Self-Regulatory Organizations; NYSE American LLC; Notice of Filing of Proposed Rule Change for New Rule 971.2NY for An Electronic Price Improvement Auction for Complex Orders, 9769-9781 [2018-04625]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 83, Number 45 (Wednesday, March 7, 2018)]
[Notices]
[Pages 9769-9781]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-04625]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82802; File No. SR-NYSEAMER-2018-05]


Self-Regulatory Organizations; NYSE American LLC; Notice of 
Filing of Proposed Rule Change for New Rule 971.2NY for An Electronic 
Price Improvement Auction for Complex Orders

March 2, 2018.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that on February 15, 2018, NYSE American LLC (the ``Exchange'' or 
``NYSE American'') 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 self-
regulatory organization. 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\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes a new Rule 971.2NY for an electronic price 
improvement auction for complex orders. The proposed rule change is 
available on the Exchange's website at www.nyse.com, at the principal 
office of the Exchange, 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 self-regulatory organization 
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 those 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 parts of such statements.

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

1. Purpose
    The Exchange proposes to expand its electronic crossing mechanism 
offering, which is the Customer Best Execution or ``CUBE'' Auction 
described in Rule 971.1NY, to make it available for complex orders. To 
effect this change, the Exchange proposes new Rule 971.2NY (Complex 
Electronic Cross Transactions) to establish the CUBE for complex orders 
(``Complex CUBE Auction'' or ``Auction''). The proposed Complex CUBE 
Auction would operate in a manner substantially similar to the CUBE 
Auction for single-leg orders (the ``Single-Leg CUBE''). Accordingly, 
proposed Rule 971.2NY is based on Rule 971.1NY with differences as 
necessary to account for different processing of and priority rules for 
Complex Orders.\4\ In addition to being substantially similar to the 
Single-Leg CUBE (discussed below), the proposed Complex CUBE Auction 
would operate in a manner consistent with electronic price improvement 
auctions for complex auctions available on other options markets.\5\
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    \4\ Rule 980NY sets forth how the Exchange conducts trading of 
Electronic Complex Orders (referred to herein simply as Complex 
Orders). Per Rule 980NY, ``an `Electronic Complex Order' means any 
Complex Order as defined in Rule 900.3NY(e) that is entered into the 
System.'' Rule 900.3NY defines Complex Order as ``any order 
involving the simultaneous purchase and/or sale of two or more 
different option series in the same underlying security, for the 
same account, in a ratio that is equal to or greater than one-to-
three (.333) and less than or equal to three-to-one (3.00) and for 
the purpose of executing a particular investment strategy.''
    \5\ See Chicago Board Options Exchange, Inc. (``CBOE'') Rule 
6.74A--Automated Improvement Mechanism (``AIM''); Nasdaq PHLX, LLC 
(``PHLX'') Rule 1087--Price Improvement XL (``PIXL''); BOX Options 
Exchange LLC (``BOX'') Rule 7245--Complex Order Price Improvement 
Period (``COPIP''); Nasdaq ISE, LLC (``ISE'') Rule 723--Price 
Improvement Mechanism (``PIM''); Miami International Securities 
Exchange, LLC (``MIAX'') Rule 515A, Interpretation and Policies 
.12--Price Improvement Mechanism (``PRIME'').
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    As proposed, the Complex CUBE Auction (like the Single-Leg CUBE) 
would be available to ATP Holders both on and off the Trading Floor of 
the Exchange, subject to the requirements of Section 11(a) of the Act 
(discussed below). In addition to the Complex CUBE Auction, Floor-based 
ATP Holders may continue to use existing Floor-based crossing rules.
    The Exchange also proposes to amend Rule 900.2NY(7)(a), make minor 
updates to the Single-Leg CUBE, and amend other Exchange rules (as 
noted herein) for purposes of clarity, transparency and internal 
consistency.
Single-Leg CUBE \6\
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    \6\ See Rule 971.1NY. See Securities Exchange Act Release No. 
72025 (April 25, 2014), 79 FR 24779 (May 1, 2017 [sic]) (SR-NYSEMKT-
2014-17) (order approving CUBE Auction for single-leg orders) 
(``Single-Leg CUBE Approval Order''). To make clear that Rule 
971.1NY relates to the CUBE Auction for single leg orders, the 
Exchange proposes to re-title this rule, and modify cross-references 
to this rule, to ``Single-Leg Electronic Cross Transactions.'' See 
proposed Rules 971.1NY; 900.2NY(18A) (regarding the definition of a 
Professional Customer); 935NY (regarding order exposure 
requirements). The Exchange also proposes to modify Rules 
900.2NY(18A) to exclude Professional Customers from the definition 
of ``Customer'' for purposes of this proposed rule. See proposed 
Rule 900.2NY(18A).
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    The Single-Leg CUBE provides a mechanism through which an ATP 
Holder may seek to guarantee the execution of a limit order it 
represents as agent on behalf of a public customer, broker dealer, or 
any other entity (the ``CUBE Order''). The ATP Holder that

[[Page 9770]]

submits the CUBE Order (the ``Initiating Participant'') agrees to 
guarantee the execution of the CUBE Order by submitting a contra-side 
order (``Contra Order'') representing principal interest or interest it 
has solicited to trade with the CUBE Order at a specified price 
(``single stop price'') or by utilizing auto-match or auto-match limit 
features. The Auction starts with an initiating price that is displayed 
(while the price(s) at which the Contra Order has guaranteed the CUBE 
Order is not displayed). Except as specified by rule, a CUBE Order to 
buy (sell) may trade at prices equal to or between the initiating price 
as the upper (lower) bound and the National Best Bid (``NBB'') 
(National Best Offer (``NBO'')) as the lower (upper) bound.\7\
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    \7\ See Rule 971.1NY(b)(1) (regarding exceptions to general 
parameters, including tighter execution parameters when there is 
Customer interest on the Book and for CUBE Orders for 50 or fewer 
contracts).
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    Although the Contra Order would guarantee the CUBE Order an 
execution, the purpose of the Single-Leg CUBE is to provide the 
opportunity for price improvement for the CUBE Order as well as the 
opportunity for other market participants to interact with the CUBE 
Order. Accordingly, the Exchange notifies market participants with a 
Request for Response (``RFR'') when an Auction is occurring so that 
they have an opportunity to participate by submitting RFR Responses in 
the form of GTX Orders (though unrelated quotes and order received 
during the Auction may be eligible to participate in the CUBE as well). 
The Response Time Interval (``RTI'') for the Auction is determined by a 
random timer, but will never be less than 100 milliseconds or more than 
1 second. However, the CUBE may end prior to the end of the RTI if 
during an Auction, the Exchange receives quotes or orders that are 
marketable to allow such incoming orders or quotes an opportunity to 
interact with interest in the Auction and then continue with regular 
order processing without delay.\8\
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    \8\ See Rule 971.1NY(c)(4).
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    At the conclusion of the Single-Leg CUBE, the CUBE Order may 
execute at multiple prices within a permissible range but would always 
trade at the best-priced interest in the Auction.\9\ Generally, the 
CUBE mechanism will determine whether the total RFR Responses can fill 
the CUBE Order at a price or prices better than the initiating price. 
If so, the CUBE Order is matched against the better-priced RFR 
Responses granting the CUBE Order the maximum amount of price 
improvement possible. As noted above, certain unrelated orders may be 
considered RFR Responses and may interact with the CUBE Order (thus 
maximizing opportunities for price improvement) and any portion of 
these unrelated orders remaining thereafter would be placed on the 
Consolidated Book.
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    \9\ See Rule 971.1NY(c)(5).
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    The Exchange proposes to make the CUBE mechanism available to 
Complex Orders, as described below.
Complex CUBE Overview
    The purpose of the Complex CUBE Auction is to provide the 
opportunity for price improvement for a Complex Order in an electronic 
paired auction as well as the opportunity for other market participants 
to interact with such Complex Order. Accordingly, just as in the 
Single-Leg CUBE, the Exchange would notify market participants when an 
Auction is occurring so that they may have an opportunity to 
participate.
    Like the Single-Leg CUBE, the Complex CUBE Auction is designed to 
work in conjunction with the Exchange's Consolidated Book--the 
Exchange's single electronic order book that contains all quotes and 
limit orders, including Complex Orders.\10\ Any orders executed in the 
Complex CUBE Auction would occur in the Complex Matching Engine 
(``CME''), which is the mechanism that ranks and maintains priority of 
Complex Orders, and monitors the bids and offers in the leg markets for 
possible execution of a Complex Order.\11\ By integrating the Complex 
CUBE Auction into the CME, the Exchange would assure that the Complex 
CUBE Auction respects the priority of interest in the Consolidated 
Book.\12\
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    \10\ See Rule 900.2NY(14) (defining Consolidated Book (or 
``Book'') and providing that all quotes and orders ``that are 
entered into the Book will be ranked and maintained in accordance 
with the rules of priority as provided in Rule 964NY'').
    \11\ See Rule 980NY(b) (``Priority of Electronic Complex Orders 
in the Consolidated Book''). See also proposed Rule 971.2NY 
(regarding processing of Complex CUBE Orders purposes to Rule 
980NY).
    \12\ See proposed Rule 971.2NY(a).
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    As discussed in more detail below, the Auction may conclude early 
(to preserve priority) if, during the Auction, the Exchange receives 
trading interest that improves the interest that existed on the 
Consolidated Book at the start of the Auction. If such incoming trading 
interest is a Complex Order, that order would have an opportunity to 
participate in the Auction; if such trading interest updates the legs 
markets, it would be processed per Rule 980NY after the Complex Order 
that initiated the Auction is fully executed.\13\
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    \13\ The Exchange notes that, as described in the ``Conclusion 
of the Complex CUBE Auction and Order Allocation'' section, the 
allocation of the Complex CUBE Order is consistent with the 
allocation of orders executed in the Complex Order Auction. See Rule 
980NY(c)(7)(B) [sic].
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    The Exchange believes that the operation of the proposed Complex 
CUBE Auction is consistent with processing of Complex Orders in the CME 
and respects the processing of updates to the leg markets consistent 
with Rule 980NY. In addition, the Exchange believes that the Complex 
CUBE Auction would provide more efficient transactions, reduce 
execution risk to ATP Holders, and afford greater opportunities for 
price improvement. The Exchange also believes this proposal would 
result in tighter markets, and ensure that each order receives the best 
possible price.
Definitions
    Because of different processing of and priority rules for Complex 
Orders, the Exchange proposes to both amend current definitions in 
Exchange rules relating to Complex Orders and add new terms that would 
be used for purposes of the Complex CUBE Auction.
    First, the Exchange proposes to amend Rule 900.2NY(7), which 
currently defines the term ``Complex BBO,'' to mean ``the BBO for a 
given complex order strategy as derived from the best bid on OX and 
best offer on OX for each individual component series of a Complex 
Order.'' The Exchange proposes both (i) a non-substantive amendment to 
rename the ``Complex BBO'' as the ``Derived BBO,'' and revise the 
description, and (ii) a substantive amendment to add a new definition 
of ``Complex BBO'' to refer to the best-priced Complex Orders in the 
Consolidated Book.
    To effect this change, the Exchange proposes to amend current Rule 
900.2NY(7)(b) to provide that a Complex BBO means complex orders with 
the lowest-priced net debit/credit price on each side of the 
Consolidated Book for the same complex order strategy.\14\ The Exchange 
believes that defining the Complex BBO to refer to Complex Orders would 
promote transparency and clarity in Exchange rules because the 
definition would be more closely correlated to prices of Complex 
Orders, and not a derived price from the leg markets. As discussed 
below, the

