[Federal Register Volume 88, Number 115 (Thursday, June 15, 2023)]
[Notices]
[Pages 39280-39285]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-12756]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97686; File No. SR-CBOE-2023-031]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Enhance 
Its Drill-Through Protection Processes for Simple Orders and Make Other 
Clarifying Changes

June 9, 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 June 2, 2023, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II 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 enhance its drill-through protection processes for simple orders and 
make other clarifying changes. 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://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 purpose of this rule filing is to amend Rule 5.34(a), Order and 
Quote Price Protection Mechanisms and Risk Controls (Simple Orders), to 
enhance the drill-through protection process for simple orders and make 
other clarifying changes.
    Drill-through price protection is currently described in Exchange 
Rule 5.34(a)(4)(A). Under Rule 5.34(a)(4)(A), if a buy (sell) order 
enters the Book \3\ at the conclusion of the opening auction process or 
would execute or post to the Book at the time of order entry, the 
System \4\ 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 \5\ or the National 
Best Offer (``NBO'') (National Best Bid (``NBB'')) that existed at the 
time of order entry, respectively (the ``drill-through price'').\6\
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    \3\ ``Book'' means the electronic book of simple orders and 
quotes maintained by the System, which single book is used during 
both the regular trading hours and global trading hours trading 
sessions. See Rule 1.1 (definition of, ``Book'').
    \4\ ``System'' means the Exchange's hybrid trading platform that 
integrates electronic and open outcry trading of option contracts on 
the Exchange and includes any connectivity to the foregoing trading 
platform that is administered by or on behalf of the Exchange, such 
as a communications hub. See Rule 1.1 (definition of, ``System'').
    \5\ See Rule 5.31(a) for the definition of Opening Collars.
    \6\ See Rule 5.34(a)(4)(A).
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    Rule 5.34(a)(4)(C) establishes an iterative drill-through process, 
whereby the Exchange permits orders to rest in the Book for multiple 
time periods and at more aggressive displayed prices during each time 
period.\7\ Specifically, for a limit order (or unexecuted portion) with 
a Time-in-Force of Day, Good-til-Cancelled (``GTC''), or Good-til-Date 
(``GTD''), the System enters the order in the Book with a displayed 
price equal to the drill-through price. The order (or unexecuted 
portion) will rest in the Book at the drill-through price for the 
duration of consecutive time periods (the Exchange determines on a 
class-by-class basis the length of the time period in milliseconds, 
which may not exceed three seconds).\8\ Following the end of each 
period, the System adds (if a buy order) or subtracts (if a sell order) 
one buffer amount (the Exchange determines the buffer amount on a 
class-by-class basis) to the drill-through price displayed during the 
immediately preceding period (each new price becomes the ``drill-
through price'').\9\ The order (or unexecuted portion) rests in the 
Book at that new drill-through price for the duration of the subsequent 
period. The System applies a timestamp to the order (or unexecuted 
portion) based on the time it enters or is re-priced in the Book for 
priority reasons. The order continues through this iterative process 
until the earliest of the following to occur: (a) the order fully 
executes; (b) the User \10\ cancels the order; and (c) the buy (sell) 
order's limit price equals or is less (greater) than 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.
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    \7\ The Exchange will announce to Trading Permit Holders the 
buffer amount and the length of the time periods in accordance with 
Rule 1.5. The Exchange notes that each time period will be the same 
length (as designated by the Exchange), and the buffer amount 
applied for each time period will be the same.
    \8\ See Rule 5.34(a)(4)(C). The proposed rule change defines 
this time period as an ``iteration.''
    \9\ See Rule 5.34(a)(4)(C).
    \10\ The term ``User'' shall mean any Trading Privilege Holder 
(TPH) or Sponsored User who is authorized to obtain access to the 
System pursuant to Rule 5.5.
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    Currently, the above-described iterative drill-through process does 
not

