[Federal Register Volume 90, Number 182 (Tuesday, September 23, 2025)]
[Notices]
[Pages 45819-45835]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-18364]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104000; File No. SR-CboeBZX-2025-126]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt
New Rules That Allow for the Trading of Complex Orders on the Exchange
September 18, 2025.
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 September 11, 2025, 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 and II
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 BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') proposes to
adopt new rules that allow for the trading of complex orders on the
Exchange. The text of the proposed rule change is provided in Exhibit
5.
The text of the proposed rule change is also available on the
Commission's website (https://www.sec.gov/rules/sro.shtml), the
Exchange's website (https://www.cboe.com/us/equities/regulation/rule_filings/bzx/), and at the principal office of the Exchange.
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
[[Page 45820]]
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 adopt new rules that describe the trading
of complex orders on the Exchange. Proposed new Rule 21.18 (Complex
Orders) details the functionality of the System \5\ in the handling of
complex orders on the Exchange. The Exchange also proposes changes to
existing Rules 16.1 (Definitions), 20.6 (Nullification and Adjustment
of Options Transactions including Obvious Errors), 21.1 (Definitions),
21.5 (Minimum Increments), 21.6 (Entry of Orders), 21.7 (Opening
Auction Process), 21.14 (Message Traffic Mitigation), 21.16 (Risk
Monitor Mechanism), and 21.17 (Additional Price Protection Mechanisms
and Risk Controls) in connection with the trading of complex orders.
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\5\ The term ``System'' means the automated system for order
execution and trade reporting owned and operated by the Exchange.
See Rule 21.1(a).
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The proposed rules are based substantially on rules of C2 Options
Exchange, Inc. (``C2''). Further, other options exchanges have similar
rules that allow for the trading of complex orders.\6\ The Exchange
believes that the similarity of its proposed complex order rules to
those of other exchanges will allow the Exchange's proposed complex
order functionality to fit seamlessly into the greater options
marketplace and benefit market participants who are already familiar
with similar functionality offered on other exchanges.
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\6\ See, e.g., Cboe Exchange, Inc. (``Cboe Options'') Rule 5.33;
MIAX Options Exchange (``MIAX'') Rule 518; Nasdaq ISE, LLC (``ISE'')
Rules Options 3, Section 14; NYSE Arca, Inc. (``NYSEArca'') Rules
6.91-O and 6.91P-O.
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Definitions
The Exchange first proposes to amend Rule 16.1 (Definitions) to
specify that ``BZX Options Book'' means the electronic book of simple
options orders maintained by the System, also known as the ``Simple
Book'', in order to distinguish it from the Complex Order Book as
defined below. The Exchange also proposes to amend Rule 16.1 to provide
a definition of Complex Order; the proposed definition is identical to
the definition of Complex Order set forth in C2 Rule 1.1. Specifically,
a ``Complex Order'' means an order involving the concurrent execution
of two or more different series in the same class (the ``legs'' or
``components'' of the complex order), for the same account, occurring
at or near the same time in any ratio and for the purpose of executing
a particular investment strategy with no more than the applicable
number of legs (which number the Exchange determines on a class-by-
class basis). The Exchange determines in which classes complex orders
are eligible for processing.
Next, the Exchange proposes to amend Rule 21.1(d), which defines
``Order Type'', to specify that Rule 21.18 sets forth the order types,
Order Instructions, and Times-in-Force the Exchange may make available
for complex orders. The Exchange also proposes to amend the definitions
of Stop Order \7\ and Stop Limit Order,\8\ to specify that for purposes
of Stop Order and Stop Limit Order elections, the consolidated last
sale price in the option excludes prices from complex order trades if
outside of the NBBO. The proposed change aligns the definitions with
those set forth in C2 Rule 5.6(b). The Exchange notes that the only
difference is that its current definition of Stop Order states that a
Stop Order will not be elected if the underlying security is in a
``Limit State'' as defined in the Limit Up-Limit Down Plan; for C2,
this provision is contained separately within C2 Rule 5.32.
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\7\ See Rule 21.1(d)(10).
\8\ See Rule 21.1(d)(11).
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Proposed Rule 21.18(a) provides definitions of terms that apply to
the trading of complex orders, and such terms are used throughout this
proposed rule change. The proposed definitions are identical to those
set forth in C2 Rule 5.33(a), except for differences in the definitions
of complex strategy and SBBO detailed below. The Exchange proposes to
specify that for purposes of Rule 21.18, the included terms will have
the meanings specified in proposed paragraph (a). A term defined
elsewhere in Exchange Rules will have the same meaning with respect to
Rule 21.18, unless otherwise defined in paragraph (a). Below is a
summary of the proposed definitions:
A ``Complex Order Auction'' or ``COA'' is an auction of a
complex order as set forth in proposed Rule 21.18(d), described below.
The ``Complex Order Book'' or ``COB'' is the Exchange's
electronic book of complex orders. All Members may submit orders to
trade against interest or rest in the COB pursuant to the proposed
Rule.
The term ``complex strategy'' means a particular
combination of components and their ratios to one another. New complex
strategies can be created by the Exchange or as the result of the
receipt of a complex instrument creation request or complex order for a
complex strategy that is not currently in the System. The Exchange may
limit the number of new complex strategies that may be in the System at
a particular time or entered for any executing firm ID (``EFID'') \9\
(which EFID limit would be the same for all Users) at a particular
time. As noted above, there is a difference between the proposed
definition and the definition of ``complex strategy'' set forth in C2
Rule 5.33(a). Specifically, the Exchange is proposing to permit new
complex strategies to be created by the Exchange. While there is no
such provision in C2 Rules, the proposed definition is identical to the
definition of ``complex strategy'' set forth in Cboe Options Rule 5.33.
The Exchange believes that permitting the Exchange, as well as
customers, to create complex strategies, including commonly traded
ones, would allow for the consolidation of liquidity within a single
complex strategy that might otherwise be spread across multiple
customer-created complex instruments expressing the same or similar
exposure profiles.
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\9\ The term ``EFIDs'' means Executing Firm IDs and shall refer
to what the System uses to identify the Member and the clearing
number for the execution of orders and quotes submitted to the
System with that EFID. A Member may obtain one or more EFIDs from
the Exchange (in a form and manner determined by the Exchange). The
Exchange assigns an EFID to its Members. See Rule 21.1(k).
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The term ``legging'' is defined in Rule 21.18(g),
described below.
The term ``regular trading'' means trading of complex
orders that occurs during a trading session other than: (a) at the
opening or re-opening of the COB for trading following a halt, or (b)
during the COA process (as described below and in proposed Rule
21.18(d)).
The ``Synthetic Best Bid or Offer'' (``SBBO'') is the best
bid and offer on the Exchange for a complex strategy calculated using
the best price available on the Simple Book for each component (or the
NBBO for a component if there is no resting interest on the Exchange
for that component) of a complex strategy. The Exchange notes that the
difference between this proposed
[[Page 45821]]
definition and the definition of ``SBBO'' set forth in C2 Rule 5.33(a)
relates to display-price sliding functionality on the Exchange, which
is not available on C2.\10\ On C2, the ``SBBO'' means the best bid and
offer on the Exchange for a complex strategy calculated using the BBO
for each component (or the NBBO for a component if the BBO for that
component is not available) of a complex strategy from the Simple
Book.\11\ Under C2 rules, the ``BBO'' is the best bid or offer
disseminated on the Exchange.\12\ On the Exchange, the display-price
sliding functionality provides an automated mechanism that
automatically adjusts how orders are displayed to the market while
preserving their actual ranking priority within the Exchange's order
book. Under the display-price sliding functionality, an order that, at
the time of entry, would lock or cross a Protected Quotation of another
options exchange will be ranked internally at the locking price in the
BZX Options Book (maintaining the user's intended execution priority)
and displayed by the System at one minimum price variation below the
current NBO (for bids) or to one minimum price variation above the
current NBB (for offers). The display-price sliding functionality
creates a more nuanced definition of SBBO which relies on best price
available, because it must account for the distinction between an
order's internal ranking price and its displayed price. Because of
display-price sliding functionality, the Exchange's proposed definition
refers to the best price available on the Simple Book rather than the
BBO.
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\10\ See Rule 21.1(h).
\11\ See C2 Rule 5.33(a).
\12\ See C2 Rule 1.1.
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The ``Synthetic National Best Bid or Offer'' (``SNBBO'')
is calculated using the NBBO for each component of a complex strategy
to establish the best net bid and offer for a complex strategy.
Types of Complex Orders
Proposed Rule 21.18(b), Types of Complex Orders, describes the
various order types and specific times-in-force for complex orders
handled by the System. Proposed Rule 21.18(b) is identical to C2 Rule
5.33(b), except for two differences.
The first difference between the proposed rules and C2 Rules
relates to a C2 restriction regarding submission of complex orders
through bulk ports. C2 Rule 5.33(b) states that Users may not submit
complex orders through bulk ports. Such restriction is not included in
the Exchange's proposal as the Exchange will permit Users to submit
complex orders through bulk ports, which the Exchange believes will
support liquidity provision in complex orders on the Exchange. To
support this, the Exchange also proposes an amendment to Rule 21.6
(Entry of Orders). Current Rule 21.6(a) provides that a User may only
enter one bid and one offer for a series per EFID per bulk port. The
Exchange proposes to amend Rule 21.6(a) to further provide that Users
may only enter one bid and one offer for a complex strategy per EFID
per bulk port.\13\ The addition of ``complex strategy'' to this rule
provision supports the Exchange's proposal to permit complex interest
to be submitted through bulk ports. The Exchange believes the proposed
rule change will encourage Users that use bulk port functionality to
submit bids and offers for a complex strategy to submit their best bids
and offers in that strategy and thus provide displayed liquidity to the
market and contribute to price discovery. Note firms may have multiple
EFIDs and multiple bulk ports and thus will have the ability through
separate ports or EFIDs to submit additional bids and offers using bulk
messages in the same strategy if they choose.
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\13\ The Exchange notes that one of its affiliated options
exchanges, Cboe Options, recently filed a rule change with the
Commission to amend its Rules related to the submission of bids and
offers for certain complex strategies for execution using bulk
message functionality. See Securities Exchange Act Release No.
103701 (August 13, 2025), 90 FR 40093 (August 18, 2025) (SR-CBOE-
2025-059). The proposed change to Rule 21.6(a) is identical to a
proposed change to Cboe Options Rule 5.7(a) set forth in that
proposal; unlike the Cboe Options proposal, this rule filing is not
permitting bulk message functionality for complex strategies, but
just use of complex orders in bulk ports.
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The second difference between the Exchange's proposed changes to
Rule 21.18(b) and related C2 Rules is that the proposed rules do not
include provisions set forth in C2 related to ``All Sessions Complex
Orders'' and ``RTH Only Complex Orders'', as Exchange rules do not
allow for a GTH trading session.
Proposed Rule 21.18(b) states that the Exchange determines which
Times-in-Force of Day,\14\ Good Til Cancelled (``GTC''),\15\ Good Til
Date (``GTD''),\16\ Immediate or Cancel (``IOC''),\17\ or At the Open
(``OPG'') \18\ are available for complex orders (including for
eligibility to enter the COB and initiate a COA). The Exchange
determines which Capacities \19\ (i.e., non-broker-dealer customers,
broker-dealers that are not Market-Makers on an options exchange, or
Market-Makers on an options exchange) are eligible for entry onto the
COB. Complex orders may be market or limit orders. Users may designate
complex orders as Attributable or Non-Attributable.\20\ In addition,
the Exchange proposes to accept the following complex orders: Complex
Only orders, COA-eligible orders, do-not-COA orders, orders with Match
Trade Prevention modifiers, Book Only Complex orders, Post Only Complex
orders, and Complex Reserve Orders, as such terms are defined below.
