Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating To Discontinue Bulk Order Functionality and Implement Bulk Message Functionality, and Make Other Nonsubstantive Changes, 67785-67792 [2018-28395]
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Federal Register / Vol. 83, No. 249 / Monday, December 31, 2018 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.32
Brent J. Fields,
Secretary.
[FR Doc. 2018–28378 Filed 12–28–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84948; File No. SRCboeBZX–2018–044]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of
Designation of a Longer Period for
Commission Action on Proceedings To
Determine Whether To Approve or
Disapprove a Proposed Rule Change,
as Modified by Amendment No. 1, To
Amend BZX Rule 14.11(c) (Index Fund
Shares)
December 21, 2018.
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On June 21, 2018, Cboe BZX
Exchange, Inc. (‘‘Exchange’’ or ‘‘BZX’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to amend BZX Rule 14.11(c) to
permit either the portfolio holdings of a
series of Index Fund Shares or the index
underlying a series of Index Fund
Shares to satisfy the listing standards
under BZX Rules 14.11(c)(3), (4), and
(5). The proposed rule change was
published for comment in the Federal
Register on July 11, 2018.3 On August
23, 2018, pursuant to Section 19(b)(2) of
the Act,4 the Commission designated a
longer period within which to approve
the proposed rule change, disapprove
the proposed rule change, or institute
proceedings to determine whether to
approve or disapprove the proposed
rule change.5 On September 28, 2018,
the Exchange filed Amendment No. 1 to
the proposed rule change, which
amended and replaced the proposed
rule change as originally filed. On
October 5, 2018, the Commission
published notice of Amendment No. 1
and instituted proceedings pursuant to
Section 19(b)(2)(B) of the Act 6 to
determine whether to approve or
disapprove the proposed rule change, as
32 17
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 83594
(July 5, 2018), 83 FR 32158.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 83919,
83 FR 44083 (August 29, 2018).
6 15 U.S.C. 78s(b)(2)(B).
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modified by Amendment No. 1.7 The
Commission has received one comment
letter on the proposed rule change.8
Section 19(b)(2) of the Act 9 provides
that, after initiating disapproval
proceedings, the Commission shall issue
an order approving or disapproving the
proposed rule change not later than 180
days after the date of publication of
notice of filing of the proposed rule
change. The Commission may extend
the period for issuing an order
approving or disapproving the proposed
rule change, however, by not more than
60 days if the Commission determines
that a longer period is appropriate and
publishes the reasons for such
determination. The proposed rule
change was published for notice and
comment in the Federal Register on July
11, 2018. January 7, 2019 is 180 days
from that date, and March 8, 2019 is 240
days from that date.
The Commission finds it appropriate
to designate a longer period within
which to issue an order approving or
disapproving the proposed rule change
so that it has sufficient time to consider
the proposed rule change, as modified
by Amendment No. 1. Accordingly, the
Commission, pursuant to Section
19(b)(2) of the Act,10 designates March
8, 2019 as the date by which the
Commission shall either approve or
disapprove the proposed rule change, as
modified by Amendment No. 1 (File No.
SR–CboeBZX–2018–044).
SECURITIES AND EXCHANGE
COMMISSION
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Brent J. Fields,
Secretary.
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.
[FR Doc. 2018–28379 Filed 12–28–18; 8:45 am]
BILLING CODE 8011–01–P
7 See Securities Exchange Act Release No. 84378,
83 FR 51745 (October 12, 2018).
8 See letter from Kyle Murray, Assistant General
Counsel, Cboe Global Markets, Inc. to Brent J.
Fields, Secretary, Commission, dated November 16,
2018.
9 15 U.S.C. 78s(b)(2).
10 Id.
11 17 CFR 200.30–3(a)(57).
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[Release No. 34–84929; File No. SR–
CboeEDGX–2018–060]
Self-Regulatory Organizations; Cboe
EDGX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change Relating To
Discontinue Bulk Order Functionality
and Implement Bulk Message
Functionality, and Make Other
Nonsubstantive Changes
December 21, 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 December
13, 2018, Cboe EDGX Exchange, Inc.
(the ‘‘Exchange’’ or ‘‘EDGX’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/CBOELegalRegulatory
Home.aspx), at the Exchange’s Office of
the Secretary, and at the Commission’s
Public Reference Room.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
In 2016, the Exchange’s parent
company, Cboe Global Markets, Inc.
(‘‘Cboe Global’’), which is the parent
1 15
2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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Federal Register / Vol. 83, No. 249 / Monday, December 31, 2018 / Notices
company of Cboe Exchange, Inc. (‘‘Cboe
Options’’) and Cboe C2 Exchange, Inc.
(‘‘C2’’), acquired the Exchange, Cboe
EDGA Exchange, Inc. (‘‘EDGA’’), Cboe
BZX Exchange, Inc. (‘‘BZX or BZX
Options’’), and Cboe BYX Exchange,
Inc. (‘‘BYX’’ and, together with C2, Cboe
Options, the Exchange, EDGA, and BZX,
the ‘‘Cboe Affiliated Exchanges’’). The
Cboe Affiliated Exchanges are working
to align certain system functionality,
retaining only intended differences
between the Cboe Affiliated Exchanges,
in the context of a technology migration.
Cboe Options intends to migrate its
technology to the same trading platform
used by the Exchange, C2, and BZX
Options in the fourth quarter of 2019.
The proposal set forth below is intended
to add certain functionality to the
Exchange’s System that is more similar
to functionality offered by Cboe Options
in order to ultimately provide a
consistent technology offering for
market participants who interact with
the Cboe Affiliated Exchanges. Although
the Exchange intentionally offers certain
features that differ from those offered by
its affiliates and will continue to do so,
the Exchange believes that offering
similar functionality to the extent
practicable will reduce potential
confusion for Users.
Cboe Options currently offers quoting
functionality to Market-Makers, which
permits Market-Makers to update their
electronic quotes in block quantities.3
Quotes on Cboe Options do not route to
other exchanges,4 and Market-Makers
generally enter new quotes at the
beginning of the trading day based onthen current market conditions.5 The
Exchange currently offers bulk order
functionality, which is intended to
provide Users, and Market-Makers in
particular, with a way to submit orders
that simulate quoting functionality.6
However, while bulk order functionality
simulates quoting functionality, bulk
order functionality provides Users with
a less efficient way to update multiple
bids and offers. To update multiple bids
3 See
Cboe Options Rule 1.1(ppp).
Cboe Options Rule 6.14B (which describes
how the Exchange routes orders (specifically
intermarket sweep orders) but not quotes routed to
other exchanges); see also Nyse Arca, LLC (‘‘Arca’’)
Rule 6.37–O(a)(3)(D) (which states quotes do not
route).
5 The Exchange understands this is common
practice by Market-Makers throughout the industry,
and is consistent with Cboe Options functionality,
which cancels all unexecuted resting Market-Maker
quotes at the close of each trading day.
Additionally, it is consistent with Market-Makers’
obligation to update market quotations in response
to changed market conditions. See Rule 22.5(a)(5);
see also Cboe Options Rule 8.7(b)(iii).
6 See Securities Exchange Act Release No. 82741
(February 20, 2018), 83 FR 8306 (February 26, 2018)
(SR–CboeEDGX–2018–005).
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4 See
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and offers, a User must submit multiple
messages at the same time, compared to
quoting functionality, which generally
permits a market participant to update
multiple bids and offers in a single
quote message. Specifically, a bulk
order port is a dedicated logical port
that provides Users with the ability to
submit single and bulk order messages
to enter, modify, or cancel orders
designated as Post Only Orders 7 with a
Time-in-Force of Day 8 or Good-til-Date
(‘‘GTD’’) 9 with an expiration time on
that trading day.10 Like quotes, bulk
order messages do not route to other
exchanges because they include a Post
Only instruction.11 Use of the Day or
GTD Time-in-Force is consistent with
Market-Maker’s entry of new quotes at
the beginning of each trading day.12
Unlike current Cboe Options quoting
functionality, bulk order ports on the
Exchange are available to all Users, not
just Market-Makers. The Exchange
makes bulk order ports available to all
Users to encourage them to provide
liquidity to the Exchange’s market.
The Exchange proposes to replace
bulk order functionality with bulk
message functionality substantially
similar to the quoting functionality
available on Cboe Options. The
proposed bulk message functionality is
similar to but more efficient than
currently available bulk order
functionality.13 A ‘‘bulk port’’ is a
dedicated logical port that, as proposed,
would provide Users with the ability to
submit:
(1) Bulk messages,14 subject to the
following:
(a) A bulk message has a Time-inForce of Day;
(b) a Market-Maker with an
appointment in a series may designate
a bulk message for that series as Post
Only or Book Only (which Post Only or
Book Only designation, as applicable,
applies to all bulk message bids and
offers within a single message),15 and
other Users must designate a bulk
message for that series as Post Only; and
(c) a User may establish a default
Match Trade Prevention (‘‘MTP’’)
Modifier of MTP Cancel Newest
(‘‘MCN’’), MTP Cancel Oldest (‘‘MCO’’),
or MTP Cancel Both (‘‘MCB’’), and a
default value of Attributable or NonAttributable, for a bulk port, each of
which applies to all bulk messages
submitted to the Exchange through that
bulk port;
(2) single orders in the same manner
as Users may submit orders to the
Exchange through any type of port,16
including designated with any Order
Type and any Time-in-Force in Rule
21.1(d) and (f), respectively, except a
Market-Maker with an appointment in a
series may designate an order for that
series submitted through a bulk port
only as Post Only or Book Only, and
other Users must designate an order for
that series submitted through a bulk
port as Post Only; and
(3) auction responses.17
Proposed Rule 21.1(j)(3)(A)(i) states
that bulk messages have a Time-in-Force
of Day. As discussed above, this is
consistent with current Cboe Options
quoting functionality, which cancels all
resting quotes at the close of the trading
7 See Rule 21.1(d)(8) for the definition of ‘‘Post
Only Orders.’’
8 See Rule 21.1(f)(3) for the definition of the
‘‘Day’’ Time-in-Force.
