[Federal Register Volume 89, Number 145 (Monday, July 29, 2024)]
[Notices]
[Pages 60958-60962]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-16552]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100582; File No. SR-CboeBZX-2024-071]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To 
Establish New Logical Ports in Connection With a New Connectivity 
Offering on Its Equity Options Platform

July 23, 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 July 17,

[[Page 60959]]

2024, Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') 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 the 
Substance of the Proposed Rule Change

    Cboe BZX Exchange, Inc. (the ``Exchange'' or BZX) proposes to 
establish new logical ports in connection with a new connectivity 
offering on its equity options platform.
    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.

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

1. Purpose
    The Exchange proposes to introduce a new connectivity offering for 
its equity options platform (``BZX Options'').
    By way of background, Exchange Members may interface with the 
Exchange's Trading System \5\ by utilizing either the Financial 
Information Exchange (``FIX'') protocol or the Binary Order Entry 
(``BOE'') protocol. The Exchange further offers a variety of Logical 
Ports,\6\ which provide users of those ports with the ability within 
the Exchange's System to accomplish a specific function through a 
connection, such as order entry, data receipt or access to information. 
For example, the Exchange currently offers Logical Ports, Purge 
Ports,\7\ and Ports with Bulk Quoting Capabilities \8\ (``Bulk 
Ports''). By way of further background, each Logical, Purge and Bulk 
Port corresponds to a single running order handler. Each order handler 
processes the messages it receives from these ports from the connected 
Members. This processing includes determining whether the message 
contains the required information to enter the System, whether the 
message parameters satisfy port-level (i.e., pre-trade) risk controls, 
and where to send that message within the System (i.e., to which 
matching engine \9\). Once an order handler completes the processing of 
a message, it sends that message to the appropriate matching engine. 
Currently, all order handlers connect to all matching engines. The 
Exchange also has multiple matching engines, each of which controls the 
book for one or more classes of options listed for trading on the 
Exchange. An order handler processes messages in the order in which it 
receives them and routes them to matching engines in that same order. A 
matching engine then handles messages in the order it receives them 
from all order handlers.
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    \5\ The terms ``Trading System'' and ``System'' mean the 
automated trading system used by BZX Options for the trading of 
options contracts. See Exchange Rule 16.1 ``Trading System and 
System''.
    \6\ See Exchange Rule 21.1 (l)(2), definition of ``logical 
port.'' Logical ports include FIX and BOE ports (used for order 
entry), drop logical port (which grants users the ability to receive 
and/or send drop copies) and ports that are used for receipt of 
certain market data feeds.
    \7\ Purge Ports provide users the ability to cancel a subset (or 
all) open orders across Executing Firm ID(s) (``EFID(s)''), 
Underlying symbol(s), or CustomGroupID(s), across multiple logical 
ports/sessions. See Securities Exchange Act Release 79956 (February 
3, 2017), 82 FR 10102 (February 9, 2017) (SR-BatsBZX-2017-05). See 
also https://cdn.cboe.com/resources/membership/US_Options_BOE_Specification.pdf and https://cdn.cboe.com/resources/membership/US_Options_FIX_Specification.pdf.
    \8\ See Exchange Rule 21.1 (l)(3), definition of ``bulk port.'' 
Bulk Ports provide users with the ability to submit and update 
multiple quote bids and offers in one message through logical ports 
enabled for bulk-quoting.
    \9\ A matching engine is a part of the Exchange's System that 
processes options quotes and trades on a symbol-by-symbol basis. 
Some matching engines will process option classes with multiple root 
symbols, and other matching engines will be dedicated to one single 
option root symbol (for example, options on SPY will be processed by 
one single matching engine that is dedicated only to SPY). A 
particular root symbol may only be assigned to a single designated 
matching engine. A particular root symbol may not be assigned to 
multiple matching engines.
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    While the Exchange has configured the software and hardware for its 
order handlers in the same manner, there may be a natural variance in 
the amount of time it takes individual order handlers to process 
messages of the same type. Factors that contribute to this 
differentiation in processing times include the availability of shared 
resources (such as memory), which is impacted by (among other things) 
then-current message rates, the number of active symbols (i.e., 
classes), and recent messages for a symbol. This natural 
differentiation in processing times inherently may cause some messages 
to be sent from an order handler to a matching engine ahead of other 
messages that the Exchange's System may have received earlier on a 
different order handler.
    The Exchange intends to implement a new unitized access 
architecture and a new version of its Binary Order Entry (BOE) protocol 
\10\ (``BOEv3''). The new unitized access architecture and protocol 
will result in, among other things, a single gateway per matching 
engine (``unitized layer''). As such, the Exchange believes the 
proposed new unitized architecture will render any natural variance of 
order handler processing irrelevant for Members that connect to the 
unitized order handler. Particularly, under the new unitized BOEv3 
architecture, a single BOEv3 order handler will correspond to a single 
matching engine and all message traffic (including FIX and current 
BOEv2 \11\ port traffic) will pass through this unitized BOEv3 order 
handler before reaching that order handler's corresponding matching 
engine. Currently, BOEv2 and FIX protocols allow Members to access all 
symbols from a single logical port since each port corresponds to a 
single order handler that conveniently connects to all matching engines 
(and those to the books for all symbols) (``convenience layer''). Under 
the new unitized BOEv3 structure, a unitized port type (as defined 
below) will connect to a single BOEv3 order handler that corresponds to 
a single matching engine (as compared to a single order handler that 
corresponds to multiple matching engines).\12\ Therefore, a Member will

