that have 
legitimate investment purposes and discourages use of System capacity 
to send unnecessary message traffic.
    As set forth in the current Rule 5.32(e), a cancel/replace order 
that decreases the size of a resting order would continue to not result 
in a loss of priority position is an order. The Exchange believes it is 
appropriate to continue to not have this type of cancel/replace order 
cause a loss of priority because it is consistent with a partial 
execution of that order, which would similarly not cause a loss of 
priority.\9\ Unlike a no-change order, an order to reduce the size of a 
resting order may have a legitimate investment purpose, such as to 
reduce execution risk. Additionally, the Exchange believes it will 
remove impediments to and perfect the mechanism of a free and open 
market as well as protect investors by adding transparency to codify 
that a change to the Max Floor (if a Reserve Order) or the stop price 
(if a Stop or Stop-Limit order) will not cause a resting order to lose 
priority because it is unnecessary given the handling of those orders 
and the fact that at that time there is no priority to lose. Such 
handling is consistent with the definitions and handling of both of

[[Page 44440]]

those order types. Specifically, as set forth in the definition of a 
Reserve Order, the Max Floor amount is relevant for replenishment of 
the Display Quantity of the order after execution, and once 
replenished, the System creates a new timestamp for both the Display 
Quantity and Reserve Quantity of the order each time it is replenished 
from reserve (i.e., prioritizes it in the book at the time of 
replenishment). Therefore, there is no need for a loss in priority due 
to a change in the Max Floor amount because that order will have its 
priority reset once it is replenished with that new amount. Similarly, 
as set forth in the definitions of Stop and Stop-Limit orders, those 
orders become market or limit orders, respectively, once triggered and 
thus placed on the book as market or limit orders and prioritized based 
on that time. The stop price is the piece of information that 
determines when these orders will be triggered. As a result, there is 
no need for an order to lose priority due to a change in the stop price 
given that those orders have not yet been prioritized on the Book and 
will be prioritized once triggered and entered into the Book for 
potential execution.
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    \9\ See Rule 5.32(d).
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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 does not 
believe that the proposed rule change will impose any burden on 
intramarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act because the System will handle 
all cancel/replace orders from all users in the same manner. All 
cancel/replace orders, except for the three exceptions, will cause the 
resting order to lose priority. The three types of cancel/replace 
orders that will not cause a resting order to lose priority and are 
consistent with current order handling rules. The Exchange does not 
believe that the proposed rule change will impose any burden on 
intermarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act because the proposed rule change 
only impacts priority of orders resting on the Exchange's book and thus 
will have no impact on terms of an order that are disseminated to 
market participants or on trading outside of the Exchange.

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

    The Exchange neither solicited nor received comments on the 
proposed rule change.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. by order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2022-038 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2022-038. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal offices of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CBOE-2022-038, and should be submitted 
on or before August 16, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-15921 Filed 7-25-22; 8:45 am]
BILLING CODE 8011-01-P