Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Rules Related to the Complex Order Book, 7092-7096 [2018-03197]
Download as PDF
<![CDATA[
7092
Federal Register / Vol. 83, No. 33 / Friday, February 16, 2018 / Notices
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change, that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filings will also be available for
inspection and copying at the principal
office of ICE Clear Europe and on ICE
Clear Europe’s website at https://
www.theice.com/clear-europe/
regulation#rule-filings.
All comments received will be posted
without change. Persons submitting
comments are cautioned that we do not
redact or edit personal identifying
information from comment submissions.
You should submit only information
that you wish to make available
publicly. All submissions should refer
to File Number SR–ICEEU–2018–003
and should be submitted on or before
March 9, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Eduardo Aleman,
Assistant Secretary.
[FR Doc. 2018–03200 Filed 2–15–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82689; File No. SR–CBOE–
2018–016]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change To Amend
Rules Related to the Complex Order
Book
daltland on DSKBBV9HB2PROD with NOTICES
February 12, 2018.
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 February
2, 2018, Cboe Exchange, Inc. (the
‘‘Exchange’’ or ‘‘Cboe Options’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’) the
11 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
VerDate Sep<11>2014
19:24 Feb 15, 2018
Jkt 244001
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend its
rules related to the Complex Order Book
(‘‘COB’’).
(additions are italicized; deletions are
[bracketed])
*
*
*
*
*
Cboe Exchange, Inc. Rules
*
*
*
*
*
Rule 6.53C. Complex Orders on the
Hybrid System
(a)–(b) No change.
(c) Complex Order Book:
(i) Routing of Complex Orders: The
Exchange will determine which classes and
which complex order origin types (i.e., nonbroker-dealer public customer, broker-dealers
that are not Market-Makers or specialists on
an options exchange, and/or Market-Makers
or specialists on an options exchange) are
eligible for entry into the COB and whether
such complex orders can route directly to the
COB and/or from PAR to the COB. In a class
in which the Exchange determines complex
orders of Market-Makers and specialists on
an options exchange are not eligible for entry
into the COB, the Exchange may determine
that Market-Makers and specialists may enter
complex orders into the COB if:
(A) their complex orders are on the
opposite side of (1) a priority customer
complex order(s) resting in the COB with a
price not outside the national spread market;
or (2) order(s) on the same side of the market
in the same strategy that initiated a COA(s)
if there are ‘‘x’’ number of COAs within ‘‘y’’
milliseconds, counted on a rolling basis (the
Exchange determines the number ‘‘x’’ (which
must be at least 2) and time period ‘‘y’’
(which may be no more than 2,000)); and
(B) they cancel their complex orders, if
they remain unexecuted, no later than a
specified time (which the Exchange
determines and may be no more than five
minutes) after the time the COB receives the
Market-Maker order.
Complex orders not eligible to route
to COB (either directly or from PAR to
COB) will route via the order handling
system pursuant to Rule 6.12.
(ii)–(iv) No change.
(d) No change.
. . . Interpretations and Policies:
.01–.12 No change.
*
*
*
*
*
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/CBOELegalRegulatory
PO 00000
Frm 00085
Fmt 4703
Sfmt 4703
Home.aspx), at the Exchange’s Office of
the Secretary, and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend its
rules related to the COB. Currently, Rule
6.53C(c)(i) states the Exchange may
determine which classes and which
complex order origin types (i.e., nonbroker-dealer public customer, brokerdealers that are not market-makers or
specialists on an options exchange, and/
or Market-Makers or specialists on an
options exchange) are eligible for entry
into the COB and whether such complex
orders can route directly to the COB
and/or from PAR to the COB.3 To the
extent an origin type is not eligible for
entry into the COB, complex orders with
that origin type may still be entered into
the System as opening-only or
immediate-or-cancel, as such orders
would not rest in the COB when the
Exchange is open for trading.
The Exchange proposes to amend
Rule 6.53C(c) to provide in a class in
which the Exchange determines
complex orders of Market-Makers and
away market-makers are not eligible for
entry into the COB, the Exchange may
determine that Market-Makers and away
market-makers may enter complex
3 Currently, Cboe Options has determined MarketMaker (origin code ‘‘M’’) and market-maker or
specialist on an options exchange (‘‘away marketmakers’’) (origin code ‘‘N’’) complex orders in
options on the S&P 500 (‘‘SPX’’ and ‘‘SPXW’’) and
the Cboe Volatility Index (‘‘VIX’’) are not eligible for
entry into the COB. See Regulatory Circular RG15–
195. The group of SPX options with standard thirdFriday settlements trade under the SPX symbol on
the Hybrid 3.0 trading system, and the group of SPX
options with other settlements trade under the
SPXW symbol on the Hybrid trading system.
Pursuant to Rule 8.14, Interpretation and Policy
.01(c), the Exchange may establish different trading
parameters for each group to the extent the
Exchange Rules otherwise provide for such
parameters to be established on a class basis.
E:\FR\FM\16FEN1.SGM
16FEN1
Federal Register / Vol. 83, No. 33 / Friday, February 16, 2018 / Notices
orders into the COB if (1) their complex
orders are on the opposite side of (A) a
priority customer complex order(s)
resting in the COB with a price not
outside the national spread market
(‘‘NSM’’) 4 or (B) order(s) on the same
side of the market in the same strategy
that initiated a COA(s) if there are ‘‘x’’
number of COAs within ‘‘y’’
milliseconds, counted on a rolling basis
(the Exchange will determine 5 the
number ‘‘x’’ (which must be at least 2)
and time period ‘‘y’’ (which may be no
more than 2,000)) and (2) they cancel
their complex orders, if such orders
remain unexecuted, no later than a
specified time (which the Exchange
determines and may be no more than
five minutes) after the time the COB
receives the order. The Exchange
intends to set these parameters at levels
it believes will permit Market-Makers to
have sufficient time to submit orders
into the COB to participate in COAs,
which determination the Exchange will
make based on Market-Maker feedback,
business conditions, and data (including
trading volume data and information
regarding number of executions of
Market-Maker orders against complex
orders).