[[Page 9771]]

Exchange proposes to use this amended term ``Complex BBO'' in the rule 
text describing the Complex CUBE Auction.
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    \14\ See Rule 980NY(b) (providing that Electronic Complex Orders 
are ranked in the Consolidated Book, in part, based on their ``total 
or net debit or credit'' price). Complex orders are entered with a 
plus (``+'') sign when the order sender wants to receive money 
(``credit'') or a negative (``-'') to indicate they are willing to 
pay out money (``debit'') when the order executes. In the examples 
used herein, prices are assumed to be credit, unless it is preceded 
by negative sign (indicating a debit).
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    The Exchange proposes this definition of Complex BBO to reflect the 
distinctions between pricing of Complex Orders (which are entered at 
net debit/credit prices) and single-leg orders. Among Complex Orders 
with the same complex strategy, a Complex Order willing to pay money, 
which is expressed with a negative sign, is lower priced than a Complex 
Order willing to pay out a smaller amount or a Complex Order that wants 
to receive money. For example, a Complex Order with a net debit price 
of -$2.00 is lower-priced than a Complex Order with a net debit price 
of -$1.00, and both those orders are lower-priced (and, as discussed 
below, better priced) than a Complex Order with a net credit of +$1.00. 
Accordingly, the concept of ``lower-priced'' for Complex Orders relates 
to the net debit/credit price associated with the order, and not 
whether such order is designated as a ``buy'' or ``sell'' order.
    The Exchange also proposes new Rule 900.2NY(7)(c) to provide that 
the ``Derived BBO'' is calculated using the BBO from the Consolidated 
Book for each of the options series comprising the given complex order 
strategy.\15\ This revised definition would not change how the Exchange 
determines what was formerly referred to as the ``Complex BBO.'' The 
Exchange proposes this change to terminology to make clear that the 
Derived BBO is derived from BBO of the leg markets, as is described in 
the current definition of a ``Complex BBO.'' The Exchange proposes to 
make conforming amendments to Rule 980NY to replace all references to 
``Complex BBO'' in that rule to the new term ``Derived BBO.'' \16\
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    \15\ Rule 900.2NY(7) (defining the BBO as the best bid or offer 
in the System).
    \16\ See proposed Rule 980NY(e)(2), (e)(3)(ii), (e)(6)(A)(i), 
(ii) and (iii), (e)(6)(B)(ii) and (iii), (e)(6)(C)(i)-(iv), and 
(e)(6)(7)(A), and Commentary .02 and .05(a) to Rule 980NY.
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    Second, the Exchange proposes that Commentary .02 to proposed Rule 
971.2NY would include terms used in Rule 971.2NY. The Exchange proposes 
to use the term ``interest'' in these definitions because these terms 
relate to any interest that could interact with a Complex Order, 
including quotes and orders in the leg markets that comprise the 
complex order strategy. As proposed:
     Better-priced or more aggressive interest would mean 
lower-priced net debit/credit interest on each side of the Consolidated 
Book for the same complex order strategy. As further proposed, higher-
priced interest would be worse-priced or less aggressive than lower-
priced interest. For example, a complex order entered with a price of -
$4.00, indicating the sender is willing to pay out up to $4.00 when the 
order trades, is more aggressively priced than a complex order entered 
with a price of -$3.00, indicating the sender is only willing to pay 
out up to $3.00 when the order trades.
     Interest improves the Complex or Derived BBO if it would 
be priced lower than the same-side Complex or Derived BBO. As noted 
above, for Complex Orders, a lower-priced order is better priced, and 
therefore an improved price for a Complex Order would be lower-priced.
     Interest locks when it would be priced at the exact 
inverse price of any contra-side interest.
     Interest crosses when it would be priced lower than the 
exact inverse price of any contra-side interest.
     A Complex Order would be executable against contra-side 
interest price [sic] at the exact inverse value or lower. For example, 
a Complex Order with a debit price of $1.00 would be executable against 
a Complex Order with a credit price of $1.00 or lower, and vice versa.
    The Exchange believes that defining these terms in the proposed 
rule would promote transparency and clarity regarding how the Complex 
CUBE Auction would function.
Criteria for Starting a Complex CUBE Auction
    Under proposed Rule 971.2NY(a), a Complex CUBE Order is a Complex 
Order, as defined in Rule 900.3NY(e) (see supra note 4) submitted 
electronically by an ATP Holder (``Initiating Participant'') into the 
Complex CUBE Auction that the Initiating Participant represents as 
agent on behalf of a public customer, broker dealer, or any other 
entity.
    Proposed Rule 971.2NY(a)(1) would provide that the Initiating 
Participant would guarantee the execution of the Complex CUBE Order by 
submitting a contra-side order (``Complex Contra Order'') representing 
principal interest or non-Customer interest it has solicited to trade 
with the Complex CUBE Order at either (A) a specified price (``stop 
price'') (as described below in proposed Rule 971.2NY(b)(1)(A)), or (B) 
an auto-match limit price (as described below in proposed Rule 
971.2NY(b)(1)(B)).\17\ Proposed Rule 971.2NY(a)(1)(A)-(B) is based on 
Rule 971.1NY(a), but differs in that it uses the term ``Complex'' and 
does not include details about the initiating price (see proposed Rule 
971.2NY(a)(3)) or any reference to an auto-match feature.\18\
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    \17\ The Exchange previously filed a proposed rule change that 
it would issue guidance advising ATP Holders that Contra Orders for 
the account of a Customer may not be entered into a CUBE Auction. 
See Securities Exchange Act Release No. 72389 (June 13, 2014), 79 FR 
35201, 35203 (SR-NYSEMKT-2014-51). The Exchange proposes to amend 
Rule 971.1NY(a) relating to Single-Leg CUBE and to include in 
proposed Rule 971.2NY the requirement that any solicited interest 
included in the Contra Order be non-Customer interest.
    \18\ Because the Exchange does not offer Market Orders for 
Complex Orders, there is no auto-match feature for Complex CUBE 
(which is a feature that is offered in the Single-Leg CUBE). See 
Rule 971.1NY(c)(1)(B) (describing auto-match feature as allowing the 
Initiating Participant for a CUBE Order to buy (sell) to 
``automatically match as principal or as agent on behalf of a Contra 
Order the price and size of all RFR Responses'' that are worse that 
are lower (higher) than the initiating price and within the range of 
permissible executions''). The Exchange proposes a clarifying 
amendment to Rule 971.1NY(c)(1)(B) relating to the Single-Leg CUBE 
to modify the auto-match text to remove, as redundant, the clause 
``as principal or as agent on behalf of a Contra Order,'' given that 
the function of the Initiating Participant is already set forth in 
the Rule 971.1NY(a).
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    Proposed Rule 971.2NY(a)(2) would define the term ``CUBE BBO,'' 
which would be determined upon entry of a CUBE Order in the System, and 
is the more aggressive of (i) the Complex BBO improved by $0.01, or 
(ii) the Derived BBO improved by: $0.01 multiplied by the smallest leg 
of the complex order strategy.\19\ As described below, the Exchange 
would use the CUBE BBO both for purposes of determining whether an 
Auction may begin or if an Auction must conclude early. Put another 
way, in order to initiate an Auction, the Complex CUBE Order must be 
priced better than the interest resting on the Consolidated Book, i.e., 
the CUBE BBO, which ensures that price-time priority is respected. 
Accordingly, the Exchange proposes to embed within the definition of 
CUBE BBO the requirement for price improvement, which concept is 
described for the Single-Leg CUBE for CUBE Orders for fewer than 50 
contracts in Rules 971.1NY(b)(1)(B) and (b)(6).
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    \19\ A complex order strategy is entered with the ratio 
expressed in the fewest number of contracts for each leg of the 
ratio. For a complex order strategy with a ratio of 2, 3, and 6 
contracts per leg, the $0.01 figure would be multiplied by 2 
contracts, which represents the smallest leg. To calculate the CUBE 
BBO for this strategy, the Derived BBO would need to be priced 
improved by $0.02.
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    The Exchange also proposes to define in proposed Rule 971.2NY(a)(2) 
that the ``same-side CUBE BBO'' and ``contra-side CUBE BBO'' refer to 
the CUBE BBO on the same or opposite side of the market as the Complex 
CUBE Order, respectively. As described below, the Exchange proposes to 
use these terms

[[Page 9772]]