9 See Rule 21.1(f)(1) for the definition of the GTD
Time-in-Force.
10 See current Rule 21.1(j)(3) for the current
definition of ‘‘bulk order ports.’’ Pursuant to Rule
21.1(j)(3)(C), Users may also submit auction
responses through bulk order ports, and will
continue to be able to submit auction responses
through bulk ports.
11 See Rule 21.1(d)(8), which provides that an
order with a Post Only instruction may not route
away to another exchange.
12 See supra note 8.
13 See supra note 4 (the Exchange adopted bulk
order functionality to simulate quoting
functionality).
14 Proposed Rule 16.1(a)(4) defines a bulk
message as a bid or offer included in a single
electronic message a User submits to the Exchange
in which the User may enter, modify, or cancel up
to an Exchange-specified number of bids and offers
(which number the Exchange will announce via
Exchange notice or publicly available technical
specifications). This is similar to Cboe Options Rule
1.1(ppp), which provides that electronic quotes may
be updated in block quantities. The limit on bids
and offers per message is a reasonable measure for
the Exchange to use to manage message traffic and
activity to protect the integrity of the System.
Proposed Rule 16.1(a)(4) also states that a User may
submit a bulk message through a bulk port as set
forth in proposed Rule 21.1(j)(3), and that the
System handles a bulk messages in the same
manner as it handles an order or quote, unless the
Rules specify otherwise. In other words, a bulk
message will be treated as an order (or quote if
submitted by a Market-Maker) pursuant to the
Rules, including with respect to priority and
allocation. The proposed rule change identifies the
rule provisions pursuant to which bulk messages
will be handled in a different manner. The
proposed rule change also amends the paragraph
numbering in Rule 16.1(a) to account for the
addition of bulk messages in subparagraph (a)(4).
15 In other words, a Market-Maker cannot
designate one bulk message bid within a single
message as Post Only and designate another bulk
message bid within the same message as Book Only.
16 The proposed rule change also specifies that,
subject to the restrictions in the proposed rule,
Users may submit single orders through bulk ports
in the same manner as they may submit single
orders through any other type port, which is
consistent with how Users may submit single orders
to the Exchange through bulk order ports today.
17 See proposed Rule 21.1(j)(3)(C). The proposed
rule change has no impact on the ability of Users
to submit auction responses through bulk ports, and
clarifies that Users may submit auction responses
through bulk ports in the same manner as they may
submit auction responses through any other type of
port.
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day. This is also consistent with a
Market-Maker’s obligation to update its
quotations in response to changed
market conditions in its appointed
classes.18 Unlike current bulk orders,
the GTD Time-in-Force with an
expiration time on that trading day will
not be available for bulk messages.
Users will continue to have the ability
to manually cancel bulk messages at any
time during the trading day, they will
just not be able to have bulk messages
automatically cancel at a specific time
on that trading day. Additionally, Users
may apply the GTD Order Type to
orders submitted through a bulk port (as
further discussed below) or other type of
port.
Unlike Cboe Options quoting
functionality, which is only available to
Cboe Options market-makers, the
proposed bulk messages will be
available to all Users (as bulk orders are
today). While all Users will be able to
use bulk messages (and may currently
use bulk orders), the primary purpose of
bulk orders and the proposed bulk
messages has always been to encourage
market-maker quoting on exchanges.19
The proposed rule change provides that
a Market-Maker with an appointment in
a series may designate a bulk message
for that series as ‘‘Post Only’’ or ‘‘Book
Only.’’ This will provide Exchange
Market-Makers with functionality
substantially similar to Cboe Options
quoting functionality currently available
to Cboe Options market-makers, which
permits Market-Makers’ incoming
quotes to execute against resting orders
and quotes, except against the resting
quote of another Market-Maker (see
discussion below).20 The Exchange
believes permitting Market-Makers to
use bulk messages to remove liquidity
from the Book (if they so elect) will put
Exchange Market-Makers on an even
playing field as market-makers on other
exchanges that offer quoting
functionality. Additionally, MarketMakers are subject to various
obligations, including obligations to
provide two-sided quotes, to provide
continuous quotes, and to trade at least
75% of its contracts each quarter in
appointed classes. The Exchange
believes providing Market-Makers with
flexibility to use the Post Only or Book
Only instruction with respect to bulk
messages will provide Market-Makers
with additional tools to meet their
18 See
Rule 22.5(a)(5).
supra notes 8 and 15.
20 Incoming market-maker quotes on some
options exchanges may execute against interest
resting in the book (see, e.g., Arca Rule 6.37A–
O(a)(3)), while on other options exchanges they may
not (see, e.g., Box Options Exchange, LLC (‘‘BOX’’)
Rule 8050, IM–8050–3).
19 See
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obligations in a manner they deem
appropriate. The Exchange further
believes this may encourage liquidity
providers to register as Market-Makers.
The proposed rule change provides
that other Users (i.e., non-MarketMakers or Market-Makers without an
appointment in a series) must designate
a bulk message for that series as ‘‘Post
Only.’’ This is consistent with current
bulk orders available to these Users, and
will continue to provide Users with
flexibility to avoid incurring a take fee
if their intent is to add liquidity to the
Book. The Exchange notes these Users
may apply the Book Only instruction to
orders submitted to the Exchange
through other ports. The proposed rule
change also amends Rule 21.9 to make
clear that bulk messages (like current
bulk orders) are not eligible for routing
(which is consistent with the Order
Types of Post Only and Book Only,
which do not route to other options
markets).21
The proposed rule change also
permits Users to establish a default MTP
Modifier of MCN, MCO, or MCB that
would apply to all bulk messages
submitted through a bulk port. Cboe
Options currently offers a Market-Maker
Trade Prevention Order, which would
be cancelled if it would trade against a
resting quote or order for the same
Market-Maker, and also cancel the
resting order or quote.22 This is
equivalent to the MCB Modifier (except
the MCB Modifier may be used by all
Users rather than just Market-Makers).
The proposed rule change provides
Users with the ability to apply same
trade prevention designation that is
available for quotes on Cboe Options to
bulk messages (MCB), as well as two
additional MTP options (MCN and
MCO) (the Exchange notes there is
currently no trade prevention
functionality equivalent to MCN or
MCO available on Cboe Options for
quotes). Allowing three MTP
designations for bulk messages will
provide Users with additional control
over the circumstances in which their
bulk messages (and resting orders
(including bulk messages)) will interact
with each other. The Exchange does not
believe there is demand by Users for the
MDC and MCS modifies (which are
available on the Exchange for orders) for
bulk messages (the Exchange notes there
is currently no trade prevention
functionality equivalent to MDC or MCS
available on Cboe Options for quotes).
The Exchange notes all Users may
continue to apply all MTP Modifiers to
21 See also Cboe Options Rule 6.14B; and Arca
Rule 6.37A–O(a)(3)(D).
22 See Cboe Options Rule 6.53(v).
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67787
orders submitted through a bulk port (as
further discussed below) or any other
type of port.
Generally, the System will handle
bulk messages in the same manner as it
handles orders with the same Order
Types and Times-in-Force that will be
available for bulk messages, including
prioritizing, displaying, and executing
them pursuant to Rule 21.8. Proposed
Rule 21.1(j)(3)(A)(iv) through (vi) adds
detail regarding how the System will
handle bulk messages and orders
submitted through bulk ports.
Specifically, proposed subparagraph
(A)(iv) states the System will cancel or
reject a Post Only bulk message bid
(offer) with a price that locks or crosses
the Exchange best offer (bid) or the ABO
(ABB).23 This is consistent with how the
System would handle a Post Only order
not subject to the Price Adjust process.24
Pursuant to the Post Only instruction,
an order (or bulk message as proposed)
may not remove liquidity from the Book
or route away to another Exchange. If a
Post Only bulk message locked or
crossed the best contra-side interest on
the Exchange, the System would cancel
it to prevent execution of the bulk
message against the interest on the
Exchange in accordance with the User’s
instructions and to prevent the
Exchange from displaying a locked or
crossed market.25 Similarly, if a Post
Only bulk message locked or crossed an
away market, the System would cancel
it since it cannot route in accordance
with the User’s instructions and to
prevent the Exchange’s dissemination of
a locked or crossed market.26
Similarly, proposed subparagraph
(A)(v) states the System will execute a
Book Only bulk message bid (offer) that
locks or crosses the ABO (ABB) against
offers (bids) resting in the Book at prices
the same as or better than the ABO
23 The ABBO means the best bid (offer)
disseminated by other exchanges.
24 See Rule 21.1(i). Pursuant to the Price Adjust
process, the System ranks and displays a buy (sell)
order that, at the time of entry, would lock a
Protected Quotation of the Exchange or another
Exchange at one minimum price increment below
(above) the current NBO (NBB). The System
executes a Book Only order against orders and
quotes and cancels any unexecuted portion if
displaying the order on the Book would create a
violation of Rule 27.3, and the System rejects a Post
Only order that locks or crosses the opposite side
Exchange best bid or offer (‘‘BBO’’) or if displaying
the order on the Book would create a violation of
Rule 27.3). Bulk messages will not be eligible for
the Price Adjust process, and thus will be handled
similar to an order not subject to the Price Adjust
process. See proposed Rule 21.1(i) (which clarifies
that the Price Adjust Process will not apply to bulk
messages).
25 See Chapter XXVII of the Rules; see also
Options Order Protection and Locked/Crossed
Market Plan (the ‘‘Linkage Plan’’).
26 See id.
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(ABB) and then cancels the unexecuted
portion. This is consistent with how the
System would handle a Book Only order
not subject to the Price Adjust process.