Unlike the leg markets, in which
market-makers provide liquidity
through quotes, the COB has no marketmaker quotes that indicate to customers
the price at which liquidity providers
are willing to trade against their orders.6
Allowing market-makers to enter orders
on the COB when there are priority
customer orders on the opposite side
will provide those customers with this
information, thus creating potential
execution opportunities for customers
whose orders are not satisfied by the leg
markets or other complex orders. The
Exchange believes the proposed rule
change will add liquidity for resting
priority customer complex orders in
classes in which the Exchange has
determined M and N complex orders are
not eligible for entry into the COB, thus
increasing execution opportunities at
prices potentially better than the leg
markets.
Additionally, the Exchange believes it
may be difficult for Market-Makers to
respond to auctions, particularly when
multiple auctions occur within a short
amount of time, while managing risk
daltland on DSKBBV9HB2PROD with NOTICES
4 See
Rule 1.1(dddd) [sic].
to Rule 6.53C, Interpretation and
Policy .01, the Exchange will announce to Trading
Permit Holders all determinations it makes
pursuant to Rule 6.53C via Regulatory Circular. The
Exchange will provide Trading Permit Holders with
sufficient, advanced notice prior to changing any
parameters its sets under the proposed rule change.
6 Market-makers are unable (and not required to)
submit quotes in the COB.
5 Pursuant
VerDate Sep<11>2014
19:24 Feb 15, 2018
Jkt 244001
related to the amount executed during
those auctions. Market-makers have
complicated risk modeling associated
with their trading activity, which factors
in the size, price, and frequency at
which they trade with orders. In the leg
markets, those risk models factor in
market-makers’ quotes. However, the
Exchange understands Market-Makers
have separate systems for quoting and
for monitoring and responding to COAs,
each of which has a different risk model
and set of risk controls. For example,
one server process submits quotes while
another server process scans the market
for opportunities, such as the presence
of customer orders and auctions.
It is common for Market-Makers to set
risk controls with respect to the COA
monitoring and response system to not
respond to too many COAs within a
short timeframe. If multiple COAs in a
strategy occur within a short amount of
time, it is common for a Market-Maker’s
system to determine this to be a
potential system issue of the submitting
Trading Permit Holder or Exchange. To
ensure a Market-Maker does not trade
with potentially erroneous orders and
protect the Market-Maker from
erroneous transactions to ensure it does
not become overexposed to risk, the
Market-Maker’s system that monitors
COAs may stop responding to COAs in
this situation pursuant to the MarketMaker’s risk controls for that system
(e.g., the system may be programmed to
only respond to a specific number of
auctions within a time period). This
ultimately reduces auction liquidity and
potential price improvement for COA
orders.
Additionally, this may result in the
Market-Maker missing opportunities to
participate in legitimate auctions.
However, it is common for market
participants to enter multiple small
orders into COAs that are not erroneous
(e.g., in accordance with market
participants’ algorithmic trading that
may break up larger orders when
hedging large portfolios). To the extent
a Market-Maker’s system stops
responding to COAs in the above
situation, a person may review the
COAs and determine in its discretion it
is appropriate to trade with the COA
orders even if the System does not
permit it due to automatic controls.
Under the proposed rule change, that
person could then submit an order to
the COB that would be available to trade
against those multiple COA orders up to
the amount the Market-Maker is willing
to trade. Even if the COAs were the
result of an error by the submitting
market participants, the Market-Maker
that submitted a complex order that
ultimately executes against those
PO 00000
Frm 00086
Fmt 4703
Sfmt 4703
7093
erroneous COA errors still had an
opportunity to review the sizes and
prices of those orders and evaluate how
much and at what prices it is willing to
trade. This is no different than the
possibility of a market-maker quote
resting in the leg market executing
against an erroneously entered order.7 It
is easier, and faster, for a person to
submit an order to the COB to cover the
amount of contracts it is willing to trade
than enter individual responses to COAs
given the brief COA response period
(currently 100 milleseconds). Allowing
Market-Makers to enter orders on the
COB when there are multiple auctions
occurring in short periods of time
permits Market-Makers to post their
trading interest up to the total amount
of contracts within a single strategy they
desire to trade within their risk controls
for orders (as an order on the COB may
trade against various COA orders),
which limits execution risk while
permitting them to continue to provide
liquidity to price improvement
auctions.8
The Exchange believes the proposed
rule change also permits it to maintain
the protections in those classes gained
from not having M and N complex
orders otherwise resting in the COB by
only permitting M and N complex
orders to rest in the COB under certain
circumstances for limited time periods.
In classes in which there is significant
open outcry trading, there is generally a
large number of complex orders that
execute in open outcry, and such orders
are generally for significant quantity.
There is a risk of orders in the COB
interfering with this trading. For
example, if a broker represents a large
buy complex order on the floor, if there
is a small sell order in the COB for that
strategy at a better price, the broker
must trade with that resting order first.
While this affords price improvement
for a small portion of the buy order, this
first execution lengthens the time of
execution for the entire order, which
may ultimately harm the customer with
respect to the overall price given the
speed at which the market changes.
Additionally, if there is a small buy
order for that strategy in the COB at a
better bid price, the floor broker would
not be able to clear that order and would
not be able to trade until that order is
no longer resting on the book at a better
7 The Exchange may nullify a transaction or
adjust the execution price of a transaction in
accordance with Rule 6.25.
8 Pursuant to Rule 6.53C(d), a Market-Maker or
away market-maker order on the opposite side of
the auctioned order resting on the COB may be
available for execution against any contracts of the
auctioned order that did not execute during the
auction.
E:\FR\FM\16FEN1.SGM
16FEN1
7094
Federal Register / Vol. 83, No. 33 / Friday, February 16, 2018 / Notices
price. This would ultimately
disadvantage the floor broker’s
customer, who must now wait for
execution. While non-market-maker
orders are permitted in the COB in these
classes, the Exchange believes these
risks would be significantly heightened
if market-maker orders were permitted
to rest on the COB, as the Exchange
expects market-makers would rest many
smaller orders in reaction to hearing an
order represented by a broker, which
could block open outcry transactions
more frequently.