[[Page 39281]]

apply to market orders.\11\ Specifically, if a buy (sell) market order 
would execute at the time of order entry, the System executes the order 
up to the Exchange-determined buffer amount above (below) the NBO (NBB) 
at the time of order entry and then rejects any remaining amount.\12\ 
For example, suppose a market order to buy two contracts enters the 
System; assume that the drill-through price buffer for a certain option 
series is $0.90 and that the following quotes are in the Book: Quote 1 
(NBBO): 1 @5.00 x 1 @7.00; Quote 2: 2 @4.00 x 1 @8.00. One contract in 
the market order will execute against the 7.00 offer quote. The 
remaining one contract of the market order is cancelled, because the 
next best offer of 8.00 is 1.00 above the NBO, which is more than the 
0.90 buffer amount.
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    \11\ Rule 5.34(a)(4)(A) and (B).
    \12\ Id.
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    The Exchange proposes for market orders with a Time-in-Force of Day 
to go through the iterative drill-through process described above.\13\ 
In the above example, rather than cancel the remaining one contract, 
the System would rest the one contract in the Book at the drill-through 
price of 7.90 (i.e., the NBO plus the buffer amount) for the Exchange-
determined time period. At the end of that time period, assuming the 
market has not changed, the remaining one contract would execute 
against the 8.00 offer, which is within a buffer amount of the 
subsequent drill-through price of 8.80. As a result, like super-
aggressive limit orders (except for those with Time-in-Force of 
Immediate-or-Cancel (``IOC'') or Fill-or-Kill (``FOK'')) do today, 
market orders (except for those with Time-in-Force of IOC) will have 
additional execution opportunities pursuant to the drill-through 
process. As the proposed rule change only applies to market orders with 
a Time-in-Force of Day, the Exchange also proposes to amend Rule 
5.34(a)(4)(B) to specify that the System will reject any market order 
with a Time-in-Force of IOC (or unexecuted portion) not executed 
pursuant to Rule 5.34(a)(4)(A).\14\ The Exchange believes it is 
appropriate to not have a market order with a Time-in-Force of IOC to 
go through the iteration process, because the iteration process would 
be inconsistent with the IOC instruction (and thus the user's intent). 
Further, the Exchange proposes to amend Rule 5.34(a)(4)(A) to more 
generally describe when applicable order types may become subject to 
drill-through protection. Specifically, the Exchange proposes to 
specify that the protections described in Rule 5.34(a)(4)(A) become 
applicable if a buy (sell) order, to which Rule 5.34(a)(4) would apply, 
(i) enters the Book at the conclusion of opening auction process, or 
(ii) would execute or post to the Book when it enters the Book.\15\
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    \13\ See proposed Rule 5.34(a)(4)(C). The proposed rule change 
also adds ``a'' prior to the term ``Time-in-Force'' in that 
provision, which was inadvertently omitted; this is a nonsubstantive 
grammatical change that conforms the language to that in 
subparagraph (B).
    \14\ There is no change to the handling of market orders with a 
Time-in-Force of GTC or GTD as a result of this rule change; such 
orders will continue to be rejected by the Exchange.
    \15\ This includes, for example, when a Stop (Stop-Loss) or 
Stop-Limit order is elected.
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    The Exchange also proposes to amend Rule 5.34(a)(1)(A)(ii) to 
exclude from the current protections for market orders in no-bid series 