throughout the proposed rule to provide parameters for commencing and, 
in some cases, concluding an Auction early. As further proposed, the 
time at which the Auction is initiated would be considered the time of 
execution for the Complex CUBE Order.\20\ Proposed Rule 971.2NY(a)(2) 
is based in part on Rule 971.1NY(b) for the Single-Leg Cube with 
differences to refer to the CUBE BBO (as opposed to the NBBO or BBO) to 
account for distinctions between single-leg orders and Complex Orders.
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    \20\ Pursuant to Rule 991NY(b)(7), option transactions effected 
as part of a Complex Trade are exempt from NBBO trade through 
liability and therefore an individual leg market of a Complex Order 
may trade at or between the Exchange Exchange's best bid/offer, 
without regard to the NBBO. See also Rule 980NY (providing that 
``[n]o leg of an Electronic Complex Order will be executed at a 
price outside the Exchange's best bid/offer for that leg'').
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    Proposed Rule 971.2NY(a)(3) would provide that the initiating price 
of a Complex CUBE Order would be the less aggressive of the net debit/
credit price of such order or the price that locks the contra-side CUBE 
BBO. Proposed Rule 971.2NY(a)(3) is similar to the second to last 
sentence of Rule 971.1NY(a) describing the initiating price at which a 
Single-Leg CUBE Auction begins. As described above in Commentary .02(a) 
to proposed Rule 971.2NY, for purposes of this Rule, ``less 
aggressive'' interest refers to higher-priced interest. Accordingly, to 
respect price-time priority of the Consolidated Book, the Exchange 
proposes that if the net debit/credit price of a Complex CUBE Order is 
crossing the contra-side CUBE BBO, the initiating price of such order 
would be the price that locks the contra-side CUBE BBO. The concept of 
an initiating price for Complex CUBE Orders set forth in proposed Rule 
971.2NY(a)(3) is based on the same concept introduced for CUBE Orders 
in a Single-Leg CUBE (in Rule 971.1NY(a), (b)(1)), but the means of 
determining that price differs to account for distinctions between 
single-leg orders and Complex Orders.
    Proposed Rule 971.2NY(a)(4) would establish the ``range of 
permissible executions'' for an Auction. Specifically, proposed Rule 
971.2NY(a)(4) would provide that a Complex CUBE Order may trade at all 
prices equal to or between the initiating price and the same-side CUBE 
BBO. Proposed Rule 971.2NY(a)(4) is based in part on Rules 
971.1NY(b)(1)(A) and (B) in that it sets forth the permissible range of 
executions for an Auction. However, because a Complex CUBE Auction 
would be based on the CUBE BBO rather than the NBBO, and the CUBE BBO 
already accounts for price improvement over the Consolidated Book, the 
Exchange would not need to differentiate permissible ranges of 
execution based on the size of the Complex CUBE Order or the presence 
of Customer interest, as set forth in Rule 971.1NY(b)(1)(A) and (B) for 
the Single-Leg CUBE. Moreover, because of distinctions between Complex 
Orders and single-leg orders, the Exchange proposes that the range of 
permissible executions for an Auction be based on the side of the 
Complex CUBE Order as it relates to the CUBE BBO.
    Proposed Rule 971.1NY(a)(4)(A) would further provide that if the 
CUBE BBO updates during the Auction (referred to as the ``updated CUBE 
BBO''), the range of permissible executions would be adjusted with the 
updated CUBE BBO unless the incoming interest would cause the Auction 
to conclude early, as described below pursuant to paragraph (c)(3) of 
this Rule. This proposed rule text is based on Rule 971.1NY(b)(1)(C), 
which similarly provides that the range of permissible executions will 
adjust if the BBO on the same side of the Single-Leg CUBE Order 
updates. The proposed requirement that the initiating price improve the 
best-priced interest in the Consolidated Book, including interest that 
arrives during the Auction, is designed to ensure that the Auction is 
integrated with the Consolidated Book such that it respects and 
preserves the priority of interest in the Book.

Example: Complex CUBE Auction Initiating Price and Range of Permissible 
Executions (proposed Rule 971.2NY(a)(2)-(4)):

LMM Jan 50 C 10 x 7.03-7.05 x 10
LMM Jan 55 C 10 x 3.00-3.02 x 10
Derived BBO for {S 1 Jan 50 C/B 1 Jan 55 C{time}  = -$4.01 to $4.05
Complex BBO for {S 1 Jan 50 C/B 1 Jan 55 C{time}  = N/A (no complex 
orders on book)
Complex CUBE Order: Cust1 {B 1 Jan 50 C/S 1 Jan 55 C{time}  x 700 -
$4.05
Complex Contra Order: Firm1 {S 1 Jan 50 C/B 1 Jan 55 C{time}  x 700 
$4.02 Auto-match limit price
CUBE BBO: -$4.02 to $4.04

    RFR sent identifying the complex order strategy, side and size, 
with initiating price of -$4.04.

Permissible range of executions = -$4.02 to -$4.04

    In the above example, the initiating price is -$4.04 because the 
initiating price for a Complex CUBE Order will be the less aggressive 
of the limit price of such order (i.e., -$4.05) or the price that locks 
the contra-side CUBE BBO (i.e., -$4.04). If during the Auction the LMM 
Jan 50C bid were to update to $7.04, the updated CUBE BBO would be -
$4.03 to $4.04 and therefore the new range of executions would be -
$4.03 to -$4.04 (per proposed Rule 971.2NY(a)(4)(A)).
    Proposed Rule 971.2NY(b) sets forth the eligibility requirements 
for initiating a Complex CUBE Auction, which Auction is available to 
all options traded on the Exchange. To initiate a Complex CUBE Auction, 
pursuant to proposed Rule 971.2NY(b)(1), the Initiating Participant 
must mark the Complex CUBE Order for Auction processing and must 
specify one of two ways in which it would guarantee the execution of a 
Complex CUBE Order--a single stop price or ``auto-match limit,'' which 
is consistent with the operation of the Single-Leg CUBE as well as the 
rules of other options exchanges that offer electronic price 
improvement auctions.\21\ The Exchange believes that these guarantee 
alternatives would afford the Initiating Participant flexibility and 
control over the price(s) at which it would be willing to guarantee a 
Complex CUBE Order. Neither the stop price nor any use of auto-match 
limit would be displayed.
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    \21\ See Rule 971.1NY(c)(1)(A) and (C). As previously stated 
(supra note 18), because the Exchange does not offer Complex Orders 
to be entered as market orders, the Exchange does not propose to 
offer the ``auto-match'' option described in Rule 971.1(c)(1)(B) for 
the Complex CUBE Auction. See also CBOE Rule 6.74A(b)(1)(A).
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    Pursuant to proposed Rule 971.2NY(b)(1)(A), if the Initiating 
Participant specifies a single stop price, the stop price must be 
executable against the initiating price of the auction.\22\ When an 
Initiating Participant elects a single stop price, this would be the 
price at which the Complex Contra Order would trade with the Complex 
CUBE Order, pursuant to paragraph (c)(4) of this proposed Rule, as 
discussed below. As further proposed, if a stop price crosses the same-
side CUBE BBO (i.e., would be priced outside the permissible range of 
executions), the Complex CUBE Order would not be eligible to initiate 
an Auction and would be rejected along with the Complex Contra Order. 
Thus, using the information in the above Example, the CUBE BBO is -
$4.02 to $4.04 and a Complex CUBE Order to buy starts an Auction with 
an initiating price of -$4.04, a stop price of $4.01 would be rejected 
because it crosses the same-side CUBE BBO (of -$4.02). The

[[Page 9773]]

proposal to allow a Complex CUBE to be guaranteed by a single stop 
price is based in part on how the single-stop price feature operates 
with the Single-Leg CUBE, but with differences to reflect the 
permissible range of executions for a Complex CUBE Order.\23\
---------------------------------------------------------------------------

    \22\ See proposed Commentary .02 to Rule 971.2NY (defining 
executable for purposes of this Rule). The Exchange proposes to 
modify the definition of the single stop price in the Single-Leg 
CUBE to similarly refer to the stop price being ``equal to,'' as 
opposed to ``at'' the initiating price, which would add clarity and 
consistency to Exchange rules. See proposed Rule 971.1NY(c)(1)(C).
    \23\ See Rule 971.1NY(c)(1)(A). The Exchange notes however that 
it would re-price a stop price to be within the range of permissible 
executions on the Single-Leg CUBE, which feature the Exchange does 
not allow in the Complex CUBE Auction.
---------------------------------------------------------------------------

    Rather than opt for a single stop price, an Initiating Participant 
may, pursuant to proposed Rule 971.2NY(b)(1)(B), elect the ``auto-match 
limit price'' alternative, which price must be executable against the 
initiating price of the Auction.\24\ As further proposed, the Complex 
Contra Order may trade with the Complex CUBE Order at prices that are 
better than or equal to the initiating price up to the auto-match limit 
price, if applicable, pursuant to paragraph (c)(4) of this proposed 
Rule.\25\ Accordingly, a Complex Contra Order with an auto-match limit 
price is eligible to trade at all prices within the range of 
permissible executions for such Auction, subject to the specified limit 
price.
---------------------------------------------------------------------------

    \24\ See proposed Commentary .02 to Rule 971.2NY (defining 
executable for purposes of this Rule).
    \25\ See proposed Rule 971.2NY(c)(1)(C) [sic].
---------------------------------------------------------------------------

    As proposed, if the auto-match limit price crosses the same-side 
CUBE BBO (i.e., would be outside the range of permissible executions), 
the Complex Contra Order would be priced back to lock the same-side 
CUBE BBO. The Exchange believes that if an Initiating Participant 
specifies an auto-match limit price, such ATP Holder has indicated that 
it is willing to trade with the Complex CUBE Order at more than one 
price. The Exchange therefore believes it would be consistent with the 
intent of the auto-match limit price election to adjust the price of 
such order so that it would be eligible to trade within the range of 
permissible executions for a Complex CUBE Order. Accordingly, if the 
auto-match limit price selected is inferior to the same-side CUBE BBO 
bound of permissible execution prices, the auto-match limit price would 
be re-priced to within the permissible execution range. Thus, using the 
information in the above Example, if the Initiating Participant 
submitted an auto-match limit price of $4.01 (which is outside the 
permissible range of executions of -$4.02 to -$4.04), it would be re-
priced to -$4.02 and an Auction would be initiated.
    The manner in which a Complex CUBE Order would be guaranteed by an 
auto-match limit price is consistent with how the Single-Leg CUBE 
functions, as described in Rule 971.1NY(c)(1)(C). The Exchange proposes 
to amend Rule 971.1NY(c)(1)(C) to update the Single-Leg CUBE rule to 
reflect this functionality. As proposed, the Exchange proposes to 
specify for the Single-Leg CUBE that, when selecting auto-match limit, 
the Initiating Participant may specify an ``auto-match limit price'' 
that is equal to or below (above) the initiating price of the Auction 
and that the Contra Order may trade with the CUBE Order at prices that 
are lower (higher) than the initiating price down (up) to the auto-
match limit price. The Exchange also proposes to specify that it would 
adjust the auto-match limit price to within the range of permissible 
executions by adding a new sentence to that Rule that would provide: 
``An auto-match limit price specified for a CUBE Order to buy (sell) 
that is below (above) the lower (upper) bound of the range of 
permissible executions will be repriced to the lower (upper) bound.''
    Paragraphs (b)(2)-(5) of proposed Rule 971.2NY set forth additional 
requirements for initiating a Complex CUBE Auction, including 
specifying the various reasons that a proposed Complex CUBE Order would 
be deemed ineligible to commence an Auction and thus would be rejected 
along with the Complex Contra Order. The enumerated bases for rejecting 
a Complex CUBE Order (and Complex Contra Order) are substantially 
similar to the bases for rejecting a CUBE Order (and Contra Order) in 
the Single-Leg CUBE.
    1. Proposed Rule 971.2NY(b)(2) would provide that a Complex CUBE 
Order that does not have a net debit/credit price that is equal to or 
better than the same-side CUBE BBO would be rejected, along with the 
Complex Contra Order. The Exchange believes that rejecting such Complex 
CUBE Orders would be appropriate because they are not the best-priced 
interest available and should not trade ahead of better-priced interest 
on the same side of the market. This proposed rule text is based on 
Rule 971.1NY(b)(2), which similarly provides that a Single-Leg CUBE 
Order would be rejected if priced less aggressively than the 
permissible range of executions.
    2. Proposed Rule 971.2NY(b)(3) would provide that Complex CUBE 
Orders submitted before the opening of trading would not be eligible to 
initiate an Auction and would be rejected, along with the Complex 
Contra Order. Because a Complex CUBE Order is deemed executed at the 
initiation of the Auction, any Complex CUBE Orders entered before the 
opening of trading would not be able to execute, and therefore the 
Exchange believes it would be appropriate to reject these Complex CUBE 
Orders. This proposed treatment of the Complex CUBE Order is the same 
as for a Single-Leg CUBE Order, per Rule 971.1NY(b)(4).
    3. Proposed Rule 971.2NY(b)(4) would provide that Complex CUBE 
Orders submitted during the final second of the trading session in the 
component series would not be eligible to initiate an Auction and would 
be rejected, along with the Complex Contra Order. As discussed below, 
the length of the Auction may be a random time between 100 milliseconds 
and 1 second, to be determined and announced by the Exchange. The 
Exchange believes, however, that it would be appropriate to reject 
Complex CUBE Orders submitted during the final second of the trading 
session to assure that the processing of a Complex CUBE Order may be 
completed. This proposed treatment of the Complex CUBE Order is the 
same as for a Single-Leg CUBE Order, per Rule 971.1NY(b)(5).
    4. Proposed Rule 971.2NY(b)(5) would provide that Complex CUBE 
Orders submitted during a trading halt would not be eligible to 
initiate an Auction and would be rejected, along with the Complex 
Contra Order. Because a Complex CUBE Order is deemed executed at the 
initiation of the Auction, any Complex CUBE Orders entered during a 
trading halt would not be able to execute, and therefore the Exchange 
believes it would be appropriate to reject these Complex CUBE Orders. 
This functionality mirrors that of the Single-Leg CUBE and the Exchange 
similarly proposes to amend the Rule 971.1NY to add sub-paragraph 
(b)(10) to set forth the same feature in the rule for Single-Leg CUBE.
    The Exchange notes that Complex Orders may be expressed in any 
decimal price, and the legs(s) of a complex order may be executed in 
one cent increments regardless of the minimum price increment (``MPV'') 
otherwise applicable to the individual legs of the order.\26\ 
Accordingly, the Exchange does not propose rule text based on Rule 
971.1NY(b)(7) for the Single-Leg CUBE, because this pricing requirement 
is already provided for in Rule 980NY.
---------------------------------------------------------------------------