[[Page 60960]]

need to obtain separate BOEv3 unitized ports to access each of the 
unitized order handlers and corresponding matching engine(s) that 
process the symbol(s) that Member desires to trade.\13\ More 
specifically, the Exchange intends to adopt three new and separate port 
types that would be used to connect directly to the BOEv3 order 
handlers in the unitized layer: (1) BOE Unitized Ports, (2) Bulk 
Unitized Ports, and (3) Purge Unitized Ports.\14\
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    \10\ The BOE protocol is a proprietary order entry protocol used 
by Members to connect to the Exchange. The current version is BOEv2.
    \11\ The Exchange anticipates decommissioning BOEv2 in February 
2025.
    \12\ Inbound order, quote, modify, and cancel messages 
originating from any supported Exchange order entry protocol will be 
deterministically ordered by the BZX System upon arrival at the 
applicable matching engine corresponding to a particular BOEv3 order 
handler.
    \13\ Members will be able to purchase unitized ports 
individually or may purchase a ``set'' which will provide the total 
number of ports needed to connect to each available matching engine.
    \14\ The Exchange intends to submit a separate rule filing to 
adopt monthly fees related to the use of these three new port types.
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    Similar to the Exchange's existing Logical Ports, the proposed BOE 
Unitized Ports will allow Members to submit orders and quotes. Similar 
to the Exchange's existing Bulk Ports, the proposed Bulk Unitized 
Ports, will allow Members to submit and update multiple quote bids and 
offers in one message. Like the current Bulk Ports, the proposed Bulk 
Unitized Ports will continue to be particularly useful for Members that 
provide quotations in many different options.
    Similar to the Exchange's existing Purge Ports, the proposed Purge 
Unitized Ports will be dedicated logical ports that provide the ability 
to cancel/purge all open orders, or a subset thereof, across multiple 
logical ports through a single cancel/purge message. Like current Purge 
Ports, Purge Unitized Ports will solely process purge messages, as 
opposed to BOE Unitized and Bulk Unitized Ports which each also process 
additional message types. Purge Unitized Ports will be designed to 
assist Members, including Market Makers, in the management of, and risk 
control over, their orders and quotes, particularly if the Member is 
dealing with a large number of options. For example, if a Member 
detects market indications that may influence the direction or bias of 
their quotes the Member may use purge ports, including the proposed 
Purge Unitized Ports, to reduce uncertainty and to manage risk by 
purging all quotes in a number of options seamlessly to avoid 
unintended executions, while continuing to adjust to market conditions. 
Purge messages received by the System from Purge Unitized Ports will 
also be handled by the System in a way that ensures minimum possible 
latency, thereby providing Members with a faster, more efficient means 
to have their quotes removed from the System and thus with an enhanced 
level of risk protection. The operation of the proposed Purge Unitized 
Ports is described in the Exchange's public technical 
specifications.\15\ Finally, like the currently available Purge Ports, 
the proposed Purge Unitized Ports are completely voluntary, and no 
Member is required, or under any regulatory obligation, to utilize 
them.
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    \15\ See US Options Binary Order Entry Version 3 Specification, 
Appendix B--Architectural Diagram at https://cdn.cboe.com/resources/membership/US_Options_BOE3_Specification.pdf.
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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.\16\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \17\ 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) \18\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ Id.
