[Federal Register Volume 88, Number 92 (Friday, May 12, 2023)]
[Notices]
[Pages 30817-30820]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-10128]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97457; File No. SR-CboeBZX-2023-029]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Rule 21.8 Regarding Certain Cancel-Replace Messages

May 8, 2023.
    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 April 25, 2023, Cboe BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') 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 BZX Exchange, Inc. (the ``Exchange'' or ``BZX Options'') 
proposes to amend Rule 21.8. 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/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at 
the Commission's Public Reference Room.

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

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

[[Page 30818]]

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 21.8 to describe the impact on 
option order priority of a cancel/replace message, including a ``no-
change'' order \3\ (i.e., an order submitted to cancel or replace a 
resting order that does not change any terms of an order). The Rules 
are currently silent regarding how the System handles a cancel-replace 
message (that either changes or does not change any terms of the 
resting order). The Exchange recently determined that if the System 
receives a no-change order, the resting order will lose its priority 
position; however, if the System receives a ``no-change'' bid or offer 
in a bulk message, the resting bid or offer will 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 and describe this behavior in 
the Exchange's Rules.
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    \3\ In this context, the term ``order'' includes bids and offers 
submitted in bulk messages. A bulk message means a bit or offer 
included in 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 16.1 (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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    Additionally, the Exchange proposes to describe in the Exchange's 
Rules how the System in general handles all cancel/replace messages 
submitted by users, including those that change or do not change the 
price and size of a resting order's terms. Specifically, the Exchange 
proposes to codify current System functionality that causes a resting 
order to lose its priority position (including if the price of an order 
is changed or the quantity is increased) if any cancel/replace message 
is submitted if any term other than a decrease to the quantity, the Max 
Floor (if a Reserve Order),\4\ or the stop price (if a Stop or Stop 
Limit Order) \5\ is modified.
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    \4\ ``Reserve Orders'' are limit orders that have both a portion 
of the quantity displayed (``Display Quantity'') and with a reserve 
portion of the quantity (``Reserve Quantity'') that is not 
displayed. Both the Display Quantity and Reserve Quantity of the 
Reserve Order are available for potential execution against incoming 
orders. 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 replenishment instructions set forth in 
the Rules. If the remainder of an order is less than the 
replenishment amount, the Exchange will replenish and display the 
entire remainder of the order. A user must instruct the Exchange as 
to the quantity of the order to be initially displayed by the System 
(``Max Floor'') when entering a Reserve Order, which is also used to 
determine the replenishment amount. A new timestamp is created for 
both the Display Quantity and the Reserve Quantity of the order each 
time it is replenished from reserve. See Rule 21.1(d)(1).
    \5\ ``Stop Orders'' are orders that become market orders when 
the stop price is elected. ``Stop Limit Orders'' are orders that 
become limit orders when the stop price is elected. A Stop or Stop 
Limit Order to buy is elected when the consolidated last sale in the 
option occurs at or above, or the NBB is equal to or higher than, 
the specified stop price. A Stop or Stop Limit Order to sell is 
elected when the consolidated last sale in the option occurs at or 
below, or the NBO is equal to or lower than, the specified stop 
price. See Rule 21.1(d)(10) and (11).
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    Therefore, the proposed rule change amends Rule 21.8 to add that 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.
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 all cancel/replace messages, including 
those that change no order terms. The Exchange believes consistency in 
handling of all no-change orders and quotes will simplify order 
handling, which will promote just and equitable principles of trade 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 proposed 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 may 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 used 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.
    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 current System functionality regarding 
all cancel/replace messages, including those that do not cause a loss 
of priority position. Under current System functionality, a cancel/
replace order that changes the price of a resting order or increases 
the size of a resting order the order loses its priority position and 
is placed in a

[[Page 30819]]

priority position based on the time the System receives the cancel/
replace message, as increasing the price or quantity of a resting order 
could cause it to gain priority over other resting orders if it did not 
otherwise get a new timestamp. Additionally, under current System 
functionality, cancel/replace order that decreases the size of a 
resting order (and changes no other terms) does not result in a loss of 
priority position. 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, but would not impact its priority compared 
to other resting orders (e.g., resting orders are often decreased in 
size if they receive partial execution, and the remainders retain their 
priority status; unlike an increase in size, a decrease in size would 
not cause a resting order to otherwise gain priority over other resting 
orders).
    Additionally, under current System functionality, a cancel/replace 
message that changes the Max Floor (if a Reserve Order) or the stop 
price (if a Stop or Stop-Limit order) and no other terms 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 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.

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, including all no-change 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 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

    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 \9\ and 
Rule 19b-4(f)(6) \10\ 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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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 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
     Send an email to [email protected]. Please include 
File Number SR-CboeBZX-2023-029 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CboeBZX-2023-029. 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. Do not include 
personal identifiable information in submissions; you should submit 
only information that you wish to make available publicly. We may 
redact in part or withhold entirely from publication submitted material 
that is obscene or subject to copyright protection. All submissions 
should refer to File Number SR-CboeBZX-2023-029, and should be 
submitted on or before June 2, 2023.


[[Page 30820]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-10128 Filed 5-11-23; 8:45 am]
BILLING CODE 8011-01-P