    \26\ See Commentary .01 to Rule 980NY.
---------------------------------------------------------------------------

    The Exchange believes that the above-described restrictions and 
requirements would ensure that the existing priority and display rules 
for Electronic Complex Orders, as well as quotes and orders making up 
the leg markets for a complex order strategy, are preserved, while 
still providing ATP Holders an

[[Page 9774]]

opportunity to guarantee either price improvement, more liquidity 
beyond the displayed size, or both, for orders they represent as 
agent.\27\
---------------------------------------------------------------------------

    \27\ See Rule 980NY.
---------------------------------------------------------------------------

Complex CUBE Auction Process: RFRs, RTI and Responses
    Proposed Rule 971.2NY(c) sets forth the Auction process, which is 
substantially similar to the Single-Leg CUBE. Proposed Rule 971.2NY(c), 
which is based on Rule 971.1NY(c), would provide that the time at which 
the Auction is initiated would be considered the time of execution for 
the Complex CUBE Order.\28\ As further proposed, only one Auction may 
be conducted at a time in any given complex order strategy and, once 
commenced, the Complex CUBE Order, as well as the Complex Contra Order, 
may not be cancelled or modified. This functionality is consistent with 
the Single-Leg CUBE as well as rules of other options exchanges that 
operate electronic price improvement auctions for complex orders.\29\
---------------------------------------------------------------------------

    \28\ Pursuant to Rule 991NY(b)(7), option transactions effected 
as part of a Complex Trade are exempt from NBBO trade through 
liability and therefore an individual leg market [sic] of a Complex 
Order may trade at or between the Exchange [sic] Exchange's best 
bid/offer, without regard to the NBBO. See also Rule 980NY 
(providing that ``[n]o leg of an Electronic Complex Order will be 
executed at a price outside the Exchange's best bid/offer for that 
leg'').
    \29\ See, e.g., Rule 971.1NY(b),(c); CBOE Rule 6.74A(b); ISE 
Rule 723(b)(4); ISE Rule 723 Supplementary Material .04.
---------------------------------------------------------------------------

    Proposed Rule 971.2NY(c)(1) would describe the Auction Request for 
Responses (``RFR'') and Response Time Interval. Pursuant to proposed 
Rule 971.2NY(c)(1)(A), upon receipt of a valid Complex CUBE Order, the 
Exchange would announce the Auction by disseminating an RFR to all 
participants who subscribe to receive Auction messages for options. The 
RFR would identify the following characteristics of a Complex CUBE 
Order: The complex order strategy, the side of the market, the size, 
and the initiating price. Proposed Rule 971.2NY(c)(1)(A) is based on 
Rule 971.1NY(c)(2)(A) with differences only to add the term ``complex'' 
as applicable.\30\
---------------------------------------------------------------------------

    \30\ See also CBOE Rule 6.74A(b)(1)(B); ISE Rule 723(c).
---------------------------------------------------------------------------

    The Exchange proposes to define the term ``Response Time Interval'' 
or ``RTI'' in proposed Rule 971.2NY(c)(1)(B) as the period of time 
during which responses to the RFR may be entered. As proposed, the 
Response Time Interval would last for a random period of time within 
parameters determined by the Exchange and announced by Trader Update. 
The proposed minimum/maximum parameters for the Response Time Interval 
would be no less than 100 milliseconds and no more than one (1) second. 
The proposed duration of an Auction would be determined in the same 
manner as the Response Time Interval is determined for a Single-Leg 
CUBE under Rule 971.1NY(c)(2)(B). The proposed use of a random Response 
Time Interval would provide each Complex CUBE Auction with a functional 
difference that distinguishes it from similar price improvement 
mechanisms offered by other exchanges.\31\
---------------------------------------------------------------------------

    \31\ See e.g., CBOE Rule 6.74A(b)(2)(C) [sic]; PHLX Rule 
1087(b)(1)(D); ISE Rule 723(c)(1).
---------------------------------------------------------------------------

    Pursuant to proposed Rule 971.2NY(c)(1)(C), during the RTI, any ATP 
Holder may respond to the RFR, provided such response is properly 
marked specifying price, size, and side of the market (each, an ``RFR 
Response''). This proposed rule text is based on Rule 971.1(c)(2)(C).
    As proposed, any RFR Response (including unrelated Electronic 
Complex Orders) that crosses the same-side CUBE BBO would be eligible 
to trade in the Auction at a price that locks the same-side CUBE BBO. 
In such instance, the RFR Response would have been priced more 
aggressively than the contra-side range of permissible execution 
prices, and it would trade with the Complex CUBE Order at a price both 
within the range of permissible executions and within the limit price 
of the RFR Response. Thus, using the information in the above Example, 
if the Initiating Participant submitted an auto-match limit price of 
$4.01 (which is outside the permissible range of executions of -$4.02 
to -$4.04), it would be re-priced to -$4.02. The Exchange notes that 
this re-pricing is consistent with treatment of RFR Responses in the 
Single-Leg CUBE.\32\
---------------------------------------------------------------------------

    \32\ See Rule 971.1NY(c)(2)(i)(f) [sic] (providing that ``[f]or 
a CUBE Order to buy (sell), GTX Orders priced below (above) the 
lower (upper) bound of executions shall be repriced to the lower 
(upper) bound of executions, as specified in paragraph (b)(1) of 
this Rule).
---------------------------------------------------------------------------

    Similar to Rule 971.1NY(c)(2)(C), proposed Rule 971.2NY(c)(1)(C) 
would specify that the Auction would accept RFR Responses as described 
in proposed sub-paragraphs (i) and (ii) to that Rule. Proposed Rule 
971.2NY(c)(1)(C)(i) would define a ``Complex GTX Order,'' which would 
operate in the same manner as GTX Orders in the Single-Leg CUBE.\33\ As 
proposed, a Complex GTX Order would be an Electronic Complex Order, as 
defined in Rule 980NY, with a time-in-force contingency for the RTI, 
and must specify the price, size, and side of the market:
---------------------------------------------------------------------------

    \33\ See Rule 971.1NY(c)(2)(C)(i).
---------------------------------------------------------------------------

     Pursuant to proposed Rule 971.2NY(c)(1)(C)(i)(a), Complex 
GTX Orders would not be displayed on the Consolidated Book or 
disseminated to any participants. Any portion of a Complex GTX Order 
that is not fully executed as provided for in paragraphs (c)(3) and (4) 
of this Rule would be cancelled at the conclusion of the Auction. This 
rule text is based on Rule 971.1NY(c)(2)(C)(i)(a) for Single-Leg CUBE 
without any substantive differences.
     Pursuant to proposed Rule 971.2NY(c)(1)(C)(i)(b), Complex 
GTX Orders with a size greater than the size of the Complex CUBE Order 
would be capped at the size of the Complex CUBE Order. This rule text 
is based on Rule 971.1NY(c)(2)(C)(i)(c) for Single-Leg CUBE without any 
substantive differences.
     Pursuant to proposed Rule 971.2NY(c)(1)(C)(i)(c), Complex 
GTX Orders may be cancelled or modified, which would afford ATP Holders 
opting to utilize this order type additional flexibility and control. 
This rule text is based on Rule 971.1NY(c)(2)(C)(i)(d) for Single-Leg 
CUBE. The Exchange proposes to amend Rule 971.1NY(c)(2)(C)(i)(d) for 
Single-Leg CUBE to similarly provide that in addition to being 
cancelled, GTX Orders submitted to the Single-Leg CUBE may be modified.
     Pursuant to proposed Rule 971.2NY(c)(1)(C)(i)(d), Complex 
GTX Orders on the same side of the market as the Complex CUBE Order 
would be rejected. Because Complex GTX Orders can only trade against a 
Complex CUBE Order or an unrelated order on the same side as a Complex 
CUBE Order, same-side Complex GTX Orders are unnecessary to the Complex 
CUBE Auction process. Therefore, the Exchange proposes that same-side 
Complex GTX Orders would be rejected. This rule text is based on Rule 
971.1NY(c)(2)(C)(i)(e) for Single-Leg CUBE without any substantive 
differences.
    In addition to being substantively identical to GTX Orders in the 
Single-Leg CUBE, other options exchanges that offer electronic price 
improvement auctions for complex orders similarly enable market 
participants to enter non-displayed interest that would participate in 
the auction only, which interest generally operates in the same

[[Page 9775]]

manner as the proposed Complex GTX Order.\34\
---------------------------------------------------------------------------

    \34\ See, e.g., CBOE 6.74A(b)(1)(I) (non-displayed interest 
intended only for the auction may be cancelled); ISE 723(c)(3) (non-
displayed interest intended only for the auction may be modified, 
but not cancelled). See also supra note 26 (regarding the MPV for 
Complex Orders).
---------------------------------------------------------------------------