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    In particular, the Exchange believes the proposed rule change 
removes impediments to and perfects the mechanism of a free and open 
market and a national market system and ultimately benefits investors, 
as it is intended to create a more consistent, deterministic experience 
for messages once received within the Exchange's System under the 
proposed new unitized BOEv3 architecture. The Exchange believes this 
will improve the overall access experience on the Exchange and enable 
future system enhancements. The Exchange expects the new BOEv3 protocol 
and architecture, along with the three new corresponding proposed 
unitized port types (i.e., BOE Unitized, Bulk Unitized and Purge 
Unitized ports), to reduce the natural variance of order handler 
processing times for messages, and as a result reduce the potential 
resulting ``reordering'' of messages when they are sent from order 
handlers to matching engines. As described above, under the current 
BOEv2 and FIX protocols, Members can access all symbols from a single 
port. However, due to a variety of factors that result in natural 
variances, under these current protocols and architecture, messages may 
be processed naturally faster by one order handler than by another 
order handler and therefore are less deterministic, which may result in 
potential ``reordering''. The proposal to adopt the unitized BOEv3 
structure (including the corresponding new Unitized Ports) is a 
technical solution that is intended to reduce the potential of this 
reordering and increase determinism. The Exchange also notes that 
Members may choose to not use the proposed new unitized ports at all, 
as such ports will not be the exclusive means for trading on the 
Exchange. Particularly firms may continue to choose to use the existing 
logical ports through the FIX and BOE protocols under the convenience 
layer, in lieu of, or in addition to, the proposed unitized ports (and 
thus continue to use FIX and BOE ports in the manner they do 
today).\19\ The Exchange also notes that at least one other exchange 
appears to also maintain both a unitized and convenience 
architecture.\20\
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    \19\ As noted above, the Exchange intends to decommission the 
current BOEv2 protocol shortly after implementation of BOEv3 
protocol. Users will still be able to connect to the Exchange using 
existing BOE logical ports through the updated BOEv3 protocol under 
the convenience layer in lieu of the existing BOEv2 logical ports.
    \20\ See MIAX Express Interface for Quoting and Trading Options, 
MEI Interface Specification, Section 1.2 (MEI Architecture) 
available at: MIAX_Express_Interface_MEI_v2.10a.pdf (miaxglobal.com) 
which indicates firms can connect directly to one or more matching 
engines depending on which symbols they wish to trade and states 
``MIAX trading architecture is highly scalable and consists of 
multiple trade matching environments (clouds). Each cloud handles 
trading for all options for a set of underlying instruments'' and 
provides that ``Market Maker firms can connect to one or more pre-
assigned servers on each cloud. This will require the firm to 
connect to more than one cloud in order to quote in all underlying 
instruments they are approved to make markets in'' See also MIAX 
Emerald Options Order Management Using FIX Protocol, FIX Interface 
Specification, available at https://www.miaxglobal.com/sites/default/files/page-files/FIX_Order_Interface_FOI_v2.6c.pdf. MIAX 
describes its FIX Order Interface Gateway as ``a high-speed FIX 
Order Interface gateway [that] conveniently routes orders to our 
trading engines through a common entry point to our trading 
platform.'' See https://www.miaxglobal.com/markets/us-options/miax-options/interface-specifications.
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    The Exchange further believes that the proposed Purge Unitized 
(like current

[[Page 60961]]

