Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Permit the Exchange To List Options on the Cboe Volatility Index (“VIX options”) on a Group Basis and Make Conforming Changes Throughout the Rules, Change the Minimum Increment for VIX Options Listed Under the Nonstandard Expirations Pilot Program (if the Exchange Lists VIX on a Group Basis), and Make Nonsubstantive Changes, 54395-54400 [2018-23508]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 83, Number 209 (Monday, October 29, 2018)]
[Notices]
[Pages 54395-54400]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-23508]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84470; File No. SR-CBOE-2018-066]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Permit 
the Exchange To List Options on the Cboe Volatility Index (``VIX 
options'') on a Group Basis and Make Conforming Changes Throughout the 
Rules, Change the Minimum Increment for VIX Options Listed Under the 
Nonstandard Expirations Pilot Program (if the Exchange Lists VIX on a 
Group Basis), and Make Nonsubstantive Changes

October 23, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 12, 2018, Cboe Exchange, Inc. (``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Exchange filed the proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 
19b-4(f)(6) thereunder.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend its rules to permit the Exchange to list options on the Cboe 
Volatility Index (``VIX options'') on a group basis and make conforming 
changes throughout the Rules, change the minimum increment for VIX 
options listed under the Nonstandard Expirations Pilot Program (if the 
Exchange lists VIX on a group basis), and make nonsubstantive changes.

(additions are italicized; deletions are [bracketed])
* * * * *

Rules of Cboe Exchange, Inc.

* * * * *

Rule 6.42. Minimum Increments for Bids and Offers

    [The Board of Directors may establish minimum increments for 
options traded on the Exchange. When the Board of Directors determines 
to change the minimum increments, the Exchange will designate such 
change as a stated policy, practice, or interpretation with respect to 
the administration of Rule 6.42 within the meaning of subparagraph 
(3)(A) of subsection 19(b) of the Exchange Act and will file a rule 
change for effectiveness upon filing with the Commission. Until such 
time as the Board of Directors makes a change to the minimum 
increments, t](a) Simple Orders. The [following] minimum increments 
[shall apply to]for bids and offers on simple orders for options traded 
on the Exchange are as follows:

------------------------------------------------------------------------
               Class                   Increment    Series Trading Price
------------------------------------------------------------------------
Class Not Participating in Penny             $0.05  Lower than $3.00.
 Pilot Program (including all                 0.10  $3.00 and higher.
 series of VIX options if the
 Exchange does not list VIX on a
 group basis pursuant to Rule
 8.14) and series of VIX Options
 not listed under the Nonstandard
 Expirations Pilot Program (if the
 Exchange lists VIX on a group
 basis pursuant to Rule 8.14)
Class Participating in Penny Pilot            0.01  Lower than $3.00.
 Program.                                     0.05  $3.00 and higher.
QQQs, IWM, and SPY, and Mini-SPX              0.01  All prices
 Index Options (XSP) (as long as
 SPDR options (SPY) participate in
 the Penny Pilot Program)
Series of VIX Options listed under            0.01  All prices.
 the Nonstandard Expirations Pilot
 Program (if the Exchange lists
 VIX on a group basis pursuant to
 Rule 8.14).
Options on the Dow Jones                      0.01  Lower than $3.00.
 Industrial Average (DJX), as long            0.05  $3.00 and higher.
 as Diamonds options (DIA)
 participate in the Penny Pilot
 Program
Mini-Options......................  ..............  Same as permitted
                                                     for standard
                                                     options on the same
                                                     security.
------------------------------------------------------------------------