    Pursuant to proposed Rule 971.2NY(c)(1)(C)(ii), the Exchange 
proposes to define ``Unrelated Electronic Complex Orders'' as 
Electronic Complex Orders (as defined in Rule 980NY, including COA-
eligible orders \35\) on the opposite side of the market as the Complex 
CUBE Order that are received during the RTI, even if not marked for 
consideration in the Auction (i.e., as a Complex GTX Order), provided 
such orders can participate within the range of permissible executions 
specified for the Auction pursuant to paragraph (a)(4) of this Rule. 
Accordingly, similar to Rule 971.1NY(c)(2)(C)(ii), which provides for 
unrelated quotes and orders that are entered during the RTI for the 
Single-Leg CUBE to be considered RFR Responses, the Exchange would 
consider Electronic Complex Orders that are entered during the RTI for 
an Auction to be RFR Responses if they could participate in the range 
of permissible executions. The Exchange believes that considering these 
unrelated complex orders as RFR Responses would increase the number of 
orders against which the Complex CUBE Order may be executed, and should 
thus maximize opportunities for price improvement of the Complex CUBE 
Order.
---------------------------------------------------------------------------

    \35\ Rule 980NY(e) describes the Complex Order Process or COA, 
which is designed to offer price improvement to Complex Orders; 
however, the COA is not a crossing mechanism and a COA-eligible 
order is not guaranteed an execution. See Rule 980NY(e)(1) (defining 
COA-eligible orders).
---------------------------------------------------------------------------

    However, unlike the Single-Leg CUBE, because quotes and orders in 
the leg markets for a complex strategy underlying a Complex CUBE Order 
would not be eligible to participate in the Auction, such quotes and 
orders would not be considered ``unrelated orders'' and therefore would 
not be RFR Responses. As described in more detail below in proposed 
Rule 971.2NY(c)(3)(B)-(F), updates to the leg markets during the 
Auction may cause it to conclude early to preserve priority of that 
interest at a price. Limiting participation in the Complex CUBE Auction 
to Complex Orders, but allowing certain updates to the leg markets to 
cause an Auction to conclude early, is consistent with how the Exchange 
treats interest in the COA process, as described in Rule 
980NY(e)(7)(B). Because the Exchange would not consider quotes and 
orders in the leg markets to be RFR Responses for an Auction, the 
Exchange does not propose rule text based on Rule 
971.1NY(c)(2)(C)(ii)(a)-(c).
Conclusion of the Complex CUBE Auction
    As proposed in Rule 971.2NY(c)(2), just as with the Single-Leg 
CUBE, the Complex CUBE Auction would conclude at the end of the 
RTI.\36\ This proposed functionality is similar to the operation of 
electronic price improvement mechanisms for complex orders offered by 
other exchanges.\37\ Consistent with the Single-Leg CUBE and the rules 
of other exchanges that operate electronic price improvement auctions 
for complex orders, this rule would further provide that an Auction 
would conclude in the event of a trading halt in any of the component 
series \38\ and the Complex CUBE Order would be executed per proposed 
Rule 971.2NY(c)(4).\39\ As described in proposed Rule 971.2NY(c)(3) 
(and discussed below), specified additional events may result in the 
early conclusion of the Auction. Proposed Rule 971.2NY(c)(2) would 
further provide that any RFR Responses that do not execute in the 
Auction would execute in accordance with Rule 980NY, Complex Order 
Trading, and any remaining balance of Complex GTX Orders would cancel, 
because such orders have a time-in-force for the duration of the 
Auction.
---------------------------------------------------------------------------

    \36\ See Rule 971.1NY(c)(3).
    \37\ See, e.g., CBOE Rule 6.74A(b)(2)(A); PHLX Rule 
1087(b)(2)(A); ISE Rule 723(c)(5)(i).
    \38\ See, e.g., Rule 971.1NY(c)(3); CBOE Rule 6.74A(b)(2)(F); 
PHLX Rule 1087(b)(2)(D).
    \39\ Because the execution [sic] of the Auction would be deemed 
the time the Complex CUBE Auction is initiated, if a trading halt 
occurs in the series during the RTI and the Auction concludes early, 
the Exchange does not believe that such execution needs to be 
nullified pursuant to Rule 953NY Commentary .03 [sic].
---------------------------------------------------------------------------

Early Conclusion of a Complex CUBE Auction
    As noted earlier, like the Single-Leg CUBE, a Complex CUBE Auction 
would conclude early (i.e., before the end of the RTI) as a result of 
certain events that would otherwise disrupt the priority of the Auction 
within the Consolidated Book.\40\ Such early conclusion events are 
consistent with how the electronic price improvement auctions for 
complex orders on other markets operate.\41\
---------------------------------------------------------------------------

    \40\ See Rule 971.1NY(c)(4).
    \41\ See, e.g., CBOE Rule 6.74A(b)(2)(B),(C),(E); PHLX Rule 
1087(b)(2)(C); ISE Rule 723(c)(5)(ii)-(iii); BOX IM 7150.
---------------------------------------------------------------------------

    Proposed Rule 971.2NY(c)(3) would provide that an Auction would 
conclude early before the end of the RTI as described in paragraphs 
(c)(3)(A)-(F) of the proposed Rule and that when it concludes, the 
Complex CUBE Order would execute as provided for in proposed Rule 
971.2NY(c)(4), described below.\42\ While the precise circumstances 
that result in the early end of a Complex CUBE Auction differ from 
those of a Single-Leg CUBE, the tenets of honoring price/time are the 
same. Specifically, the Exchange proposes to use references to the 
same-side and contra-side CUBE BBO to describe early conclusion 
scenarios for Complex CUBE Auctions because these definitions take into 
consideration updates to both the leg markets and better-priced 
Electronic Complex Orders in the Consolidated Book.
---------------------------------------------------------------------------

    \42\ Pursuant to proposed Rule 971.2NY(c)(2), and as discussed 
herein, a trading halt in the affected series would also result in 
the early conclusion of an Auction and contracts would be allocated 
pursuant to proposed paragraph (c)(4).
---------------------------------------------------------------------------

     First, pursuant to proposed Rule 971.2NY(c)(3)(A), an 
Auction would conclude early if, during the RTI, the Exchange receives 
a new Complex CUBE Order in the same complex order strategy that meets 
the conditions of proposed Rule 971.2NY(b). As proposed, after the 
first Auction concludes, the incoming Complex CUBE Order would initiate 
its own Auction and proceed as described in proposed Rule 971.2NY(c). 
Proposed Rule 971.1NY(c)(3)(A) functions in the same manner as Rule 
971.1NY(c)(4)(A) relating to the Single-Leg CUBE with non-substantive 
differences to refer to the same complex order strategy instead of the 
same series. This proposed basis for an early conclusion of an Auction 
is also consistent with the rules of other exchanges operating 
electronic auctions for complex orders.\43\
---------------------------------------------------------------------------

    \43\ See, e.g., CBOE Rule 6.74A(b); ISE Rule 723 Supplementary 
Material .04. The Exchange notes that although these rules specify 
that auctions may not overlap or queue in any manner, the rules are 
nonetheless silent on how this is enforced (i.e., by rejecting new 
auction orders or by concluding an ongoing auction early).
---------------------------------------------------------------------------

     Second, pursuant to proposed Rule 971.2NY(c)(3)(B), an 
Auction would conclude early if, during the RTI, the Exchange receives 
any interest that would adjust the same-side CUBE BBO to be better than 
the initiating price. The Exchange proposes to conclude the Auction 
early in such circumstance to honor the priority of the Consolidated 
Book, which would now be equal to or better-priced than the initiating 
price of the Auction. This early conclusion scenario is based in part 
on Rule 971.1NY(c)(4)(D) for Single-Leg CUBE, but uses Complex CUBE 
terminology.

[[Page 9776]]

     Third, pursuant to proposed Rule 971.2NY(c)(3)(C), an 
Auction would conclude early if, during the RTI, the Exchange receives 
any interest that adjusts the same-side CUBE BBO to cross any RFR 
Responses. This early conclusion scenario is based in part on Rule 
971.1NY(c)(4)(B) for Single-Leg CUBE in that the interest would be on 
the same side as the Complex CUBE Order and would be marketable against 
RFR Responses, but uses Complex CUBE terminology.
     Fourth, pursuant to proposed Rule 971.2NY(c)(3)(D), an 
Auction would conclude early if, during the RTI, the Exchange receives 
any interest that adjusts the same-side CUBE BBO to cross the single 
stop price specified by the Initiating Participant. This early end 
scenario would not apply to instances where the Initiating Participant 
specified an auto-match limit price. The Exchange proposes to conclude 
the Auction early in such circumstances because the stop price would 
not be eligible to trade as part of an updated CUBE BBO.\44\ 
Accordingly, the Exchange proposes to conclude such Auction early and 
execute the Complex CUBE Order as provided for in proposed Rule 
971.2NY(c)(4).
---------------------------------------------------------------------------

    \44\ See proposed Rule 971.2NY(a)(4).
---------------------------------------------------------------------------

     Fifth, pursuant to proposed Rule 971.2NY(c)(3)(E), an 
Auction would conclude early if, during the RTI, the Exchange receives 
interest that crosses the same-side CUBE BBO. This early conclusion 
scenario is based in part on Rule 971.1NY(c)(4)(C) for the Single-Leg 
CUBE because arriving interest that crosses the same-side CUBE BBO 
would be marketable against interest in the Consolidated Book, but uses 
Complex CUBE terminology.
     Finally, pursuant to proposed Rule 971.2NY(c)(3)(F), an 
Auction would conclude early if, during the RTI, the Exchange receives 
interest in the leg market that causes the contra-side CUBE BBO to be 
better than the stop price or auto-match limit price. This early 
conclusion scenario is based in part on Rule 971.1NY(c)(4)(C) for the 
Single-Leg CUBE because arriving interest that crosses the contra-side 
CUBE BBO would be marketable against interest in the Consolidated Book, 
but uses Complex CUBE terminology.
    In each of the above scenarios, the Auction would conclude early to 
preserve priority of incoming interest. When the Auction concludes, the 
Complex CUBE Order would be matched with the best-priced interest 
received during the Auction and, once the Complex CUBE Order is filled, 
the incoming interest (that caused the Auction to conclude early) would 
be ranked and prioritized. If the incoming interest is a Complex Order 
and on the opposite side, it may execute against the Complex CUBE 
Order; if the incoming interest is on the same side as the Complex CUBE 
Order, it may execute against any unfilled RFR Responses before being 
posted to the Consolidated Book. If the incoming interest (that caused 
the Auction to conclude early) is an updated quote or order in the leg 
markets, it would be processed after the Complex CUBE Auction pursuant 
to Rule 980NY. Again, the rationale for concluding the Auction early in 
each of the above scenarios is to operate seamlessly with the 
Consolidated Book and honor the price-time priority model on the 
Exchange--while still affording the Complex CUBE Order an opportunity 
to receive price improvement.
Complex CUBE Order Allocation
    Proposed Rule 971.2NY(c)(4) sets forth the order allocation process 
for the Auction. Generally, at the conclusion of the Complex CUBE 
Auction, the Auction mechanism would determine whether the total RFR 
Responses can fill the Complex CUBE Order at a price or prices better 
than the stopped price or auto-match limit price.\45\ If so, the 
Complex CUBE Order is matched against the better-priced RFR Responses 
granting the Complex CUBE Order the maximum amount of price improvement 
possible.
---------------------------------------------------------------------------