For the following examples, suppose
the NBBO for the VIX October 14 call
is 2.50 to 2.60, and the market for the
VIX October 14 put is 1.50 to 1.60.
Therefore, the NSM for a straddle 9 is
4.00 to 4.20. Pursuant to the proposed
rule change, the Exchange permits M
and N orders to rest in VIX when there
is an opposing side customer order
resting in the COB with a price not
outside $4.00 and $4.20 or if there are
at least two COAs within a 1,000
millisecond interval, and provides
Market-Makers with three minutes to
cancel orders once those Market-Maker
orders are received into the COB.
daltland on DSKBBV9HB2PROD with NOTICES
Example #1
• At 10:00 a.m., a customer submits
to the COB an order to buy 20 of the VIX
October 14 straddle at $4.10 (there are
no other customer orders resting in the
COB to buy this strategy at any price).
• At 10:01 a.m., the customer order is
still resting, and the COB receives a
Market-Maker order to sell 50 of the VIX
October 14 straddle at $4.12. The
Market-Maker must cancel the order by
10:04 a.m.
• At 10:04 a.m., the Market-Maker
cancels the order.
• At 10:04:30 a.m., the same customer
order continues to rest on the COB, and
the Market-Maker enters another order
to sell the straddle at $4.11. The MarketMaker must cancel that order by
10:07:30 a.m.
• At 10:07 a.m., the Market-Maker
cancels the order.
Example #2
• At 10:31 a.m., a customer submits
to the COB an order to buy 20 of the VIX
October 14 straddle at $3.99 (there are
no other customer orders resting in the
COB to buy this strategy at any price).
• Market-Makers would not be
permitted to enter opposing orders into
the COB, because the customer order
resting in the COB is priced outside of
the NSM.
• At 10:35 a.m., the NSM changes
from $4.00 to $4.20 to $3.90 to $4.10,
9 A straddle order buys or sells the put and call
of the same series.
VerDate Sep<11>2014
19:24 Feb 15, 2018
Jkt 244001
and thus the resting customer order is
now within the NSM.
• At 10:38 a.m., the COB receives a
Market-Maker order to sell 50 of the
straddle at $4.00.
• At 10:40 a.m., the customer cancels
its resting order and submits a new
order to buy 20 of the straddle at $4.00,
which executes again the resting
Market-Maker order.10 At 10:41 a.m.,
the Market-Maker cancels the remaining
30 of the straddle.
Example #3
• At 10:00:00:000 a.m., a customer
submits an order to buy the VIX October
14 straddle, which initiates a COA
(there was no other COA within the
previous 1000 milliseconds), so MarketMakers may not submit an order into
the COB.
• At 10:00:00:999 a.m., another
customer submits an order to buy the
VIX October 14 straddle, which initiates
another COA. As this is the second COA
within a one thousand millisecond
interval, Market-Makers may submit
orders to the COB.
• At 10:01:000 a.m., a Market-Maker
submits to the COB an order to sell the
VIX October 14 straddle at $4.12.
• The Market-Maker must cancel the
order by 10:04:000 a.m.
The time period within which a
Market-Maker must cancel its complex
order pursuant to the proposed rule
change provides the Market-Maker with
sufficient time for the opposing
customer to potentially re-price its order
for execution against the MarketMaker’s order or for the Market-Maker
order to execute against an order
following a COA, while also giving the
Market-Maker sufficient time to
manually cancel its unexecuted orders
while managing all of its trading
activity. A time period that is too short
may discourage market-makers from
entering orders under these
circumstances, but a time period that is
too long may eliminate the benefits of
not permitting market-maker orders to
rest in the COB (as discussed above).
Additionally, requiring customer orders
to be not outside the NSM for MarketMakers to submit orders to the COB
prevents situations in which market
participants may take advantage of this
functionality. For example, a customer
may rest an order in the COB that is far
outside the NSM (and thus unlikely to
execute) for long periods of time, which
would then permit Market-Makers to
rest orders in the COB for such long
10 Note
the customer receives a better price than
is currently offered in the leg markets—to get an
execution in the leg markets, the customer would
have had to buy the straddle at $4.10.
PO 00000
Frm 00087
Fmt 4703
Sfmt 4703
periods of time, because if a MarketMaker order on the COB does not trade,
the Market-Maker could cancel it
pursuant to the proposed rule change
and then re-submit the order to the
COB.
The Exchange’s Regulatory Division
will have surveillance in place to
enforce the proposed rule change,
which surveillance will monitor
whether M and N orders have only been
entered in the permitted circumstances
described above, and whether any such
unexecuted orders have been cancelled
by the deadline imposed by the
proposed rule change.
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.11 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 12 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) 13 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the Exchange believes
the proposed rule change will add
liquidity and increase customer
execution opportunities at prices
potentially better than the leg markets
for resting priority customer complex
orders and auctioned orders in classes
in which the Exchange has determined
M and N orders are otherwise not
eligible for entry into the COB, while
maintaining the protections in those
classes gained from not having M and N
complex orders otherwise resting in the
COB,14 which benefits investors. Unlike
11 15
12 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
13 Id.
14 As discussed above, in classes in which there
is significant open outcry trading, the Exchange is
aware of risk that market-makers could rest orders
in the COB at prices that would interfere with
executions by in-crowd market participants.
E:\FR\FM\16FEN1.SGM
16FEN1
daltland on DSKBBV9HB2PROD with NOTICES
Federal Register / Vol. 83, No. 33 / Friday, February 16, 2018 / Notices
the leg markets, in which market-makers
provide liquidity through quotes, the
COB has no market-maker quotes that
indicate to customers the price at which
liquidity providers are willing to trade
against their orders. Allowing marketmakers to enter orders on the COB when
there are priority customer orders on the
opposite side will provide those
customers with this information, thus
creating potential execution
opportunities for customers whose
orders are not satisfied by the leg
markets or other complex orders.