Pursuant to the Book Only instruction,
an order (or bulk message as proposed)
may not route away to another
Exchange. If a Book Only bulk message
locked or crossed an away market, the
System would execute it to the extent it
could against contra-side interest on the
Exchange and then cancel it since it
cannot route in accordance with the
User’s instructions and to prevent the
Exchange’s dissemination of a locked or
crossed market.27 In addition to being
similar to current Exchange Rules
regarding the handling of Post Only and
Book Only Orders not subject to the
Price Adjust process, the Exchange
notes that proposed subparagraphs
(A)(iv) and (v) are substantially the same
as another exchange’s handling rules
applicable to quotes.28
Proposed subparagraph (A)(vi) states
the System will cancel or reject a Book
Only bulk message bid (offer) (or
unexecuted portion) submitted by a
Market-Maker with an appointment in
the series through a bulk port if it would
execute against a resting offer (bid) with
a Capacity of M (Market-Maker). The
options market is driven by MarketMaker quotes, and thus Market-Maker
quotes are critical to provide liquidity to
the market and contribute to price
discovery for investors. The Exchange
expects Market-Makers regularly to use
bulk messages to input and update
prices on multiple series of options at
the same time. Market-Maker quotes are
generally based on pricing models that
rely on various factors, including the
price of the underlying security and that
security’s volatility. As these variables
change, a Market-Maker’s pricing model
automatically will enter updates to its
bids and offers with bulk messages for
some or all of an option’s series.
Because Market-Makers may update
bids and offers using bulk messages in
multiple series at the same time, there
can be a multitude of instances in which
their bids and offers inadvertently
interact with each other, which can lead
to significant risk and exposure. This
27 See
id.
Cboe Options Rule 6.14(b) (if Cboe Options
is not at the NBBO, the System rejects a quote back
to a Market-Maker if the quote locks or crosses the
NBBO, which is the ABBO) and (c) (if the Cboe
Options System accepts a quote that locks or
crosses the NBBO, it executes the quote against
quotes and orders in the Cboe Options Book at the
price(s) that is the same or better than the best price
disseminated by an away exchange(s) up to the size
available on the Exchange and cancels the
remaining size if the quote’s price locks or crosses
the ABBO or books any remaining size); see also
Rule 6.37A–O(a)(3).
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may occur, for example, when one
Market-Maker’s price update system is
faster than systems used by other
Market-Makers. In this respect, a
Market-Maker’s system that updates
options prices microseconds faster than
another Market-Maker’s system may
lock or cross its bids (offers) against the
other Market-Maker’s offers (bids) every
time its bid (offer) adjusts to the offer
(bid) of the second Market-Maker even
if the second Market-Maker’s system
was also in the process of updating that
offer (bid). For example, assume MarketMakers A and B are both quoting $1.10–
1.20 when the underlying moves,
causing both each Market-Maker’s
system to update its quotes to $1.20–
1.30. By being microseconds faster,
Market-Maker A’s system will send a
bid of $1.20, which locks Market-Maker
B’s offer prior to Market-Maker B’s offer
updating, even though its system was
also in the process of updating its offer.
This could happen contemporaneously
in a large number of series within the
class, such that instead of locking one
quote, Market-Maker A may lock 20 of
Market-Maker B’s quotes. This may
expose each Market-Maker to significant
risk due to these unintended executions.
The proposed rule change will protect
Market-Makers from executions that
occur due to technology disparities
rather than the intention of MarketMakers to trade with one another at a
particular price. As a result, MarketMaker quotes will continue to provide
liquidity on the Book. This proposed
functionality is similar to the quote-lock
functionality available on Cboe
Options.29 While that functionality
permits locked quotes to execute against
each other after a specified amount of
time, it also provides market-makers
with an opportunity to update their
resting quotes, which would prevent
execution of an incoming market-maker
quote against a resting market-maker
quote. As proposed, a Market-Maker
bulk message (or order) will be rejected
if it would execute against resting
Market-Maker interest. The MarketMaker may resubmit its bulk message
(or order) after being rejected, which
would be able to rest in the Book if the
Market-Maker repriced its resting bid or
offer in the interim. Additionally, a
Market-Maker may interact with resting
Market-Maker interest by submitting an
order to the Exchange through a
different type of port.
Proposed Rule 21.6(a) provides that a
User may only enter one bid and one
offer for a series per Executing Firm ID
(‘‘EFID’’) per bulk port. The Exchange
believes this will encourage Users to
29 See
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submit their best bids and offers in
series, and thus provide displayed
liquidity to the market and contribute to
public price discovery. Note firms may
have multiple EFIDs and multiple bulk
ports, and thus will have the ability
through separate ports or EFIDs to
submit additional bids and offers using
bulk messages in the same series if they
choose. This provision is consistent
with the rule interpretation of another
exchange.30
In addition to permitting Users to
submit bulk orders (which functionality
the Exchange will discontinue and
replace with bulk message
functionality), current bulk order ports
permit Users to submit single orders to
the Exchange. To encourage Users that
may not have quoting systems to
provide liquidity to the Exchange, the
proposed rule change will permit Users
to continue to submit single orders to
the Exchange through these ports,
which are proposed to be renamed as
bulk ports. Proposed Rule 21.1(j)(3)(B)(i)
will permit Users to designate these
orders with any Order Type and any
Time-in-Force in Rule 21.1(d) and (f),
respectively, subject to the Book Only
and Post Only restrictions described
below. This will provide Users with
additional functionality that is available
for single orders submitted through bulk
ports today, and allow their liquidity to
rest on the Exchange for multiple
trading days, if Users so choose. This
will also provide Users with additional
control over the orders they use to
provide liquidity to the Exchange
through bulk ports. Proposed
subparagraph (B)(i) imposes the same
restrictions on the use of Book Only and
Post Only for orders submitted through
a bulk port that apply to bulk messages,
as described above. Additionally,
proposed subparagraph (B)(ii) imposes
the same prohibition on Market-Maker
orders submitted through bulk ports
from removing resting Market-Maker
30 See Cboe Options Regulatory Circular RG18–
008 (March 6, 2018), which provides that each
market-maker acronym may only have one quote
(which is considered to be a two-sided quote) in
each series at a time. An EFID is comparable to an
acronym. Under Cboe Options rules, the term
Market-Maker generally refers to an individual (and
thus a person with a specific acronym), except as
otherwise provided in the Rules. See, e.g., Cboe
Options Rule 8.7(d)(ii)(B) (which provides that
market-maker continuous electronic quoting
obligations may be satisfied by market-makers
either individually or collectively with marketmakers of the same TPH organization). The
interpretation in the circular referenced above is
consistent with this term and a Market-Maker’s
obligations set forth in Rule 8.7 (e.g., market-Makers
must contribute to the maintenance of a fair and
orderly market, including by competing to improve
markets, update quotes in response to changed
market conditions, and price options contracts
fairly).
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interest that applies to bulk messages, as
described above. The Exchange believes
it is appropriate for orders submitted
through bulk ports be subject to the
same restrictions on adding and
removing liquidity as bulk messages
submitted through bulk ports, so that
orders submitted through bulk ports do
not have an advantage over bulk
messages, and vice versa.
While liquidity providers are most
commonly registered market-makers,
other professional traders also provide
liquidity to the options market, which
contributes to price discovery. As a
result, unlike other exchanges that
restrict quoting functionality to marketmakers, the Exchange believes it is
appropriate to make bulk messages
available to all Users to encourage them
to provide liquidity, which is critical to
the Exchange’s market. Additionally,
permitting orders to be submitted
through bulk ports will continue to
provide all liquidity providers with this
functionality that is available today, as
well as additional flexibility with
respect to this functionality they may
use to provide liquidity to the Exchange.
The proposed rule change adds a
price protection mechanism for bulk
messages similar to the fat finger check
the Exchange currently provides for
orders. Proposed Rule 21.17(f) states the
System cancels or rejects any bulk
message bid (offer) above (below) the
NBO (NBB) by more than a specified
amount determined by the Exchange.
This is similar to the fat finger check
currently applicable to limit orders.31
Bulk messages that cross the NBBO by
more than a specified amount are
rejected as presumptively erroneous.
This proposed check will not apply to
bulk messages submitted prior to the
conclusion of the Opening Process or
when no NBBO is available. The
Exchange believes it is appropriate to
have the ability to not apply this check
during the pre-open or opening rotation
so that the check does not impact the
determination of the opening price. The
Exchange also believes it is appropriate
to not apply this check when there is no
NBBO, as the Exchange believes that is
the most reliable measure against which
to compare the price of the bulk
message to determine its reasonability.
The proposed change is similar to a
31 See Rule 21.17(b). Orders submitted through
bulk ports will be subject to the current order price
protection mechanisms, such as limit fat finger
check in Rule 21.17. The proposed rule change
amends Rule 21.17(a) through (e) (and the
introductory language to that rule) to make clear
that the price protections and risk controls in those
paragraphs will not be applicable to bulk messages.
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quote price protection mechanism
available at other options exchanges.32
Proposed Rule 21.17(g) states if,
pursuant to the Rules, the System
cancels or rejects a bulk message bid
(offer) to update a resting bulk message
bid (offer) submitted for the same EFID
and bulk port, the System also cancels
the resting bulk message bid (offer). The
Exchange currently offers Users similar
functionality for orders, which is
optional.33 Pursuant to the proposed
rule change, the System will always
apply this protection to bulk messages.
The Exchange believes this will operate
as an additional safeguard that causes
liquidity providers to re-evaluate their
bids and offers in a series before
attempting to update them again.
Additionally, when a User submits a
new bulk message, it is implicitly
instructing the Exchange to cancel any
resting bulk message in the same series.
Thus, even if the new bulk message is
rejected as a result of this proposed
check, the implicit instruction to cancel
the resting bulk message remains valid
nonetheless. The proposed rule change
is substantially similar to a risk control
applicable to quotes available at another
options exchange.34
The proposed rule change amends
Rule 21.1(d), (f), and (g) to provide that
eligible Order Types, Times in Force,
and MTP Modifiers, respectively, are
subject to the proposed restrictions in
Rule 21.1(j) with respect to orders and
bulk messages submitted through bulk
ports, and clarify which Order Types,
Times in Force, and MTP Modifiers are
available and not available for bulk
messages, as described above. The
proposed rule change also amends the
definitions of Orders, Order Types,
Time in Force, and MTP Modifiers in
Rule 21.1(c), (d), (f), and (g),
respectively, in accordance with
proposed Rule 21.1(j)(3)(A).