    \45\ See proposed Rule 971.2NY(c)(4)(A), (B)(i)-(ii).
---------------------------------------------------------------------------

    When there are multiple RFR Responses at a given price, the Complex 
CUBE Order would be executed against the RFR Responses on a pro-rata 
basis pursuant to the size pro rata algorithm set forth in Rule 
964NY(b)(3), except that Customers at a given price would be executed 
first in priority. The Exchange believes that, as proposed, the Auction 
would maximize the opportunity for price improvement while maintaining 
the priority of Customer orders.
    Proposed Rule 971.2NY(c)(4) would provide that any RFR Response 
that exceeds the size of the Complex CUBE Order would be capped at the 
Complex CUBE Order for allocation purposes, per Rule 964NY(b)(3). This 
function is based on Rule 971.1NY(c)(5), which similarly caps the size 
of RFR Responses to a Single-Leg CUBE.
    Pursuant to proposed Rule 971.2NY(c)(4)(A), at each price level, 
any Customer orders that arrived during the Complex CUBE Auction as RFR 
Responses would have first priority to execute and be allocated on a 
size pro rata allocation pursuant to Rule 964NY(b)(3). Allocating 
Customer interest first is consistent with the Exchange's allocation 
model and is based on Rule 971.1NY(c)(5)(A) for the Single-Leg CUBE.
    Pursuant to proposed Rule 971.2NY(c)(4)(B), after Customer interest 
at a particular price level has been satisfied, any remaining size 
would be allocated among the Complex Contra Order and RFR Responses 
differently depending on whether the Initiating Participant designated 
a single stop price or auto-match limit. In each case, the proposed 
allocation of a Complex CUBE Order would follow the same allocation 
rules for a Single-Leg CUBE Order, as described below.
    Proposed Rule 971.2NY(c)(4)(B)(i) would specify how remaining size 
of the Complex CUBE Order for which the Initiating Participant 
specifies a single stop price would trade with interest received during 
the Auction as follows:
     First, to RFR Responses priced better than the stop price, 
beginning with the most aggressive price within the range of 
permissible executions, pursuant to the size pro rata algorithm set 
forth in Rule 964NY(b)(3) at each price point. Proposed Rule 
971.2NY(c)(4)(B)(i)(a) is based on Rule 971.1NY(c)(5)(B)(i)(a),with 
differences only to use terminology for Complex CUBE Orders as defined 
in proposed Commentary .02 to Rule 971.2NY.
     Next, any remaining size of the Complex CUBE Order would 
execute at the stop price. At the stop price, if there is sufficient 
size of the Complex CUBE Order still available after executing at 
prices better than the stop price or against Customer interest, the 
Complex Contra Order would receive an allocation of the greater of 40% 
of the original Complex CUBE Order size or one contract (or the greater 
of 50% of the original Complex CUBE Order size or one contract if there 
is only one RFR Response). Any remaining size of the Complex CUBE Order 
at the stop price would be allocated among remaining RFR Responses 
pursuant to the size pro rata algorithm set forth in Rule 964NY(b)(3). 
If all RFR Responses are filled, any remaining size of the Complex CUBE 
Order would be allocated to the Complex Contra Order.
    Proposed Rule 971.2NY(c)(4)(B)(i)(b) is based on Rule 
971.1NY(c)(5)(B)(i)(b), with differences to use terminology for Complex 
CUBE Orders as defined in proposed Commentary .02 to Rule 971.2NY and 
non-substantive differences to refer to ``size'' rather than 
``contracts'' and to use ``will'' instead of ``shall.'' In addition, 
other exchanges that operate electronic pricing

[[Page 9777]]

mechanism for complex orders similarly guarantee minimum levels of 
participation for the initiating participant.\46\
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    \46\ See, e.g., PHLX Rule 1087(b)(5)(B)(iv) (providing up to 50% 
allocation with participation guarantees); ISE Rule 713 Commentary 
.03 (providing up to 60% allocation for participation guarantees); 
CBOE Rule 6.74A(b)(3)(F).
---------------------------------------------------------------------------

     If there are no RFR Responses, the Complex CUBE Order 
would execute against the Complex Contra Order at the stop price. 
Proposed Rule 971.2NY(c)(4)(B)(i)(c) is based on Rule 
971.1NY(c)(5)(B)(i)(c) without any substantive differences.
    Proposed Rule 971.2NY(c)(4)(B)(ii) would specify how remaining size 
of the Complex CUBE Order for which an Initiating Participant specifies 
an ``auto-match limit price'' would trade with interest received during 
the Auction as follows:
     First, to RFR Responses at each price level priced better 
than the auto-match limit price (if any) within the range of 
permissible executions, beginning with the most aggressive price, 
pursuant to the size pro rata algorithm set forth in Rule 964NY(b)(3) 
at each price point. Proposed Rule 971.2NY(c)(4)(B)(ii)(a) is based on 
Rule 971.1NY(c)(5)(B)(iii)(a), with differences to use terminology for 
Complex CUBE Orders as defined in proposed Commentary .02 to Rule 
971.2NY.
     Next, to RFR Responses at a price equal to the price of 
the Complex Contra Order's auto-match limit price, and if volume 
remains, to prices worse than the auto-match limit price. At each price 
point equal to or worse than the auto-match limit price, the Complex 
Contra Order would receive an allocation equal to the aggregate size of 
all other RFR Responses starting with the best price at which an 
execution against an RFR Response occurs within the range of 
permissible executions until a price point is reached where the balance 
of the CUBE Order can be fully executed (the ``clean-up price''). At 
the clean-up price, if there is sufficient size of the Complex CUBE 
Order still available after executing at better prices or against 
Customer interest, the Complex Contra Order would be allocated 
additional volume required to achieve an allocation of the greater of 
40% of the original Complex CUBE Order size or one contract (or the 
greater of 50% of the original Complex CUBE Order size or one contract 
if there is only one RFR Response). If the Complex Contra Order meets 
its allocation guarantee at a price better than the clean-up price, it 
would cease matching RFR Responses that may be priced worse than the 
price at which the Complex Contra Order received its allocation 
guarantee. If there are other RFR Responses at the clean-up price, the 
remaining size of the Complex CUBE Order would be allocated to such 
interest pursuant to the size pro rata algorithm set forth in Rule 
964NY(b)(3). Any remaining portion of the Complex CUBE Order would be 
allocated to the Complex Contra Order at the initiating price.
    Proposed Rule 971.2NY(c)(4)(B)(ii)(b) is based on Rule 
971.1NY(c)(5)(B)(iii)(b), with differences to use terminology for 
Complex CUBE Orders as defined in proposed Commentary .02 to Rule 
971.2NY and includes non-substantive differences to define the term 
``clean-up price,'' which for the Single-Leg CUBE, is defined in Rule 
971.1NY(c)(5)(B)(ii)(a).
     If there are no RFR Responses, the Complex CUBE Order 
would execute against the Complex Contra Order at the initiating price. 
Proposed Rule 971.2NY(c)(4)(B)(iii)(c) without any substantive 
differences.
    As noted above, certain unrelated orders may be considered RFR 
Responses and may interact with the Complex CUBE Order (thus maximizing 
opportunities for price improvement) and any portion of these unrelated 
orders remaining thereafter would be processed in accordance with Rule 
980NY, Electronic Order Trading. Proposed Rule 971.2NY(c)(4)(C) is 
based on Rule 971.1NY(c)(5)(C) without any substantive differences.
    Finally, proposed Rule 971.2NY(c)(4)(D) would provide that a single 
RFR Response would not be allocated a volume that is greater than its 
size. This proposed rule text is based on Rule 971.1NY(c)(4)(D) without 
any substantive differences.
Conduct Inconsistent With Just and Equitable Principles of Trade
    The Exchange is proposing Commentary .01 to Rule 971.2NY to set 
forth that certain activity in connection with the Complex CUBE Auction 
would be considered conduct inconsistent with just and equitable 
principles of trade to discourage ATP Holders from attempting to misuse 
or manipulate the Auction process. Proposed Commentary .01 to the Rule 
is based on Commentary .02 to Rule 971.1NY relating to the Single-Leg 
CUBE without any substantive differences and is consistent with the 
rules of other options exchanges that offer electronic price 
improvement auction mechanisms.\47\ Specifically, pursuant to proposed 
Commentary .01 (a)-(d) to Rule 971.2NY, the Exchange proposes that the 
following conduct would be considered conduct inconsistent with just 
and equitable principles of trade:
---------------------------------------------------------------------------

    \47\ See, e.g., Rule 971.1NY, Commentary .02; PHLX 1087(c)-(e); 
ISE 723 Supplementary Material .01; BOX IM-7150-2(a) and (b). The 
Exchange proposes to correct a typographical error in Commentary .02 
of the Single-Leg CUBE rule by adding the word ``of,'' which was 
inadvertently omitted, to add clarity and consistency to the Rule. 
See proposed Commentary .02(b) to Rule 971.1NY (providing, as 
updated, that ``[e]ngaging in a pattern and practice of trading or 
quoting activity for the purpose of causing a CUBE Auction to 
conclude before the end of the Response Interval Time'').
---------------------------------------------------------------------------

    (a) An ATP Holder entering RFR Responses to a Complex CUBE Auction 
for which the ATP Holder is the Initiating Participant. The Exchange 
believes this would prevent Initiating Participants from submitting an 
inaccurate or misleading stop price or trying to improve their 
allocation entitlement by participating with multiple expressions of 
interest.
    (b) Engaging in a pattern and practice of entering unrelated orders 
and quotes for the purpose of causing a Complex CUBE Auction to 
conclude early, i.e., before the end of the RTI. The Exchange believes 
this would prevent an ATP Holder from shortening the duration of the 
Auction thus possibly reducing the number Responses to an Auction in 
order to gain a higher allocation than the percentage the ATP Holder 
may have otherwise received had the Auction not concluded early.
    (c) An Initiating Participant that breaks up an agency order into 
separate Complex CUBE Orders for the purpose of gaining a higher 
allocation percentage than the Initiating Participant would have 
otherwise received in accordance with the allocation procedures 
contained in proposed paragraph (c)(5) to proposed Rule 971.2NY. The 
Exchange believes this would prevent Initiating Participants from 
manipulating the Complex CUBE Orders size and number to gain a higher 
guaranteed execution than the Initiating Participant would have 
otherwise received.
    (d) Engaging in a pattern and practice of sending multiple RFR 
Responses at the same price that in the aggregate exceed the size of 
the Complex CUBE Order. The Exchange believes this will prevent ATP 
Holders from attempting to misuse or manipulate the process.
Order Exposure and Prohibited Conduct
    Current Rule 935NY prohibits Users \48\ from executing as principal 
any orders they represent as agent unless (i) agency orders are first 
exposed on the Exchange for at least one (1) second or (ii) the User