Additionally, the Exchange believes it
may be difficult for Market-Makers to
respond to auctions, particularly when
multiple auctions occur within a short
amount of time, while managing risk
related to amount executed during those
auctions. Market-makers have
complicated risk modeling associated
with their trading activity, which factors
in the size, price, and frequency at
which they trade with orders. In the leg
markets, those risk models factor in
market-makers’ quotes. However, the
Exchange understands Market-Makers
have separate systems for quoting and
for monitoring and responding to COAs,
each of which has a different risk model
and set of risk controls. It is common for
Market-Makers to set risk controls with
respect to the COA monitoring and
response system to not respond to too
many COAs within a short timeframe. If
multiple COAs in a strategy occur
within a short amount of time, it is
common for a Market-Maker’s system to
determine this to be a potential system
issue of the submitting Trading Permit
Holder or Exchange. To ensure a
Market-Maker does not trade with
potentially erroneous orders and protect
the Market-Maker from erroneous
transactions, the Market-Maker’s system
that monitors COAs may stop
responding to COAs in this situation
pursuant to the Market-Maker’s risk
controls for that system. This ultimately
reduces auction liquidity and potential
price improvement for COA orders.
Allowing Market-Makers to enter orders
on the COB when there are multiple
auctions occurring in short periods of
time permits Market-Makers to post
their trading interest up to the total
amount of contracts within a single
strategy they desire to trade within their
risk controls for orders (as an order on
the COB may trade against various COA
orders), which limits execution risk
while permitting them to continue to
provide liquidity to price improvement
auctions.
Therefore, the proposed rule change
will improve Market-Makers’ ability to
trade against orders auctioned in a short
period of time while managing their risk
VerDate Sep<11>2014
19:24 Feb 15, 2018
Jkt 244001
and thus increase execution
opportunities for these orders. M and N
complex orders provide customers with
additional information regarding prices
at which there is interest in the
strategies. Current rules permit the
Exchange to allow M and N orders into
the COB; the rule change merely
provides the Exchange with flexibility
to allow this if certain conditions exist.
The time period within which a MarketMaker must cancel its complex order
pursuant to the proposed rule change
provides the Market-Maker with
sufficient time for the opposing
customer to potentially re-price its order
for execution against the MarketMaker’s order or for the Market-Maker
order to execute against an order
following a COA, while also giving the
Market-Maker sufficient time to
manually cancel its unexecuted orders
while managing all of its trading
activity. A time period that is too short
may discourage market-makers from
entering orders under these
circumstances, as they may not have
time to cancel the order in time while
managing all their trading activity, but
a time period that is too long may
eliminate the benefits of not permitting
market-maker orders to rest in the COB
(as discussed above). Additionally,
requiring customer orders to be not
outside the NSM for Market-Makers to
submit orders to the COB prevents
situations in which market participants
may take advantage of this
functionality—for example, a customer
may rest an order in the COB that is far
outside the NSM (and thus unlikely to
execute) for long periods of time, which
would then permit Market-Makers to
rest orders in the COB for such long
periods of time, because if a MarketMaker order on the COB does not trade,
the Market-Maker could cancel it
pursuant to the proposed rule change
and then re-submit the order to the
COB.
The Exchange’s Regulatory Division
will have surveillance in place to
enforce the proposed rule change,
which surveillance will monitor
whether M and N orders have only been
entered in the permitted circumstances
described above, and whether any such
unexecuted orders have been cancelled
by the deadline imposed by the
proposed rule change.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
Cboe Options 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. Current Rule
6.53C(c) permits the Exchange to
PO 00000
Frm 00088
Fmt 4703
Sfmt 4703
7095
determine M and N complex orders are
not eligible to rest in the COB; the rule
change merely provides the Exchange
with flexibility to allow this if certain
conditions exist. The proposed rule
change permits Market-Makers to
submit complex orders for entry into the
COB, and cancel such orders if they
remain unexecuted, in the same
circumstances in those classes. If
permitted, Market-Makers may enter
complex orders for entry into the COB
in their discretion; such order entry will
not be required. Market-Makers may
continue to enter opening only or
immediate-or-cancel complex orders in
those classes, or submit no complex
orders in those classes, as they do today.
Market-Makers have differing levels of
resources, and some may determine to
not expend resources to update systems
to automatically recognize that
conditions exist to permit them to rest
orders in the COB. However, through
discussions with Market-Makers, the
Exchange understands any such system
updates to require minimal expenditure.
Additionally, it is possible for MarketMakers to manually observe the
existence of conditions that would
permit them to rest orders in the COB,
and manually cancel them within the
required timeframe. The proposed rule
change does not require Market-Makers
to submit orders to the COB if the
conditions in the proposed rule change
exist; such order submission would be
voluntary and in Market-Makers’
discretion. The proposed rule change
provides all Market-Makers with the
ability to submit orders to the COB in
these circumstances.
The Exchange believes the proposed
rule change will add liquidity and
increase customer execution
opportunities at prices potentially better
than the leg markets for resting priority
customer complex orders and auctioned
orders in classes in which the Exchange
has determined M and N orders are not
otherwise eligible for entry into the
COB. The proposed rule change will
apply in the same manner to all MarketMakers in the classes in which the
Exchange permits the proposed activity.
The proposed rule change has no impact
on intermarket competition, as it relates
solely to orders that the Exchange
permits to rest in its COB.
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.
E:\FR\FM\16FEN1.SGM
16FEN1
7096
Federal Register / Vol. 83, No. 33 / Friday, February 16, 2018 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will:
A. By order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CBOE–2018–016, and
should be submitted on or before March
9, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Eduardo A. Aleman,
Assistant Secretary.