Purge Ports) will promote just and equitable principles of trade and 
remove impediments to and perfect the mechanism of a free and open 
market because offering this option service promotes choice, 
flexibility, and efficiency. Moreover, the proposed operation of Purge 
Unitized Ports can enhance Market Makers' ability to manage quotes, 
which would, in turn, improve their risk controls and liquidity 
provision to the benefit of all market participants. The Exchange 
believes that proper risk management, including the ability to 
efficiently cancel multiple quotes quickly when necessary is valuable 
to all firms, including Market Makers that have heightened quoting 
obligations \21\ that are not applicable to other market participants. 
This may also be especially critical for those market participants that 
conduct business activity that exposes them to a large amount of risk 
across a number of securities. Finally, like the currently available 
Purge Ports, the proposed Purge Unitized Ports are completely 
voluntary, and no Member is required or under any regulatory obligation 
to utilize them. Market Makers will also continue to have the ability 
to cancel individual quotes through existing functionality, such as 
through the use of a mass cancel message by which a Market Maker may 
request that the Exchange remove all or a subset of its quotations and 
block all or a subset of its new inbound quotations.\22\ As a result, 
Market Makers can currently cancel quotes in rapid succession across 
their existing logical ports or through a single cancel message, all 
open quotes or a subset of open quotes. The Exchange also notes that 
similar connectivity and purge functionality are offered by other 
exchanges.\23\
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    \21\ The proposed rule change will not relieve Market Makers of 
their quoting obligations or firm quote obligations under Regulation 
NMS Rule 602. 17 CFR 242.602. Market Makers that purge their orders 
will not be relieved of the obligation to provide continuous two-
sided quotes on a daily basis, nor is the Exchange prohibited from 
taking disciplinary action against a Market Maker for failing to 
meet their continuous quoting obligation each trading day. See 
Exchange Rule 22.6. See also generally Chapter XXII of the 
Exchange's rules.
    \22\ See Exchange Rule 22.11.
    \23\ See e.g., Securities Exchange Act Release 81252 (July 28, 
2017), 82 FR 36172 (August 3, 2017) (SR-MIAX-2017-36); see also 
Priority Mass Cancel Ports, MIAX Express Interface for Quoting and 
Trading Options, available at: MIAX_Express_Interface_MEI_v2.10a.pdf 
(miaxglobal.com). See also Securities Exchange Act Release 81095 
(July 7, 2017), 82 FR 32409 (July 13, 2017) (SR-ISE-2017-62).
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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. Particularly, the Exchange 
believes the proposed rule change does not impose any burden on intra-
market competition that is not necessary or appropriate in furtherance 
of the purposes of the Act because the proposed BOEv3 structure changes 
(and corresponding new unitized logical ports) will be available to all 
Users. While the Exchange believes that the proposed new structure and 
corresponding BOE Unitized Ports and Bulk Unitized Ports provide a 
valuable service, Members will be able to choose to purchase, or not 
purchase, the proposed logical ports based on their own determination 
of the value and their business needs. Indeed, no Member will be 
currently required or under any regulatory obligation to use unitized 
ports and may continue to use existing FIX and BOE logical ports that 
connect through FIX and BOE order handlers under the convenience 
layer.\24\
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    \24\ Supra note 19.
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    The Exchange also does not believe that the proposed Purge Unitized 
Ports will impose any burden on competition that is not necessary or 
appropriate in furtherance of the Act. First, as is the case with 
existing Purge Ports, all Members are allowed to purchase Purge 
Unitized Ports, although the Exchange anticipates Market Makers to be 
the primary user of such ports. Unlike other market participants, 
Market Makers have a heightened obligation on the Exchange to maintain 
a continuous two-sided market. As such, Market Makers have an 
obligation to provide continuous quotes for a large number of series. 
The volume of quotes that the Market Maker has in the market directly 
correlates to the Market Maker's risk exposure. Other Members by 
contrast, generally only send orders to the Exchange and do not have 
similar obligations. The Exchange believes providing Market Makers with 
an additional risk management tool is a reasonable means to better 
manage their quoting risk while still enabling them to meet their 
heightened quoting obligations.
    Additionally, nothing in the proposal imposes any burden on the 
ability of other exchanges to compete. The Exchange operates in a 
highly competitive market in which exchanges offer various connectivity 
services as a means to facilitate the trading and other market 
activities of those market participants. The Exchange believes the 
proposed Purge Unitized Ports will also enhance competition as similar 
connectivity and purge functionality is offered by other exchanges.\25\
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    \25\ Id.
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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 \26\ and 
Rule 19b-4(f)(6) \27\ 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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    \26\ 15 U.S.C. 78s(b)(3)(A).
    \27\ 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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-CboeBZX-2024-071 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-2024-071. This

[[Page 60962]]

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-CboeBZX-2024-071 and should 
be submitted on or before August 19, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-16552 Filed 7-26-24; 8:45 am]
BILLING CODE 8011-01-P