[[Page 9778]]

has been bidding or offering on the Exchange for at least one (1) 
second prior to receiving an agency order that is executable against 
such bid or offer. This rule helps to ensure that orders are properly 
exposed to market participants, affording them a reasonable amount of 
time in which to participate in the execution of the agency order.
---------------------------------------------------------------------------

    \48\ Rule 900.2NY(87) defines User as any ATP Holder that is 
authorized to obtain access to the System.
---------------------------------------------------------------------------

    As previously stated in this filing, the Exchange believes that the 
proposed RTI, with a random length of no less than 100 milliseconds and 
no greater than 1 second (to be determined and announced by the 
Exchange), is of sufficient length so as to permit ATP Holders time to 
respond to a Complex CUBE Auction thereby enhancing opportunities for 
competition among participants and increasing the likelihood of price 
improvement for the Complex CUBE Order. Accordingly, the Exchange 
proposes to amend Rule 935NY to stipulate that a User may execute as 
principal an order that the User represents as agent, provided that the 
User avails him or herself of the Complex CUBE Auction process, 
pursuant to Rule 971.2NY. Such Complex CUBE Order would not be subject 
to the one-second order exposure requirement of Rule 935NY, which 
exclusion from the one-second order exposure requirement is consistent 
with the treatment of similar orders on the Exchange.\49\ Consistent 
with Rule 935NY Commentary .01, ATP Holders would only utilize the 
Auction where there is a genuine intention to execute a bona fide 
transaction.\50\
---------------------------------------------------------------------------

    \49\ See Rule 935NY(iii), (iv) (exempting orders submitted into 
the Single-Leg CUBE and into the Complex Order Auction Process from 
the one second order exposure requirement).
    \50\ See Rule 935NY Commentary .01 (``Rule 935NY prevents a User 
from executing agency orders to increase its economic gain from 
trading against the order without first giving other trading 
interest on the Exchange an opportunity to either trade with the 
agency order or to trade at the execution price when the User was 
already bidding or offering on the book.'')
---------------------------------------------------------------------------

Modification to Complex Order Trading Rule Regarding COA
    Consistent with the principle that the Exchange would only conduct 
one auction in a given complex order strategy at a time, the Exchange 
proposes to amend Rule 980NY(e)(6) to make clear that a COA in progress 
would end upon receipt of a better-priced Complex CUBE Order received 
during the COA.\51\
---------------------------------------------------------------------------

    \51\ See proposed Rule 980NY(e)(6)(A), (B) (making clear that 
Complex CUBE Orders are included in the category of ``[i]ncoming 
Electronic Complex Orders'' that may cause the COA in progress to 
end early'').
---------------------------------------------------------------------------

Section 11(a) of the Exchange Act
    Section 11(a) of the Exchange Act prohibits any member of a 
national securities exchange from effecting transactions on that 
exchange for its own account, the account of an associated person, or 
an account over which it or its associated persons exercises discretion 
(``covered accounts''), unless, as discussed below, an exception 
applies.\52\ The Commission, in its order to approve the Single-Leg 
CUBE, determined that orders effected utilizing this mechanism complied 
with the requirements of Section 11(a).\53\ As noted herein, the 
Complex CUBE Auction operates in a manner substantially similar to the 
Single-Leg CUBE and the argument supporting the Exchange's position 
that the proposed Complex CUBE Auction is consistent with the 
requirements of Section 11(a) and the rules thereunder mirror those 
made (and accepted by the Commission) in regards to the Single-Leg 
CUBE.
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78k(a)(1).
    \53\ See Single-Leg CUBE Approval Order, supra note 6, 79 FR at 
24787-24788.
---------------------------------------------------------------------------

    First, Section 11(a)(1) contains a number of exceptions for 
principal transactions by members and their associated persons. 
Specifically, Section 11(a)(1)(A) provides an exception from the 
prohibitions in Section 11(a) for dealers acting in the capacity of 
market makers. The Exchange believes that orders sent by on- and off-
floor market makers, for covered accounts, to the proposed Complex CUBE 
Auction would qualify for this exception from Section 11(a).
    In addition to this market maker exception, Rule 11a2-2(T) under 
the Exchange Act, known as the ``effect versus execute'' rule, provides 
exchange members with an exception from Section 11(a) by permitting 
them, subject to certain conditions, to effect transactions for covered 
accounts by arranging for an unaffiliated member to execute the 
transactions on the exchange.\54\ To comply with the ``effect versus 
execute'' rule's conditions, a member: (i) Must transmit the order from 
off the exchange floor; (ii) may not participate in the execution of 
the transaction once it has been transmitted to the member performing 
the execution; \55\ (iii) may not be affiliated with the member 
executing the transaction on the floor, or through the facilities, of 
the Exchange; and (iv) with respect to an account over which the member 
has investment discretion, neither the member nor its associated person 
may retain any compensation in connection with effecting the 
transaction except as provided in the rule.\56\
---------------------------------------------------------------------------

    \54\ 17 CFR 240.11a2-2(T).
    \55\ The member, however, may participate in clearing and 
settling the transaction. See Securities Exchange Act Release No. 
14563 (March 14, 1978), 43 FR 11542 (March 17, 1978).
    \56\ 17 CFR 240.11a2-2(T).
---------------------------------------------------------------------------

    The Exchange believes that orders sent by off-floor ATP Holders, 
for covered accounts, to the proposed Complex CUBE Auction would 
qualify for this ``effect versus execute'' exception from Section 
11(a), as described below. In this regard, the first condition of Rule 
11a2-2(T) is that orders for covered accounts be transmitted from off 
the exchange floor. The Exchange represents that orders for covered 
accounts from off-floor ATP Holders sent to the Complex CUBE Auction 
would be transmitted from remote terminals that are off the Exchange 
floor directly to the mechanisms by electronic means.\57\ In the 
context of other automated trading systems, the Commission has found 
that the off-floor transmission requirement is met if a covered account 
order is transmitted from a remote location directly to an exchange's 
floor by electronic means.\58\
---------------------------------------------------------------------------

    \57\ In the alternative, orders for a covered account may be 
sent by an off-floor ATP Holder to an unaffiliated Floor Broker for 
entry into the Complex CUBE Auction mechanism. Floor Brokers, 
however, may not enter orders for their own covered accounts into 
the Auction mechanism from on the floor, or transmit such orders 
from on the floor to off of the floor for entry into the Complex 
CUBE Auction mechanism.
    \58\ See, e.g., Securities Exchange Act Release Nos. 59154 
(December 23, 2008), 73 FR 80468 (December 31, 2008) (SR-BSE-2008-
48) (approving, among other things, the equity rules of the Boston 
Stock Exchange); 57478 (March 12, 2008), 73 FR 14521 (March 18, 
2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-080) (approving rules 
governing the trading of options on The NASDAQ Options Market); 
49068 (January 13, 2004), 69 FR 2775 (January 20, 2004) (SR-BSE-
2002-15) (approving the Boston Options Exchange as an options 
trading facility of BSE); 15533 (January 29, 1979), 44 FR 6084 
(January 31, 1979) (approving the Amex Post Execution Reporting 
System, the Amex Switching System, the Intermarket Trading System, 
the Multiple Dealer Trading Facility of the Cincinnati Stock 
Exchange, the PCX Communications and Execution System, and the 
Philadelphia Stock Exchange Automated Communications and Execution 
System) (``1979 Release''); and 14563 (March 14, 1978), 43 FR 11542 
(March 17, 1978) (approving NYSE's Designated Order Turnaround 
System) (``1978 Release'').
---------------------------------------------------------------------------

    The second condition of Rule 11a2-2(T) requires that the member not 
participate in the execution of its order once the order is transmitted 
to the floor for execution.\59\ The Exchange represents that, upon 
submission to the Complex CUBE Auction, an order will

[[Page 9779]]

be executed automatically pursuant to the proposed rules set forth for 
the Auction. In particular, execution of an order sent to the Auction 
depends not on the ATP Holder entering the order, but rather on what 
other orders are present and the priority of those orders. Thus, at no 
time following the submission of an order is an ATP Holder able to 
acquire control or influence over the result or timing of order 
execution.\60\
---------------------------------------------------------------------------

    \59\ The description above covers the universe of the types of 
ATP Holders (i.e., on- and off-floor market makers, off-floor firms 
that are not market makers, and Floor Brokers).
    \60\ The Exchange notes that the Initiating Participant may not 
cancel or modify a Complex CUBE Order once a Complex CUBE Auction 
has started. See proposed Rule 971.2NY(c).
---------------------------------------------------------------------------

    The third condition of Rule 11a2-2(T) requires that the order be 
executed by an exchange member who is unaffiliated with the member 
initiating the order. The Commission has stated that this requirement 
is satisfied when automated exchange facilities, such as the Complex 
CUBE Auction, are used, as long as the design of these systems ensures 
that members do not possess any special or unique trading advantages in 
handling their orders after transmitting them to the exchange.\61\ The 
Exchange represents that the CUBE Auction is designed so that no ATP 
Holder has any special or unique trading advantage in the handling of 
its orders after transmitting its orders to the mechanism.
---------------------------------------------------------------------------

    \61\ In considering the operation of automated execution systems 
operated by an exchange, the Commission noted that, while there is 
not an independent executing exchange member, the execution of an 
order is automatic once it has been transmitted into the system. 
Because the design of these systems ensures that members do not 
possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange, the Commission has 
stated that executions obtained through these systems satisfy the 
independent execution requirement of Rule 11a2-2(T). See 1979 
Release.
---------------------------------------------------------------------------

    The fourth condition of Rule 11a2-2(T) requires that, in the case 
of a transaction effected for an account with respect to which the 
initiating member or an associated person thereof exercises investment 
discretion, neither the initiating member, nor any associated person 
thereof, may retain any compensation in connection with effecting the 
transaction, unless the person authorized to transact business for the 
account has expressly provided otherwise by written contract, referring 
to Section 11(a) of the Act and Rule 11a2-2(T) thereunder.\62\ The 
Exchange recognizes that ATP Holders relying on Rule 11a2-2(T) for 
transactions effected through the Complex CUBE Auction must comply with 
this condition of the Rule.
---------------------------------------------------------------------------