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:
[FR Doc. 2018–03197 Filed 2–15–18; 8:45 am]
Electronic Comments
[Release No. 34–82692; File No. SR–ICEEU–
2018–001]
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CBOE–2018–016 on the subject line.
daltland on DSKBBV9HB2PROD with NOTICES
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–CBOE–2018–016. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
VerDate Sep<11>2014
19:24 Feb 15, 2018
Jkt 244001
BILLING CODE 8011–01–P
changes to the ICE Clear Europe
Clearing Rules or Procedures.3
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, ICE
Clear Europe included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. ICE
Clear Europe has prepared summaries,
set forth in sections (A), (B), and (C)
below, of the most significant aspects of
such statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
(a) Purpose
SECURITIES AND EXCHANGE
COMMISSION
Self-Regulatory Organizations; ICE
Clear Europe Limited; Notice of Filing
of Proposed Rule Change, SecurityBased Swap Submission or Advance
Notice Relating to Amendments to the
ICE Clear Europe CDS Clearing Stress
Testing Policy (the ‘‘Stress Testing
Policy’’)
February 12, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on February
6, 2018, ICE Clear Europe Limited (‘‘ICE
Clear Europe’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
changes described in Items I, II, and III
below, which Items have been prepared
by ICE Clear Europe. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
ICE Clear Europe proposes revising its
Stress Testing Policy, among other
matters, to recategorize certain CDS
stress testing scenarios and make certain
other enhancements and clarifications.
These revisions do not involve any
15 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
PO 00000
Frm 00089
Fmt 4703
Sfmt 4703
ICE Clear Europe proposes revising its
Stress Testing Policy, among other
matters, to recategorize certain CDS
stress testing scenarios, address specific
wrong way risk, introduce new forward
looking credit event scenarios and make
certain other enhancements and
clarifications. These revisions do not
involve any changes to the ICE Clear
Europe Clearing Rules or Procedures.4
ICE Clear Europe currently maintains
a broad array of stress testing scenarios
that are applied to portfolios of
positions as part of its risk management
practices for the CDS product category.
As part of the existing policy, the
Clearing House management regularly
evaluates whether to retire certain
scenarios or portfolios as outdated or
otherwise inapplicable, and whether to
add new scenarios or portfolios for
testing purposes. ICE Clear Europe is
not proposing to change the frequency
of stress testing or of its regular reviews
of stress testing scenarios, models and
underlying parameters and
assumptions.
The amendments generally reorganize
the existing stress testing scenarios into
two broad categories: Extreme but
plausible market scenarios and extreme
market scenarios. Extreme but plausible
scenarios include both historical
scenarios (such as those involving the
2008/2009 credit crisis, the Lehman
Brothers default and discordant
scenarios, where there are discordant
moves among major indices) and
hypothetical scenarios (such as
3 Capitalized terms used but not defined herein
have the meanings specified in the ICE Clear
Europe Clearing Rules (the ‘‘Rules’’).
4 Capitalized terms used but not defined herein
have the meanings specified in the ICE Clear
Europe Clearing Rules (the ‘‘Rules’’).
E:\FR\FM\16FEN1.SGM
16FEN1
]]>Agencies
[Federal Register Volume 83, Number 33 (Friday, February 16, 2018)]
[Notices]
[Pages 7092-7096]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-03197]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82689; File No. SR-CBOE-2018-016]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Amend Rules Related to the Complex
Order Book
February 12, 2018.
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 February 2, 2018, Cboe Exchange, Inc. (the ``Exchange'' or
``Cboe Options'') filed with the Securities and Exchange Commission
(the ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend its rules related to the Complex
Order Book (``COB'').
(additions are italicized; deletions are [bracketed])
* * * * *
Cboe Exchange, Inc. Rules
* * * * *
Rule 6.53C. Complex Orders on the Hybrid System
(a)-(b) No change.
(c) Complex Order Book:
(i) Routing of Complex Orders: The Exchange will determine which
classes and which complex order origin types (i.e., non-broker-
dealer public customer, broker-dealers that are not Market-Makers or
specialists on an options exchange, and/or Market-Makers or
specialists on an options exchange) are eligible for entry into the
COB and whether such complex orders can route directly to the COB
and/or from PAR to the COB. In a class in which the Exchange
determines complex orders of Market-Makers and specialists on an
options exchange are not eligible for entry into the COB, the
Exchange may determine that Market-Makers and specialists may enter
complex orders into the COB if:
(A) their complex orders are on the opposite side of (1) a
priority customer complex order(s) resting in the COB with a price
not outside the national spread market; or (2) order(s) on the same
side of the market in the same strategy that initiated a COA(s) if
there are ``x'' number of COAs within ``y'' milliseconds, counted on
a rolling basis (the Exchange determines the number ``x'' (which
must be at least 2) and time period ``y'' (which may be no more than
2,000)); and
(B) they cancel their complex orders, if they remain unexecuted,
no later than a specified time (which the Exchange determines and
may be no more than five minutes) after the time the COB receives
the Market-Maker order.
Complex orders not eligible to route to COB (either directly or
from PAR to COB) will route via the order handling system pursuant to
Rule 6.12.
(ii)-(iv) No change.
(d) No change.
. . . Interpretations and Policies:
.01-.12 No change.
* * * * *
The text of the proposed rule change is also available on the
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend its rules related to the COB.
Currently, Rule 6.53C(c)(i) states the Exchange may determine which
classes and which complex order origin types (i.e., non-broker-dealer
public customer, broker-dealers that are not market-makers or
specialists on an options exchange, and/or Market-Makers or specialists
on an options exchange) are eligible for entry into the COB and whether
such complex orders can route directly to the COB and/or from PAR to
the COB.\3\ To the extent an origin type is not eligible for entry into
the COB, complex orders with that origin type may still be entered into
the System as opening-only or immediate-or-cancel, as such orders would
not rest in the COB when the Exchange is open for trading.
---------------------------------------------------------------------------
\3\ Currently, Cboe Options has determined Market-Maker (origin
code ``M'') and market-maker or specialist on an options exchange
(``away market-makers'') (origin code ``N'') complex orders in
options on the S&P 500 (``SPX'' and ``SPXW'') and the Cboe
Volatility Index (``VIX'') are not eligible for entry into the COB.