    [(1) Subject to paragraphs (2) and (3) below, bids and offers shall 
be expressed in decimal increments no smaller than $0.10, unless a 
different increment is approved by the Exchange for an option contract 
of a particular series.
    (2) Subject to paragraph (3) below, bids and offers for all option 
series quoted below $3 a contract shall be expressed in decimal 
increments no smaller than $0.05
    (3) The decimal increments for bids and offers for all series of 
the option classes participating in the Penny Pilot Program are: $0.01 
for all option series quoted below $3 (including LEAPS), and $0.05 for 
all option series $3 and above (including LEAPS). For QQQQs, IWM, and 
SPY, the minimum increment is $0.01 for all option series. The Exchange 
may replace any option class participating in the Penny Pilot Program 
that has been delisted with the next most actively-traded, multiply-
listed option class, based on national average daily volume in the 
preceding six calendar months, that is not yet included in the Pilot 
Program. Any replacement class would be added on the second trading day 
following July 1, 2018. The Penny Pilot shall expire on December 31, 
2018.]
    ([4]b) Complex Orders. Except as provided in Rule 6.53C, the 
minimum increment for bids and offers on complex orders, as defined in 
Interpretation and Policy .01 below, [may be expressed in any net price 
increment (that may not be less than] is $0.01[)] or greater, 
[that]which may be determined by the Exchange on a class-by-class basis 
and announced to [the] Trading Permit Holders via Regulatory Circular[, 
regardless of the minimum increments otherwise appropriate to the 
individual legs of the order].

[[Page 54396]]

Notwithstanding the foregoing sentence, the minimum increment for bids 
and offers on complex orders in options on the S&P 500 Index (SPX) or 
on the S&P 100 Index (OEX and XEO), except for box/roll spreads, [shall 
be expressed in decimal increments no smaller than]is $0.05 or greater, 
or in any increment, [as]which may be determined by the Exchange on a 
class-by-class basis and announced to [the] Trading Permit Holders via 
Regulatory Circular. In addition:

([a]i) [T]the legs of a complex order may be executed in $0.01 
increments; and
([b]ii) complex orders are subject to special priority requirements as 
described in Rules 6.45, 6.53C, 24.19 and 24.20.

    . . . Interpretations and Policies:
    .01 For purposes of this rule, ``complex order'' means a spread, 
straddle, combination or ratio order as defined in Rule 6.53, a stock-
option order as defined in Rule 1.1(ii), a security future-option order 
as defined in Rule 1.1(zz), or any other complex order as defined in 
Rule 6.53C.
    .02 For purposes of this rule, ``box/roll spread'' or ``box 
spread'' means an aggregation of positions in a long call option and 
short put option with the same exercise price (``buy side'') coupled 
with a long put option and short call option with the same exercise 
price (``sell side'') all of which have the same aggregate current 
underlying value, and are structured as either: ([A]a) a ``long box 
spread'' in which the sell side exercise price exceeds the buy side 
exercise price or ([B]b) a ``short box spread'' in which the buy side 
exercise price exceeds the sell side exercise price.
    .03 When the Exchange determines to change the minimum increment 
for a class, the Exchange will designate such change as a stated 
policy, practice, or interpretation with respect to the administration 
of Rule 6.42 within the meaning of subparagraph (3)(A) of subsection 
19(b) of the Act and will file a rule change for effectiveness upon 
filing with the Commission.
    .04 The Exchange may replace any option class participating in the 
Penny Pilot Program that has been delisted with the next most actively 
traded, multiply listed option class, based on national average daily 
volume in the preceding six calendar months, that is not yet included 
in the Pilot Program. Any replacement class would be added on the 
second trading day following July 1, 2018. The Penny Pilot will expire 
on December 31, 2018.
    [.03 For so long as SPDR options (SPY) and options on Diamonds 
(DIA) participate in the Penny Pilot Program, the minimum increments 
for Mini-SPX Index Options (XSP) shall be the same as SPY for all 
options series (including LEAPS) and for options on the Dow Jones 
Industrial Average (DJX) are $0.01 for all option series quoted below 
$3 (including LEAPS), and $0.05 for all option series $3 and above 
(including LEAPS).
    .04 The minimum price variation for bids and offers for mini-
options shall be determined in accordance with Interpretation and 
Policy .22(d) to Rule 5.5.]
* * * * *

Rule 6.53C. Complex Orders on the Hybrid System

    (a)-(d) No change.
    . . . Interpretations and Policies:
    .01 No change.
    .02 If the Exchange determines to list SPX or VIX on a group basis 
pursuant to Rule 8.14, a marketable complex order consisting of legs in 
different groups of series in the class does not automatically execute 
against individual orders residing in the EBook pursuant to Rule 
6.53C(c)(ii)(1) or (d)(v)(1) and automatically executes against complex 
orders (or COA responses) in accordance with Rules 6.53C(c)(ii)(2) or 
(d)(v)(2) through (4). A marketable complex order consisting of legs in 
the same group of series in SPX or VIX executes against individual 
orders in the EBook in accordance with Rule 6.53C(c)(ii) and (d)(v). 
Complex orders consisting of legs in different groups of series that 
are marketable against each other may only execute at a net price that 
has priority over the individual orders and quotes resting in the 
EBook.
    .03-.12 No change.
* * * * *