    \62\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written 
contract to retain compensation, in connection with effecting 
transactions for covered accounts over which such member or 
associated persons thereof exercises investment discretion, to 
furnish, at least annually to the person authorized to transact 
business for the account, a statement setting forth the total amount 
of compensation retained by the member in connection with effecting 
transactions for the account during the period covered by the 
statement, which amount must be exclusive of all amounts paid to 
others during that period for services rendered to effect such 
transactions. See also 1978 Release (stating ``[t]he contractual and 
disclosure requirements are designed to assure that accounts 
electing to permit transaction-related compensation do so only after 
deciding that such arrangements are suitable to their interests'').
---------------------------------------------------------------------------

    For all of the foregoing reasons, like the Single-Leg CUBE, the 
Exchange believes the Complex CUBE Auction promotes just and equitable 
principles of trade and is consistent with the general policy 
objectives of Section 11(a) of the Act.
Implementation
    The Exchange will announce the implementation date of the proposed 
rule change in a Trader Update to be published no later than 60 days 
following Commission approval. The implementation date will be no later 
than 60 days following publication of the Trader Update announcing 
Commission approval. The Exchange believes that this implementation 
schedule would provide ATP Holders with adequate notice of the Auction 
and would allow ample time for ATP Holders to prepare their systems for 
participation in the Auction process, if such participation is desired.
2. Statutory Basis
    For the reasons set forth above, the Exchange believes the proposed 
rule change is consistent with Section 6(b) of the Act in general, and 
furthers the objectives of Section 6(b)(5) of the Act, in that it is 
designed to promote just and equitable principles of trade, 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.
    The Exchange proposes to add new Rule 971.2NY to allow Complex 
Orders to be submitted to the Complex CUBE Auction in substantially the 
same manner as orders for single options series instruments currently 
are submitted to the Single-Leg CUBE, except as necessary to account 
for distinctions between regular orders on the Book and Complex Orders. 
As described in greater detail above, the provisions in proposed Rule 
971.2NY are substantially similar to those in Rule 971.1NY, with non-
substantive differences to reflect their applicability to an Auction 
for a Complex Order as compared to a CUBE for orders in a single-leg 
options series. The Exchange believes that the Complex CUBE Auction 
would remove impediments to and perfect the mechanism of a free and 
open market and a national market system because it is designed to 
afford Complex Orders the opportunity for price improvement in a paired 
auction, similar to the Single-Leg CUBE. The Exchange believes that the 
Complex CUBE would provide more efficient transactions, reduce 
execution risk to ATP Holders, and afford greater opportunities for 
price improvement for Complex Orders. The Exchange also believes that 
the proposed rule change would remove impediments to and perfect the 
mechanism of a free and open market and a national market system 
because it result in tighter markets for complex orders, and ensure 
that each order receives the best possible price. Similar to how the 
Single-Leg CUBE operates, the Exchange believes that by integrating the 
Auction into the CME, the Exchange is able to assure that the Auction 
respects the priority of interest in the Consolidated Book.
    The Exchange believes that this rule filing is reasonable, 
equitable and not unfairly discriminatory to customers and Participants 
because it follows the fundamental principles of the existing Single-
Leg CUBE mechanism \63\ and the Exchange's priority and allocation 
rules in the context of the auction for Complex Orders,\64\ each of 
which has been previously approved by the Commission. The Exchange 
further believes the proposal is not unfairly discriminatory because 
the benefits of the proposed Complex CUBE on the Exchange, like the 
Single-Leg CUBE, are equally available to all ATP Holders.
---------------------------------------------------------------------------

    \63\ See Rule 971.1NY, amended to reflect their applicability to 
a Complex CUBE on a Complex Order as compared to a CUBE on orders 
for single-leg options series.
    \64\ See Rule 980NY(e) (describing COA process generally).
---------------------------------------------------------------------------

    The Exchange believes this proposal would remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system because it would increase opportunities for execution of Complex 
Orders. Further, the Exchange believes the proposed Complex CUBE 
Auction would provide greater flexibility to ATP Holders trading 
Complex Orders on the Exchange. The Exchange also believes that the 
proposed Complex CUBE would provide additional opportunities for ATP 
Holders to achieve better handling of Complex Orders and result in 
increased opportunities for execution and better pricing. These 
benefits have

[[Page 9780]]

been realized for orders on single option series under its existing 
Single-Leg CUBE mechanism and the same principles are expected to 
transfer readily to Complex Orders. As a result, the proposed Complex 
CUBE Auction mechanism would promote just and equitable principles of 
trade, foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, and remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system.
    For purposes of the Complex CUBE Auction, only Complex Orders 
received during the Auction would be considered RFR Responses because 
quotes and orders in the leg markets would not be eligible to interact 
with the Complex CUBE Order. Although this aspect of the Complex CUBE 
Auction would differ from the Single-Leg CUBE, it is consistent with 
the current treatment of interest in auctions for complex orders on the 
Exchange, e.g., the COA.\65\ Similarly, to ensure that the Exchange 
preserves price/time priority, the Complex CUBE would conclude early 
when interest arrives during the Auction (including quotes and orders) 
that improve the best-priced interest at the start of the Complex CUBE, 
which is also consistent with COA processing.\66\
---------------------------------------------------------------------------

    \65\ See Rule 980NY(e)(7)(describing that only Complex Orders 
are eligible for execution in Auction).
    \66\ See Rule 980NY(e)(6)(describing that updates to the leg 
markets can end a COA early to preserve priority)
---------------------------------------------------------------------------

    The Exchange believes that proposed Commentary .02 to Rule 971.2NY 
and amendments to Rule 900.2NY(7) relating to definitions that would be 
applicable to the Complex CUBE would remove impediments to and perfect 
the mechanism of a free and open market because these terms reflect the 
different processing of and priority of Complex Orders. The Exchange 
believes that use of these terms achieves the same results as the 
Single-Leg CUBE, but the terms for Complex CUBE are tailored to how 
Complex Orders function. The Exchange further believes that defining 
these terms in Exchange rules would promote transparency and clarity 
for members, the public, and the Commission to understand how the 
Complex CUBE functions, including circumstances when an Auction would 
conclude early. Accordingly, any such differences between the rule for 
Complex CUBE and Single-Leg CUBE are designed to provide clarity in the 
rules and promote just and equitable principles of trade.
    Upon adoption of the proposal, the Exchange would operate price 
improvement auctions in both single-leg options series and Complex 
Orders.\67\ As with the Single-Leg CUBE, the Exchange will not operate 
multiple, simultaneous Complex CUBE Auctions on the same complex order 
strategy. However, the Exchange proposes that it would accept orders 
designated for the CUBE on a single option series where a Complex CUBE 
on a Complex Order strategy that includes such series may be in 
progress. The Exchange would also accept Complex Orders designated for 
the Complex CUBE where a Single-Leg CUBE on either of the component 
series may be in progress. The Exchange believes this simultaneous 
price improvement auction functionality would reduce order cancelation 
and, thereby remove impediments to, and perfect the mechanism of, a 
free and open market and a national market system.
---------------------------------------------------------------------------

    \67\ Exchange rules governing events occurring during permitted, 
simultaneous auctions are clear. Processes on the Exchange System 
are sequential, which prevents any two orders (including CUBE Orders 
and Complex CUBE Orders) from having the same time stamp. Each order 
is processed in accordance with Exchange rules without race 
conditions.
---------------------------------------------------------------------------

    ATP Holders must not use the Complex CUBE process to create a 
misleading impression of market activity (i.e., the facilities may be 
used only where there is a genuine intention to execute a bona fide 
transaction). These provisions are substantially the same as the 
corresponding rules for the Single-Leg CUBE and are important customer 
protection features that prevent fraudulent and manipulative acts and 
practices, promote just and equitable principles of trade and protect 
investors and the public interest.
    In addition, the Complex CUBE Auction promotes equal access by 
providing any ATP Holder that elects to subscribe to receive auction 
messages with the opportunity to interact with orders in the Auction. 
As a result, no ATP Holder would have an information advantage and the 
proposal serves to promote just and equitable principles of trade and 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system.
    The proposed changes to Rule 980NY(e)(6) that make clear that a COA 
in progress would end upon receipt of a better-priced Complex CUBE 
Order received during the COA would add clarity, transparency and 
internal consistency to Exchange rules and thereby remove impediments 
to, and perfect the mechanism of, a free and open market and a national 
market system.
    The Exchange also believes that the proposed amendment to Rule 
900.2NY to exclude Professional Customers from the definition of 
``Customer'' for purposes of this rule is consistent with just and 
equitable principles of trade because it is intended to protect 
investors that are not broker dealers and ensure that their orders are 
protected regardless of whether there is an Auction, and is consistent 
with treatment for Single-Leg CUBE. The Exchange also believes the 
proposed changes to Rule 953NY to exempt Complex CUBE Orders from the 
1-second order exposure requirement would add clarity, transparency and 
internal consistency to Exchange rules to the benefit of investors and 
the investing public.
    As discussed herein, the Exchange proposes to make certain 
miscellaneous conforming and clarifying changes to Rules 900.2NY(18A), 
935NY, 980NY to make them consistent with the adoption of the proposed 
Complex CUBE rule. These conforming and clarifying changes are required 
to make the Complex CUBE rules consistent with the Exchange's Single-
Leg CUBE rule and are necessary to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.
    For the foregoing reasons, the Exchange believes this proposal is a 
reasonable modification to its rules, designed to facilitate increased 
interaction of Complex Orders on the Exchange, and to do so in a manner 
that ensures a dynamic, real-time trading mechanism that maximizes 
opportunities for trade executions for Complex Orders. The Exchange 
believes it is appropriate and consistent with the Act to adopt the 
proposed rule changes.

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 is proposing 
the Auction as a market enhancement that should increase competition 
for Complex Order flow on the Exchange in a manner that would be 
beneficial to investors. Specifically, the Exchange believes that the 
Complex CUBE Auction would provide investors seeking to effect Complex 
Orders with an opportunity for increased liquidity available at 
improved prices, with competitive final

[[Page 9781]]

pricing out of the Initiating Participant's complete control. The 
proposal is structured to offer the same enhancement to all market 
participants and would not impose a competitive burden on any 
participant. The Exchange notes that it operates in a highly 
competitive market in which market participants can readily direct 
order flow to competing venues who offer similar functionality. The 
Exchange believes the proposed rule change is pro-competitive because 
it would enable the Exchange to provide market participants with 
functionality that is similar to that of other options exchanges. The 
Exchange notes that not having the Complex CUBE Auction at the Exchange 
places the Exchange at a competitive disadvantage vis-[agrave]-vis 
other exchanges that offer similar price improvement mechanisms.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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 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 self-regulatory 
organization consents, the Commission will:
    (A) By order approve or disapprove the 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-NYSEAMER-2018-05 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEAMER-2018-05. 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 the 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-NYSEAMER-2018-05 and should be submitted 
on or before March 28, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\68\
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    \68\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018-04625 Filed 3-6-18; 8:45 am]
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