certain orders that would be otherwise subject to the drill-through 
protection under the proposed rule changes. Currently, under Rule 
5.34(a)(1)(A)(ii), if the System receives a sell market order in a 
series after it is open for trading with an NBB of zero, and the NBO in 
the series is greater than $0.50, the System cancels or rejects the 
market order, or routes the market order to PAR for manual handling, 
subject to a User's instruction. The Exchange proposes amending this 
protection in the event a drill-through process is in progress. 
Specifically, the Exchange proposes to amend Rule 5.34(a)(1)(A)(ii) to 
note that in the event the System receives a sell market order in a 
series after it is open for trading with an NBB of zero and the NBO in 
the series is greater than $0.50, if the drill-through process is in 
progress for sell orders and the sell market order would be subject to 
drill-through protection, then the order would join the on-going drill-
through process in the then-current iteration and at the then-current 
drill-through price, regardless of NBBO. The Exchange believes it is 
not optimal for these orders to be immediately booked at the minimum 
tick increment, as under the proposed rule change, such orders would 
instead, be subject to the drill-through protection mechanism described 
under Rule 5.34(a)(4), which may allow opportunity for execution at a 
more beneficial price level than the minimum tick increment.
    Further, the Exchange proposes to amend Rule 5.34(a)(2) to 
specifically exclude orders that would be subject to drill-through 
protection from the market order NBBO width protections described 
therein. Currently, under Rule 5.34(a)(2), if a User submits a market 
order to the System when the NBBO width is greater than x% of the 
midpoint of the NBBO, subject to a minimum and maximum dollar amount 
(as determined by the Exchange on a class-by-class basis), the System 
cancels or rejects the market order. The Exchange proposes amending 
Rule 5.34(a)(2) to exclude Stop (Stop-Loss) \16\ and Market-on-Close 
orders from this protection. Such orders may intentionally be further 
away from the NBBO at the time the order is entered, and the protection 
may cause the orders to be inadvertently rejected pursuant to this 
check. The Exchange believes it is not optimal for these orders to be 
subject to the market order NBBO width protection, as the check may 
inadvertently cause rejections for orders that may otherwise not have 
an opportunity to execute if they are immediately cancelled due to 
market width. Under the proposed rule change, such orders would 
instead, upon entry into the Book (when elected in accordance with 
their definitions), be subject to the drill-through protection 
mechanism described under Rule 5.34(a)(4). The Exchange also proposes a 
clarification to Rule 5.34(a)(4)(E). Currently, under Rule 
5.34(a)(4)(E), if multiple Stop (Stop-Loss) or Stop-Limit \17\ orders 
to buy (sell) have the same stop price and are thus triggered by the 
same trade price or NBBO, and would execute or post to the Book, the 
System uses the contra-side NBBO that existed at the time the first 
order in sequence was entered into the Book as the drill-through price 
for all orders. The Exchange proposes to remove the conditional 
language noting that such Stop (Stop-Loss) or Stop-Limit orders to buy 
(sell) must have the same stop price, as it is possible that orders 
with different stop prices may be triggered by the same trade price or 
NBBO. Further, the Exchange proposes to add language stating that, 
where multiple orders are simultaneously re-priced, the orders will be 
prioritized under subparagraph (C)(v) of Rule 5.34(a)(4)(C)(v) and will