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\14\ ``DAY'' shall mean, for an order so designated, a limit
order to buy or sell which, if not executed expires at market close.
Users may designate bulk messages as Day. See Rule 21.1(f)(3).
\15\ ``Good Til Cancelled'' or ``GTC'' mean, for an order so
designated, that if after entry into the System, the order is not
fully executed, the order (or the unexecuted portion thereof) shall
remain available for potential display and/or execution unless
cancelled by the entering party, or until the option expires,
whichever comes first. Users may not designate bulk messages as GTC.
See Rule 21.1(f)(4).
\16\ ``Good Til Date'' or ``GTD'' shall mean, for orders so
designated, that if after entry into the System, the order is not
fully executed, the order (or the unexecuted portion thereof) shall
remain available for potential display and/or execution for the
amount of time specified by the entering User unless canceled by the
entering party. Users may not designate bulk messages as GTD. See
Rule 21.1(f)(1).
\17\ ``Immediate Or Cancel'' or ``IOC'' shall mean, for an order
so designated, a limit order that is to be executed in whole or in
part as soon as such order is received. The portion not so executed
immediately on the Exchange or another options exchange is cancelled
and is not posted to the BZX Options Book. IOC limit orders that are
not designated as Book Only Orders and that cannot be executed in
accordance with Rule 21.8 on the System when reaching the Exchange
will be eligible for routing away pursuant to Rule 21.9. Users may
designate bulk messages as IOC. See Rule 21.1(f)(2).
\18\ ``At the Open'' or ``OPG'' shall mean, for an order so
designated, an order that shall only participate in the opening
process on the Exchange. An OPG order not executed in the opening
process will be cancelled. Users may not designate bulk messages as
OPG. See Rule 21.1(f)(6).
\19\ See Rule 16.1 for definition of ``Capacity.''
\20\ See Rule 21.1(c)(1) and (2).
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The Exchange proposes to allow a Market-Maker to designate orders
with a Time-in-Force of Day or IOC to execute only against complex
orders in the COB. These orders, defined as ``Complex Only Orders'' may
not leg into the Simple Book. Unless designated as Complex Only, and
for all other Times-in-Force and Capacities, a complex order may
execute against complex orders in the COB and may Leg into the Simple
Book. The Exchange also believes the proposed functionality is
analogous to other types of functionality already
[[Page 45822]]
offered by the Exchange that provides Members the ability to direct the
Exchange not to route their orders away from the Exchange \21\ or not
to remove liquidity from the Exchange.\22\ Similar to such analogous
features, the Exchange believes that Members may utilize Complex Only
Order functionality as part of their strategy to maintain additional
control over their executions, in connection with their attempt to
provide and not remove liquidity, or in connection with applicable fees
for executions.
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\21\ See Rule 21.1(d)(7), which describes ``Book Only Orders''
as orders that do not route to away options exchanges.
\22\ See Rule 21.1(d)(8), which describes ``Post Only Orders''
as orders that do not route to away options exchanges or remove
liquidity from the Exchange.
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A COA-eligible order is a complex order designated to be placed
into a Complex Order Auction upon receipt that meets the requirements
of Rule 21.18(b)(2), as described below. The Exchange proposes to allow
all types of orders to initiate a COA. Under the proposal, certain
types of orders will default to initiating a COA upon arrival with the
ability to opt-out of initiating a COA and other types of orders will
default to not initiating a COA upon arrival with the ability to opt-in
to initiating a COA. Specifically, as proposed, complex orders that are
marked as IOC will, by default, not initiate a COA upon arrival, but a
Member that submits an order marked IOC may elect to opt-in to
initiating a COA and any quantity of the IOC order not executed will be
cancelled at the end of the COA. Complex orders that are marked as Post
Only with any Time-in-Force will not initiate COA upon arrival, and if
a Members submits an order marked as Post Only to initiate a COA, the
System will cancel the order. Orders with other Times in Force (except
OPG) will by default initiate a COA, but a Member may elect to opt-out
of initiating a COA. Orders with instructions to (or which default to)
initiate a COA are referred to as COA-eligible orders, subject to the
additional eligibility requirements set forth in the proposed rule,
while orders with instructions not to (or which default not to)
initiate a COA are referred to as do-not-COA orders, subject to the
additional eligibility requirements set forth in the proposed rule.
The Exchange also proposes to allow the use of certain Match Trade
Prevention (``MTP'') Modifiers, which allow a Member to avoid trading
against the Member's own orders or orders of affiliates as specified on
an identifier established by the Member (``Unique Identifiers'').\23\
As proposed, the System will support, when trading against other
complex orders on the COB, complex orders with the following MTP
Modifiers defined in Rule 21.1(g): MTP Cancel Newest,\24\ MTP Cancel
Oldest \25\ and MTP Cancel Both.\26\ When Legging (as defined below)
into the Simple Book, a complex order with any MTP Modifier will be
cancelled if it would execute against any leg on the Simple Book that
includes an order with an MTP Modifier and the same Unique Identifier
as the complex order.
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\23\ See Rule 21.1(g).
\24\ Pursuant to Rule 21.1(g)(1), an incoming order marked with
the MTP Cancel Newest (``MCN'') modifier will not execute against
opposite side resting interest marked with any MTP modifier
originating from the same Unique Identifier. The incoming order
marked with the MCN modifier will be cancelled back to the
originating User(s). The resting order marked with an MTP modifier
will remain on the BZX Options Book.
\25\ Pursuant to Rule 21.1(g)(2), an incoming order marked with
the MTP Cancel Oldest (``MCO'') modifier will not execute against
opposite side resting interest marked with any MTP modifier
originating from the same Unique Identifier. The resting order
marked with the MTP modifier will be cancelled back to the
originating User(s). The incoming order marked with the MCO modifier
will remain on the BZX Options Book.
\26\ Pursuant to Rule 21.1(g)(4), an incoming order marked with
the MTP Cancel Both (``MCB'') modifier will not execute against
opposite side resting interest marked with any MTP modifier
originating from the same Unique Identifier. The entire size of both
orders will be cancelled back to the originating User(s).
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The Exchange proposes to allow ``Book Only'' and ``Post Only''
complex orders. A ``Book Only'' complex order is a complex order that
the System ranks and executes pursuant to Rule 21.18, or cancels or
rejects, as applicable (in accordance with the User's instructions). A
``Post Only'' complex order is a complex order the System ranks and
executes pursuant to Rule 21.18 or cancels or rejects, as applicable
(in accordance with the User's instructions), except the order may not
remove liquidity from the COB or the Simple Book. The System cancels or
rejects a Post Only market complex order unless it is subject to the
drill-through price protection in proposed Rule 21.17(b)(6).
The Exchange also proposes to allow ``Complex Reserve Orders.'' As
proposed, a ``Complex Reserve Order'' is a complex limit order with
both a portion of the quantity displayed (``Display Quantity'') and a
reserve portion of the quantity (``Reserve Quantity'') not displayed.
Both the Display Quantity and Reserve Quantity of the Complex Reserve
Order are available for potential execution pursuant to Rule 21.18 (c)
through (e), described below. When entering a Complex Reserve Order, a
User must instruct the Exchange as to the quantity of the Complex
Reserve Order to be initially displayed by the System (``Max Floor'').
If the Display Quantity of a Complex 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 below
replenishment instructions. If the remainder of a Complex Reserve Order
is less than the replenishment amount, the System will display the
entire remainder of the Complex Reserve Order. The System creates a new
timestamp for both the Display Quantity and Reserve Quantity of the
Complex Reserve Order each time it is replenished from reserve. A User
may attach a Random Replenishment instruction to a Complex Reserve
Order, where the System randomly replenishes the Display Quantity for
the Complex Reserve Order with a number of contracts not outside a
replenishment range, which equals the Max Floor plus and minus a
replenishment value established by the User when entering a Complex
Reserve Order with a Random Replenishment instruction. For any Complex
Reserve Order for which a User does not select Random Replenishment,
the System will replenish the Display Quantity of the Complex Reserve
Order with the number of contracts equal to the Max Floor (or the
entire remainder of the Complex Reserve Order if it is less than the
replenishment amount).
COB Opening Process
Proposed Rule 21.18(c) describes the process of accepting orders
prior to the opening of the COB for trading (including after a trading
halt), and the process by which the Exchange will open the COB or re-
open the COB following a trading halt (the ``Opening Process'').\27\
The proposed COB opening process is identical to the COB opening
process for C2, as set forth in C2 Rule 5.33(c). The COB opening
process is critical because it establishes fair opening prices for
multi-leg option strategies by aggregating overnight information and
matching complex orders at optimal prices, preventing market
disruption. This process ensures an orderly market opening, protects
participants from stale pricing, and maintains market integrity by
providing transparent price discovery for complex
[[Page 45823]]
strategies before continuous trading begins.
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\27\ The Exchange also proposes to add Rule 21.7(b)(2)(E) which
provides that complex orders do not participate in the opening
auction process described in Rule 21.7 and instead may participate
in the COB Opening Process pursuant to Rule 21.18(c).
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Proposed Rule 21.18(c)(1) states that the System accepts complex
orders for inclusion in the COB Opening Process at the times and in the
manner set forth in Rule 21.7, except the order entry period for
complex orders ends when the complex strategy opens. The proposed Rule
also states that complex orders entered during the order entry period
are not eligible for execution until the COB Opening Process occurs.
Proposed Rule 21.18(c)(1) states that beginning at 7:30 a.m. and
updated every five seconds thereafter until the initiation of the COB
Opening Process, indicative prices and order imbalance information
based on complex orders queued in the System for the COB Opening
Process will be disseminated by the Exchange.
Pursuant to proposed Rule 21.18(c)(2), the System initiates the COB
Opening Process for a complex strategy after a number of seconds
(determined by the Exchange) after all legs of the complex strategy are
open on the Simple Book. All complex orders the System receives prior
to opening a complex strategy pursuant to Rule 21.18(c)(2) are eligible
to be matched in the COB Opening Process and not during the Opening
Process set forth in Rule 21.7. Under proposed Rule 21.18(c)(2)(A), if
there are matching complex orders in a complex strategy, the System
determines the COB opening price, which is the price at which the most
complex orders can trade. If there are multiple prices that would
result in the same number of complex orders executed, the System
chooses the price that would result in the smallest remaining imbalance
as the COB opening price. If there are multiple prices that would
result in the same number of complex orders executed and the same
smallest imbalance, the System chooses the price closest to the
midpoint of the (i) SNBBO or (ii) if there is no SNBBO available, the
highest and lowest potential opening prices as the COB opening price.
If the midpoint price would result in an invalid increment, the System
rounds the COB opening price up to the nearest permissible increment.
If the COB opening price equals the SBBO, the System adjusts the COB
opening price to a price that is better than the corresponding bid or
offer in the Simple Book by $0.01.
Under proposed Rule 21.18(c)(2)(B), after the System determines a
COB opening price, the Exchange executes matching complex orders in
accordance with the priority in Rule 21.8(a) applicable to the class at
the COB opening price. The System enters any remaining complex orders
(or unexecuted portions) into the COB, subject to a User's
instructions.