See Regulatory Circular RG15-195. The group of SPX options with
standard third-Friday settlements trade under the SPX symbol on the
Hybrid 3.0 trading system, and the group of SPX options with other
settlements trade under the SPXW symbol on the Hybrid trading
system. Pursuant to Rule 8.14, Interpretation and Policy .01(c), the
Exchange may establish different trading parameters for each group
to the extent the Exchange Rules otherwise provide for such
parameters to be established on a class basis.
---------------------------------------------------------------------------
The Exchange proposes to amend Rule 6.53C(c) to provide in a class
in which the Exchange determines complex orders of Market-Makers and
away market-makers are not eligible for entry into the COB, the
Exchange may determine that Market-Makers and away market-makers may
enter complex
[[Page 7093]]
orders into the COB if (1) their complex orders are on the opposite
side of (A) a priority customer complex order(s) resting in the COB
with a price not outside the national spread market (``NSM'') \4\ or
(B) order(s) on the same side of the market in the same strategy that
initiated a COA(s) if there are ``x'' number of COAs within ``y''
milliseconds, counted on a rolling basis (the Exchange will determine
\5\ the number ``x'' (which must be at least 2) and time period ``y''
(which may be no more than 2,000)) and (2) they cancel their complex
orders, if such orders remain unexecuted, no later than a specified
time (which the Exchange determines and may be no more than five
minutes) after the time the COB receives the order. The Exchange
intends to set these parameters at levels it believes will permit
Market-Makers to have sufficient time to submit orders into the COB to
participate in COAs, which determination the Exchange will make based
on Market-Maker feedback, business conditions, and data (including
trading volume data and information regarding number of executions of
Market-Maker orders against complex orders).
---------------------------------------------------------------------------
\4\ See Rule 1.1(dddd) [sic].
\5\ Pursuant to Rule 6.53C, Interpretation and Policy .01, the
Exchange will announce to Trading Permit Holders all determinations
it makes pursuant to Rule 6.53C via Regulatory Circular. The
Exchange will provide Trading Permit Holders with sufficient,
advanced notice prior to changing any parameters its sets under the
proposed rule change.
---------------------------------------------------------------------------
Unlike the leg markets, in which market-makers provide liquidity
through quotes, the COB has no market-maker quotes that indicate to
customers the price at which liquidity providers are willing to trade
against their orders.\6\ Allowing market-makers to enter orders on the
COB when there are priority customer orders on the opposite side will
provide those customers with this information, thus creating potential
execution opportunities for customers whose orders are not satisfied by
the leg markets or other complex orders. The Exchange believes the
proposed rule change will add liquidity for resting priority customer
complex orders in classes in which the Exchange has determined M and N
complex orders are not eligible for entry into the COB, thus increasing
execution opportunities at prices potentially better than the leg
markets.
---------------------------------------------------------------------------
\6\ Market-makers are unable (and not required to) submit quotes
in the COB.
---------------------------------------------------------------------------
Additionally, the Exchange believes it may be difficult for Market-
Makers to respond to auctions, particularly when multiple auctions
occur within a short amount of time, while managing risk related to the
amount executed during those auctions. Market-makers have complicated
risk modeling associated with their trading activity, which factors in
the size, price, and frequency at which they trade with orders. In the
leg markets, those risk models factor in market-makers' quotes.
However, the Exchange understands Market-Makers have separate systems
for quoting and for monitoring and responding to COAs, each of which
has a different risk model and set of risk controls. For example, one
server process submits quotes while another server process scans the
market for opportunities, such as the presence of customer orders and
auctions.
It is common for Market-Makers to set risk controls with respect to
the COA monitoring and response system to not respond to too many COAs
within a short timeframe. If multiple COAs in a strategy occur within a
short amount of time, it is common for a Market-Maker's system to
determine this to be a potential system issue of the submitting Trading
Permit Holder or Exchange. To ensure a Market-Maker does not trade with
potentially erroneous orders and protect the Market-Maker from
erroneous transactions to ensure it does not become overexposed to
risk, the Market-Maker's system that monitors COAs may stop responding
to COAs in this situation pursuant to the Market-Maker's risk controls
for that system (e.g., the system may be programmed to only respond to
a specific number of auctions within a time period). This ultimately
reduces auction liquidity and potential price improvement for COA
orders.
Additionally, this may result in the Market-Maker missing
opportunities to participate in legitimate auctions. However, it is
common for market participants to enter multiple small orders into COAs
that are not erroneous (e.g., in accordance with market participants'
algorithmic trading that may break up larger orders when hedging large
portfolios). To the extent a Market-Maker's system stops responding to
COAs in the above situation, a person may review the COAs and determine
in its discretion it is appropriate to trade with the COA orders even
if the System does not permit it due to automatic controls. Under the
proposed rule change, that person could then submit an order to the COB
that would be available to trade against those multiple COA orders up
to the amount the Market-Maker is willing to trade. Even if the COAs
were the result of an error by the submitting market participants, the
Market-Maker that submitted a complex order that ultimately executes
against those erroneous COA errors still had an opportunity to review
the sizes and prices of those orders and evaluate how much and at what
prices it is willing to trade. This is no different than the
possibility of a market-maker quote resting in the leg market executing
against an erroneously entered order.\7\ It is easier, and faster, for
a person to submit an order to the COB to cover the amount of contracts
it is willing to trade than enter individual responses to COAs given
the brief COA response period (currently 100 milleseconds). Allowing
Market-Makers to enter orders on the COB when there are multiple
auctions occurring in short periods of time permits Market-Makers to
post their trading interest up to the total amount of contracts within
a single strategy they desire to trade within their risk controls for
orders (as an order on the COB may trade against various COA orders),
which limits execution risk while permitting them to continue to
provide liquidity to price improvement auctions.\8\
---------------------------------------------------------------------------
\7\ The Exchange may nullify a transaction or adjust the
execution price of a transaction in accordance with Rule 6.25.
\8\ Pursuant to Rule 6.53C(d), a Market-Maker or away market-
maker order on the opposite side of the auctioned order resting on
the COB may be available for execution against any contracts of the
auctioned order that did not execute during the auction.