Rule 8.3. Appointment of Market-Makers

    (a)-(b) No change.
    (c) Market-Maker Appointments. Absent an exemption by the Exchange, 
an appointment of a Market-Maker confers the right to quote 
electronically and in open outcry in the Market-Maker's appointed 
classes during Regular Trading Hours as described below. Subject to 
paragraph (e) below, a Market-Maker may change its appointed classes 
upon advance notification to the Exchange in a form and manner 
prescribed by the Exchange.
    (i) Hybrid Classes. Subject to paragraphs (c)(iv) and (e) below, a 
Market-Maker can create a Virtual Trading Crowd (``VTC'') appointment, 
which confers the right to quote electronically during Regular Trading 
Hours in an appropriate number of Hybrid classes (as defined in Rule 
1.1(aaa)) selected from ``tiers'' that have been structured according 
to trading volume statistics, except for the AA tier. All classes 
within a specific tier will be assigned an ``appointment cost'' 
depending upon its tier location. The following table sets forth the 
tiers and related appointment costs.

------------------------------------------------------------------------
                                                            Appointment
              Tier                Hybrid option classes        cost
------------------------------------------------------------------------
AA.............................  Options on the Cboe             .499 **
                                  Volatility Index (VIX).
                                 Options on the Standard          1.0 **
                                  & Poor's 500 Index
                                  (SPX).
 
                              * * * * * * *
------------------------------------------------------------------------
** If the Exchange determines to list SPX or VIX on a group basis
  pursuant to Rule 8.14, the SPX or VIX appointment cost, as applicable,
  confers the right to trade in all SPX or VIX groups, respectively.

    (ii)-(v) No change.
    (d)-(e) No change.
* * * * *

Rule 8.13. Preferred Market-Maker Program

    (a)-(d) No change.
    . . . Interpretations and Policies:
    .01-.03 No change.
    .04 If the Exchange determines to list SPX or VIX on a group basis 
pursuant to Rule 8.14, obligations of an SPX or VIX Market-Maker, as 
applicable, designated as a Preferred Market-Maker, as set forth in 
Rule 8.13, apply on a class basis, unless the Exchange determines to 
apply obligations on a group basis.

Rule 8.14. Hybrid Trading System Platforms & Market-Maker Participants

    (a)-(b) No change.
    . . . Interpretations and Policies:

[[Page 54397]]

    .01 For each Hybrid 3.0 class, the Exchange may determine to 
authorize a group of series of the class for trading on the Hybrid 
Trading System and, if that authorization is granted, shall determine 
the eligible categories of Market-Maker participants for that group of 
series. The Exchange will also have the authority to determine whether 
to change the trading platform on which the group of series trades. If 
the Exchange lists SPX or VIX on the Hybrid Trading System, the 
Exchange may determine to list the class on a group basis, with both 
groups trading on the Hybrid Trading System. The Exchange will also 
have the authority to change the eligible categories of Market-Makers 
participants for each group. In addition, the following shall apply:
    (a)-(c) No change.

Rule 8.15. Lead Market-Makers

    (a)-(d) No change.
    . . . Interpretations and Policies:
    .01-.04 No change.
    .05 If the Exchange determines to list SPX or VIX on a group basis 
pursuant to Rule 8.14, obligations of an SPX or VIX Market-Maker, as 
applicable, designated as a Lead Market-Maker, as set forth in Rule 
8.15, apply on a class basis, unless the Exchange determines to apply 
obligations on a group basis.
* * * * *