Finally, pursuant to proposed Rule 21.18(c)(2)(C), if there are no
matching complex orders in a complex strategy, the System opens the
complex strategy without a trade. If after an Exchange-established
period of time that may not exceed 30 seconds, the System cannot match
orders because (i) the System cannot determine a COB opening price
(i.e., all queued orders are market orders) or (ii) the COB opening
price is outside the SNBBO, the System opens the complex strategy
without a trade. In both cases, the System enters any orders in the
complex strategy in the COB (in time priority), except it Legs any
complex orders it can into the Simple Book (as described below).
Complex Order Auctions (``COAs'')
Proposed Rule 21.18(d) describes the COA process. The proposed COA
process is identical to the COA process for C2, as set forth in C2 Rule
5.33(d), except for one difference related to the priority of
allocation of COA-eligible orders, as described below. All option
classes will be eligible to participate in a COA. A COA is important
because it provides a transparent, competitive price discovery
mechanism that potentially allows complex orders to receive better
execution prices than would be available in the continuous market. The
auction process aggregates liquidity and enables price improvement
opportunities while ensuring fair access for all market participants to
compete for complex order flow.
Proposed Rule 21.18(d)(1) describes the circumstances under which a
COA is begun. Upon receipt of a COA-eligible order, the System
initiates the COA process by sending a COA auction message to all
subscribers to the Exchange's data feeds that deliver COA auction
messages. The COA auction message will identify the COA auction ID,
instrument ID (i.e., complex strategy), Capacity, quantity, and side of
the market of the COA-eligible order. If the COA-eligible order is a
Complex Reserve Order, the COA auction message only identifies the
Display Quantity; however, the entire quantity (both the Display
Quantity and Reserve Quantity) may execute following the COA pursuant
to proposed Rule 21.18(d)(5) described below. The Exchange may also
determine to include the price in COA auction messages, which will be
the limit order price, unless the COA is initiated by a complex market
order, in which case such price will be the SBBO, subject to any
applicable price protections, or the drill-through price if the order
is subject to the drill-through price protection in Rule 21.17(b)(6),
as proposed.
Pursuant to proposed Rule 21.18(d)(2), a COA will be allowed to
occur at the same time as other COAs for the same complex strategy.\28\
If there are multiple COAs ongoing for a specific complex strategy,
each COA concludes sequentially based on the time each COA commenced,
unless terminated early pursuant to proposed Rule 21.18(d)(3) described
below. At the time each COA concludes, the System allocates the COA-
eligible order pursuant to Rule 21.18 and takes into account all COA
Responses for that COA, orders in the Simple Book, and unrelated
complex orders on the COB at the time the COA concludes. If there are
multiple COAs ongoing for a specific complex strategy that are each
terminated early pursuant to Rule 21.18(d)(3), the System processes the
COAs sequentially based on the order in which they commenced. If a COA
Response is not fully executed at the end of the identified COA to
which the COA Response was submitted, the System cancels or rejects the
COA Response (or unexecuted portion) at the conclusion of the specified
COA.
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\28\ The Exchange represents that it has systems capacity to
process multiple overlapping COAs consistent with the proposal,
including systems necessary to conduct surveillance of activity
occurring in such auctions.
---------------------------------------------------------------------------
Proposed Rule 21.18(d)(3) defines the amount of time, the
``Response Time Interval'', in which Users may submit responses to the
COA auction message (``COA Responses''). The Exchange will determine
the duration of the Response Time Interval, which shall not exceed 500
milliseconds. However, the Response Time Interval terminates prior to
the end of that time duration: (A) when the System receives a non-COA-
eligible order on the same side as the COA-eligible order that
initiated the COA but with a price better than the COA price, in which
case the System terminates the COA and processes the COA-eligible order
pursuant to proposed Rule 21.18(d)(5) and posts the new order to the
COB; or (B) when the System receives an order in a leg of the complex
order that would improve the SBBO on the same side as the COA-eligible
order that initiated the COA to a price equal to or better than the COA
price, in which case the System terminates the COA and processes the
COA-eligible order pursuant to proposed Rule 21.18(d)(5), posts the new
order to the Simple Book, and updates the SBBO. Early termination
[[Page 45824]]
scenarios for a COA exist to prevent market disruption and protect
participants when market conditions change significantly during the
auction period, such as when the underlying security experiences rapid
price movements or trading halts that would make the auction price
stale or unfair. These termination triggers ensure market integrity by
canceling auctions when continuing would result in executions at prices
that no longer reflect current market conditions.
Proposed Rule 21.18(d)(4) states that the System accepts a COA
Response(s) with any Capacity in $0.01 increments during the Response
Time Interval. COA Responses must specify the price, size, side of the
market (i.e., a response to a buy COA as a sell or a response to a sell
COA as a buy) and COA auction ID for the COA to which the response is
targeted. COA Responses may be larger than the COA-eligible order. The
System aggregates the size of COA Responses submitted at the same price
for an EFID, and caps the size of the aggregated COA Responses at the
size of the COA-eligible order (including Display Quantity and Reserve
Quantity if the COA-eligible order is a Complex Reserve Order). COA
Responses represent non-firm interest that can be modified or withdrawn
at any time prior to the end of the Response Time Interval, though any
modification to a COA Response other than a decrease of size will
result in a new timestamp and a loss of priority. COA Responses will
not be displayed by the Exchange. At the end of the Response Time
Interval, COA Responses are firm (i.e., guaranteed at their price and
size). A COA Response may only execute against the COA-eligible order
for the COA to which a User submitted the COA Response. The System
cancels or rejects any unexecuted COA Responses (or unexecuted
portions) at the conclusion of the COA.
Proposed Rule 21.18(d)(5) describes how COA-eligible orders are
handled following the Response Time Interval. At the end of the
Response Time Interval, the System executes a COA-eligible order (in
whole or in part) against contra-side interest in price priority. If
there is contra-side interest at the same price, the System allocates
the contra-side interest in the following order: (i) against COA
Responses and unrelated orders with Priority Complex Order Status, if
the Exchange has designated the class as eligible for Priority Complex
Order status as set forth in proposed Rule 21.18(d)(5)(C); (ii) against
orders and quotes in the Simple Book (both displayed and nondisplayed
orders) for the individual leg components of the complex order through
Legging (subject to 21.18(g)), which the System allocates in accordance
with the priority in Rule 21.8(a) applicable to the class; and (iii)
against COA Responses and unrelated orders posted to the COB, which the
System allocates on a pro-rata basis. As described in proposed Rule
21.18(d)(5)(B), the System enters any COA-eligible order (or unexecuted
portion) that does not execute at the end of the COA into the COB (if
eligible for entry), and applies a timestamp based on the time it
enters the COB. The System cancels or rejects any COA-eligible order
(or unexecuted portion) that does not execute at the end of the COA if
not eligible for entry into the COB or in accordance with the User's
instructions. Complex orders resting on the COB may execute pursuant to
proposed Rule 21.18(e) following evaluation pursuant to proposed Rule
21.18(i) and remain on the COB until they execute or are cancelled or
rejected.
As noted above, the proposed COA process is identical to the COA
process for C2, as set forth in C2 Rule 5.33(d), except for the
following difference related to the priority of allocation of COA-
eligible orders. Proposed Rule 21.18(d)(5)(C) describes Priority
Complex Order Status. Users with contra-side complex interest at the
conclusion of the COA and displayed resting quotes and orders in any of
the component legs of the COA-eligible order that were at a price equal
to the NBBO on the opposite side of the market from any of the
components of the COA-eligible order at the time the COA commenced,
have priority in their contra-side complex interest (``Priority Complex
Orders'') up to the largest size of their quotes and orders at the NBBO
in a pro-rata manner. Priority Complex Order status is only valid for
the duration of the particular COA.
The Exchange believes the introduction of Priority Complex Order
status for COA allocation priority will create incentive for Market-
Makers to maintain competitive quotes at the NBBO across individual
legs. By giving priority to those participants who were providing the
best displayed liquidity (i.e., displaying the most competitive (best)
bid and offer prices in a component leg of the COA-eligible order on
the opposite side of the market from any of the components of the COA-
eligible order when the auction began) at the commencement of a COA,
the proposed allocation incentivizes those who contribute to tight
markets and price discovery. Further, the pro rata allocation among
orders with Priority Complex Order status ensures fairness amongst
participants, if multiple participants meet the criteria. Additionally,
participants can only have Priority Complex Order status up to the
largest size of their quotes or orders at the NBBO. The Exchanges notes
that the concept in general of the priority allocation framework
proposed is not novel. Cboe Options Rule 5.38(e)(4) currently allows
for Priority Complex Order Plus Status within Cboe Options' Complex
Automated Improvement Mechanism (``C-AIM'' or ``C-AIM Auction''), which
is similar in concept to the Priority Complex Order status proposed
herein. Both are designed to provide execution priority to market
participants who had displayed interest at the best market prices when
specific auction mechanisms commence. Both statuses grant priority
allocation rights to users with contra-side complex interest who
maintained displayed resting quotes and orders in any of the components
of the auctioned order at prices equal to the best bid or offer on the
opposite side of the market from the auction-eligible order at the time
their respective auctions began. Because the Exchange allocates orders
based on price-time and does not provide priority to Customers, the
proposal, unlike the C-AIM Auction, does not provide an allocation for
Customer orders before the allocation for Priority Complex Orders. In
addition, unlike in the C-AIM Auction, where Priority Complex Order
Plus Status is available only for exclusively listed exchange options,
the proposed Priority Complex Order status will be available for all
equity and index options. The Exchange does not have a C-AIM Auction,
and thus is merely proposing to include this priority allocation in a
different auction for complex orders to provide Users with an incentive
to display liquidity at the best prices.
Processing of Do-Not-COA Orders/Orders Resting on the COB
Proposed Rule 21.18(e) describes the processing of do not-COA
orders and orders resting on the COB. The proposed processing of do-
not-COA orders and orders resting on the COB is identical to the
process for C2, as set forth in C2 Rule 5.33(e).
As proposed, upon receipt of a do-not-COA order, or if the System
determines an order resting on the COB is eligible for execution
following evaluation pursuant to proposed Rule 21.18(i), the System
executes it (in whole or in part) against contra side interest in price
priority. If there is contra side interest at the same price, the
System allocates the contra side
[[Page 45825]]
interest as follows: (1) Orders and quotes in the Simple Book (both
displayed and nondisplayed orders) for the individual leg components of
the complex order through Legging (subject to proposed Rule 21.18(g)),
which the System allocates in accordance with the priority in Rule
21.8(a) applicable to the class; and (2) Complex orders resting on the
COB, which the System allocates in accordance with the priority in Rule
21.8(a) applicable to the class. The System enters any do-not-COA order
(or unexecuted portion) that does not execute against the individual
leg markets or complex orders into the COB (if eligible for entry), and
applies a timestamp based on the time it enters the COB. The System
cancels or rejects any complex order (or unexecuted portion) that would
execute at a price outside of the SBBO, that is not eligible for entry
into the COB, or in accordance with the User's instructions. Complex
orders resting on the COB may execute pursuant to proposed Rule
21.18(e) following evaluation pursuant to proposed Rule 21.18(i) and
remain on the COB until they execute or are cancelled or rejected.
Minimum Increments and Execution Prices.
Proposed Rule 21.18(f) describes the minimum increments and
execution prices for complex orders. The minimum increments and
execution price provisions are identical to C2, as set forth in C2 Rule
5.33(f), except for one difference related to the proposed definition
of SBBO. Proposed Rule 21.18(f)(1) provides the minimum increment for
bids and offers on a complex order is $0.01, and the components of a
complex order may be executed in $0.01 increments, regardless of the
minimum increments otherwise applicable to the individual components of
the complex order.\29\
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\29\ The Exchange also proposes to add Rule 21.5(e) (Minimum
Increments), which provides that, notwithstanding any other
provision of Rule 21.5, the minimum trading increment for bids and
offers on complex orders shall be determined in accordance with Rule
21.18.