---------------------------------------------------------------------------
The Exchange believes the proposed rule change also permits it to
maintain the protections in those classes gained from not having M and
N complex orders otherwise resting in the COB by only permitting M and
N complex orders to rest in the COB under certain circumstances for
limited time periods. In classes in which there is significant open
outcry trading, there is generally a large number of complex orders
that execute in open outcry, and such orders are generally for
significant quantity. There is a risk of orders in the COB interfering
with this trading. For example, if a broker represents a large buy
complex order on the floor, if there is a small sell order in the COB
for that strategy at a better price, the broker must trade with that
resting order first. While this affords price improvement for a small
portion of the buy order, this first execution lengthens the time of
execution for the entire order, which may ultimately harm the customer
with respect to the overall price given the speed at which the market
changes. Additionally, if there is a small buy order for that strategy
in the COB at a better bid price, the floor broker would not be able to
clear that order and would not be able to trade until that order is no
longer resting on the book at a better
[[Page 7094]]
price. This would ultimately disadvantage the floor broker's customer,
who must now wait for execution. While non-market-maker orders are
permitted in the COB in these classes, the Exchange believes these
risks would be significantly heightened if market-maker orders were
permitted to rest on the COB, as the Exchange expects market-makers
would rest many smaller orders in reaction to hearing an order
represented by a broker, which could block open outcry transactions
more frequently.
For the following examples, suppose the NBBO for the VIX October 14
call is 2.50 to 2.60, and the market for the VIX October 14 put is 1.50
to 1.60. Therefore, the NSM for a straddle \9\ is 4.00 to 4.20.
Pursuant to the proposed rule change, the Exchange permits M and N
orders to rest in VIX when there is an opposing side customer order
resting in the COB with a price not outside $4.00 and $4.20 or if there
are at least two COAs within a 1,000 millisecond interval, and provides
Market-Makers with three minutes to cancel orders once those Market-
Maker orders are received into the COB.
---------------------------------------------------------------------------
\9\ A straddle order buys or sells the put and call of the same
series.
---------------------------------------------------------------------------
Example #1
At 10:00 a.m., a customer submits to the COB an order to
buy 20 of the VIX October 14 straddle at $4.10 (there are no other
customer orders resting in the COB to buy this strategy at any price).
At 10:01 a.m., the customer order is still resting, and
the COB receives a Market-Maker order to sell 50 of the VIX October 14
straddle at $4.12. The Market-Maker must cancel the order by 10:04 a.m.
At 10:04 a.m., the Market-Maker cancels the order.
At 10:04:30 a.m., the same customer order continues to
rest on the COB, and the Market-Maker enters another order to sell the
straddle at $4.11. The Market-Maker must cancel that order by 10:07:30
a.m.
At 10:07 a.m., the Market-Maker cancels the order.
Example #2
At 10:31 a.m., a customer submits to the COB an order to
buy 20 of the VIX October 14 straddle at $3.99 (there are no other
customer orders resting in the COB to buy this strategy at any price).
Market-Makers would not be permitted to enter opposing
orders into the COB, because the customer order resting in the COB is
priced outside of the NSM.
At 10:35 a.m., the NSM changes from $4.00 to $4.20 to
$3.90 to $4.10, and thus the resting customer order is now within the
NSM.
At 10:38 a.m., the COB receives a Market-Maker order to
sell 50 of the straddle at $4.00.
At 10:40 a.m., the customer cancels its resting order and
submits a new order to buy 20 of the straddle at $4.00, which executes
again the resting Market-Maker order.\10\ At 10:41 a.m., the Market-
Maker cancels the remaining 30 of the straddle.
---------------------------------------------------------------------------
\10\ Note the customer receives a better price than is currently
offered in the leg markets--to get an execution in the leg markets,
the customer would have had to buy the straddle at $4.10.
---------------------------------------------------------------------------
Example #3
At 10:00:00:000 a.m., a customer submits an order to buy
the VIX October 14 straddle, which initiates a COA (there was no other
COA within the previous 1000 milliseconds), so Market-Makers may not
submit an order into the COB.
At 10:00:00:999 a.m., another customer submits an order to
buy the VIX October 14 straddle, which initiates another COA. As this
is the second COA within a one thousand millisecond interval, Market-
Makers may submit orders to the COB.
At 10:01:000 a.m., a Market-Maker submits to the COB an
order to sell the VIX October 14 straddle at $4.12.
The Market-Maker must cancel the order by 10:04:000 a.m.
The time period within which a Market-Maker must cancel its complex
order pursuant to the proposed rule change provides the Market-Maker
with sufficient time for the opposing customer to potentially re-price
its order for execution against the Market-Maker's order or for the
Market-Maker order to execute against an order following a COA, while
also giving the Market-Maker sufficient time to manually cancel its
unexecuted orders while managing all of its trading activity. A time
period that is too short may discourage market-makers from entering
orders under these circumstances, but a time period that is too long
may eliminate the benefits of not permitting market-maker orders to
rest in the COB (as discussed above). Additionally, requiring customer
orders to be not outside the NSM for Market-Makers to submit orders to
the COB prevents situations in which market participants may take
advantage of this functionality. For example, a customer may rest an
order in the COB that is far outside the NSM (and thus unlikely to
execute) for long periods of time, which would then permit Market-
Makers to rest orders in the COB for such long periods of time, because
if a Market-Maker order on the COB does not trade, the Market-Maker
could cancel it pursuant to the proposed rule change and then re-submit
the order to the COB.
The Exchange's Regulatory Division will have surveillance in place
to enforce the proposed rule change, which surveillance will monitor
whether M and N orders have only been entered in the permitted
circumstances described above, and whether any such unexecuted orders
have been cancelled by the deadline imposed by the proposed rule
change.
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.\11\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \12\ 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) \13\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
\13\ Id.