Rule 8.85. DPM Obligations

    (a)-(e) No change.
    . . . Interpretations and Policies:
    .01-.02 No change.
    .03 If the Exchange determines to list SPX or VIX on a group basis 
pursuant to Rule 8.14, obligations of a Designated Primary Market-Maker 
with an SPX or VIX appointment, as applicable, as set forth in Rule 
8.85, apply on a class basis, except if the Exchange determines to 
apply obligations on a group basis.
* * * * *
    (b) Not applicable. [sic]
    (c) Not applicable. [sic]
    The text of the proposed rule change is also available on the 
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The Exchange proposes to amend its Rules to permit the Exchange to 
list options on the Cboe Volatility Index (``VIX options'') on [sic] 
group basis and make conforming changes throughout the Rules, change 
the minimum increment for VIX options listed under the Nonstandard 
Expirations Pilot Program (if the Exchange lists VIX on a group basis), 
and make nonsubstantive changes. Rule 8.14, Interpretation and Policy 
.01 currently permits the Exchange to authorize a group of series of a 
Hybrid 3.0 \5\ class for trading on the Hybrid Trading System. Rule 
8.14, Interpretation and Policy .01 also permits the Exchange to list 
options on the S&P 500 (``SPX options'') on a group basis, with both 
groups trading on the Hybrid Trading System, if the Exchange lists SPX 
on the Hybrid Trading System.\6\ If the Exchange authorizes this, it 
determines the eligible categories of Market-Maker participants for the 
group (Designated Primary Market-Makers (``DPMs''), Lead Market-Makers 
(``LMMs''), or Market-Makers). The Exchange may also appoint no DPM or 
LMM to a class if the conditions in Rule 8.14(b) are satisfied with 
respect to the class. A DPM's or LMM's obligations will apply to a 
class, unless the Exchange determines to apply a DPM's or LMM's 
obligations on a group basis. Market-Maker appointments apply on a 
class basis. The Exchange establishes Hybrid Trading System trading 
parameters (e.g., applicable matching algorithm under Rule 6.45, 
opening rotation parameters under Rule 6.2B, automatic execution 
parameters under Rule 6.13, simple auction liaison parameters under 
Rule 6.13A, hybrid agency liaison parameters under Rule 6.14A, complex 
order parameters under Rule 6.53C, and automated improvement mechanism 
parameters under Rule 6.74A) on a group basis to the extent the Rules 
otherwise provide for such parameters to be established on a class 
basis.
---------------------------------------------------------------------------

    \5\ ``Hybrid Trading System'' refers to (i) the Exchange's 
trading platform that allows Market-Makers to submit electronic 
quotes in their appointed classes and (ii) any connectivity to the 
foregoing trading platform that is administered by or on behalf of 
the Exchange, such as a communications hub. ``Hybrid 3.0 Platform'' 
is an electronic trading platform on the Hybrid Trading System that 
allows one or more quoters to submit electronic quotes which 
represent the aggregate Market-Maker quoting interest in a series 
for the trading crowd. Classes authorized by the Exchange for 
trading on the Hybrid Trading System are referred to as Hybrid 
classes. Classes authorized by the Exchange for trading on the 
Hybrid 3.0 Platform are referred to as Hybrid 3.0 classes. See Rule 
1.1(aaa). Currently, no classes trade on the Hybrid 3.0 Platform.
    \6\ Currently, the Exchange lists SPX options on the Hybrid 
Trading System, and lists the class in two groups--one group 
consists of SPX options with A.M.-settled standard third-Friday 
expirations and the other group consists of SPX options with P.M.-
settled standard third-Friday expirations and nonstandard end-of-
week or end-of-month expirations. The Exchange lists both groups of 
SPX options on the Hybrid Trading System.
---------------------------------------------------------------------------

    The proposed rule change amends Rule 8.14, Interpretation and 
Policy .01 to permit the Exchange to list a class [sic] VIX options on 
a group basis if the Exchange lists VIX options on the Hybrid Trading 
System (which it currently does).\7\ The remaining provisions of 
Interpretation and Policy .01 would apply. Thus, if the Exchange lists 
VIX options in two groups, it may determine on which trading platform 
each group trades (both could trade on the Hybrid Trading System, both 
could trade on the Hybrid 3.0 Platform, and one could trade on each 
platform) and the eligible categories of Market-Maker participants for 
each group. If the Exchange determines to appoint a DPM or LMM, the 
obligations of the DPM or LMM would apply to the entire VIX class, 
unless the Exchange determines to apply the DPM or LMM obligations, as 
applicable, on a group basis.\8\ Market-Maker appointments would 
continue to apply to the entire VIX class, as further discussed 
below.\9\
---------------------------------------------------------------------------