---------------------------------------------------------------------------
Next, with respect to the execution of complex orders, as described
in proposed Rule 21.18(f)(2), the System does not execute a complex
order pursuant to Rule 21.18 at a net price: that would cause any
component of the complex strategy to be executed at a price of zero;
that would cause any component of the complex strategy to be executed
at a price worse than the individual component price on the Simple
Book; worse than the price that would be available if the complex order
Legged into the Simple Book; or worse than the SBBO.
Further, if a complex order has a ratio equal to or greater than
one-to-three (.333) and less than or equal to three-to-one (3.00), at
least one component of the complex order must execute at a price that
improves the best price available for that component; or if the complex
order has a ratio less than one-to-three (.333) or greater than three-
to-one (3.00), the component(s) of the complex order for the leg(s)
with a Customer order at the best price available must execute at a
price that improves the price of that Customer order(s) on the Simple
Book. The Exchanges notes a slight difference between this proposed
Rule and C2 Rule 5.33(f)(1)(D)(i) and (ii), which states that if a
complex order has a ratio equal to or greater than one-to-three (.333)
and less than or equal to three-to-one (3.00), at least one component
of the complex order must execute at a price that improves the BBO for
that component; or if the complex order has a ratio less than one-to-
three (.333) or greater than three-to-one (3.00), the component(s) of
the complex order for the leg(s) with a Customer order at the BBO must
execute at a price that improves the price of that Customer order(s) on
the Simple Book. The difference between the Exchange's consideration of
``best price available'' and C2's consideration of ``BBO'' is due to
the difference in the Exchange's proposed definition of SBBO, described
above.
The purpose of this provision is to prevent a component of a
complex order from being executed at a price that is inferior to the
best-priced contra-side orders on the Simple Book (including Customer
orders) and, for a complex order with a ratio less than one-to-three or
greater than three-to-one, to prevent the component(s) of a complex
order for the leg(s) with a Customer order at the best price from
executing at that price. For a complex order with a ratio equal to or
greater than one-to-three and less than or equal to three-to-one, the
provision is designed to protect Customer order interest on the Simple
Book.
As set forth in proposed Rule 21.18(f)(3), complex orders will be
executed without consideration of any prices for the complex strategy
that might be available on other exchanges trading the same complex
strategy provided, however, that such complex order price may be
subject to the drill-through price protection described in Rule
21.17(b)(6).
Legging
Proposed Rule 21.18(g) describes the Legging process through which
complex orders, under certain circumstances, are executed against the
individual components of a complex strategy on the Simple Book. The
Legging provisions are identical to C2, as set forth in C2 Rule
5.33(g).
Complex orders up to a maximum number of legs (which the Exchange
determines on a class-by-class basis and may be up to 16) may be
automatically executed against bids and offers on the Simple Book for
the individual legs of the complex order (``Legging''), provided the
complex order can be executed in full or in a permissible ratio by such
bids and offers. The Legging provisions proposed are identical to those
set forth in C2 Rule 5.33(g). All two leg COA-eligible Customer complex
orders may Leg into the Simple Book without restriction. Complex orders
for any other Capacity with two option legs that are both buy or both
sell and that are both calls or both puts may not Leg into the Simple
Book, and all complex orders with three or four option legs that are
all buy or all sell (regardless of whether the option legs are calls or
puts) may not Leg into the Simple Book; these orders may execute
against other complex orders in the COB. Post Only complex orders may
not Leg into the Simple Book. The entire quantity of a Complex Reserve
Order (both the Display Quantity and Reserve Quantity) Legs into the
Simple Book at the same time, and any quantity that does not execute
pursuant to Rule 21.18(d) or (e) after Legging will rest in the COB in
accordance with the Complex Reserve Order instruction.
While, in general, Legging restrictions are designed to prevent
market participants from breaking apart complex option strategies into
individual leg executions to circumvent the complex order book and gain
unfair trading advantages, there are certain circumstances where there
are legitimate trading scenarios where participants need flexibility to
manage risk or execute strategies when the complex order book lacks
sufficient liquidity or appropriate pricing. These proposed rules are
designed to provide this flexibility, while also ensuring multi-leg
strategies are executed as intended through the complex order process,
to maintain market integrity.
The Exchange believes the proposed rules will provide greater
liquidity to the marketplace as a whole by fostering the interaction
between the components of complex orders on the COB and the Simple
Book. This should enhance the opportunity for executions of both
complex orders and simple orders. The Exchange also believes the
interaction of orders will increase the opportunity for
[[Page 45826]]
complex orders to receive execution, while also enhancing execution
quality for orders on the Simple Book. The proposed rule will
facilitate the execution of more complex orders because complex orders
will have a greater chance of execution when they are allowed to leg
into the simple market. This will increase the execution rate for these
orders, thus providing market participants with an increased
opportunity to execute these orders on the Exchange.
The prohibition (though inapplicable to two-leg COA-eligible
Customer complex orders) against the Legging of complex orders with two
option legs where both legs are buying or both legs are selling and
both legs are calls or both legs are puts, and on complex orders with
three or four option legs where all legs are buying or all legs are
selling regardless of whether the option leg is a call or a put ensures
that Market Makers providing liquidity do not trade above their
established risk tolerance levels.
Further, the Exchange also believes it is reasonable to limit other
types of complex orders that are eligible to leg into the Simple Book.
Specifically, the Exchange believes that the potential risk of offering
Legging functionality for complex orders such as those impacted by the
proposed rule could limit the amount of liquidity that Market Makers
are willing to provide in the Simple Book. In particular, Market
Makers, without the proposed limitation, are at risk of executing the
cumulative size of their quotations across multiple options series
without an opportunity to adjust their quotes. Market Makers may be
compelled to change their quoting and trading behavior to account for
this additional risk by widening their quotes and reducing the size
associated with their quotes, which would diminish the Exchange's
quality of markets and the quality of the markets in general. The
proposed limitations substantially diminish a potential source of
unintended Market Maker risk when certain types of complex orders leg
into the Simple Book and protect investors and the public interest by
adding confidence and stability in the Exchange's marketplace. This
benefit to investors far exceeds the small amount of potential
liquidity provided by the few complex orders to which this aspect of
the proposal applies.
Additional Complex Order Handling
Proposed Rule 21.18(h) sets forth additional provisions regarding
the processing and execution of complex orders, which are identical to
those set forth in C2 Rule 5.33(h). Additional complex order handling
rules are included to address scenarios and order types that fall
outside the standard complex order book framework, ensuring
comprehensive coverage of all possible complex trading situations.
These rules provide clarity on how to handle circumstances that require
specific treatment beyond the basic complex order matching process,
maintaining consistent and fair market operations across all complex
trading scenarios.
Under the proposed rule, a complex market order or a limit order
with a price that locks or crosses the then-current opposite side SBBO
and does not execute because the SBBO is the best price but not
available for execution (because it does not satisfy the complex order
ratio or the complex order cannot Leg into the Simple Book) enters the
COB with a book and display price that improves the then-current
opposite side SBBO by $0.01. If the SBBO changes, the System
continuously reprices the book and display price of the complex order
(or unexecuted portion) based on the new SBBO (up to the limit price,
if it is a limit order), subject to the drill-through price protection
described in Rule 21.17(b)(6), until the complex order has been
executed in its entirety or the complex order (or unexecuted portion)
of the complex order is cancelled or rejected.
Additionally, under the proposed rule, if there is a zero NBO for
any leg, the System replaces the zero with a price $0.01 above the NBB
to calculate the SNBBO, and complex orders with any buy legs do not Leg
into the Simple Book. If there is a zero NBB, the System replaces the
zero with a price of $0.01, and complex orders with any sell legs do
not Leg into the Simple Book. If there is a zero NBB and zero NBO, the
System replaces the zero NBB with a price of $0.01 and replaces the
zero NBO with a price of $0.02, and complex orders do not Leg into the
Simple Book. Proposed Rule 21.18(h)(3) states that the System cancels
or rejects a Post Only complex order if it locks or crosses a resting
complex order in the COB or the then-current opposite side SBBO. The
System cancels a resting Post Only complex limit order after evaluation
pursuant to proposed Rule 21.18(i) if the System determines the resting
Post Only complex limit order locks or crosses the updated SBBO.
Finally, under proposed Rule 21.18(h)(4), displayed complex orders
resting on the COB have priority over nondisplayed portions of Complex
Reserve Orders resting on the COB.
Evaluation Process
Proposed Rule 21.18(i) describes how and when the System determines
to execute or otherwise handle complex orders in the System and is
identical to C2 Rule 5.33(i). These evaluation process rules define the
systematic criteria and procedures the System uses to determine how and
when to handle complex orders, ensuring consistent, transparent, and
fair treatment of all complex strategies within the System.
Evaluation results in the various manners of handling and executing
complex orders as described herein. The System evaluates an incoming
complex order upon receipt after the open of trading to determine
whether it is a COA-eligible order or a do-not-COA order and thus
whether it should be processed pursuant to proposed Rule 21.18(d) or
(e), respectively. The System reevaluates a complex order resting on
the COB (including an order (or unexecuted portion) that did not
execute pursuant to proposed Rule 21.18(d) or (e) upon initial receipt)
at the time the COB opens, following a halt, and during the trading
session when the leg market price or quantity changes to determine
whether the complex order can execute pursuant to proposed Rule
21.18(e), should be repriced pursuant to proposed Rule 21.18(h), should
remain resting on the COB, or should be cancelled.
Limit Up-Limit Down State and Trading Halts
Proposed Rule 21.18(j) and Rule 21.18(k) set forth details
regarding the Exchange's handing of complex orders in a limit up-limit
down state and in the context of a trading halt. In general, limit up-
limit down state and trading halt provisions are designed to maintain
orderly markets and protect participants by automatically pausing or
restricting trading when securities experience extreme price movements
that could indicate market disruption or erroneous activity. These
mechanisms prevent cascading volatility, allow time for information
dissemination and rational decision-making, and ensure that trading
resumes in a fair and orderly manner once market conditions stabilize.
Proposed Rule 21.18(j), which is identical to C2 Rule 5.33(j),
states that the System cancels or rejects a complex market order it
receives when the underlying security is subject to a limit up-limit
down state. If during a COA of a COA-eligible market order, the
underlying security enters a limit up-limit down state, the System
terminates
[[Page 45827]]
the COA without trading and cancels or rejects all COA Responses.
Proposed Rule 21.18(k), which is identical to C2 Rule 5.33(k), sets
forth the details regarding the Exchange's handling of complex orders
in the context of a trading halt. Proposed Rule 21.18(k)(1) would
govern halts during regular trading and would state that if a trading
halt exists for the underlying security or a component of a complex
strategy, trading in the complex strategy will be suspended. The System
queues a User's open complex orders during a halt, unless the User
entered instructions to cancel its open complex orders upon a halt, for
participation in the re-opening of the COB as set forth in Rule
21.18(k)(3) below. The COB will remain available for Members to enter
and manage complex orders. Incoming complex orders that could otherwise
execute or initiate a COA in the absence of a halt will be placed on
the COB. Incoming complex orders with a time in force of IOC will be
cancelled.