---------------------------------------------------------------------------
In particular, the Exchange believes the proposed rule change will
add liquidity and increase customer execution opportunities at prices
potentially better than the leg markets for resting priority customer
complex orders and auctioned orders in classes in which the Exchange
has determined M and N orders are otherwise not eligible for entry into
the COB, while maintaining the protections in those classes gained from
not having M and N complex orders otherwise resting in the COB,\14\
which benefits investors. Unlike
[[Page 7095]]
the leg markets, in which market-makers provide liquidity through
quotes, the COB has no market-maker quotes that indicate to customers
the price at which liquidity providers are willing to trade against
their orders. Allowing market-makers to enter orders on the COB when
there are priority customer orders on the opposite side will provide
those customers with this information, thus creating potential
execution opportunities for customers whose orders are not satisfied by
the leg markets or other complex orders.
---------------------------------------------------------------------------
\14\ As discussed above, in classes in which there is
significant open outcry trading, the Exchange is aware of risk that
market-makers could rest orders in the COB at prices that would
interfere with executions by in-crowd market participants.
---------------------------------------------------------------------------
Additionally, the Exchange believes it may be difficult for Market-
Makers to respond to auctions, particularly when multiple auctions
occur within a short amount of time, while managing risk related to
amount executed during those auctions. Market-makers have complicated
risk modeling associated with their trading activity, which factors in
the size, price, and frequency at which they trade with orders. In the
leg markets, those risk models factor in market-makers' quotes.
However, the Exchange understands Market-Makers have separate systems
for quoting and for monitoring and responding to COAs, each of which
has a different risk model and set of risk controls. It is common for
Market-Makers to set risk controls with respect to the COA monitoring
and response system to not respond to too many COAs within a short
timeframe. If multiple COAs in a strategy occur within a short amount
of time, it is common for a Market-Maker's system to determine this to
be a potential system issue of the submitting Trading Permit Holder or
Exchange. To ensure a Market-Maker does not trade with potentially
erroneous orders and protect the Market-Maker from erroneous
transactions, the Market-Maker's system that monitors COAs may stop
responding to COAs in this situation pursuant to the Market-Maker's
risk controls for that system. This ultimately reduces auction
liquidity and potential price improvement for COA orders. Allowing
Market-Makers to enter orders on the COB when there are multiple
auctions occurring in short periods of time permits Market-Makers to
post their trading interest up to the total amount of contracts within
a single strategy they desire to trade within their risk controls for
orders (as an order on the COB may trade against various COA orders),
which limits execution risk while permitting them to continue to
provide liquidity to price improvement auctions.
Therefore, the proposed rule change will improve Market-Makers'
ability to trade against orders auctioned in a short period of time
while managing their risk and thus increase execution opportunities for
these orders. M and N complex orders provide customers with additional
information regarding prices at which there is interest in the
strategies. Current rules permit the Exchange to allow M and N orders
into the COB; the rule change merely provides the Exchange with
flexibility to allow this if certain conditions exist. The time period
within which a Market-Maker must cancel its complex order pursuant to
the proposed rule change provides the Market-Maker with sufficient time
for the opposing customer to potentially re-price its order for
execution against the Market-Maker's order or for the Market-Maker
order to execute against an order following a COA, while also giving
the Market-Maker sufficient time to manually cancel its unexecuted
orders while managing all of its trading activity. A time period that
is too short may discourage market-makers from entering orders under
these circumstances, as they may not have time to cancel the order in
time while managing all their trading activity, but a time period that
is too long may eliminate the benefits of not permitting market-maker
orders to rest in the COB (as discussed above). Additionally, requiring
customer orders to be not outside the NSM for Market-Makers to submit
orders to the COB prevents situations in which market participants may
take advantage of this functionality--for example, a customer may rest
an order in the COB that is far outside the NSM (and thus unlikely to
execute) for long periods of time, which would then permit Market-
Makers to rest orders in the COB for such long periods of time, because
if a Market-Maker order on the COB does not trade, the Market-Maker
could cancel it pursuant to the proposed rule change and then re-submit
the order to the COB.
The Exchange's Regulatory Division will have surveillance in place
to enforce the proposed rule change, which surveillance will monitor
whether M and N orders have only been entered in the permitted
circumstances described above, and whether any such unexecuted orders
have been cancelled by the deadline imposed by the proposed rule
change.
B. Self-Regulatory Organization's Statement on Burden on Competition
Cboe Options 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. Current Rule 6.53C(c)
permits the Exchange to determine M and N complex orders are not
eligible to rest in the COB; the rule change merely provides the
Exchange with flexibility to allow this if certain conditions exist.
The proposed rule change permits Market-Makers to submit complex orders
for entry into the COB, and cancel such orders if they remain
unexecuted, in the same circumstances in those classes. If permitted,
Market-Makers may enter complex orders for entry into the COB in their
discretion; such order entry will not be required. Market-Makers may
continue to enter opening only or immediate-or-cancel complex orders in
those classes, or submit no complex orders in those classes, as they do
today. Market-Makers have differing levels of resources, and some may
determine to not expend resources to update systems to automatically
recognize that conditions exist to permit them to rest orders in the
COB. However, through discussions with Market-Makers, the Exchange
understands any such system updates to require minimal expenditure.
Additionally, it is possible for Market-Makers to manually observe the
existence of conditions that would permit them to rest orders in the
COB, and manually cancel them within the required timeframe. The
proposed rule change does not require Market-Makers to submit orders to
the COB if the conditions in the proposed rule change exist; such order
submission would be voluntary and in Market-Makers' discretion. The
proposed rule change provides all Market-Makers with the ability to
submit orders to the COB in these circumstances.
The Exchange believes the proposed rule change will add liquidity
and increase customer execution opportunities at prices potentially
better than the leg markets for resting priority customer complex
orders and auctioned orders in classes in which the Exchange has
determined M and N orders are not otherwise eligible for entry into the
COB. The proposed rule change will apply in the same manner to all
Market-Makers in the classes in which the Exchange permits the proposed
activity. The proposed rule change has no impact on intermarket
competition, as it relates solely to orders that the Exchange permits
to rest in its COB.
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.
[[Page 7096]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2018-016 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-CBOE-2018-016. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CBOE-2018-016, and should be submitted
on or before March 9, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
---------------------------------------------------------------------------
\15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-03197 Filed 2-15-18; 8:45 am]
BILLING CODE 8011-01-P