[[Page 39282]]

be sequenced based on the original time each order was entered into the 
Book.
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    \16\ 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. Users may not 
designate a Stop Order as All Sessions. Users may not designate bulk 
messages as Stop Orders. A User may not designate a Stop order as 
Direct to PAR. See Rule 5.6(c) (definition of ``Stop (Stop-Loss)'' 
order).
    \17\ 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. A User may not 
designate a Stop-Limit Order as All Sessions. Users may not 
designate bulk messages as Stop-Limit Orders. A User may not 
designate a Stop-Limit order as Direct to PAR. See Rule 5.6(c) 
(definition of ``Stop-Limit'' order).
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    For example, assume that the drill-through price buffer for a 
certain option series is $0.90, and that the following quotes are in 
the Book: Quote 1 (NBBO): 1 @5.00 x 1 @7.00; Quote 2: 2 @4.00 x 1 
@8.00. Additionally, the following Stop orders are being held in the 
System when Quote 2 is updated to 2 @4.00 x 1 @6.50 (the System 
received these stop orders in the below sequence):

Order 1: Sell 1 @Market, Stop Price = $6.50
Order 2: Sell 1 @Market, Stop Price = $6.55
Order 3: Sell 1 @$3.95, Stop Price = $6.60

Each of orders 1, 2 and 3 have a stop price less than the NBO, and will 
therefore be triggered by the 6.50 quote and enter the Book for 
execution or posting. A drill-through price for all three orders is set 
at the contra-side NBB of 5.00. Per proposed Rule 5.34(a)(4)(C), the 
orders will go through the drill-through process as follows:
    1. Order 1 will execute against Quote 1 @$5.00.
    2. Orders 2 and 3 are posted to sell at $4.10 for the Exchange-
determined time period.
    3. Drill-through process continues for orders 2 and 3 until they 
are canceled or executed.
    As amended, under Rule 5.34(a)(4)(E), all Stop (Stop-Loss) and 
Stop-Limit orders elected as a result of the same election trigger 
(NBBO update or last sale price) will continue to use the same 
reference price for drill-through (even though they may have different 
stop prices).
    The Exchange proposes to amend Rule 5.34(a)(4)(c)(ii), to specify 
that if at any time during the drill-through process, the NBO (NBB) 
changes to be below (above) the current drill-through price, such NBO 
(NBB) will become the new drill-through price and a new drill-through 
will immediately begin. As a result, any improvements to the market 
that occur while the drill-through is in process will be incorporated, 
thereby providing Users with further opportunity to be priced within 
the market while still being protected. Under the proposed rule change, 
any limit order with a price that is less aggressive than the new 
drill-through price would be entered in the Book at its limit price.
    The Exchange also proposes to add Rule 5.34(a)(4)(C)(iv) to provide 
that if the System receives a market or limit order that would be 
subject to the drill-through process while a drill-through is in 
progress in the same series, the order joins the ongoing drill-through 
process in the then-current iteration and at the then-current drill-
through price. Under the proposed rule, orders that come in while a 
drill-through is in process receive the benefit of joining the drill-
through at the NBBO at the time of entry, as opposed to immediately 
executing or being displayed at a more aggressive price than the drill-
through price. By way of illustration, consider the following example:
    Assume that the drill-through price buffer for a certain option 
series is $0.90, and that the following quotes are in the Book: Quote 1 
(NBBO): 1 @5.00 x 1 @7.00; Quote 2: 2 @4.00 x 1 @8.00. The System 
receives the following orders in the below sequence:

Order 1: Sell 1 @Market, Stop Price = $6.50
Order 2: Sell 1 @Market, Stop Price = $6.55
Order 3: Sell 1 @$3.95, Stop Price $6.60
Order 4: Sell 2 @Market, Stop Price = $4.50

    During this time, Quote 2 is updated to: 2 @4.00 x 1 @6.50. Orders 
1, 2, and 3 are elected, and the drill-through reference price for all 
three orders is set to contra-side NBB of 5.00.
    1. Order 1 executes Quote 1 @$5.00.
    2. Orders 2 and 3 are posted to sell @$4.10 (drill-through price) 
for the Exchange-determined time period.
    3. Order 4 is elected due to updated best offer of $4.10, and joins 
Orders 2 and 3 at the iterative drill-through price of $4.10. The offer 
is updated to 4 @$4.10.
    4. Order 5 (Sell 10 @Market (Day)) and Order 6 (Sell 1 @$4.05 Limit 
(Day)) enter the Book. Per proposed Rule 5.34(a)(4)(C)(iv), Orders 5 
and 6 join the drill-through iteration at the drill-through reference 
price of $4.10, and the best offer is updated to 15 @$4.10.
    5. The drill-through process continues for orders 2, 3, 4, 5, and 6 
until the contracts are canceled or executed.
    Because the proposed rule change may result in multiple orders 
going through the drill-through process at the same price and at the 
same time, the proposed rule change also describes how these orders 
will be prioritized and allocated when executing against resting 
interest or incoming interest. Specifically, proposed Rule 
5.34(a)(4)(C)(v) \18\ states the System prioritizes orders that are 
part of the same drill-through iteration (A) based on the time the 
System enters or reprices them in the Book (i.e., in time priority) 
when, after an iteration, the new drill-through price makes the 
order(s) marketable against resting orders and (B) in accordance with 
the applicable base allocation algorithm when executing against any 
incoming interest. The Exchange believes this is appropriate because 
incoming marketable orders would ultimately execute in time priority 
today. Additionally, having multiple orders execute in accordance with 
the applicable base allocation algorithm when executing against 
incoming interest is consistent with how resting orders execute against 
incoming interest.
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    \18\ As a result of the additional provisions described above, 
the proposed rule change renumbers current subparagraph (iv) to be 
proposed subparagraph (vi).
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    Continuing from the above example, assume the drill-through process 
iterates to the next drill-through price, which would be $3.20. In 
doing so, Order 6 posts at its limit price of $4.05, and the rest of 
the orders are eligible to execute in time sequence against the resting 
$4.00 bid. Per proposed Rule 5.34(a)(4)(C)(v), the orders will go 
through the drill-through process as follows:

1. Order 2 (Sell 1 @Market) will execute against Quote 2 @$4.00
2. Order 3 (Sell 1 @$3.95) will execute against Quote 2 @$4.00
3. The Quote 2 is exhausted, and the next best bid is Quote 1 for 5 
@$3.00
4. Remaining drill-through is Order 4 (Sell 2 @Market) and Order 5 
(Sell 10 @Market). Market is now 5 @$3.00 x 12 @$3.20, and the drill-
through process continues until these contracts are executed or 
cancelled.

    If, prior to the next drill-through iteration, Order 7 (buy 5 
@$3.25) is entered and executes against Orders 4 and 5 at $3.20, the 
allocation will depend on the allocation algorithm for the relevant 
class, under the amended Rule.
    1. If pro-rata, Order 7 trades 1 contract against Order 4 and 4 
contracts against Order 5.
    2. If price-time, Order 7 trades 2 contracts against Order 4 and 3 
contracts against Order 5.
    3. Remaining size on Order 4 (if applicable) and Order 5 will 
continue to drill-through as described in previous examples.
    The Exchange also proposes to amend Rule 5.34(a)(4)(C)(vi).\19\ 
Currently, the rule states that an order will continue through the 
drill-through process until the earliest of the following to occur: (a) 
the order fully executes; (b) the User cancels the order; and (c) the 
buy (sell) order's limit price equals or is less (greater) than the 
drill-through price at

[[Page 39283]]