Proposed Rule 21.18(k)(2) would govern halts during a COA and would
state that if, during a COA, any component(s) and/or the underlying
security of a COA-eligible order is halted, the COA will end early
without trading, and the System cancels or rejects all COA Responses.
Remaining complex orders will be placed on the COB if eligible, or
cancelled. Under proposed Rule 21.18(k)(3), when trading in the halted
component(s) and/or underlying security of the complex order resumes,
the System re-opens the COB pursuant to Rule 21.18(c). The System
queues any complex orders designated for a re-opening following a halt
until the halt has ended, at which time they are eligible for execution
in the Opening Process.
Interpretations and Policies
The Exchange also proposes several Interpretations and Policies to
proposed Rule 21.18, which are identical to the Interpretations and
Policies in C2 Rule 5.33.
First, the Exchange has not proposed different standards for
participation by Market Makers on the COB (e.g., no specific benefits
or obligations). Proposed Rule 21.18, Interpretation and Policy .01
makes clear that Market Makers are not required to quote on the COB.
Thus, unlike the continuous quoting requirements in the simple order
market, there are no continuous quoting requirements respecting complex
orders. Complex strategies are not subject to any quoting requirements
that are applicable to Market Makers in the simple market in its
appointed classes. The Exchange does not take into account a Market-
Maker's complex orders entered in its appointed classes when
determining whether a Market-Maker meets its quoting obligations
pursuant to Rule 22.6 in its appointed classes.
Proposed Rule 21.18, Interpretation and Policy .02 states that a
Market-Maker's orders for complex strategies executed in classes in
which it has no appointment are included in the total number of all
contracts the Market-Maker executes on the Exchange in any calendar
quarter in determining whether the Market-Maker exceeds the 25%
threshold pursuant to Rule 22.6(f).
Finally, proposed Rule 21.18, Interpretation and Policy .03 is a
regulatory provision that prohibits the dissemination of information
related to COA-eligible orders by the submitting Member to third
parties and prohibits a pattern or practice of submitting orders that
cause a COA to conclude early. Such conduct will be deemed conduct
inconsistent with just and equitable principles of trade as described
in Exchange Rule 3.1.
Risk Monitor Mechanism
Risk monitor mechanism rules are designed to provide real-time
safeguards that can reject or cancel orders before they expose
participants to unacceptable risk levels. The Exchange proposes to
adopt Rule 21.16(f) to provide that complex orders will participate in
the Exchange's existing risk functionality, the Risk Monitor Mechanism,
identical to C2 Rule 5.34(c)(4)(E). The Risk Monitor functions by
counting Member activity both within a specified time period and also
on an absolute basis for the trading day and then rejecting or
cancelling orders that exceed Member-designated volume, notional, count
or percentage triggers. The Exchange proposes to make clear via the
proposed rule change that for purposes of counting within a specified
time period and for purposes of calculating absolute limits, the
Exchange will count individual trades executed as part of a complex
order when determining whether a volume trigger, notional trigger or
count trigger has been reached. Further, the Exchange proposes to make
clear that for purposes of counting within a specified time period and
for purposes of calculating absolute limits, the Exchange will count
the percentage executed of a complex order (or COA response) when
determining whether the percentage trigger has been reached.
Message Traffic Mitigation
The Exchange proposes to adopt Rule 21.14(e), identical to C2 Rule
5.25(c), which would apply to the Exchange's auction mechanism (i.e.,
COA) to increase the likelihood that timely submitted auction responses
may participate in the auction, even during periods of high message
traffic. Under the proposed functionality, at the time an auction
response period ends, the System will continue to process its inbound
queue for any messages that were received by the System before the end
of the auction period (including auction messages) for up to an
Exchange-determined period of time, not to exceed 100 milliseconds
(which the Exchange may determine on a class-by-class basis which would
apply to all auction mechanisms and which would be announced with
reasonable advanced notice via Exchange Notice). That is, any auction
responses that were in the queue before the conclusion of the auction
(as identified by the Network Interface Card (``NIC'') timestamp on the
message) would be processed as long as the Exchange-determined time on
a class-by-class basis (not to exceed 100 milliseconds) is not
exceeded. Only auction messages received prior to the execution of the
applicable auction are eligible to be processed for that auction. The
applicable auction will execute once all messages, including auction
responses, received before the end time of the auction response period
have been processed or the Exchange-determined maximum time limit of up
to 100 milliseconds has elapsed, whichever occurs first. This
continuation of processing the queue for an additional amount of time
for messages that were received before the end of the auction allows
for auction responses that would otherwise have been canceled due to
the conclusion of the auction response period to still have an
opportunity to participate in the auction. This provides such responses
with increased opportunities to participate in the auction, even during
periods of high message traffic, thereby potentially providing
customers with additional opportunities for price improvement, while
still providing a processing cut off time to ensure auction executions
aren't unduly delayed.
Additional Price Protection Mechanisms and Risk Controls
The Exchange proposes changes to Rule 21.17 (Additional Price
Protection Mechanisms and Risk Controls).\30\ Rule
[[Page 45828]]
21.17(b), as proposed, establishes price protection standards that are
intended to ensure that certain types of complex strategies will not be
executed outside of a preset standard minimum and/or maximum price
limit. These Rules are identical to C2 Rule 5.34(b).
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\30\ As part of the proposed rule change, the Exchange proposes
to restructure Rule 21.17 to rename subparagraph (a) as ``Simple
Orders'', subparagraph (b) as ``Complex Orders'', and subparagraph
(c) as ``All Orders''; and relabel current Rule 21.17(a), (c), (d),
(e), and (f) as Rule 21.17(a)(1), (2), (3), (4), and (5),
respectively. As described herein, current Rule 21.17(b) and (g)
will be moved under Rule 21.17(c), as amended.
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First, in paragraph (1) of Rule 21.17(b), as amended, the Exchange
proposes to define various terms as follows:
A ``vertical'' spread is a two-legged complex order with
one leg to buy a number of calls (puts) and one leg to sell the same
number of calls (puts) with the same expiration date but different
exercise prices.
A ``butterfly'' spread is a three-legged complex order
with two legs to buy (sell) the same number of calls (puts) and one leg
to sell (buy) twice as many calls (puts), all with the same expiration
date but different exercise prices, and the exercise price of the
middle leg is between the exercise prices of the other legs. If the
exercise price of the middle leg is halfway between the exercise prices
of the other legs, it is a ``true'' butterfly; otherwise, it is a
``skewed'' butterfly.
A ``box'' spread is a four-legged complex order with one
leg to buy calls and one leg to sell puts with one strike price, and
one leg to sell calls and one leg to buy puts with another strike
price, all of which have the same expiration date and are for the same
number of contracts.
Second, in paragraph (2) of Rule 21.17(b), as amended, the Exchange
has proposed to specify credit-to-debit parameters that would prevent
execution of, and instead cancel or reject, market orders that would be
executed at a net debit price after receiving a partial execution at a
net credit price.
Next, in paragraph (3) of Rule 21.17(b), as amended, the Exchange
proposes to set forth various Debit/Credit Price Reasonability Checks,
as follows. To the extent a price check parameter is applicable, the
Exchange will cancel or reject a complex order (or unexecuted portion)
that is a limit order for a debit strategy with a net credit price that
exceeds a pre-set buffer, a limit order (or unexecuted portion) for a
credit strategy with a net debit price that exceeds a pre-set buffer,
or a market order (or unexecuted portion) for a credit strategy that
would be executed at a net debit price that exceeds a pre-set buffer.
As proposed in subparagraph (3)(B), the System would define a complex
order as a debit or credit as follows: (i) a call butterfly spread for
which the middle leg is to sell (buy) and twice the exercise price of
that leg is greater than or equal to the sum of the exercise prices of
the buy (sell) legs is a debit (credit); (ii) a put butterfly spread
for which the middle leg is to sell (buy) and twice the exercise price
of that leg is less than or equal to the sum of the exercise prices of
the buy (sell) legs is a debit (credit); and (iii) an order for which
all pairs and loners are debits (credits) is a debit (credit). For
purposes of Debit/Credit Price Reasonability Checks, a ``pair'' is a
pair of legs in an order for which both legs are calls or both legs are
puts, one leg is a buy and one leg is a sell, and both legs have the
same expiration date but different exercise prices, or the same
exercise price with different expiration dates. A ``loner'' is any leg
in an order that the System cannot pair with another leg in the order.
The proposed rule would further specify: that the System first pairs
legs to the extent possible within each expiration date, pairing one
leg with the leg that has the next highest exercise price; and that the
System then pairs legs to the extent possible with the same exercise
prices across expiration dates, pairing one leg with the leg that has
the next nearest expiration date. A pair of calls is a credit (debit)
if the exercise price of the buy (sell) leg is higher than the exercise
price of the sell (buy) leg (if the pair has the same expiration date)
or if the expiration date of the sell (buy) leg is farther than the
expiration date of the buy (sell) leg (if the pair has the same
exercise price). A pair of puts is a credit (debit) if the exercise
price of the sell (buy) leg is higher than the exercise price of the
buy (sell) leg (if the pair has the same expiration date) or if the
expiration date of the sell (buy) leg is farther than the expiration
date of the buy (sell) leg (if the pair has the same exercise price). A
loner to buy is a debit, and a loner to sell is a credit. Proposed
subparagraph (3(C)) would make clear that the System does not apply
this check to an order it cannot define as a debit or credit, and
proposed subparagraph (3)(D) would make clear that the check applies to
COA Responses in the same manner as it does to orders.
In addition to the proposed Debit/Credit Price Reasonability Checks
described above, the Exchange proposes to adopt specific Buy Strategy
Parameters that would be set forth in proposed paragraph (4) to Rule
21.17(b). As proposed, the System will cancel or reject a limit complex
order where all the components of the strategy are to buy and the order
is priced at zero, a net credit price that exceeds a pre-set buffer
(which the Exchange determines), or a net debit price that is less than
the number of individual option series legs in the strategy (or
applicable ratio) multiplied by $0.01 (i.e., the applicable minimum net
price increment for the complex order).
Proposed paragraph (5) to Rule 21.17(b) would set forth a Maximum
Value Acceptable Price Range as an additional price check for vertical,
true butterfly or box spreads as well as certain limit and market
orders. Specifically, the System will cancel or reject an order if the
order is a vertical, true butterfly or box spread and is a limit order
with, or a market order that would execute at, a price that is outside
of an acceptable price range. The acceptable price range is set by the
minimum and maximum possible value of the spread, subject to an
additional buffer amount determined by the Exchange. The maximum
possible value of a vertical, true butterfly and box spread is the
difference between the exercise prices of (1) the two legs; (2) the
middle leg and the legs on either side; and (3) each pair of legs,
respectively. The minimum possible value of the spread is zero.
Proposed subparagraph (5)(C) would make clear that the check applies to
COA Responses in the same manner as it does to orders.
Proposed paragraph (6) to Rule 21.17(b) would set forth the
Exchange's Drill-Through Price Protection for complex orders. As
proposed, if a User enters a buy (sell) complex order into the System,
the System executes the order pursuant to proposed Rule 21.18(e) up to
a buffer amount above (below) the SNBO (SNBB) that existed at the time
of order entry (the ``drill-through price''), or initiates a COA at the
drill-through price if the order would initiate a COA pursuant to
proposed Rule 21.18(d).
