[Federal Register Volume 89, Number 16 (Wednesday, January 24, 2024)]
[Notices]
[Pages 4639-4641]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-01305]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99386; File No. SR-C2-2024-003]


Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Rule 5.34

January 18, 2024.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on January 3, 2024, Cboe C2 Exchange, Inc. (the ``Exchange'' or 
``C2'') 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 
Exchange filed the proposal as a ``non-controversial'' proposed rule 
change pursuant to section 19(b)(3)(A)(iii) of the Act \3\ and Rule 
19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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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 below.

(additions are italicized; deletions are [bracketed])
* * * * *
Rules of Cboe C2 Exchange, Inc.
* * * * *
Rule 5.34. Order and Quote Price Protection Mechanisms and Risk 
Controls
    The System's acceptance and execution of orders, quotes, and bulk 
messages, as applicable, pursuant to the Rules, including Rules 5.31 
through 5.33, are subject to the following price protection mechanisms 
and risk controls, as applicable.
    (a) Simple Orders.
    (1)-(3) No change.
    (4) Drill-Through Price Protection.
    (A)-(B) No change.
    (C) The System enters a market order with a Time-in-Force of Day or 
limit order with a Time-in-Force of Day, GTC, or GTD (or unexecuted 
portion) not executed pursuant to subparagraph (A) in the Book with a 
displayed price equal to the drill-through price.
    (i)-(vii) No change.
    (D) This protection does not apply to bulk messages or ISOs.
* * * * *
    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

[[Page 4640]]

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 exclude Intermarket Sweep Orders (``ISOs'') from 
its drill-through protection. Pursuant to Rule 5.34(a)(4)(A), if a buy 
(sell) order enters the book at the conclusion of the opening auction 
process or would execute or post to the book when it enters the book, 
the Exchange's system executes the order up to an Exchange-determined 
buffer amount (determined 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''). The System 
cancels or rejects any market order with a time-in-force of immediate-
or-cancel (``IOC'') (or unexecuted portion or limit order with time-in-
force of IOC or fill-or-kill (``FOK'') (or unexecuted portion not 
executed pursuant to the previous sentence.\6\ 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. Specifically, 
the Exchange system enters a market order with a time-in-force of day 
or limit order with a time-in-force of day, good-til-cancelled 
(``GTC''), or good-til-gate (``GTD'') (or unexecuted portion) 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), which are referred 
to as ``iterations.'' Following the end of each period, the Exchange 
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''). 
The order (or unexecuted portion) rests in the book at that new drill-
through price for the duration of the subsequent period. The Exchange 
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 
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.
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    \5\ See Rule 5.31(a) for the definition of Opening Collars.
    \6\ See Rule 5.34(a)(4)(B).
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    Currently, the drill-through protection applies to ISOs. An ISO is 
a limit order for an options series that meets the following 
requirements: (1) when routed to an Eligible Exchange,\7\ the order is 
identified as an ISO; and (2) simultaneously with the routing of the 
order, one or more additional ISOs, as necessary, are routed to execute 
against the full displayed size of any Protected Bid, in the case of a 
limit order to sell, or any Protected Offer, in the case of a limit 
order to buy, for the options series with a price that is superior to 
the limit price of the ISO, with such additional orders also marked as 
ISOs.\8\
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    \7\ An ``Eligible Exchange'' means a national securities 
exchange registered with the SEC in accordance with section 6(a) of 
the Securities Exchange Act of 1934 (the ``Act'') that: (a) is a 
Participant Exchange in OCC (as that term is defined in Section VII 
of the OCC by-laws); (b) is a party to the OPRA Plan (as that term 
is described in Section I of the OPRA Plan); and (c) if the national 
securities exchange chooses not to become a party to this Plan, is a 
participant in another plan approved by the Securities and Exchange 
Commission (the ``Commission'') providing for comparable Trade-
Through and Locked and Crossed Market protection. The term ``Trade-
Through'' means a transaction in an options series at a price that 
is lower than a Protected Bid or higher than a Protected Offer. A 
``Protected Bid'' or ``Protected Offer'' means a bid or offer in an 
options series, respectively, that (a) is disseminated pursuant to 
the OPRA Plan; and (b) is the best bid or best offer, respectively, 
displayed by an Eligible Exchange. A ``Locked Market'' means a 
quoted market in which a Protected Bid is equal to a Protected Offer 
in a series of an options class, and a ``Crossed Market'' means a 
quoted market in which a Protected bid is higher than a Protected 
Offer in a series of an options class. See Cboe Options, Inc. 
(``Cboe Options'') Rule 5.65(e), (g), (i), (o), and (q) 
(incorporated by reference into the Exchange's Rules, as set forth 
in Chapter 5, Section E of the Rulebook).
    \8\ See Rule 5.6(c) (definition of ISO) and Cboe Options Rule 
5.65(h) (incorporated by reference into the Exchange's Rules, as set 
forth in Chapter 5, Section E of the Rulebook).
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    The Exchange proposes to exclude ISOs from the drill-through 
protection.\9\ 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. This is inconsistent with the primary purpose of ISOs, which 
is to permit orders to trade at prices outside of the market. The 
Exchange believes excluding ISOs from the drill-through is consistent 
with the purpose of each type of functionality.
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    \9\ See proposed Rule 5.34(a)(4)(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.\10\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
section 6(b)(5) \11\ 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) \12\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ Id.
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    In particular, the Exchange believes the proposed rule change will 
promote just and equitable principles of trade, remove impediments to 
and perfect the mechanism of a national market system, and protect 
investors and the public interest, because it will increase instances 
in which ISOs receive executions up to their limit prices, including 
outside of the market prices when the ISOs were submitted to the 
Exchange, which the Exchange believes is consistent with the 
expectations of users that submit those orders. As noted above, the 
primary purpose of ISOs is to permit orders to trade at prices outside 
of the market. 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 excluding ISOs from the drill-through 
is consistent with the purpose of each type of functionality. 
Therefore, the Exchange believes the proposed rule

[[Page 4641]]

change will enhance the Exchange system by aligning its drill-through 
protection with the intended purpose of ISOs.\13\ The Exchange believes 
the proposed rule change may ultimately result in additional executions 
consistent with the expectations of users that submit ISOs, which 
ultimately benefits investors. The Exchange further believes the 
proposed rule change is not designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers, as it will apply to 
ISOs of all users.
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    \13\ The Exchange notes ISOs will continue to receive price 
protection, such as from the limit order fat finger check. See Rule 
5.34(c)(1).
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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 it will apply in the 
same manner to ISOs of all Trading Permit Holders. 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 it relates solely to 
the application of one of the Exchange's price protection mechanisms to 
ISOs. Additionally, the proposed rule change substantively identical to 
a recent rule change by Cboe EDGX Exchange, Inc. (``EDGX 
Options'').\14\ The Exchange also notes at least one other options 
exchange excludes ISOs from certain of its price protection 
measures.\15\
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    \14\ See SR-CboeEDGX-2023-082 (December 21, 2023).
    \15\ See Miami International Securities Exchange, LLC (``MIAX'') 
Rule 515(c)(1) (ISOs excluded from MIAX's price protection on non-
market maker orders in non-proprietary products, which prevents 
orders from executing more than a specified number of increments 
away from the national best bid or offer (``NBBO'') at the time the 
order is received).
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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 \16\ and 
Rule 19b-4(f)(6) \17\ thereunder.\18\ 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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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ 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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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-C2-2024-003 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-C2-2024-003. 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 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-C2-2024-003 and should be submitted on 
or before February 14, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-01305 Filed 1-23-24; 8:45 am]
BILLING CODE 8011-01-P