Additionally, the proposed rule
change amends Rule 21.20 to make clear
that Users may not submit complex
orders through bulk ports.35 The
proposed rule change also amends Rules
21.18 and 21.19 to clarify that bulk
messages are not eligible for the Step Up
Mechanism for Bats Auction
Mechanism, respectively. Quotes are not
32 See, e.g., Cboe Options Rule 6.14(a) and (b);
Arca Rule 6.37A–O(a)(3).
33 See ‘‘cancel on reject’’ functionality in
technical specifications available at https://
markets.cboe.com/us/options/support/technical/.
34 See, e.g., Cboe Options Rule 6.14(b); Arca Rule
6.37A–O(a)(3)(C).
35 The Exchange notes that Market-Makers are not
required to quote on the COB, and that complex
quoting functionality is not currently available on
Cboe Options.
PO 00000
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67789
eligible for submission in corresponding
auction mechanisms on Cboe Options.36
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.37 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 38 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) 39 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the proposed rule
change will remove impediments to and
perfect the mechanism of a free and
open market because it provides Users,
including Market-Makers and other
liquidity providers, with enhanced
functionality to allow them to provide
liquidity to the market and update bids
and offers in response to changed
market conditions. While current bulk
orders simulate quotes, Users must
submit multiple messages in bulk to
update bids and offers in multiple
series. The proposed bulk messages will
permit Users to update multiple bids
and offers in block quantities in a single
message, which will permit them to
update bids and offers (for example, in
response to changing market conditions)
in a more efficient manner. The
proposed ability to update bids and
offers in block quantities is similar to
that available on another options
exchange.40
With respect to all Users, the
proposed bulk messages are
36 See Cboe Options Rules 6.14A (describing the
Hybrid Agency Liaison, which is similar to the Step
Up Mechanism) and 6.74A (describing the
Automated Improvement Mechanism, which is
similar to the Bats Auction Mechanism).
37 15 U.S.C. 78f(b).
38 15 U.S.C. 78f(b)(5).
39 Id.
40 See Cboe Options Rule 1.1(ppp), which
provides that electronic quotes may be updated in
block quantities.
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substantially similar to the current bulk
orders available through bulk order
ports—Users will be able to submit bulk
messages that are Day and Post Only.
However, the proposed rule change will
permit them to do so in a single bulk
message rather than in multiple
messages. While the use of the GTD
Time-in-Force will not be permitted for
bulk messages as it currently is for bulk
orders, Users may achieve the same
result as GTD for their bulk messages by
manually cancelling a bulk message at
a specified time during the trading
day—the proposed rule change merely
does not provide a means for automatic
cancellation of bulk messages at a
specific time during the trading day.
Additionally, Users may continue to
apply GTD to orders submitted to the
Exchange through bulk ports and other
ports.
The Exchange believes the proposed
rule change will permit liquidity
providers to more efficiently update
their resting bids and offers, which may
help them manage their risk exposure
when, for example, updating their bids
and offers in response to changing
market conditions. The Exchange
believes this will continue to encourage
all Users to provide liquidity on the
Exchange and avoid incurring a taker
fee if their intent is to submit bids and
offers to add liquidity to the Book. As
a result, this may increase liquidity,
resulting in more trading opportunities
and tighter spreads, which benefits all
investors. The Exchange notes the
proposed rule change provides Users
with additional flexibility by permitting
certain MTP Modifiers to be applied to
bulk messages to prevent their orders
and bulk messages from trading against
each other. The MTP Modifiers not
available for bulk messages will
continue to be available for Users on
orders submitted through bulk ports and
other ports. Unlike other options
exchanges that limit the use of quoting
functionality to market-makers, the
proposed rule change will permit all
Users to submit bulk messages.
Additionally, the proposed rule change
to permit Users to continue to submit
orders (subject to restrictions on the
Post Only and Book Only instructions,
as discussed above) through bulk ports
will encourage Users that may not have
quoting systems to provide liquidity to
the Exchange by submitting single
orders through bulk ports. This is also
consistent with current bulk orders,
which permits Users to submit both
single and bulk orders through bulk
order ports.
The proposed rule change further
removes impediments to and perfects
the mechanism of a free and open
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market and a national market system by
providing appointed Market-Makers
with the ability to submit Book Only
bulk messages, because it will align
functionality available to appointed
Market-Makers on the Exchange with
the quoting functionality available to
market-makers on other options
exchanges, including Cboe Options,
which permit quotes to both add and
remove liquidity.41 Market-Makers are
critical to providing liquidity and price
discovery on the Exchange, and are
subject to various obligations, as
discussed above. The Exchange notes all
other Users may continue to use the
Book Only instruction (or other
instructions that permit execution
against resting orders on the Book) on
orders submitted through other ports, as
they may do today. The Exchange
believes providing Market-Makers with
flexibility to use the Post Only or Book
Only instruction with respect to bulk
messages will provide them with
additional tools to meet their obligations
in a manner they deem appropriate and
is reasonable given the critical role
Market-Makers plan in the options
market. The Exchange believes this may
also encourage liquidity providers to
register as Market-Makers.
The proposed rule change provides
Market-Makers with a combination of
functionality available to market-makers
on other exchanges, as some exchanges
permit market-makers to remove
liquidity and others only permit marketmakers to post liquidity using quotes.42
As a result, the Exchange believes the
proposed rule change will provide
Market-Makers with greater control over
their interactions with contra-side
liquidity and would increase
opportunities for such interaction. The
Exchange believes this will provide
Market-Makers with a greater level of
determinism, in terms of managing their
exposure, which may encourage them to
be more aggressive when providing
liquidity. The Exchange believes this
may result in more trading
opportunities and tighter spreads,
which contributes to price discovery.
Ultimately, this may improve overall
market quality and enhance competition
on the Exchange, which benefits all
investors.
Similarly, the proposed rule change to
prevent Market-Maker bulk messages
from removing Market-Maker orders or
bulk messages resting on the Book
removes impediments to and perfects
41 Other options exchanges only permit marketmakers to submit quotes. See, e.g., Cboe Options
Rules 1.1(ppp) and 8.3(c); Arca Rule 6.37A–O(a)(1).
42 See id. and Box Options Exchange, LLC
(‘‘BOX’’) Rule 8050, IM–8050–3.
PO 00000
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the mechanism of a national market
system by eliminating trades that may
be unintended (potentially the result of
technological disparities between
Market-Makers) and thus not beneficial
to customers, and that may impede
certain liquidity providers’ ability to
competitively price their bids and
offers. The Exchange believes the
proposed rule change will increase
availability of liquidity in the market
and will enhance competition, because
Market-Makers will be better able to
quote aggressively with fewer concerns
over technological disparities in their
quoting systems, which ultimately
benefits all investors. The Exchange
notes this proposed rule change is
similar to functionality available on
another options exchange.43
The proposed handling of bulk
messages to prevent the display of a
locked or crossed market will perfect
the mechanism of a free and open
market and national market system, as
it is consistent with the Linkage Plan
and the Exchange’s handling of orders
with similar instructions. This proposed
handling of bulk messages is also
consistent with handling of quotes on
other options exchanges.44 The
proposed risk controls and price
protection mechanisms that will apply
to bulk messages promote just and
equitable principles of trade and will
protect investors by mitigating potential
risks associated with Users submitting
bulk messages at clearly unintended
prices and trading at extreme and
potentially erroneous prices.
Additionally, the proposed rule change
to cancel a User’s resting bulk message
when the System rejects a bulk message
intended to update that resting bulk
message provides Users with an
additional safeguard that causes Users
to reevaluate their bids and offers in the
series before attempting to update them
again. Additionally, when a User
submits a new bulk message, it is
implicitly instructing the Exchange to
cancel any resting bulk message. Thus,
even if the new bulk message is rejected,
the Market-Maker’s implicit instruction
to cancel the resting bulk message
remains valid nonetheless.
The options markets are quote driven
markets and thus dependent on
liquidity providers, which are most
commonly registered market-makers but
also other professional traders, for
liquidity and price discovery. The
Exchange believes the proposed
enhanced functionality, including the
additional flexibility for Market-Makers
43 See
Cboe Options Rule 6.45(c).
Cboe Options Rule 6.14(b) and (c); see also
Rule 6.37A–O(a)(3).
44 See
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to manage their risk exposure and
provide additional control over
interactions with contra-side liquidity,
for these liquidity providers to more
efficiently enter and update bids and
offers. This may encourage the
provision of more aggressive liquidity,
which may result in more trading
opportunities and tighter spreads,
which contributes to price discovery.
This may improve overall market
quality and enhance competition on the
Exchange, which benefits all investors.
The proposed rule change is generally
intended to align system functionality
currently offered by the Exchange with
Cboe Options functionality in order to
provide a consistent technology offering
for the Cboe Affiliated Exchanges. A
consistent technology offering, in turn,
will simplify the technology
implementation, changes, and
maintenance by Users of the Exchange
that are also participants on Cboe
Affiliated Exchanges. The proposed rule
change would also provide Users with
access to functionality that is generally
available on markets other than the
Cboe Affiliated Exchanges, which may
result in the efficient execution of
quotes and orders and provide Users
with additional flexibility and increased
functionality on the Exchange’s System.
When Cboe Options migrates to the
same technology as that of the Exchange
and other Cboe Affiliated Exchanges,
Users of the Exchange and other Cboe
Affiliated Exchanges will have access to
similar functionality on all Cboe
Affiliated Exchanges. As such, the
proposed rule change would foster
cooperation and coordination with
persons engaged in facilitating
transactions in securities and would
remove impediments to and perfect the
mechanism of a free and open market
and a national market system.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange does not believe the proposed
rule change will impose any burden on
intramarket competition that is not
necessary or appropriate in furtherance
of the purposes of the Act, as the
proposed bulk messages, like the
current bulk orders, are optional for all
Users. While only Market-Makers may
submit Book Only bulk messages, the
Exchange believes this is appropriate
given the various obligations MarketMakers must satisfy under the Rules and
the unique and critical role MarketMakers play in the options market, as
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discussed above. The Exchange believes
providing Market-Makers with
flexibility to use the Post Only or Book
Only instruction with respect to bulk
messages will provide Market-Makers
with additional tools to meet their
obligations in a manner they deem
appropriate. The Exchange believes the
proposed functionality for MarketMakers adds value to market-making on
the Exchange and provides them with
greater control over how their quotes
interact with contra-side liquidity both
on the Exchange. The Exchange notes
all other Users may continue to use the
Book Only instruction on orders
submitted to the Exchange through
other types of ports. The Post Only
instruction for bulk messages will be
available to all Users, and is
substantially similar to the bulk orders
currently available to all Users.