any time during application of the drill-through mechanism, in which 
case the orders rests in the Book at its limit price, subject to a 
User's instruction. The Exchange proposes to amend part (c) to remove 
reference to when the order's limit price equals the drill-through 
price, since under the drill-through process, if a buy (sell) order's 
limit price equals the drill-through price during the application of 
the drill-through mechanism it will remain part of the drill-through 
process, until the order's limit price is less (greater) than the 
drill-through price, at which point it will rest in the Book at its 
limit price. The Exchange also proposes to remove reference to a User's 
instruction, as there is no additional instruction that would allow a 
User to choose a different order handling option once the buy (sell) 
order limit price is less (greater) than the drill-through price.
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    \19\ See supra note 20.
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    Finally, the Exchange proposes to add Rule 5.34(a)(4)(C)(vii) to 
specify that the drill-through protection mechanism applies during all 
trading sessions and to provide clarity as to what happens to orders 
that are undergoing the drill-through process at the end of a trading 
session. Under the proposed rule change, if an order(s) (or unexecuted 
portion(s)) is undergoing the drill-through process at the end of a 
Global Trading Hours (``GTH'') \20\ session, then the drill-through 
process concludes and the order(s) (or unexecuted portions(s)) enters 
the Regular Trading Hours (``RTH'') \21\ Queuing Book \22\ as a market 
order or limit order (at its limits price) on that same trading day, 
subject to a User's instructions. If an order(s) (or unexecuted 
portion(s)) is undergoing the drill-through process at the end of an 
RTH trading session and is eligible for trading during the Curb trading 
session \23\ (i.e., All Sessions or RTH and Curb orders), the drill-
through process will continue into the Curb trading session on that 
same trading day. Finally, if an order(s) (or unexecuted portion(s)) is 
undergoing the drill-through process at the end of its last eligible 
trading session for that trading day (i.e., RTH or Curb), the drill-
through process concludes. Any order (or unexecuted portion) with a 
Time-in-Force of (i) Day is canceled, and (ii) GTC or GTD enters the 
Queuing Book for the next eligible trading session (i.e., GTH or RTH) 
as a market order or limit order (at its limit price).
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    \20\ The GTH session currently begins at 8:15 p.m. (previous 
day) and goes until 9:15 a.m. ET on Monday through Friday.
    \21\ RTH for transactions in equity options (including options 
on individual stocks, ETFs, ETNs, and other securities) are the 
normal business days and hours set forth in the rules of the primary 
market currently trading the securities underlying the options, 
except for options on ETFs, ETNs, Index Portfolio Shares, Index 
Portfolio Receipts, and Trust Issued Receipts the Exchange 
designates to remain open for trading beyond 4:00 p.m. Eastern Time 
(ET) but in no case later than 4:15 p.m. ET. RTH for transactions in 
index options are from 9:30 a.m. to 4:15 p.m. ET, subject to certain 
exceptions.
    \22\ See Rule 5.31 for the definition of Queuing Book.
    \23\ The Curb session begins at 4:15 p.m. and goes until 5:00 
p.m. on Monday through Friday.
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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.\24\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
section 6(b)(5) \25\ 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) \26\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \24\ 15 U.S.C. 78f(b).
    \25\ 15 U.S.C. 78f(b)(5).
    \26\ Id.
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    In particular, the Exchange believes the proposed rule change to 
enhance drill-through protections for simple orders and to make certain 
market orders eligible for drill-through protection 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 these orders with additional and consistent execution 
opportunities and protections. The primary purpose of the drill-through 
price protection is to prevent orders from executing at prices ``too 
far away'' from the market when they enter the Book for potential 
execution. The Exchange believes the proposed rule change is consistent 
with this purpose, because Users who submit market orders with a Time-
in-Force of Day will receive the same level of drill-through price 
protection against execution at potentially erroneous prices that is 
currently afforded to supermarketable limit orders while receiving the 
same additional execution opportunities. Supermarketable limit orders 
currently go through the drill-through process, and market orders with 
a Time-in-Force of Day are functionally similar to supermarketable 
limit orders. Therefore, the Exchange believes it is appropriate to 
provide both types of orders with the same price protection.
    Further, the proposed rule change to provide that any new market 
and limit orders that would be subject to drill-through protection will 
join any in-progress drill-through iterations and display at the then-
current drill-through price (and the corresponding changes regarding 
allocation and prioritization) allows new orders to receive the same 
level of price protection as other orders undergoing the drill-through 
process. The proposed rule change will allow all orders additional 
execution opportunities while continuing to protect them against 
execution at potentially erroneous prices. Similarly, the Exchange 
believes the proposed change to consider changes to the NBO (NBB) 
during drill-through and to update the drill-through price to such NBO 
(NBB) should it be lower (higher) than the drill-through price will 
further provide opportunity for execution at reasonable prices by 
capturing any market moves that may result in more aggressive prices.
    The Exchange believes the proposal will enhance risk protections, 
the individual firm benefits of which flow downstream to counterparties 
both at the Exchange and at other options exchanges, which increases 
systemic protections as well. The Exchange believes enhancing risk 
protections will allow Users to enter orders and quotes with further 
reduced fear of inadvertent exposure to excessive risk, which will 
benefit investors through increased exposure to liquidity for the 
execution of their orders.
    Additionally, the Exchange believes changes to specifically exclude 
from market order NBBO width and market order in no-bid series 
protections certain orders that would be subject to drill-through 
protection will remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, 
protect investors. Specifically, the Exchange believes the changes to 
exclude certain orders that would be subject to drill-through 
protection from market order NBBO width protections may reduce 
inadvertent rejection of such orders which may be purposely priced far 
away from the NBBO at the time of entry and may otherwise miss an

