[Federal Register Volume 87, Number 197 (Thursday, October 13, 2022)]
[Notices]
[Pages 62158-62161]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-22179]
[[Page 62158]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95996; File No. SR-C2-2022-017]
Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Rule 5.34 Concerning Drill-Through Protection and Fat Finger Check
October 6, 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 October 4, 2022, Cboe C2 Exchange, Inc. (``Exchange'' or ``C2'')
filed with the Securities and Exchange Commission (``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 C2 Exchange, Inc. (the ``Exchange'' or ``C2 Options'')
proposes to amend Rule 5.34. The text of the proposed rule change is
provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (http://markets.cboe.com/us/options/regulation/rule_filings/ctwo/), 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 5.34. Specifically, the
Exchange proposes to amend its drill-through protection mechanism for
both simple and complex orders and its limit order fat finger check.
The Exchange proposes to amend Rule 5.34(a)(4) and (b)(6) to update
the drill-through protection mechanism for simple and complex orders,
respectively, to provide orders with additional execution
opportunities. Pursuant to the current simple drill-through protection,
if a buy (sell) order enters the Book at the conclusion of the opening
auction process or would execute or post to the Book at the time of
order entry, the System executes the order up to a buffer amount (the
Exchange determines the buffer amount on a class and premium basis)
above (below) the offer (bid) limit of the opening collar \3\ or the
national best bid (``NBO'') (national best offer (``NBB'')) that
existed at the time of order entry, respectively (the ``drill-through
price'').\4\ The System enters a limit order (as long as it has a Time-
in-Force of Day, Good-til-Cancelled or Good-til-Day) (or unexecuted
portion) not executed pursuant to the provision in the immediately
preceding sentence in the Book with a displayed equal to the drill-
through price.\5\ The order (or unexecuted portion) rests in the Book
at the drill-through price \6\ until the earlier to occur of its full
execution and the end of the duration of a number of consecutive time
periods (the Exchange determines on a class-by-class basis the number
of periods, which may not exceed five, and the length of the time
period in milliseconds, which may not exceed three seconds).\7\
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\3\ See Rule 5.31(a) for the definition of Opening Collars.
\4\ See Rule 5.34(a)(4)(A).
\5\ See Rule 5.34(a)(4)(C).
\6\ The proposed rule change adds ``at the drill-through price''
in the first sentence of subparagraph (a)(4)(C)(i), which is a
nonsubstantive change, as it reflects current functionality and is
stated in the introductory paragraph to Rule 5.34(a)(4)(C). The
proposed rule change merely includes this detail in the next portion
of the rule for additional clarity.
\7\ See Rule 5.34(a)(4)(C)(i).
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The proposed rule change amends Rule 5.34(a)(4)(C)(i) to eliminate
the concept that there will be a maximum number of time periods and
proposes that the order (or unexecuted portion) will rest in the Book
at the drill-through price for the duration of consecutive time
periods.\8\ The proposed rule change makes conforming changes to
subparagraph (ii) by deleting references to ``the final period'' and
subparagraph (iv) by deleting the reference to ``any remaining time
period(s),'' as there will no longer be an Exchange-determined limited
number of time periods. Currently, as set forth in current subparagraph
(i), the drill-through mechanism will continue until the earlier to
occur of the order's full execution and the end of the duration of the
Exchange-determined number of time periods. The Exchange proposes to
amend subparagraph (iv) to describe when the drill-through process will
conclude. Specifically, proposed Rule 5.34(a)(4)(C)(iv) provides that
the order continues through the process described in subparagraph (ii)
(as proposed to be amended) until the earliest of the following to
occur: (a) the order fully executes; (b) the User cancels the order;
and (c) the order's limit price equals or is less than (if a buy order)
or greater than (if a sell order) the drill-through price at any time
during application of the drill-through mechanism, in which case the
order rests in the Book at its limit price, subject to a User's
instructions. In other words, the order will continue through
consecutive time periods until it fully executes (unless it is
cancelled by the User or reaches its limit price prior to full
execution), compared to today when the order will continue through
consecutive time periods until it fully executes or reaches the
Exchange-determined final time period, at which time the order would be
cancelled (unless it reaches its limit price prior to full execution).