    \7\ If VIX was a Hybrid 3.0 class, the Exchange would be able to 
list it on a group basis today pursuant to Rule 8.14, Interpretation 
and Policy .01.
    \8\ The proposed rule change makes conforming changes to Rules 
8.15 and 8.85. The proposed rule change also makes a similar change 
to Rule 8.13 with respect to Preferred Market-Makers.
    \9\ The Exchange does not currently (and does not intend to) 
appoint Preferred Market-Makers (``PMMs'') or DPMs to VIX options 
pursuant to Rules 8.13 or 8.95, respectively. The Exchange currently 
appoints an on-floor LMM to VIX options (which includes VIXW 
options), and may determine to apply a DPM or LMM to each group of 
VIX options if the Exchange determines to list VIX on a group basis.
---------------------------------------------------------------------------

    As it does today, when determining whether to list a class on a 
group basis, the Exchange intends to generally select series with 
common expirations or classifications (e.g., end-of-week series or end-
of-month series, short-term option series, long-term option series, or 
series that expire on a particular expiration date) and trade them 
under individual listing symbols. For example, the Exchange currently 
lists SPX

[[Page 54398]]

options with A.M.-settled standard third-Friday expirations under 
symbol ``SPX'' and lists options on the S&P 500 Index with P.M-settled 
standard third-Friday expirations and nonstandard expirations with all 
other expirations under symbol ``SPXW.'' The Exchange would provide 
sufficient notice to Trading Permit Holders if it determines to list 
VIX on a group basis.
    If the Exchange determines to list VIX on a group basis, the 
Exchange would establish trading parameters (e.g. applicable matching 
algorithm under Rule 6.45, opening rotation parameters under Rule 6.2, 
automatic execution parameters under Rule 6.13, simple auction liaison 
parameters under Rule 6.13A, hybrid agency liaison parameters under 
Rule 6.14A, complex order parameters under Rule 6.53C, and automated 
improvement mechanism parameters under Rule 6.74A) on a group basis, as 
it does today for SPX and SPXW. Pursuant to the proposed rule change, 
the Exchange could apply a different allocation algorithm to each group 
of VIX options.
    The Exchange believes for VIX, groups of series may exhibit 
different trading characteristics, including appeal to different 
categories of market participants. For example, the Exchange believes 
VIXW options may be more appealing to retail customers given their 
short expiration, and would be in more demand with a smaller trading 
increment (see discussion below). The Exchange generally establishes 
market models for classes based on these characteristics that most fit 
the product, which the Exchange believes benefits investors. This is 
true for VIX options with standard third-Friday expirations and VIX 
options with nonstandard expirations, which is why the Exchange 
believes it is appropriate to permit the Exchange to list VIX options 
in groups.
    The Exchange proposes to amend Rule 6.53C, Interpretation and 
Policy .02 to state if the Exchange determines to list VIX options on a 
group basis pursuant to Rule 8.14, if a marketable complex order 
consists of legs in different groups of series in the class, it will 
not automatically execute against individual orders residing in the 
EBook pursuant to Rule 6.53C(c)(ii)(1) or (d)(v)(1). This is consistent 
with current functionality today applicable to SPX and SPXW pursuant to 
Rule 6.53C, Interpretation and Policy .10. The proposed rule change 
extends this functionality to VIX, if the Exchange lists it on a group 
basis.
    As discussed above, if the Exchange lists VIX on a group basis, the 
Exchange may apply different trading parameters (including different 
allocation algorithms) to each group. Due to system limitations that in 
the Exchange's experience were prohibitively expensive to modify, 
complex orders consisting of different groups of series will not 
automatically execute against individual orders residing in the EBook, 
even if they trade on the same platform. Pursuant to Rule 6.53C, 
complex orders may only consist of legs from the same class. While VIX 
and VIXW series would be part of the same class even if the Exchange 
lists VIX on a group basis, and thus permissible for electronic 
handling under the Rules, the System would treat VIX and VIXW series as 
different classes (since they would potentially have different 
settings) and would be unable to process complex orders with components 
in different classes. The System has settings for each class. 
Currently, trading is not possible ``across'' classes given these 
different settings. Each class also has separate market data inputs, as 
the System must read different market data for each class in connection 
with potential executions in the class. If the System receives a 
complex order with one VIX leg and one VIXW leg, it would need to trade 
the VIX leg against the appropriate leg in the VIX ``class.'' After 
that leg execution, it would then need to trade the VIXW leg against 
the appropriate leg in the VIXW ``class.'' Given the time these 
executions would take across classes, it would not result in the near 
simultaneous execution of legs that is sought by the entry of complex 
orders. Additionally, after the first leg execution, because the 
complex order has not fully executed, the System would not be able to 
execute any other orders within the series of the first leg, which may 
prevent execution opportunities of those other orders.
    For example, suppose the Exchange lists VIX on a group basis, as 
VIX and VIXW (similar to SPX and SPXW). The Exchange may determine 
pursuant to Rule 6.45(a) the allocation algorithm applicable to VIX/
VIXW orders.\10\ VIX/VIXW orders may execute against other VIX/VIXW 
orders in the COB upon entry or against orders and COA responses 
following a COA in accordance with the allocation and priority rules 
set forth in 6.53C(c)(ii)(2) and (d)(v)(2) through (4), 
respectively.\11\ The proposed rule change states marketable VIX/VIXW 
orders will be eligible to automatically execute against other VIX/VIXW 
orders resting in the COB provided the execution is at a net price that 
has priority over the individual orders and quotes residing in the 
EBook (which is consistent with the manner in which the Exchange 
currently handles these complex orders are handled [sic], as provided 
in Rule 6.53C, Interpretation and Policy .10(b)). A VIX/VIXW order that 
is marketable against individual orders resting in the EBook but not 
marketable against any complex orders resting in the COB or COA 
responses will enter the COB or instead be routed to a PAR workstation 
during Regular Trading Hours and rejected back to the Trading Permit 
Holder during Extended Trading Hours if not eligible for COB entry due 
to the terms of the order (for example, if the order is for an origin 
code the Exchange does not permit to rest in the COB). This is how SPX/
SPXW orders are handled today.\12\
---------------------------------------------------------------------------