The Exchange determines a default buffer amount on a class-by-class
basis; however, a User may establish a higher or lower amount than the
Exchange default amount. Orders with user-defined buffers rest at the
drill-through price for a single time period (up to three seconds)
before being cancelled if unexecuted, while orders using default
exchange buffers undergo a progressive repricing process where the
drill-through price is incrementally adjusted by one buffer amount
after each time period until the order executes, is cancelled, or the
complex order's limit price equals or is less than (if a buy order) or
greater than (if a sell order) the
[[Page 45829]]
drill-through price at any time during application of the drill-through
mechanism, in which case the complex order rests in the COB at its
limit price, subject to a User's instructions. Under the proposed rule,
the System applies a timestamp to the complex order (or unexecuted
portion) based on the time it enters or is re-priced in the COB for
priority purposes.
As proposed, if the underlying SBBO changes prior to the end of any
period but the complex order cannot Leg, and the new SBO (SBB) crosses
the current drill-through price, the System changes the displayed price
of the complex order to the new SBO (SBB) minus (plus) the applicable
minimum increment for the class, and the order rests in the COB at that
displayed price, subject to a User's instructions.
Rule 21.17(c), as proposed, sets forth price protection mechanisms
and risk controls that are applicable to all orders (i.e., simple and
complex). The Exchange proposes to relocate current Rules 21.17(b)
(Limit Order Fat Finger Check) and 21.17(g) (Rejection of Bulk Message
Updates) to this paragraph as Rules 21.17(c)(1) and (2), respectively,
as such protections will apply to simple orders (as today) and complex
orders (as proposed).
The Exchange proposes to amend the Limit Order Fat Finger Check
provision to include complex orders, and provide that if a User submits
a buy (sell) limit order to the System with a price that is more than a
buffer amount established by the Exchange above (below) the NBO (NBB)
for simple orders or the SNBO (SNBB) for complex orders, or, in the
case of an order received prior to 9:30 a.m., above (below) the
midpoint of the NBBO at the close of the market on the previous trading
day, the System will reject or cancel back to the User the limit order.
The check does not apply to bulk messages, Limit-on-Close orders, or
Stop-Limit Orders, and will not apply to complex orders prior to the
conclusion of the Opening Process. There are no changes to the
Rejection of Bulk Message Updates check; under this check, if, pursuant
to the Rules, the System cancels or rejects a bulk message bid (offer)
to update a resting bulk message bid (offer) submitted for the same
EFID and bulk port, the System also cancels the resting bulk message
bid (offer).
The Exchange also proposes to add three additional risk controls to
apply to all orders under Rule 21.17(c), as amended. These controls are
currently active for simple orders on the Exchange and will apply to
complex orders under the proposed rule change, and thus are being added
to paragraph Rule 21.17(c), as proposed, for clarity and transparency.
Proposed paragraph (3), to Rule 21.17(c) sets forth a Maximum Contract
Size check, whereby the System cancels or rejects an incoming order or
quote with a size that exceeds the maximum contract size (which the
Exchange determines). The size of a complex order for purposes of this
check is the size of the largest leg of the order. Proposed paragraph
(4), to Rule 21.17(c) sets forth a Maximum Notional Value check,
whereby if a User enables the functionality, the System cancels or
rejects an incoming order or quote with a notional value that exceeds
the maximum notional value a User establishes for each of its ports.
Lastly, proposed paragraph (5), to Rule 21.17(c) sets forth a Duplicate
Order Protection. Under this protection, if a User enables the
functionality for a port, after the System receives a specified number
of duplicate orders with the same EFID, side, price, quantity, and
class (the User determines the number of duplicative orders), the
System will (A) reject additional duplicate orders until it receives
instructions from the User to reset this control or (B) reject all
incoming orders submitted through that port for that EFID until the
User contacts the Trade Desk to request it reset this control. The User
may continue to submit cancel requests prior to reset. Price protection
rules are important because they prevent potentially costly trading
errors that could harm participants or disrupt market functions.
Nullification and Adjustment of Options Transactions Including Obvious
Errors
Finally, the Exchange proposes to amend Rule 20.6 (Nullification
and Adjustment of Options Transactions including Obvious Errors) to
include provisions related to complex orders, identical to the
provisions set forth in C2 Rule 6.5, Interpretation and Policy .07.
Obvious error rules allow trades executed at clearly erroneous prices
to be cancelled or adjusted, protecting participants from unreasonable
executions that don't reflect true market conditions. Proposed Rule
20.6, Interpretation and Policy .04(a) provides that if a complex order
executes against individual legs and at least one of the legs qualifies
as an Obvious Error under subparagraph (c)(1) of Rule 20.6 or a
Catastrophic Error under subparagraph (d)(1) of Rule 20.6, then the
leg(s) that is an Obvious or Catastrophic Error will be adjusted in
accordance with subparagraph (c)(4)(A) or (d)(3) of Rule 20.6,
respectively, regardless of whether one of the parties is a Customer.
However, any Customer order subject to this provision will be nullified
if the adjustment would result in an execution price higher (for buy
transactions) or lower (for sell transactions) than the Customer's
limit price on the complex order or individual leg(s). If any leg of a
complex order is nullified, the entire transaction is nullified.
Proposed Rule 20.6, Interpretation and Policy .04(b) provides that if a
complex order executes against another complex order and at least one
of the legs qualifies as an Obvious Error under subparagraph (c)(1) of
Rule 20.6 or a Catastrophic Error under subparagraph (d)(1) of Rule
20.6, then the leg(s) that is an Obvious or Catastrophic Error will be
adjusted or busted in accordance with subparagraph (c)(4) or (d)(3) of
Rule 20.6, respectively, so long as either: (1) the width of the
National Spread Market for the complex order strategy just prior to the
erroneous transaction was equal to or greater than the amount set forth
in the wide quote table of subparagraph (b)(3) of Rule 20.6 or (2) the
net execution price of the complex order is higher (lower) than the
offer (bid) of the National Spread Market for the complex order
strategy just prior to the erroneous transaction by an amount equal to
at least the amount shown in the table in subparagraph (c)(1) of Rule
20.6. If any leg of a complex order is nullified, the entire
transaction is nullified. For purposes of Rule 20.6, the National
Spread Market for a complex order strategy is determined by the
National Best Bid/Offer of the individual legs of the strategy.
The Exchange believes that its existing surveillance and reporting
safeguards in place, which will be applied to complex orders, are
adequate to deter and detect possible manipulative behavior which might
arise from trading complex orders and will support the protection of
investors and the public interest. The Exchange also represents that it
has the necessary system capacity to support trading of complex orders.
Finally, the Exchange does not believe that any market disruptions will
be encountered with the introduction of complex orders. As noted above,
complex orders are traded on other options exchanges today, pursuant to
substantively similar rules.\31\
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\31\ See, e.g., Cboe Options Rule 5.33; MIAX Rule 518; Nasdaq
ISE, LLC (``ISE'') Rules Options 3, Section 14; NYSEArca Rules 6.91-
O and 6.91P-O.
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Implementation
As noted above, the Exchange will announce via Exchange Notice the
implementation date of the proposed
[[Page 45830]]
rule change no later than 120 days after the operative date of this
rule filing.
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.\32\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \33\ 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) \34\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------
\32\ 15 U.S.C. 78f(b).
\33\ 15 U.S.C. 78f(b)(5).
\34\ Id.
---------------------------------------------------------------------------
The Exchange believes that the general provisions regarding the
trading of complex orders provide a clear framework for trading of
complex orders in a manner consistent with other options exchanges.
This consistency should promote a fair and orderly national options
market system. The Exchange believes that the proposed rules will
result in efficient trading and reduce the risk for investors that
complex orders could fail to execute by providing additional
opportunities to fill complex orders.
Additionally, investors will have greater opportunities to manage
risk with the addition of a new venue at which to trade complex orders.
The proposed adoption of rules governing a complex order auction will
facilitate the execution of complex orders while providing
opportunities to access additional liquidity and fostering price
improvement. The Exchange believes the proposed rules are appropriate
in that complex orders are widely recognized by market participants as
invaluable, both as an investment, and a risk management strategy. The
proposed rules will provide an efficient mechanism for carrying out
these strategies. As noted above, the proposed rule changes are based
substantially on similar rules of C2. Further, other options exchanges
have rules which allow for the trading of complex orders.\35\
---------------------------------------------------------------------------
\35\ See, e.g., Cboe Options Rule 5.33; MIAX Rule 518; ISE Rules
Options 3, Section 14; NYSEArca Rules 6.91-O and 6.91P-O.
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The Exchange believes that the proposed changes are equitable and
not unfairly discriminatory, as the proposed rule changes related to
complex orders will apply equally and in the same manner to all market
participants who wish to trade complex orders. Additionally, trading of
complex orders is voluntary and available to all participants equally.
Definitions
The Exchange believes the proposed changes to amend Rules 16.1,
Rule 21.1(d), and Rule 21.18(a) are consistent with the Act \36\
because the proposed changes provide necessary clarity and transparency
for market participants regarding how these multi-leg strategies will
be handled, thereby facilitating informed participation in complex
option trading. Further, the Exchange believes that the minor
differences between C2 rules and the proposed rules are reasonable.
Specifically, the Exchange believes that the minor differences between
C2 rules and the proposed definition of SBBO for the Exchange is
reasonable as it is due to the display-price sliding functionality
available on the Exchange which is not available on C2. Further, the
Exchange believes it is reasonable for the Exchange to permit Exchange-
created complex strategies, as such functionality is currently
available on Cboe Options.
---------------------------------------------------------------------------
\36\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Type of Complex Orders
The Exchange believes the proposed changes to Rule 21.18 related to
types of complex orders will remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, protect investors and the public interest, as the changes
clearly define which multi-leg strategies are eligible for complex
order treatment, ensuring they understand what trading opportunities
are available and can structure their strategies accordingly to take
advantage of potential price improvements and execution efficiencies.
The Exchange proposes that complex orders may be submitted as limit
orders and market orders, and orders with a Time in Force of DAY, GTC,
GTD, IOC, or OPG, as each such term is defined in Exchange Rule 21.1,
or as a Complex Only order, COA-eligible, do-not-COA order, complex
order with MTP Modifier, Book Only complex order, Post Only complex
order, or Complex Reserve order. In particular, the Exchange believes
that limit orders, Day, GTC, GTD, IOC, or OPG orders all provide
valuable limitations on execution price and time that help to protect
Exchange participants and investors in both the Simple Book and in the
proposed COB. In addition, the Exchange believes that offering
participants the ability to utilize MTP Modifiers for complex orders in
a similar way to the way they are used on the Simple Book provides such
participants with the ability to protect themselves from inadvertently
matching against their own interest. The Exchange believes that
permitting complex orders to be entered with these varying order types
and modifiers will give the Exchange participants greater control and
flexibility over the manner and circumstances in which their orders may
be executed, modified, or cancelled, and thus will provide for the
protection of investors and contribute to market efficiency. In
particular, the Exchange notes that while both the Complex Only order
and the do-not-COA instruction may reduce execution opportunities for
the entering Member, the Exchange believes that similar features are
already offered by other options exchanges in connection with complex
order functionality and that they are reasonable instructions a Member
may wish to include on their order in order to participate on the COB
more in accordance with their own investment strategies.