The Exchange believes eliminating the limit on the number of time
periods may increase execution opportunities for limit orders, which
will still continue to be bound by their limit prices and protected by
the limit order fat finger check.\9\
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\8\ The Exchange will continue to determine on a class-by-class
basis the length of the time periods in milliseconds, which may
continue to not exceed three seconds.
\9\ If a limit price is ``too far away'' from the market, the
order will continue to be subject to the limit order fat finger
protection set forth in Rule 5.34(c)(1) and thus will still be
subject to protection against a potentially erroneous execution due
to an order pricing error upon submission.
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The proposed rule change makes a similar change to the drill-
through protection mechanism for complex orders. Specifically, the
proposed rule change eliminates the concept that, for complex orders
for which the user does not establish a buffer amount (and instead the
Exchange-determined default buffer amount applies),\10\ there
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will be a maximum number of time periods and proposes that the complex
order (or unexecuted portion) will rest in the Book at the drill-
through price for the duration of consecutive time periods.\11\
Currently, similar to the drill-through protection mechanism for simple
orders (as described above), if a user enters a buy (sell) complex
order into the System (and does not enter its own buffer amount), the
System executes the order \12\ up to a buffer amount above (below) the
Synthetic National Best Offer (``SNBO'') (Synthetic National Best Bid
(``SNBB'')) that existed at the time of entry (the ``drill-through
price'') or initiates a complex order auction (``COA'') at the drill-
through price if the order would initiate a COA.\13\ For complex orders
for which the user did not establish a buffer amount, the complex order
(or unexecuted portion) rests in the COB with a displayed price equal
to the drill-through price until the earlier to occur of the complex
order's full execution and the end of the duration of a number of time
periods (the Exchange determines on a class-by-class basis the number
of periods, which may not exceed five, and the length of the time
period in milliseconds, which may not exceed three seconds). Following
the end of each period prior to the final period, the System adds (if a
buy order) or subtracts (if a sell order) one buffer amount to the
drill-through price displayed during the immediately preceding period
(each new price becomes the ``drill-through price''). The complex order
(or unexecuted portion) rests in the COB at that new drill-through
price during the subsequent period. Following the end of the final
period, the System cancels, the complex order (or unexecuted portion)
not executed during any time period.\14\
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\10\ See Rule 5.34(b)(6)(A).
\11\ See proposed Rule 5.34(b)(6)(B). The proposed rule change
has no impact on how the drill-through protection mechanism applies
to a complex order for which the inputting user establishes a buffer
amount, as in that situation, there is only a single time period
pursuant to the current rule (which will continue to be the case).
\12\ Executions occur pursuant to Rule 5.33(e).
\13\ Unlike the simple order drill-through protection mechanism,
the complex order drill-through protection mechanism permits users
to establish a buffer amount different than the Exchange-determined
default buffer amount. See Rule 5.34(b)(6)(A). A description of COAs
is located in Rule 5.33(d).
\14\ See current Rule 5.34(b)(6)(B)(i) and (ii). As set forth in
current subparagraph (iv), if the complex order's limit price is
reached during the application of the drill-through mechanism, the
order will rest in the COB at its limit price.