[[Page 39284]]

opportunity for execution if immediately cancelled. The Exchange also 
believes the changes to exclude certain orders that would be subject to 
drill-through protection from market order in no-bid series protections 
may allow opportunity for execution at a more beneficial price level 
than if they were immediately booked at the minimum tick increment. 
This proposed rule change may increase execution opportunities for 
Users that submit such Stop (Stop-Loss) and Market-on-Close orders (in 
the case of market order NBBO width protections) and sell market orders 
with an NBB of zero when the NBO in the series is greater than $0.50 
(in the case of market orders in no-bid series protections).
    The Exchange believes the proposed change to Rule 5.34(a)(4)(E) 
will protect investors because it clarifies that if multiple Stop 
(Stop-Loss) and Stop-Limit orders are triggered by the same trade price 
or NBBO (even if the orders have different stop prices), and would 
execute or post to the Book, the System uses the contra-side NBBO that 
existed at the time the first order in sequence was entered into the 
Book as the drill-through price for all orders. The Exchange believes 
that the proposed rule change will bring greater transparency and 
clarity to the rulebook, thus benefitting investors.
    Finally, the Exchange believes the proposed changes to clarify when 
an order ceases to remain a part of the drill-through process and to 
specify what happens to orders undergoing drill-through at the end of a 
trading session will protect investors by adding transparency to the 
rules regarding the drill-through functionality and provide greater 
certainty as to the application of the drill-through process.

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 enhanced drill-
through protection will apply to all marketable orders in the same 
manner. Additionally, it will provide the same price protection and 
execution opportunities to relevant market orders that are currently 
provided to supermarketable limit orders, which function in a similar 
manner.
    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. The proposed 
enhancement to the drill-through protection is consistent with the 
current protection and provides relevant market orders with improved 
protection against execution at potentially erroneous prices through 
drill-through price protection in accordance with User instructions. 
Additionally, the proposed rule change relates specifically to a price 
protection offered on the Exchange and how the System handles orders as 
part of this price protection mechanism.
    The Exchange believes the proposed rule change would ultimately 
provide all market participants with additional execution opportunities 
when appropriate while providing protection from erroneous execution. 
The Exchange believes the proposal will enhance risk protections, the 
individual firm benefits of which flow downstream to counterparties 
both at the Exchange and at other options exchanges, which increases 
systemic protections as well. The Exchange believes enhancing risk 
protections will allow Users to enter orders and quotes with further 
reduced fear of inadvertent exposure to excessive risk, which will 
benefit investors through increased exposure to liquidity for the 
execution of their orders. Without adequate risk management tools, 
Trading Permit Holders could reduce the amount of order flow and 
liquidity they provide. Such actions may undermine the quality of the 
markets available to customers and other market participants. 
Accordingly, the proposed rule change is designed to encourage Trading 
Permit Holders to submit additional order flow and liquidity to the 
Exchange. Accordingly, the proposed rule change is designed to 
encourage Trading Permit Holders to submit additional order flow and 
liquidity to the Exchange. The proposed flexibility may similarly 
provide additional execution opportunities, which further benefits 
liquidity in potentially volatile markets. In addition, providing 
Trading Permit Holders with more tools for managing risk will 
facilitate transactions in securities because, as noted above, Trading 
Permit Holders will have more confidence protections are in place that 
reduce the risks from potential system errors and market events.
    Finally, the proposed clarifying changes are not intended to have 
any impact on competition, but rather codify current functionality to 
add transparency to the Rules.

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: (i) 
significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days 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)(iii) of the Act \27\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\28\
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    \27\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \28\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-CBOE-2023-031 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.


[[Page 39285]]


All submissions should refer to file number SR-CBOE-2023-031. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office 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-CBOE-2023-031 and should be 
submitted on or before July 6, 2023.
    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-12756 Filed 6-14-23; 8:45 am]
BILLING CODE 8011-01-P