Additionally, all Users may submit
single orders with all other Times-inForce and Order Types (subject to the
same Post Only and Book Only
restrictions applicable to bulk messages)
not available for bulk messages through
bulk ports, which may encourage Users
that may not have quoting systems to
provide liquidity to the Exchange.
The proposed rule change to prevent
Market-Maker bulk message executions
against other resting Market-Maker
interest is intended to protect MarketMakers from executions due to
technology disparities rather than the
intention of Market-Makers to trade
with one another at that price. The
Exchange believes this functionality and
protection for Market-Makers may
encourage Market-Makers to quote
tighter and deeper markets, which will
increase liquidity and enhance
competition. The proposed price
protection mechanisms and risk
controls applicable to bulk messages
will apply in the same manner to all
bulk messages submitted by market
participants. The Exchange believes this
protection for bulk messages provides
liquidity providers with additional
protection from anomalous or erroneous
executions. Generally, once bulk
messages are resting on the Book, the
System will handle them no differently
than resting orders—this includes how
the System prioritizes orders and quotes
when executing them against incoming
orders or quotes. Bulk messages that are
available to all Users will work in the
same manner for all Users, and the
additional bulk message functionality
available to appointed Market-Makers
will work in the same manner for all
such Market-Makers. The Exchange
believes it is reasonable to provide
additional functionality to Market-
PO 00000
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67791
Makers given their unique and critical
role in the options market and the
various obligations that Market-Makers
must satisfy.
The Exchange does not believe the
propose rule change will impose any
burden on intermarket competition that
is not necessary or appropriate in
furtherance of the purposes of the Act,
because it will provide Market-Makers
with bulk message functionality that is
similar to that quoting available to
market-makers on other options
exchanges. The Exchange believes the
proposed functionality will permit the
Exchange to operate on an even playing
field relative to other exchanges that
have similar functionality. As discussed
above, the options markets are quote
driven markets and thus dependent on
liquidity providers, which are most
commonly registered market-makers but
also other professional traders, for
liquidity and price discovery. The
Exchange believes the proposed
enhanced functionality, including the
additional flexibility for Market-Makers
to manage their risk exposure and
provide additional control over
interactions with contra-side liquidity,
for these liquidity providers to more
efficiently enter and update bids and
offers. This may encourage the
provision of more aggressive liquidity,
which may result in more trading
opportunities and tighter spreads,
which contributes to price discovery.
This may improve overall market
quality and enhance competition on the
Exchange, which benefits all investors.
The Exchange reiterates that the
proposed rule change is being proposed
in the context of the technology
integration of the Cboe Affiliated
Exchanges. Thus, the Exchange believes
this proposed rule change permits fair
competition among national securities
exchanges. In addition, the Exchange
believes the proposed rule change will
benefit Exchange participants in that it
will provide a consistent technology
offering for Users by the Cboe Affiliated
Exchanges.
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: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
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burden on competition; and (iii) become
operative for 30 days after the date of
the filing, or such shorter time as the
Commission may designate, it has
become effective pursuant to 19(b)(3)(A)
of the Act 45 and Rule 19b–4(f)(6) 46
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 shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CboeEDGX–2018–060 on the subject
line.
Paper Comments
khammond on DSK30JT082PROD with NOTICES
• 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–CboeEDGX–2018–060. 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
45 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
46 17
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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–CboeEDGX–2018–060 and
should be submitted on or before
January 22, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.47
Brent J. Fields,
Secretary.
[FR Doc. 2018–28395 Filed 12–28–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84934; File No. SR–GEMX–
2018–43]
Self-Regulatory Organizations; Nasdaq
GEMX, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend General 8
December 21, 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 December
19, 2018, Nasdaq GEMX, LLC (‘‘GEMX’’
or ‘‘Exchange’’) 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
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to delete the
Exchange’s existing rules on colocation,
47 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
PO 00000
Frm 00081
Fmt 4703
Sfmt 4703
connectivity, and direct connectivity
(the ‘‘Existing Connectivity Rules’’),
under General 8, and incorporate by
reference into General 8 The Nasdaq
Stock Market LLC’s (‘‘Nasdaq’s’’) rules
on colocation, connectivity, and direct
connectivity, which are located in
General 8 of the Nasdaq rulebook shell
structure.3
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaqgemx.cchwallstreet.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
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 delete its
Existing Connectivity Rules, currently
under General 8, and incorporate by
reference the corresponding Nasdaq
rules, at General 8 of Nasdaq’s rulebook.
The Exchange proposes to remove the
current rule text from General 8 and
replace it with the following text:
General 8 Connectivity
The rules contained in The Nasdaq Stock
Market LLC General 8, as such rules may be
in effect from time to time (the ‘‘General 8
Rules’’), are hereby incorporated by reference
into this Nasdaq GEMX General 8, and are
thus Nasdaq GEMX Rules and thereby
applicable to Nasdaq GEMX Members.
Nasdaq GEMX Members shall comply with
the General 8 Rules as though such rules
were fully set forth herein. All defined terms,
including any variations thereof, contained
in the General 8 Rules shall be read to refer
to the Nasdaq GEMX related meaning of such
term. Solely by way of example, and not in
limitation or in exhaustion: the defined term
3 Recently, the six exchanges affiliated with
Nasdaq, Inc. (The Nasdaq Stock Market LLC,
Nasdaq BX, Inc., Nasdaq PHLX LLC, Nasdaq ISE,
LLC, Nasdaq GEMX, LLC, and Nasdaq MRX, LLC
(collectively, the ‘‘Affiliated Exchanges’’)) added
shell structures to their respective rulebooks with
the purpose of improving efficiency and readability
and to align their respective rules.
E:\FR\FM\31DEN1.SGM
31DEN1
]]>Agencies
[Federal Register Volume 83, Number 249 (Monday, December 31, 2018)]
[Notices]
[Pages 67785-67792]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-28395]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84929; File No. SR-CboeEDGX-2018-060]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change
Relating To Discontinue Bulk Order Functionality and Implement Bulk
Message Functionality, and Make Other Nonsubstantive Changes
December 21, 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 December 13, 2018, Cboe EDGX Exchange, Inc. (the ``Exchange'' or
``EDGX'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The 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
In 2016, the Exchange's parent company, Cboe Global Markets, Inc.
(``Cboe Global''), which is the parent
[[Page 67786]]
company of Cboe Exchange, Inc. (``Cboe Options'') and Cboe C2 Exchange,
Inc. (``C2''), acquired the Exchange, Cboe EDGA Exchange, Inc.
(``EDGA''), Cboe BZX Exchange, Inc. (``BZX or BZX Options''), and Cboe
BYX Exchange, Inc. (``BYX'' and, together with C2, Cboe Options, the
Exchange, EDGA, and BZX, the ``Cboe Affiliated Exchanges''). The Cboe
Affiliated Exchanges are working to align certain system functionality,
retaining only intended differences between the Cboe Affiliated
Exchanges, in the context of a technology migration. Cboe Options
intends to migrate its technology to the same trading platform used by
the Exchange, C2, and BZX Options in the fourth quarter of 2019. The
proposal set forth below is intended to add certain functionality to
the Exchange's System that is more similar to functionality offered by
Cboe Options in order to ultimately provide a consistent technology
offering for market participants who interact with the Cboe Affiliated
Exchanges. Although the Exchange intentionally offers certain features
that differ from those offered by its affiliates and will continue to
do so, the Exchange believes that offering similar functionality to the
extent practicable will reduce potential confusion for Users.
Cboe Options currently offers quoting functionality to Market-
Makers, which permits Market-Makers to update their electronic quotes
in block quantities.\3\ Quotes on Cboe Options do not route to other
exchanges,\4\ and Market-Makers generally enter new quotes at the
beginning of the trading day based on-then current market
conditions.\5\ The Exchange currently offers bulk order functionality,
which is intended to provide Users, and Market-Makers in particular,
with a way to submit orders that simulate quoting functionality.\6\
However, while bulk order functionality simulates quoting
functionality, bulk order functionality provides Users with a less
efficient way to update multiple bids and offers. To update multiple
bids and offers, a User must submit multiple messages at the same time,
compared to quoting functionality, which generally permits a market
participant to update multiple bids and offers in a single quote
message. Specifically, a bulk order port is a dedicated logical port
that provides Users with the ability to submit single and bulk order
messages to enter, modify, or cancel orders designated as Post Only
Orders \7\ with a Time-in-Force of Day \8\ or Good-til-Date (``GTD'')
\9\ with an expiration time on that trading day.\10\ Like quotes, bulk
order messages do not route to other exchanges because they include a
Post Only instruction.\11\ Use of the Day or GTD Time-in-Force is
consistent with Market-Maker's entry of new quotes at the beginning of
each trading day.\12\ Unlike current Cboe Options quoting
functionality, bulk order ports on the Exchange are available to all
Users, not just Market-Makers. The Exchange makes bulk order ports
available to all Users to encourage them to provide liquidity to the
Exchange's market.
---------------------------------------------------------------------------
\3\ See Cboe Options Rule 1.1(ppp).
\4\ See Cboe Options Rule 6.14B (which describes how the
Exchange routes orders (specifically intermarket sweep orders) but
not quotes routed to other exchanges); see also Nyse Arca, LLC
(``Arca'') Rule 6.37-O(a)(3)(D) (which states quotes do not route).