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The proposed rule change amends Rule 5.34(b)(6)(B)(i) and (ii) to
eliminate the concept that there will be a maximum number of time
periods and proposes that the order (or unexecuted portion) will rest
in the COB at the drill-through price for the duration of consecutive
time periods when a User does not establish its own buffer amount.\15\
The proposed rule change makes conforming changes to current
subparagraphs (i), (ii), and (iv) (proposed subparagraphs (ii) and
(iii)) by deleting references to ``the final period'' and deleting the
reference to ``any remaining time period(s),'' as there will no longer
be an Exchange-determined limited number of time periods. Currently, as
set forth in current subparagraphs (i), (ii), and (iv), if the
inputting User does not establish a buffer amount for the complex
order, the drill-through mechanism will continue until the earlier to
occur of the order's full execution and the end of the duration of the
Exchange-determined number of time periods (unless it reaches its limit
price prior to full execution), at which time the order would be
cancelled. The Exchange proposes to add to the end of proposed
subparagraph (ii) when the drill-through process will conclude and what
happens at that time for complex orders for which the user did not
establish a buffer amount. Specifically, proposed Rule
5.34(b)(6)(B)(ii) provides that the complex order continues through the
process described in proposed subparagraph (ii) until the earliest of
the following to occur: (a) the complex order fully executes; (b) the
User cancels the order; and (c) the complex order's limit price equals
or is less than (if a buy order) or greater than (if a sell order) the
drill-through price at any time during application of the drill-through
mechanism, in which case the complex order rests in the COB at its
limit price, subject to a User's instructions.\16\ In other words, a
complex order for which the User did not establish a buffer amount will
continue through consecutive time periods until it fully executes (or
is cancelled or reaches its limit price), compared to today when the
complex order will continue through consecutive time periods until it
fully executes or reaches the Exchange-determined final time period, at
which time the order would be cancelled (unless it reaches its limit
price, as described in current subparagraph (iv)). The Exchange
believes eliminating the limit on the number of time periods may
increase execution opportunities for limit orders, which will still
continue to be bound by their limit prices and protected by the limit
order fat finger check.\17\
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\15\ The Exchange will continue to determine on a class-by-class
basis the length of the time periods in milliseconds, which may
continue to not exceed three seconds.
\16\ Proposed clause (c) is applicable today and located in
current subparagraph (iv). As described below, the proposed rule
change merely moves this provision from current subparagraph (iv) to
proposed subparagraph (ii).
\17\ If a limit price is ``too far away'' from the market, the
order will continue to be subject to the limit order fat finger
protection set forth in Rule 5.34(c)(1) and thus will still be
subject to protection against a potentially erroneous execution due
to an order pricing error upon submission.
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The proposed rule change also makes certain nonsubstantive changes
to Rule 5.34(b)(6). Specifically, the proposed rule change moves all
provisions specific to the application of the drill-through mechanism
if the user establishes a buffer amount into Rule 5.34(b)(6)(B)(i) and
moves all provisions specific to the application of the drill-through
mechanism if the user does not establish a buffer amount into Rule
5.34(b)(6)(B)(ii). This includes incorporating into each of proposed
subparagraphs (i) and (ii) how the System handles a complex order if
its limit price equals or less than (if a buy order) or greater than
(if a sell order) the drill-through price, as described in current
subparagraph (iv). As a result, the proposed rule change deletes
current subparagraph (iv). Additionally, the proposed rule change moves
certain language regarding what happens if the SBBO changes during any
period, which applies to all complex orders subject to the drill-
through protection mechanism, regardless of whether the user input its
own buffer amount, to proposed subparagraph (iii) from current
subparagraph (ii) and correspondingly changes current subparagraph
(iii) to proposed subparagraph (iv). The proposed rule change makes a
nonsubstantive change to the beginning of proposed subparagraph (iii)
by changing ``However'' to ``Notwithstanding the above,'' as the
Exchange believes that phrase is more appropriate.
In addition, the Exchange proposes to amend Rule 5.34(c)(1)(D) to
add Limit-on-Close orders \18\ to the list of orders to which the limit
order fat finger check does not apply. Pursuant to the limit order fat
finger check, if a User submits a buy (sell) limit order to the System
with a price that is more than a buffer
[[Page 62160]]
amount \19\ above (below) the NBO (NBB) for simple orders or the SNBO
(SNBB) for complex orders, the System cancels or rejects the order.\20\
Currently, the limit order fat finger check does not apply to bulk
messages or stop-limit orders.\21\ The Exchange proposes to also not
apply the limit order fat finger check to Limit-on-Close orders. The
limit order fat finger check applies to orders upon entry to the
System. However, the limit price of a Limit-on-Close order is intended
to relate to the price at the market close, and thus may intentionally
be further away from the NBBO or SNBBO, as applicable, at the time the
order is entered. This may cause the order to be inadvertently rejected
pursuant to this check. The Exchange believes it is not appropriate for
this limit order to be subject to the fat finger check, as the check
may inadvertently cause rejections for orders with limit prices that
are intentionally ``far away'' from the market at the time of order
entry.