Despite the enhanced execution opportunities provided by Legging,
as described above, the Exchange believes it is reasonable and
consistent with the Act to permit Market-Makers to submit orders
designated as Complex Only Orders that will not leg into the Simple
Book. As described above, the proposed types of complex orders,
including Complex Only Orders, are substantially similar to those set
forth in C2 Rule 5.33(b). Further, the Exchange also believes the
proposed functionality is analogous to other types of functionality
already offered by the Exchange that provides Members the ability to
direct the Exchange not to route their orders away from the Exchange
\37\ or not to remove liquidity from the Exchange.\38\
[[Page 45831]]
Similar to such analogous features, the Exchange believes that Members
may utilize Complex Only Order functionality as part of their strategy
to maintain additional control over their executions, in connection
with their attempt to provide and not remove liquidity, or in
connection with applicable fees for executions. Based on the foregoing,
the Exchange does not believe that Complex Only Order functionality
raises any new or novel concepts under the Act, and instead is
consistent with the goals of the Act to remove impediments to and to
perfect the mechanism of a free and open market and a national market
system, and to protect investors and the public interest.
---------------------------------------------------------------------------
\37\ See Rule 21.1(d)(7), which describes ``Book Only Orders''
as orders that do not route to away options exchanges.
\38\ See Rule 21.1(d)(8), which describes ``Post Only Orders''
as orders that do not route to away options exchanges or remove
liquidity from the Exchange.
---------------------------------------------------------------------------
The Exchange believes that the minor differences between C2 rules
and the proposed rules are reasonable. First, the Exchange believes its
proposal to permit Users to submit complex orders through bulk ports is
reasonable, as it will support liquidity provision on the Exchange. As
noted above, the proposed change to Rule 21.6(a) is identical to a
proposed rule change that Cboe Options recently filed with the
Commission.\39\ Additionally, the Exchange believes its proposal to
amend Rule 21.6(a) to further provide that Users may only enter one bid
and one offer for a complex strategy per EFID per bulk port is
reasonable, as the change allows complex orders to be submitted through
bulk ports. Finally, the Exchange also believes it is reasonable not to
include provisions related to GTH, as a global trading hours session is
not currently available on the Exchange.
---------------------------------------------------------------------------
\39\ See Securities Exchange Act Release No. 103701 (August 13,
2025), 90 FR 40093 (August 18, 2025) (SR-CBOE-2025-059). The
proposed change to Rule 21.6(a) is identical to a proposed change to
Cboe Options Rule 5.7(a) set forth in that proposal; this rule
filing is not permitting bulk message functionality for complex
strategies, but just use of complex orders in bulk ports.
---------------------------------------------------------------------------
COB Opening Process
The Exchange believes proposed Rule 21.18(c), which sets forth
provisions related to the COB opening process, will promote just and
equitable principles of trade, foster cooperation and coordination with
persons engaged in facilitating transactions in securities, remove
impediments to and perfect the mechanisms of a free and open market and
a national market system and, in general, protect investors and the
public interest. As noted above, the COB opening process is critical
because it establishes fair opening prices for multi-leg option
strategies by aggregating overnight information and matching complex
orders at optimal prices, preventing market disruption. This process
ensures orderly market opens, protects participants from stale pricing,
and maintains market integrity by providing transparent price discovery
for complex strategies before continuous trading begins.
Complex Order Auctions (``COAs'')
The Exchange believes the COA process, set forth in proposed Rule
21.18(d), is also designed to promote just and equitable principles of
trade, to foster cooperation and coordination with persons engaged in
facilitating transactions in securities, to remove impediments to and
perfect the mechanisms of a free and open market and a national market
system and, in general, to protect investors and the public interest.
Following evaluation, a COA-eligible order may begin a new COA. The
COA process promotes just and equitable principles of trade, fosters
cooperation and coordination with persons engaged in facilitating
transactions in securities, removes impediments to and perfects the
mechanisms of a free and open market and a national market system and,
in general, protects investors and the public interest by ensuring that
eligible complex orders are given every opportunity to be executed at
the best prices against an increased level of contra-side liquidity
responding to the COA auction message. This mechanism of a free and
open market is designed to enhance liquidity and the potential for
better execution prices during the Response Time Interval, all to the
benefit of investors on the Exchange, and thereby consistent with the
Act.
The Exchange believes that the proposed COA provisions remove
impediments to, and perfects the mechanisms of, a free and open market
and a national market system and, in general, protects investors and
the public interest, by ensuring that a COA is conducted for a complex
order only when there is a reasonable and realistic chance for price
improvement through a COA. The Exchange believes the proposed COA
structure, including the termination provisions set forth in proposed
Rule 21.18(d)(3), promotes market integrity and price discovery, and
balances the need for price improvement opportunities with maintaining
an orderly and efficient market. As described above, as proposed, a COA
will terminate when the System receives a non-COA-eligible order on the
same side as the COA-eligible order that initiated the COA but with a
price better than the COA price; or when the System receives an order
in a leg of the complex order that would improve the SBBO on the same
side as the COA-eligible order that initiated the COA to a price equal
to or better than the COA price. The purpose of this provision is to
ensure that orders receive the best execution opportunity when market
conditions change, thus maintaining a fair and orderly market for
complex orders.
The Exchange believes the proposed maximum 500 millisecond Response
Time Interval promotes just and equitable principles of trade and
removes impediments to a free and open market because it allows
sufficient time for Members participating in a COA to submit COA
Responses and would encourage competition among participants, thereby
enhancing the potential for price improvement for complex orders in the
COA to the benefit of investors and public interest. The Exchange
believes the proposed rule change is not unfairly discriminatory
because it establishes a Response Time Interval applicable to all
Exchange participants participating in a COA.
The Exchange again notes that it has not proposed to limit the
frequency of COAs for a complex strategy and could have multiple COAs
occurring concurrently with respect to a particular complex strategy.
The Exchange represents that it has systems capacity to process
multiple overlapping COAs consistent with the proposal, including
systems necessary to conduct surveillance of activity occurring in such
auctions.
The Exchange does not anticipate overlapping auctions necessarily
to be a common occurrence, however, the Exchange believes that such
behavior is more fair and reasonable with respect to Members who submit
orders to the COB because the alternative presents other issues to such
Members. Specifically, if the Exchange does not permit overlapping COAs
then a Member who wishes to submit a COA-eligible order but has its
order rejected because another COA is already underway in the complex
strategy must either wait for such COA to conclude and re-submit the
order to the Exchange (possibly constantly resubmitting the complex
order to ensure it is received by the Exchange before another COA
commences) or must send the order to another options exchange that
accepts complex orders.
The COA process also protects investors and the public interest by
creating more opportunities for price improvement of complex orders,
all to the benefit of Exchange participants and the marketplace as a
whole. Further, the
[[Page 45832]]
proposed complex order rules related to COA promote equal access by
providing Members that subscribe to the Exchange's data feeds that
include auction notifications with the opportunity to interact with
orders in the COA. In this regard, any Member can subscribe to the
options data provided through the Exchange's data feeds that include
auction notifications.
Finally, the Exchange believes that the proposed COA allocation
priority is reasonable. Specifically, as noted above, the Exchange
believes the introduction of Priority Complex Order status for COA
allocation priority will create incentive for Users to maintain
competitive quotes at the NBBO across individual legs. By giving
priority to those participants who were providing the best displayed
liquidity (i.e., displaying the most competitive (best) bid and offer
prices in a component leg of the COA-eligible order on the opposite
side of the market from any of the components of the COA-eligible order
when the auction began) at the commencement of a COA, the proposed
allocation incentivizes those who contribute to tight markets and price
discovery, to the benefit of investors. Further, the pro rata
allocation ensures fairness amongst participants, if multiple
participants meet the criteria for Priority Complex Order status.
Additionally, participants can only have Priority Complex Order status
up to the largest size of their quotes or orders at the NBBO.
As noted above, the concept in general of the priority allocation
framework proposed is not novel. Cboe Options Rule 5.38(e)(4) currently
allows for Priority Complex Order Plus Status within Cboe Options' C-
AIM Auction, which is similar in concept to the Priority Complex Order
status proposed herein. Both are designed to provide execution priority
to market participants who had displayed interest at the best market
prices when specific auction mechanisms commence. Both statuses grant
priority allocation rights to users with contra-side complex interest
who maintained displayed resting quotes and orders in any of the
components of the auctioned order at prices equal to the best bid or
offer on the opposite side of the market from the auction-eligible
order at the time their respective auctions began. The Exchange does
not have a C-AIM Auction, so the proposed rule change merely applies
this priority to a different complex order auction to incentivize the
provision of liquidity at the best prices.
Processing of Do-Not-COA Orders/Orders Resting on the COB
Proposed Rule 21.18(e) describes the processing of do not-COA
orders and orders resting on the COB. The Exchange believes the
proposed processing of do-not-COA orders and orders resting on the COB
are consistent with the principles of the Act to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in facilitating transactions in securities, to
remove impediments to and perfect the mechanisms of a free and open
market and a national market system and, in general, to protect
investors and the public interest, by providing clarity and
transparency within the rules as to the Exchange's process for
processing do-not-COA orders and orders resting on the COB. As noted
above, while the do-not-COA instruction may reduce execution
opportunities for the entering Member, the Exchange believes it is a
similar feature is already offered by other options exchanges in
connection with complex order functionality and that it is a reasonable
instruction a Member may wish to include on their order in order to
participate on the COB more in accordance with their own investment
strategies.
Minimum Increments and Execution Prices
Proposed Rule 21.18(f) describes the minimum increments and
execution prices for complex orders. The proposed execution and
priority rules will allow complex orders to interact with interest in
the Simple Book and, conversely, interest on the Simple Book to
interact with complex orders in an efficient and orderly manner.
Further, the Exchange believes that the proposed rule changes related
to execution prices will protect investors and the public interest. The
proposed rules state that a complex order may not be executed at a net
price that would cause any component of the complex strategy to be
executed at a price of zero; that would cause any component of the
complex strategy to be executed at a price worse than the individual
component price on the Simple Book; worse than the price that would be
available if the complex order Legged into the Simple Book; or worse
than the SBBO. Further, if a complex order has a ratio equal to or
greater than one-to-three (.333) and less than or equal to three-to-one
(3.00), at least one component of the complex order must execute at a
price that improves the best price available for that component; or if
the complex order has a ratio less than one-to-three (.333) or greater
than three-to-one (3.00), the component(s) of the complex order for the
leg(s) with a Customer order at the best price available must execute
at a price that improves the price of that Customer order(s) on the
Simple Book.
As noted above, the protections are designed to prevent a component
of a complex order from being executed at a price that is inferior to
the best-priced contra-side orders on the Simple Book (including
Customer orders) and, for a complex order with a ratio less than one-
to-three or greater than three-to-one, to prevent the component(s) legs
of the order from executing at the same price of resting Customer
interest on the Simple book. Further, for a complex order with a ratio
equal to or greater than one-to-three and less than or equal to three-
to-one, the protections are designed to protect Customer order interest
on the Simple Book. These proposed provisions are identical to C2, as
set forth in C2 Rule 5.33(f), except for one difference related to the
proposed definition of SBBO described above.
For the reasons set forth above, the Exchange believes the proposed
rule change regarding complex order execution is consistent with the
goals of the Act to remove impediments to and to perfect the mechanism
of a free and open market and a national market system, and to protect
investors and the public interest.
Legging
The Exchange believes proposed Rule 21.18(g), which describes the
Legging process through which complex orders, under certain
circumstances, are executed against the individual components of a
complex strategy on the Simple Book is consistent with the Act.\40\ In
particular, the Exchange believes that its proposal regarding
executions of complex orders against the Simple Book is consistent with
the Act \41\ because it provides greater liquidity to the marketplace
as a whole by fostering the interaction between the components of
complex orders on the COB and the Simple Book. This should enhance the
opportunity for executions of both complex orders and simple orders.