\5\ The Exchange understands this is common practice by Market-
Makers throughout the industry, and is consistent with Cboe Options
functionality, which cancels all unexecuted resting Market-Maker
quotes at the close of each trading day. Additionally, it is
consistent with Market-Makers' obligation to update market
quotations in response to changed market conditions. See Rule
22.5(a)(5); see also Cboe Options Rule 8.7(b)(iii).
\6\ See Securities Exchange Act Release No. 82741 (February 20,
2018), 83 FR 8306 (February 26, 2018) (SR-CboeEDGX-2018-005).
\7\ See Rule 21.1(d)(8) for the definition of ``Post Only
Orders.''
\8\ See Rule 21.1(f)(3) for the definition of the ``Day'' Time-
in-Force.
\9\ See Rule 21.1(f)(1) for the definition of the GTD Time-in-
Force.
\10\ See current Rule 21.1(j)(3) for the current definition of
``bulk order ports.'' Pursuant to Rule 21.1(j)(3)(C), Users may also
submit auction responses through bulk order ports, and will continue
to be able to submit auction responses through bulk ports.
\11\ See Rule 21.1(d)(8), which provides that an order with a
Post Only instruction may not route away to another exchange.
\12\ See supra note 8.
---------------------------------------------------------------------------
The Exchange proposes to replace bulk order functionality with bulk
message functionality substantially similar to the quoting
functionality available on Cboe Options. The proposed bulk message
functionality is similar to but more efficient than currently available
bulk order functionality.\13\ A ``bulk port'' is a dedicated logical
port that, as proposed, would provide Users with the ability to submit:
---------------------------------------------------------------------------
\13\ See supra note 4 (the Exchange adopted bulk order
functionality to simulate quoting functionality).
---------------------------------------------------------------------------
(1) Bulk messages,\14\ subject to the following:
---------------------------------------------------------------------------
\14\ Proposed Rule 16.1(a)(4) defines a bulk message as a bid or
offer included in a single electronic message a User submits to the
Exchange in which the User may enter, modify, or cancel up to an
Exchange-specified number of bids and offers (which number the
Exchange will announce via Exchange notice or publicly available
technical specifications). This is similar to Cboe Options Rule
1.1(ppp), which provides that electronic quotes may be updated in
block quantities. The limit on bids and offers per message is a
reasonable measure for the Exchange to use to manage message traffic
and activity to protect the integrity of the System. Proposed Rule
16.1(a)(4) also states that a User may submit a bulk message through
a bulk port as set forth in proposed Rule 21.1(j)(3), and that the
System handles a bulk messages in the same manner as it handles an
order or quote, unless the Rules specify otherwise. In other words,
a bulk message will be treated as an order (or quote if submitted by
a Market-Maker) pursuant to the Rules, including with respect to
priority and allocation. The proposed rule change identifies the
rule provisions pursuant to which bulk messages will be handled in a
different manner. The proposed rule change also amends the paragraph
numbering in Rule 16.1(a) to account for the addition of bulk
messages in subparagraph (a)(4).
---------------------------------------------------------------------------
(a) A bulk message has a Time-in-Force of Day;
(b) a Market-Maker with an appointment in a series may designate a
bulk message for that series as Post Only or Book Only (which Post Only
or Book Only designation, as applicable, applies to all bulk message
bids and offers within a single message),\15\ and other Users must
designate a bulk message for that series as Post Only; and
---------------------------------------------------------------------------
\15\ In other words, a Market-Maker cannot designate one bulk
message bid within a single message as Post Only and designate
another bulk message bid within the same message as Book Only.
---------------------------------------------------------------------------
(c) a User may establish a default Match Trade Prevention (``MTP'')
Modifier of MTP Cancel Newest (``MCN''), MTP Cancel Oldest (``MCO''),
or MTP Cancel Both (``MCB''), and a default value of Attributable or
Non-Attributable, for a bulk port, each of which applies to all bulk
messages submitted to the Exchange through that bulk port;
(2) single orders in the same manner as Users may submit orders to
the Exchange through any type of port,\16\ including designated with
any Order Type and any Time-in-Force in Rule 21.1(d) and (f),
respectively, except a Market-Maker with an appointment in a series may
designate an order for that series submitted through a bulk port only
as Post Only or Book Only, and other Users must designate an order for
that series submitted through a bulk port as Post Only; and
---------------------------------------------------------------------------
\16\ The proposed rule change also specifies that, subject to
the restrictions in the proposed rule, Users may submit single
orders through bulk ports in the same manner as they may submit
single orders through any other type port, which is consistent with
how Users may submit single orders to the Exchange through bulk
order ports today.
---------------------------------------------------------------------------
(3) auction responses.\17\
---------------------------------------------------------------------------
\17\ See proposed Rule 21.1(j)(3)(C). The proposed rule change
has no impact on the ability of Users to submit auction responses
through bulk ports, and clarifies that Users may submit auction
responses through bulk ports in the same manner as they may submit
auction responses through any other type of port.
---------------------------------------------------------------------------
Proposed Rule 21.1(j)(3)(A)(i) states that bulk messages have a
Time-in-Force of Day. As discussed above, this is consistent with
current Cboe Options quoting functionality, which cancels all resting
quotes at the close of the trading
[[Page 67787]]
day. This is also consistent with a Market-Maker's obligation to update
its quotations in response to changed market conditions in its
appointed classes.\18\ Unlike current bulk orders, the GTD Time-in-
Force with an expiration time on that trading day will not be available
for bulk messages. Users will continue to have the ability to manually
cancel bulk messages at any time during the trading day, they will just
not be able to have bulk messages automatically cancel at a specific
time on that trading day. Additionally, Users may apply the GTD Order
Type to orders submitted through a bulk port (as further discussed
below) or other type of port.
---------------------------------------------------------------------------
\18\ See Rule 22.5(a)(5).
---------------------------------------------------------------------------
Unlike Cboe Options quoting functionality, which is only available
to Cboe Options market-makers, the proposed bulk messages will be
available to all Users (as bulk orders are today). While all Users will
be able to use bulk messages (and may currently use bulk orders), the
primary purpose of bulk orders and the proposed bulk messages has
always been to encourage market-maker quoting on exchanges.\19\ The
proposed rule change provides that a Market-Maker with an appointment
in a series may designate a bulk message for that series as ``Post
Only'' or ``Book Only.'' This will provide Exchange Market-Makers with
functionality substantially similar to Cboe Options quoting
functionality currently available to Cboe Options market-makers, which
permits Market-Makers' incoming quotes to execute against resting
orders and quotes, except against the resting quote of another Market-
Maker (see discussion below).\20\ The Exchange believes permitting
Market-Makers to use bulk messages to remove liquidity from the Book
(if they so elect) will put Exchange Market-Makers on an even playing
field as market-makers on other exchanges that offer quoting
functionality. Additionally, Market-Makers are subject to various
obligations, including obligations to provide two-sided quotes, to
provide continuous quotes, and to trade at least 75% of its contracts
each quarter in appointed classes. The Exchange believes providing
Market-Makers with flexibility to use the Post Only or Book Only
instruction with respect to bulk messages will provide Market-Makers
with additional tools to meet their obligations in a manner they deem
appropriate. The Exchange further believes this may encourage liquidity
providers to register as Market-Makers.
---------------------------------------------------------------------------
\19\ See supra notes 8 and 15.
\20\ Incoming market-maker quotes on some options exchanges may
execute against interest resting in the book (see, e.g., Arca Rule
6.37A-O(a)(3)), while on other options exchanges they may not (see,
e.g., Box Options Exchange, LLC (``BOX'') Rule 8050, IM-8050-3).
---------------------------------------------------------------------------
The proposed rule change provides that other Users (i.e., non-
Market-Makers or Market-Makers without an appointment in a series) must
designate a bulk message for that series as ``Post Only.'' This is
consistent with current bulk orders available to these Users, and will
continue to provide Users with flexibility to avoid incurring a take
fee if their intent is to add liquidity to the Book. The Exchange notes
these Users may apply the Book Only instruction to orders submitted to
the Exchange through other ports. The proposed rule change also amends
Rule 21.9 to make clear that bulk messages (like current bulk orders)
are not eligible for routing (which is consistent with the Order Types
of Post Only and Book Only, which do not route to other options
markets).\21\
---------------------------------------------------------------------------
\21\ See also Cboe Options Rule 6.14B; and Arca Rule 6.37A-
O(a)(3)(D).
---------------------------------------------------------------------------
The proposed rule change also permits Users to establish a default
MTP Modifier of MCN, MCO, or MCB that would apply to all bulk messages
submitted through a bulk port. Cboe Options currently offers a Market-
Maker Trade Prevention Order, which would be cancelled if it would
trade against a resting quote or order for the same Market-Maker, and
also cancel the resting order or quote.\22\ This is equivalent to the
MCB Modifier (except the MCB Modifier may be used by all Users rather
than just Market-Makers). The proposed rule change provides Users with
the ability to apply same trade prevention designation that is
available for quotes on Cboe Options to bulk messages (MCB), as well as
two additional MTP options (MCN and MCO) (the Exchange notes there is
currently no trade prevention functionality equivalent to MCN or MCO
available on Cboe Options for quotes). Allowing three MTP designations
for bulk messages will provide Users with additional control over the
circumstances in which their bulk messages (and resting orders
(including bulk messages)) will interact with each other. The Exchange
does not believe there is demand by Users for the MDC and MCS modifies
(which are available on the Exchange for orders) for bulk messages (the
Exchange notes there is currently no trade prevention functionality
equivalent to MDC or MCS available on Cboe Options for quotes). The
Exchange notes all Users may continue to apply all MTP Modifiers to
orders submitted through a bulk port (as further discussed below) or
any other type of port.
---------------------------------------------------------------------------
\22\ See Cboe Options Rule 6.53(v).
---------------------------------------------------------------------------
Generally, the System will handle bulk messages in the same manner
as it handles orders with the same Order Types and Times-in-Force that
will be available for bulk messages, including prioritizing,
displaying, and executing them pursuant to Rule 21.8. Proposed Rule
21.1(j)(3)(A)(iv) through (vi) adds detail regarding how the System
will handle bulk messages and orders submitted through bulk ports.