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\18\ A ``Limit-on-Close'' or ``LOC'' order is a limit order that
may not execute on the Exchange until three minutes prior to market
close. At that time, the System enters LOC orders into the Book in
time sequence (based on the times at which the System initially
received them), where they may be processed in accordance with Rule
5.32. The System cancels an LOC order (or unexecuted portion) that
does not execute by the market close. Users may not designate bulk
messages as LOC. See Rule 5.6(d) (definition of ``Limit-on-Close''
and ``LOC'' order).
\19\ The Exchange determines a default buffer amount on a class-
by-class basis; however, a User may establish a higher or lower
amount than the Exchange default for a class.
\20\ Rule 5.34(c)(1).
\21\ Rule 5.34(c)(1)(D).
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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.\22\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \23\ 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) \24\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\22\ 15 U.S.C. 78f(b).
\23\ 15 U.S.C. 78f(b)(5).
\24\ Id.
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In particular, the Exchange believes the proposed rule change to
eliminate the maximum number of time periods for which a simple or
complex order will rest in the Book or COB, respectively, during
application of the drill-through protection mechanism will remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, protect investors, because
it will provide simple and complex orders with additional execution
opportunities. These orders may continue to be available on the Book or
COB, as applicable, for execution, at a wider range of prices, as
opposed to today when such orders are cancelled after a specified
number of time periods (depending on the User's instructions and if the
order does not reach its limit price prior to the end of those time
periods). The Exchange believes these additional execution
opportunities will benefit investors that submit such orders and
believes such orders will continue to receive protection against
potentially erroneous executions, as the limit order fat finger check
will continue to apply to them.
The Exchange believes the proposed nonsubstantive rule changes to
the complex order drill-through protection mechanism will protect
investors and the public interest, because these changes improve the
organization of this rule's provisions by grouping all provisions that
apply when a User establishes its own buffer and all provisions that
apply when a User does not establish its own buffer, eliminating
potential confusion.
Finally, the Exchange believes excluding Limit-on-Close orders from
the limit order fat finger check will remove impediments to and perfect
the mechanism of a free and open market and a national market system,
and, in general, protect investors, because it may reduce inadvertent
rejections of Limit-on-Close orders, which may be purposely priced
further away from the NBBO or SNBBO, as applicable, at the time of
entry, as their limit prices are intended to relate to price at the
market close. Therefore, this proposed rule change may increase
execution opportunities for Users that submit Limit-on-Close orders.
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 amended drill-
through protection mechanism (for both simple and complex orders) and
limit order fat finger check will continue to apply in the same manner
to orders of all Users and may lead to increased execution
opportunities. 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 purposes of the Act, because
the proposed rule change relates solely to Exchange risk controls and
how the Exchange handles orders subject to those risk controls.
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
Because the foregoing proposed rule change does not:
A. significantly affect the protection of investors or the public
interest;
B. impose any significant burden on competition; and
C. become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act \25\ and
Rule 19b-4(f)(6) \26\ thereunder. At any time within 60 days of the
filing of the proposed rule change, the Commission summarily may
temporarily suspend such rule change if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission will institute proceedings to determine whether the proposed
rule change should be approved or disapproved.
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\25\ 15 U.S.C. 78s(b)(3)(A).
\26\ 17 CFR 240.19b-4(f)(6).
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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
[[Page 62161]]
Send an email to [email protected]. Please include
File Number SR-C2-2022-017 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-C2-2022-017. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-C2-2022-017 and should be submitted on
or before November 3, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 2022-22179 Filed 10-12-22; 8:45 am]
BILLING CODE 8011-01-P