    \10\ Rule 6.45(a)(i) permits the Exchange to determine which 
base electronic allocation algorithm will apply to a class, and Rule 
6.53C(ii)(2) permits the Exchange to determine which electronic 
allocation algorithm will apply to executions of complex orders on 
the COB. Pursuant to the proposed rule change, as discussed above, 
the Exchange may establish trading parameters on a group basis when 
the Rules otherwise provide for parameters to be established on a 
class basis.
    \11\ Rule 6.53C(c)(ii)(2) states the allocation of a complex 
order within the COB will be pursuant to the rules of trading 
priority otherwise applicable to incoming electronic orders in the 
individual component legs or another electronic matching algorithm 
from Rule 6.45, as determined by the Exchange on a class-by-class 
basis. Therefore, pursuant to that provision and the proposed rule 
change, the Exchange will determine for VIX/VIXW complex orders 
which electronic matching algorithm will apply to those orders when 
executing against other orders in the COB. Rules 6.53(d)(v)(2) 
through (4) specify the matching algorithm applicable to complex 
orders that execute following a COA, and those provisions will apply 
to VIX/VIXW complex orders pursuant to the proposed rule change.
    \12\ See Rule 6.12(a)(1), which states orders initially routed 
for electronic processing that are not eligible for automatic 
execution or book entry will route to PAR or back to the Trading 
Permit Holder, Rule 6.53C(d)(vi), which states a COA-eligible order 
that cannot be filled in whole or in a permissible ratio will route 
to the COB or back to PAR, as applicable, and Rule 6.1A(b), which 
states if in accordance with the Rules, an order would route to PAR, 
the order entry firm's booth, or otherwise for manual handling, the 
System will return the order to the Trading Permit Holder during 
Extended Trading Hours.
---------------------------------------------------------------------------