Specifically, proposed subparagraph (A)(iv) states the System will
cancel or reject a Post Only bulk message bid (offer) with a price that
locks or crosses the Exchange best offer (bid) or the ABO (ABB).\23\
This is consistent with how the System would handle a Post Only order
not subject to the Price Adjust process.\24\ Pursuant to the Post Only
instruction, an order (or bulk message as proposed) may not remove
liquidity from the Book or route away to another Exchange. If a Post
Only bulk message locked or crossed the best contra-side interest on
the Exchange, the System would cancel it to prevent execution of the
bulk message against the interest on the Exchange in accordance with
the User's instructions and to prevent the Exchange from displaying a
locked or crossed market.\25\ Similarly, if a Post Only bulk message
locked or crossed an away market, the System would cancel it since it
cannot route in accordance with the User's instructions and to prevent
the Exchange's dissemination of a locked or crossed market.\26\
---------------------------------------------------------------------------
\23\ The ABBO means the best bid (offer) disseminated by other
exchanges.
\24\ See Rule 21.1(i). Pursuant to the Price Adjust process, the
System ranks and displays a buy (sell) order that, at the time of
entry, would lock a Protected Quotation of the Exchange or another
Exchange at one minimum price increment below (above) the current
NBO (NBB). The System executes a Book Only order against orders and
quotes and cancels any unexecuted portion if displaying the order on
the Book would create a violation of Rule 27.3, and the System
rejects a Post Only order that locks or crosses the opposite side
Exchange best bid or offer (``BBO'') or if displaying the order on
the Book would create a violation of Rule 27.3). Bulk messages will
not be eligible for the Price Adjust process, and thus will be
handled similar to an order not subject to the Price Adjust process.
See proposed Rule 21.1(i) (which clarifies that the Price Adjust
Process will not apply to bulk messages).
\25\ See Chapter XXVII of the Rules; see also Options Order
Protection and Locked/Crossed Market Plan (the ``Linkage Plan'').
\26\ See id.
---------------------------------------------------------------------------
Similarly, proposed subparagraph (A)(v) states the System will
execute a Book Only bulk message bid (offer) that locks or crosses the
ABO (ABB) against offers (bids) resting in the Book at prices the same
as or better than the ABO
[[Page 67788]]
(ABB) and then cancels the unexecuted portion. This is consistent with
how the System would handle a Book Only order not subject to the Price
Adjust process. Pursuant to the Book Only instruction, an order (or
bulk message as proposed) may not route away to another Exchange. If a
Book Only bulk message locked or crossed an away market, the System
would execute it to the extent it could against contra-side interest on
the Exchange and then cancel it since it cannot route in accordance
with the User's instructions and to prevent the Exchange's
dissemination of a locked or crossed market.\27\ In addition to being
similar to current Exchange Rules regarding the handling of Post Only
and Book Only Orders not subject to the Price Adjust process, the
Exchange notes that proposed subparagraphs (A)(iv) and (v) are
substantially the same as another exchange's handling rules applicable
to quotes.\28\
---------------------------------------------------------------------------
\27\ See id.
\28\ See Cboe Options Rule 6.14(b) (if Cboe Options is not at
the NBBO, the System rejects a quote back to a Market-Maker if the
quote locks or crosses the NBBO, which is the ABBO) and (c) (if the
Cboe Options System accepts a quote that locks or crosses the NBBO,
it executes the quote against quotes and orders in the Cboe Options
Book at the price(s) that is the same or better than the best price
disseminated by an away exchange(s) up to the size available on the
Exchange and cancels the remaining size if the quote's price locks
or crosses the ABBO or books any remaining size); see also Rule
6.37A-O(a)(3).
---------------------------------------------------------------------------
Proposed subparagraph (A)(vi) states the System will cancel or
reject a Book Only bulk message bid (offer) (or unexecuted portion)
submitted by a Market-Maker with an appointment in the series through a
bulk port if it would execute against a resting offer (bid) with a
Capacity of M (Market-Maker). The options market is driven by Market-
Maker quotes, and thus Market-Maker quotes are critical to provide
liquidity to the market and contribute to price discovery for
investors. The Exchange expects Market-Makers regularly to use bulk
messages to input and update prices on multiple series of options at
the same time. Market-Maker quotes are generally based on pricing
models that rely on various factors, including the price of the
underlying security and that security's volatility. As these variables
change, a Market-Maker's pricing model automatically will enter updates
to its bids and offers with bulk messages for some or all of an
option's series. Because Market-Makers may update bids and offers using
bulk messages in multiple series at the same time, there can be a
multitude of instances in which their bids and offers inadvertently
interact with each other, which can lead to significant risk and
exposure. This may occur, for example, when one Market-Maker's price
update system is faster than systems used by other Market-Makers. In
this respect, a Market-Maker's system that updates options prices
microseconds faster than another Market-Maker's system may lock or
cross its bids (offers) against the other Market-Maker's offers (bids)
every time its bid (offer) adjusts to the offer (bid) of the second
Market-Maker even if the second Market-Maker's system was also in the
process of updating that offer (bid). For example, assume Market-Makers
A and B are both quoting $1.10-1.20 when the underlying moves, causing
both each Market-Maker's system to update its quotes to $1.20-1.30. By
being microseconds faster, Market-Maker A's system will send a bid of
$1.20, which locks Market-Maker B's offer prior to Market-Maker B's
offer updating, even though its system was also in the process of
updating its offer. This could happen contemporaneously in a large
number of series within the class, such that instead of locking one
quote, Market-Maker A may lock 20 of Market-Maker B's quotes. This may
expose each Market-Maker to significant risk due to these unintended
executions.
The proposed rule change will protect Market-Makers from executions
that occur due to technology disparities rather than the intention of
Market-Makers to trade with one another at a particular price. As a
result, Market-Maker quotes will continue to provide liquidity on the
Book. This proposed functionality is similar to the quote-lock
functionality available on Cboe Options.\29\ While that functionality
permits locked quotes to execute against each other after a specified
amount of time, it also provides market-makers with an opportunity to
update their resting quotes, which would prevent execution of an
incoming market-maker quote against a resting market-maker quote. As
proposed, a Market-Maker bulk message (or order) will be rejected if it
would execute against resting Market-Maker interest. The Market-Maker
may resubmit its bulk message (or order) after being rejected, which
would be able to rest in the Book if the Market-Maker repriced its
resting bid or offer in the interim. Additionally, a Market-Maker may
interact with resting Market-Maker interest by submitting an order to
the Exchange through a different type of port.
---------------------------------------------------------------------------
\29\ See Cboe Options Rule 6.45(c).
---------------------------------------------------------------------------
Proposed Rule 21.6(a) provides that a User may only enter one bid
and one offer for a series per Executing Firm ID (``EFID'') per bulk
port. The Exchange believes this will encourage Users to submit their
best bids and offers in series, and thus provide displayed liquidity to
the market and contribute to public price discovery. Note firms may
have multiple EFIDs and multiple bulk ports, and thus will have the
ability through separate ports or EFIDs to submit additional bids and
offers using bulk messages in the same series if they choose. This
provision is consistent with the rule interpretation of another
exchange.\30\
---------------------------------------------------------------------------
\30\ See Cboe Options Regulatory Circular RG18-008 (March 6,
2018), which provides that each market-maker acronym may only have
one quote (which is considered to be a two-sided quote) in each
series at a time. An EFID is comparable to an acronym. Under Cboe
Options rules, the term Market-Maker generally refers to an
individual (and thus a person with a specific acronym), except as
otherwise provided in the Rules. See, e.g., Cboe Options Rule
8.7(d)(ii)(B) (which provides that market-maker continuous
electronic quoting obligations may be satisfied by market-makers
either individually or collectively with market-makers of the same
TPH organization). The interpretation in the circular referenced
above is consistent with this term and a Market-Maker's obligations
set forth in Rule 8.7 (e.g., market-Makers must contribute to the
maintenance of a fair and orderly market, including by competing to
improve markets, update quotes in response to changed market
conditions, and price options contracts fairly).
---------------------------------------------------------------------------
In addition to permitting Users to submit bulk orders (which
functionality the Exchange will discontinue and replace with bulk
message functionality), current bulk order ports permit Users to submit
single orders to the Exchange. To encourage Users that may not have
quoting systems to provide liquidity to the Exchange, the proposed rule
change will permit Users to continue to submit single orders to the
Exchange through these ports, which are proposed to be renamed as bulk
ports. Proposed Rule 21.1(j)(3)(B)(i) will permit Users to designate
these orders with any Order Type and any Time-in-Force in Rule 21.1(d)
and (f), respectively, subject to the Book Only and Post Only
restrictions described below. This will provide Users with additional
functionality that is available for single orders submitted through
bulk ports today, and allow their liquidity to rest on the Exchange for
multiple trading days, if Users so choose. This will also provide Users
with additional control over the orders they use to provide liquidity
to the Exchange through bulk ports. Proposed subparagraph (B)(i)
imposes the same restrictions on the use of Book Only and Post Only for
orders submitted through a bulk port that apply to bulk messages, as
described above. Additionally, proposed subparagraph (B)(ii) imposes
the same prohibition on Market-Maker orders submitted through bulk
ports from removing resting Market-Maker
[[Page 67789]]
interest that applies to bulk messages, as described above. The
Exchange believes it is appropriate for orders submitted through bulk
ports be subject to the same restrictions on adding and removing
liquidity as bulk messages submitted through bulk ports, so that orders
submitted through bulk ports do not have an advantage over bulk
messages, and vice versa.
While liquidity providers are most commonly registered market-
makers, other professional traders also provide liquidity to the
options market, which contributes to price discovery. As a result,
unlike other exchanges that restrict quoting functionality to market-
makers, the Exchange believes it is appropriate to make bulk messages
available to all Users to encourage them to provide liquidity, which is
critical to the Exchange's market. Additionally, permitting orders to
be submitted through bulk ports will continue to provide all liquidity
providers with this functionality that is available today, as well as
additional flexibility with respect to this functionality they may use
to provide liquidity to the Exchange.