The Exchange also believes the interaction of orders will benefit
investors by increasing the opportunity for complex orders to receive
execution, while also enhancing execution quality for orders on the
Simple Book. The Exchange believes it is reasonable to permit complex
orders that are the subject of this rule change to leg into the Simple
Book. The proposed rule
[[Page 45833]]
concerning Legging will facilitate the execution of more complex
orders, and will thus benefit investors and the general public because
complex orders will have a greater chance of execution when they are
allowed to leg into the simple market. This will increase the execution
rate for these orders, thus providing market participants with an
increased opportunity to execute these orders on the Exchange. The
prohibition (though inapplicable to two-leg COA-eligible Customer
complex orders) against the Legging of complex orders with two option
legs where both legs are buying or both legs are selling and both legs
are calls or both legs are puts, and on complex orders with three or
four option legs where all legs are buying or all legs are selling
regardless of whether the option leg is a call or a put, protects
investors and the public interest by ensuring that Market Makers
providing liquidity do not trade above their established risk tolerance
levels, as described above.
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\40\ Id.
\41\ Id.
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The Exchange also believes it is reasonable to limit other types of
complex orders that are eligible to leg into the Simple Book. The
Exchange believes that the vast majority of complex orders sent to the
Exchange will be unaffected by this proposed rule, including two leg
COA-eligible Customer complex orders, which will still be allowed to
leg into the Simple Book without restriction. Moreover, the Exchange
believes that the potential risk of offering Legging functionality for
complex orders such as those impacted by the proposed rule could limit
the amount of liquidity that Market Makers are willing to provide in
the Simple Book. In particular, Market Makers, without the proposed
limitation, are at risk of executing the cumulative size of their
quotations across multiple options series without an opportunity to
adjust their quotes. Market Makers may be compelled to change their
quoting and trading behavior to account for this additional risk by
widening their quotes and reducing the size associated with their
quotes, which would diminish the Exchange's quality of markets and the
quality of the markets in general. The proposed limitations
substantially diminish a potential source of unintended Market Maker
risk when certain types of complex orders leg into the Simple Book,
thereby removing impediments to and perfecting the mechanisms of a free
and open market and a national market system and, in general,
protecting investors and the public interest by adding confidence and
stability in the Exchange's marketplace. This benefit to investors far
exceeds the small amount of potential liquidity provided by the few
complex orders to which this aspect of the proposal applies.
Additional Complex Order Handling
Proposed Rule 21.18(h) sets forth additional provisions regarding
the processing and execution of complex orders. The Exchange believes
these additional complex order handling rules, which address scenarios
and order types that fall outside the standard complex order book
framework, are reasonable as they ensure comprehensive coverage of all
possible complex trading situations. These rules provide clarity for
investors on how the System will handle complex orders when these
circumstances arise, maintaining consistent and fair market operations
across all complex trading scenarios.
Evaluation
The Exchange believes proposed Rule 21.18(d), which describes how
and when the System determines to execute or otherwise handle complex
orders in the System is consistent with the Act. Specifically, the
Exchange believes that the regular and event-driven evaluation of the
COB for the eligibility of complex orders to initiate a COA, and to
determine their eligibility to participate in the managed interest
process, their eligibility for full or partial execution against a
complex order resting on the COB or through Legging with the Simple
Book, whether the complex order should be cancelled, and whether the
complex order or any remaining portion thereof should be placed on the
COB are consistent with the principles of the Act to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanisms of a free and open market and a national market system and,
in general, to protect investors and the public interest.
Evaluation of the executability of complex orders and for the
determination as to whether a complex order is COA-eligible is central
to the removal of impediments to, and the perfection of, the mechanisms
of a free and open market and a national market system and, in general,
the protection of investors and the public interest. The evaluation
process ensures that the System will capture and act upon complex
orders that are due for execution or placed in a COA. The regular and
event-driven evaluation process removes potential impediments to the
mechanisms of the free and open market and the national market system
by ensuring that complex orders are given the best possible chance at
execution at the best price, evaluating the availability of complex
orders to be handled in a number of ways as described in this proposal.
Any potential impediments to the order handling and execution process
respecting complex orders are substantially removed due to their
continual and event-driven evaluation for subsequent action to be taken
by the System. This protects investors and the public interest by
ensuring that complex orders in the System are continually monitored
and evaluated for potential action(s) to be taken on behalf of
investors that submit their complex orders to the Exchange.
Interpretations and Policies
The Exchange believes the proposed Rule 21.18 Interpretations and
Policies remove impediments to and perfect the mechanisms of a free and
open market and a national market system and, in general, protect
investors and the public interest. Specifically, the proposed changes
establish a balanced framework that promotes market integrity without
imposing unnecessary barriers to participation. The proposed
interpretations and policies which maintain voluntary Market Maker
participation in the COB, preserve existing Market Maker accountability
measures by including complex order executions in the 25% threshold
calculation under Rule 22.6(f), and implement specific prohibitions
against manipulative order submission practices, are designed to
prevent fraudulent and manipulative acts and practices while promoting
just and equitable principles of trade. These provisions collectively
ensure that the complex order market operates with appropriate
regulatory oversight while promoting a competitive and efficient market
structure. As noted above, the proposed interpretations and policies
are identical to the Interpretations and Policies in C2 Rule 5.33.
Risk Monitor Mechanism
The proposed changes to Rule 21.16 are designed to protect
investors and the public interest by assisting Members submitting
complex orders in their risk management. Members are vulnerable to the
risk from system or other errors or a market event that may cause them
to send a large number of orders or receive multiple, automatic
executions before they can adjust their order exposure in the market.
Without adequate risk management tools, such as the Risk Monitor
Mechanism, Members could reduce the amount of order flow and liquidity
that they provide to the
[[Page 45834]]
market. Such actions may undermine the quality of the markets available
to customers and other market participants. Accordingly, the proposed
amendments to the Risk Protection Monitor should instill additional
confidence in Members that submit orders to the Exchange that their
risk tolerance levels are protected, and thus should encourage such
Members to submit additional order flow and liquidity to the Exchange
with the understanding that they have this protection respecting all
orders they submit to the Exchange, including complex orders, thereby
removing impediments to and perfecting the mechanisms of a free and
open market and a national market system and, in general, protecting
investors and the public interest.
Message Traffic Mitigation
The Exchange believes the proposed amendment to Exchange Rule 21.14
related to auction response processing will promote just and equitable
principles of trade, foster cooperation and coordination with persons
engaged in facilitating transactions in securities, to remove
impediments to and perfect the mechanisms of a free and open market and
a national market system and, in general, protect investors and the
public interest. In particular, the Exchange believes allowing the
System to potentially process more, if not all, timely submitted
auction responses may provide further opportunities for auctioned
orders to receive price improvement, which removes impediments to a
free and open market and ultimately protects and benefits investors. In
particular, the proposed rule change will continue to provide investors
with timely processing of their options quote and order messages, while
providing investors who submit auction orders with additional auction
liquidity. Indeed, the proposed rule change may allow more investors
additional opportunities to receive price improvement through an
auction mechanism. Additionally, because the proposed functionality may
provide liquidity providers that submit auction responses with
additional execution opportunities in auctions, the Exchange believes
they may be further encouraged to submit more auction responses, which
may contribute to a deeper, more liquid auction process that provides
investors with additional price improvement opportunities. The Exchange
believes the proposed maximum amount of additional time for processing
(i.e., 100 milliseconds) is both an adequate amount of time to provide
pending auction responses with such execution opportunity, but also an
amount minimal enough that impact to other message traffic, if any,
would be de minimis.
Limit Up-Limit Down State and Trading Halts
The Exchange is proposing to add Rule 21.18(k) to suspend trading
in complex orders, to remove certain complex orders from the COB, and
to end a COA early when there is a halt in the underlying security of,
or in an individual component of, a complex order. Further, the
Exchange is proposing to add Rule 21.18(j) to cancel or reject complex
market orders it receives when the underlying security is subject to a
limit up-limit down state. These protections are intended to protect
investors and the public interest by causing the System not to execute
during potentially disruptive conditions or events that could affect
customer protection, and, in the case of a trading halt, to resume
trading in complex orders upon the conclusion of the trading halt. The
System's proposed functionality during a trading halt and limit-up
limit-down state protects investors and the public interest by ensuring
that the execution of complex orders on behalf of investors and the
public will only occur at times when there is a fair and orderly
market.
Nullification and Adjustment of Options Transactions Including Obvious
Errors
The Exchange proposes to amend Rule 20.6 (Nullification and
Adjustment of Options Transactions including Obvious Errors) to include
provisions related to complex orders, identical to the provisions set
forth in C2 Rule 6.5, Interpretation and Policy .07. Obvious error
rules allow trades executed at clearly erroneous prices to be cancelled
or adjusted, protecting participants from unreasonable executions that
don't reflect true market conditions.
Additional Price Protection Mechanisms and Risk Controls
Rule 21.17(b), as proposed, establishes price protection standards
that are intended to ensure that certain types of complex strategies
will not be executed outside of a preset standard minimum and/or
maximum price limit. The Exchange believes these price protection
limits for complex strategies are consistent with the Act, as they are
designed to prevent executions at unreasonable prices that could harm
investors or create disorderly market conditions and ensure fair
pricing in sophisticated multi-leg option transactions, to the benefit
of investors.
Rule 21.17(c) as proposed makes clear which price protection
mechanisms and risk controls that are applicable to all orders (i.e.,
simple and complex). The Exchange believes these price protections are
consistent with the Act, as they maintain fair and orderly markets by
preventing erroneous trades that could disrupt market integrity. The
limit order fat finger checks, bulk message rejection controls, and
size and notional limits ensure that only reasonable orders reach the
market, protecting both individual investors and overall market
stability from operational errors or system malfunctions. Further,
duplicate order protections prevent unintended position accumulation
that could expose participants to excessive risk or create artificial
market activity. These proposed changes promote market transparency and
fairness by ensuring that all market participants are protected from
the adverse effects of erroneous orders that could otherwise create
unfair trading conditions or misleading price discovery.
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, as the proposed rule changes
related to complex orders will apply equally and in the same manner to
all market participants who wish to trade complex orders. Additionally,
trading of complex orders is voluntary.
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. As noted above
and described herein, the proposed rules are substantively identical
(with the few differences noted above) to complex order rules of C2
(and Cboe Exchange in certain circumstances as noted above). Further,
other options exchanges have similar rules that allow for the trading
of complex orders.\42\ The competition among the options exchanges is
vigorous and this proposal is intended to afford market participants on
the Exchange the opportunity to execute complex orders in a manner that
is similar to that allowed on other
[[Page 45835]]
options exchanges. The Exchange believes that the proposal will enhance
competition among the various markets for complex order execution,
potentially resulting in more active complex order trading on all
exchanges.
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\42\ See, e.g., Cboe Options Rule 5.33; MIAX Rule 518; Nasdaq
ISE, LLC (``ISE'') Rules Options 3, Section 14; NYSEArca Rules 6.91-
O and 6.91P-O.
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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
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A) of the Act \43\ and Rule 19b-4(f)(6) \44\ thereunder.
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) of the Act \45\ and Rule 19b-4(f)(6) \46\
thereunder.
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\43\ 15 U.S.C. 78s(b)(3)(A).
\44\ 17 CFR 240.19b-4(f)(6).
\45\ 15 U.S.C. 78s(b)(3)(A).
\46\ 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, along
with a brief description and text of 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-CboeBZX-2025-126 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-2025-126. 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 filing 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-2025-126 and should be submitted
on or before October 14, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
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\47\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-18364 Filed 9-22-25; 8:45 am]
BILLING CODE 8011-01-P