    The proposed rule change amends Rule 8.3(c)(i) to state if the 
Exchange determines to list VIX on a group basis pursuant to Rule 8.14, 
the appointment cost for VIX confers the right to trade in all groups 
of the class. This is consistent with how appointment costs currently 
work for VIX, and is consistent with how the appointment cost for SPX 
works (which the Exchange has determined to list on a group basis). A 
VIX Market-Maker's obligations pursuant to Rule 8.7 will continue to 
apply to VIX on a class basis (i.e., series within all VIX groups), 
even if the

[[Page 54399]]

Exchange lists VIX on a group basis. This is consistent with how VIX 
Market-Makers' obligations apply to VIX today, as VIX Market-Makers' 
obligations apply to all VIX series. The Exchange proposes no change to 
the appointment cost, and thus Market-Makers with VIX appointments will 
not need to purchase any additional trading permits to quote VIX if the 
Exchange determines to list VIX on a group basis.
    The Exchange also proposes to amend Rule 6.42 to permit series of 
VIX options listed under the Nonstandard Expiration pilot program 
(``VIXW'') to have a minimum increment of $0.01 for all strike prices 
if the Exchange determines to list VIX on a group basis. Currently, all 
VIX options have a minimum increment of $0.05 for series trading below 
$3 and $0.10 for series trading above $3.\13\ The Exchange believes 
market demand (particularly by retail investors, who generally prefer 
lower trading increments) supports a lower trading increment for these 
series. Permitting a different minimum increment for VIXW and VIX is 
consistent with the Exchange's current authority (as discussed above) 
to determine all trading parameters and market model elements other 
than minimum increment on a group basis to address different trading 
characteristics and market demand between groups of series. Permitting 
VIXW series to trade at a different minimum increment than VIX series 
will permit the Exchange to similarly address the different trading 
characteristics and market demand for these two groups of series.
---------------------------------------------------------------------------

    \13\ As set forth in proposed Rule 6.42, if the Exchange does 
not list VIX on a group basis, these same increments would apply to 
the entire class.
---------------------------------------------------------------------------

    Additionally, penny pricing is available in weekly options on 
competitor products such as the iPath S&P 500 VIX Short-Term Futures 
exchange-traded note (``VXX''). As a result, the Exchange believes 
penny pricing for VIXW options is necessary for competitive reasons to 
allow the Exchange to price these weekly options at the same level of 
granularity as permitted for competitor weekly products.\14\ The 
Exchange expects this more granular pricing to lead to narrowing of the 
bid-ask spread for these options and increase the possible number of 
price points available to investors for these series. The Exchange also 
notes that penny increments are appropriate for Nonstandard Expiration 
series, because they have shorter durations than standard options, and 
finer increments permit more precise pricing in line with the 
theoretical value of these shorter-term options. The proposed rule 
change also makes nonsubstantive changes to Rule 6.42, including moving 
certain provisions from the main body of the Rule to interpretations 
and policies .03 and .04, making language more plain English, 
conforming paragraph numbering and lettering to other rules, and 
displaying the increments in a more user-friendly table.
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    \14\ The Exchange notes that other options that trade on the 
Exchange are currently permitted to trade in penny increments 
because competitive products are able to trade in penny increments. 
See Rule 6.42, Interpretation and Policy .03 (the minimum for XSP 
options is $0.01 because that is the minimum increment for SPY 
options, and the minimum increment for DJX options is $0.01 for 
series below $3 and $0.05 for series $3 and above because that is 
the minimum increment for DIA options).
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    With regard to the impact of this proposed rule change on system 
capacity, the Exchange has analyzed its capacity and represents that it 
and the Options Price Reporting Authority have the necessary systems 
capacity to handle any potential additional traffic associated with 
this proposal. The Exchange does not believe any potential increased 
traffic will become unmanageable since this proposed rule change with 
respect to minimum trading increments is limited to a single class of 
options. The proposed rule change does not impact the number of 
expirations for VIX options the Exchange may list pursuant to Rule 
24.9.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\15\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \16\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \17\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
    \17\ Id.
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    In particular, the Exchange believes the proposed rule change to 
permit the Exchange to list VIX options on a group basis will benefit 
investors and promote just and equitable principles of trade, as it 
provides the Exchange with flexibility to establish a more appropriate 
market model for a group of VIX options series that may exhibit 
different trading characteristics than other series in the class, even 
if both groups trade on the same platform. Currently, the Exchange may 
list VIX on a group basis if the groups of a class trade on different 
trading platforms (e.g., if VIX was a Hybrid 3.0 class); the proposed 
rule change merely permits the Exchange to similarly list VIX on a 
group basis on the same trading platform.
    Similarly, the proposed rule change to provide [sic] that VIX/VIXW 
complex orders will not execute against individual orders in the EBook, 
which is consistent with the treatment of SPX/SPXW orders. These orders 
will continue to be eligible for electronic processing, including 
electronic execution, in the same manner as complex orders consisting 
of VIX series only or VIXW series only, except they will not 
automatically execute against individual orders in the EBook for the 
legs due to system limitations described above and would instead rest 
in the COB (if eligible) or route to PAR or the Trading Permit Holder 
during Regular Trading Hours, or be rejected back to the Trading Permit 
Holder during Extended Trading Hours.
    Additionally, the proposed rule change will similarly benefit 
investors. Retail customers generally prefer options with shorter 
expirations, and the proposed rule change will permit series of VIX 
with short expirations to be listed in a smaller increment consistent 
with that demand from retail investors. Permitting a different minimum 
increment for VIXW and VIX is consistent with the Exchange's current 
authority (as discussed above) to determine all trading parameters and 
market model elements other than minimum increment on a group basis to 
address different trading characteristics and market demand between 
groups of series. Permitting VIXW series to trade at a different 
minimum increment than VIX series will permit the Exchange to similarly 
address the different trading characteristics and market demand for 
these two groups of series.
    Penny increments for VIXW series may lead to more granular pricing 
and narrowing of the bid-ask spread for these options and increase the 
possible

[[Page 54400]]

number of price points available for investors for these series. 
Additionally, as discussed above, penny pricing is available in weekly 
options on competitive products. The Exchange believes penny pricing 
for VIXW options is necessary for competitive reasons, which will and 
promote just and equitable principles of trade, to allow the Exchange 
to price these weekly options at the same level of granularity as 
permitted for competitor weekly products.\18\ The Exchange also notes 
that penny increments are appropriate for Nonstandard Expiration 
series, because they have shorter durations than standard options, and 
finer increments permit more precise pricing in line with the 
theoretical value of these shorter-term options.
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    \18\ The Exchange notes that other options that trade on the 
Exchange are currently permitted to trade in penny increments 
because competitive products are able to trade in penny increments. 
See Rule 6.42, Interpretation and Policy .03 (the minimum for XSP 
options is $0.01 because that is the minimum increment for SPY 
options, and the minimum increment for DJX options is $0.01 for 
series below $3 and $0.05 for series $3 and above because that is 
the minimum increment for DIA options).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Cboe Options does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed rule change has 
no impact on intramarket competition, as it will apply to all market 
participants that trade VIX if the Exchange determines to list VIX on a 
group basis. If VIX was a Hybrid 3.0 class, the Exchange could 
determine to list VIX on a group basis under current rules; the 
proposed rule change merely permits the Exchange to similarly list VIX 
on a group basis on the same trading platform. The proposed rule change 
has no impact on intermarket competition, as the proposed rule change 
relates to products exclusively listed on the Exchange. Additionally, 
the proposed rule change to permit VIXW options to be listed in penny 
increments may relieve any burden on, or otherwise promote, 
competition, as it will allow the Exchange to price these options at 
the same level of granularity as permitted for competitor weekly 
products. The Exchange notes that other options that trade on the 
Exchange are currently permitted to trade in penny increments because 
competitive products are able to trade in penny increments.\19\
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    \19\ See Rule 6.42, Interpretation and Policy .03 (the minimum 
for XSP options is $0.01 because that is the minimum increment for 
SPY options, and the minimum increment for DJX options is $0.01 for 
series below $3 and $0.05 for series $3 and above because that is 
the minimum increment for DIA options).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not:
    A. Significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \20\ and 
Rule 19b-4(f)(6) \21\ thereunder. At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(6).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2018-066 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2018-066. 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-CBOE-2018-066, and should be submitted 
on or before November 19, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-23508 Filed 10-26-18; 8:45 am]
BILLING CODE P