The proposed rule change adds a price protection mechanism for bulk
messages similar to the fat finger check the Exchange currently
provides for orders. Proposed Rule 21.17(f) states the System cancels
or rejects any bulk message bid (offer) above (below) the NBO (NBB) by
more than a specified amount determined by the Exchange. This is
similar to the fat finger check currently applicable to limit
orders.\31\ Bulk messages that cross the NBBO by more than a specified
amount are rejected as presumptively erroneous. This proposed check
will not apply to bulk messages submitted prior to the conclusion of
the Opening Process or when no NBBO is available. The Exchange believes
it is appropriate to have the ability to not apply this check during
the pre-open or opening rotation so that the check does not impact the
determination of the opening price. The Exchange also believes it is
appropriate to not apply this check when there is no NBBO, as the
Exchange believes that is the most reliable measure against which to
compare the price of the bulk message to determine its reasonability.
The proposed change is similar to a quote price protection mechanism
available at other options exchanges.\32\
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\31\ See Rule 21.17(b). Orders submitted through bulk ports will
be subject to the current order price protection mechanisms, such as
limit fat finger check in Rule 21.17. The proposed rule change
amends Rule 21.17(a) through (e) (and the introductory language to
that rule) to make clear that the price protections and risk
controls in those paragraphs will not be applicable to bulk
messages.
\32\ See, e.g., Cboe Options Rule 6.14(a) and (b); Arca Rule
6.37A-O(a)(3).
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Proposed Rule 21.17(g) states if, pursuant to the Rules, the System
cancels or rejects a bulk message bid (offer) to update a resting bulk
message bid (offer) submitted for the same EFID and bulk port, the
System also cancels the resting bulk message bid (offer). The Exchange
currently offers Users similar functionality for orders, which is
optional.\33\ Pursuant to the proposed rule change, the System will
always apply this protection to bulk messages. The Exchange believes
this will operate as an additional safeguard that causes liquidity
providers to re-evaluate their bids and offers in a series before
attempting to update them again. Additionally, when a User submits a
new bulk message, it is implicitly instructing the Exchange to cancel
any resting bulk message in the same series. Thus, even if the new bulk
message is rejected as a result of this proposed check, the implicit
instruction to cancel the resting bulk message remains valid
nonetheless. The proposed rule change is substantially similar to a
risk control applicable to quotes available at another options
exchange.\34\
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\33\ See ``cancel on reject'' functionality in technical
specifications available at https://markets.cboe.com/us/options/support/technical/.
\34\ See, e.g., Cboe Options Rule 6.14(b); Arca Rule 6.37A-
O(a)(3)(C).
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The proposed rule change amends Rule 21.1(d), (f), and (g) to
provide that eligible Order Types, Times in Force, and MTP Modifiers,
respectively, are subject to the proposed restrictions in Rule 21.1(j)
with respect to orders and bulk messages submitted through bulk ports,
and clarify which Order Types, Times in Force, and MTP Modifiers are
available and not available for bulk messages, as described above. The
proposed rule change also amends the definitions of Orders, Order
Types, Time in Force, and MTP Modifiers in Rule 21.1(c), (d), (f), and
(g), respectively, in accordance with proposed Rule 21.1(j)(3)(A).
Additionally, the proposed rule change amends Rule 21.20 to make
clear that Users may not submit complex orders through bulk ports.\35\
The proposed rule change also amends Rules 21.18 and 21.19 to clarify
that bulk messages are not eligible for the Step Up Mechanism for Bats
Auction Mechanism, respectively. Quotes are not eligible for submission
in corresponding auction mechanisms on Cboe Options.\36\
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\35\ The Exchange notes that Market-Makers are not required to
quote on the COB, and that complex quoting functionality is not
currently available on Cboe Options.
\36\ See Cboe Options Rules 6.14A (describing the Hybrid Agency
Liaison, which is similar to the Step Up Mechanism) and 6.74A
(describing the Automated Improvement Mechanism, which is similar to
the Bats Auction Mechanism).
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\37\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \38\ 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) \39\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------
\37\ 15 U.S.C. 78f(b).
\38\ 15 U.S.C. 78f(b)(5).
\39\ Id.
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In particular, the proposed rule change will remove impediments to
and perfect the mechanism of a free and open market because it provides
Users, including Market-Makers and other liquidity providers, with
enhanced functionality to allow them to provide liquidity to the market
and update bids and offers in response to changed market conditions.
While current bulk orders simulate quotes, Users must submit multiple
messages in bulk to update bids and offers in multiple series. The
proposed bulk messages will permit Users to update multiple bids and
offers in block quantities in a single message, which will permit them
to update bids and offers (for example, in response to changing market
conditions) in a more efficient manner. The proposed ability to update
bids and offers in block quantities is similar to that available on
another options exchange.\40\
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\40\ See Cboe Options Rule 1.1(ppp), which provides that
electronic quotes may be updated in block quantities.
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With respect to all Users, the proposed bulk messages are
[[Page 67790]]
substantially similar to the current bulk orders available through bulk
order ports--Users will be able to submit bulk messages that are Day
and Post Only. However, the proposed rule change will permit them to do
so in a single bulk message rather than in multiple messages. While the
use of the GTD Time-in-Force will not be permitted for bulk messages as
it currently is for bulk orders, Users may achieve the same result as
GTD for their bulk messages by manually cancelling a bulk message at a
specified time during the trading day--the proposed rule change merely
does not provide a means for automatic cancellation of bulk messages at
a specific time during the trading day. Additionally, Users may
continue to apply GTD to orders submitted to the Exchange through bulk
ports and other ports.
The Exchange believes the proposed rule change will permit
liquidity providers to more efficiently update their resting bids and
offers, which may help them manage their risk exposure when, for
example, updating their bids and offers in response to changing market
conditions. The Exchange believes this will continue to encourage all
Users to provide liquidity on the Exchange and avoid incurring a taker
fee if their intent is to submit bids and offers to add liquidity to
the Book. As a result, this may increase liquidity, resulting in more
trading opportunities and tighter spreads, which benefits all
investors. The Exchange notes the proposed rule change provides Users
with additional flexibility by permitting certain MTP Modifiers to be
applied to bulk messages to prevent their orders and bulk messages from
trading against each other. The MTP Modifiers not available for bulk
messages will continue to be available for Users on orders submitted
through bulk ports and other ports. Unlike other options exchanges that
limit the use of quoting functionality to market-makers, the proposed
rule change will permit all Users to submit bulk messages.
Additionally, the proposed rule change to permit Users to continue to
submit orders (subject to restrictions on the Post Only and Book Only
instructions, as discussed above) through bulk ports will encourage
Users that may not have quoting systems to provide liquidity to the
Exchange by submitting single orders through bulk ports. This is also
consistent with current bulk orders, which permits Users to submit both
single and bulk orders through bulk order ports.
The proposed rule change further removes impediments to and
perfects the mechanism of a free and open market and a national market
system by providing appointed Market-Makers with the ability to submit
Book Only bulk messages, because it will align functionality available
to appointed Market-Makers on the Exchange with the quoting
functionality available to market-makers on other options exchanges,
including Cboe Options, which permit quotes to both add and remove
liquidity.\41\ Market-Makers are critical to providing liquidity and
price discovery on the Exchange, and are subject to various
obligations, as discussed above. The Exchange notes all other Users may
continue to use the Book Only instruction (or other instructions that
permit execution against resting orders on the Book) on orders
submitted through other ports, as they may do today. The Exchange
believes providing Market-Makers with flexibility to use the Post Only
or Book Only instruction with respect to bulk messages will provide
them with additional tools to meet their obligations in a manner they
deem appropriate and is reasonable given the critical role Market-
Makers plan in the options market. The Exchange believes this may also
encourage liquidity providers to register as Market-Makers.
---------------------------------------------------------------------------
\41\ Other options exchanges only permit market-makers to submit
quotes. See, e.g., Cboe Options Rules 1.1(ppp) and 8.3(c); Arca Rule
6.37A-O(a)(1).
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The proposed rule change provides Market-Makers with a combination
of functionality available to market-makers on other exchanges, as some
exchanges permit market-makers to remove liquidity and others only
permit market-makers to post liquidity using quotes.\42\ As a result,
the Exchange believes the proposed rule change will provide Market-
Makers with greater control over their interactions with contra-side
liquidity and would increase opportunities for such interaction. The
Exchange believes this will provide Market-Makers with a greater level
of determinism, in terms of managing their exposure, which may
encourage them to be more aggressive when providing liquidity. The
Exchange believes this may result in more trading opportunities and
tighter spreads, which contributes to price discovery. Ultimately, this
may improve overall market quality and enhance competition on the
Exchange, which benefits all investors.
---------------------------------------------------------------------------
\42\ See id. and Box Options Exchange, LLC (``BOX'') Rule 8050,
IM-8050-3.
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Similarly, the proposed rule change to prevent Market-Maker bulk
messages from removing Market-Maker orders or bulk messages resting on
the Book removes impediments to and perfects the mechanism of a
national market system by eliminating trades that may be unintended
(potentially the result of technological disparities between Market-
Makers) and thus not beneficial to customers, and that may impede
certain liquidity providers' ability to competitively price their bids
and offers. The Exchange believes the proposed rule change will
increase availability of liquidity in the market and will enhance
competition, because Market-Makers will be better able to quote
aggressively with fewer concerns over technological disparities in
their quoting systems, which ultimately benefits all investors. The
Exchange notes this proposed rule change is similar to functionality
available on another options exchange.\43\
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\43\ See Cboe Options Rule 6.45(c).
---------------------------------------------------------------------------
The proposed handling of bulk messages to prevent the display of a
locked or crossed market will perfect the mechanism of a free and open
market and national market system, as it is consistent with the Linkage
Plan and the Exchange's handling of orders with similar instructions.
This proposed handling of bulk messages is also consistent with
handling of quotes on other options exchanges.\44\ The proposed risk
controls and price protection mechanisms that will apply to bulk
messages promote just and equitable principles of trade and will
protect investors by mitigating potential risks associated with Users
submitting bulk messages at clearly unintended prices and trading at
extreme and potentially erroneous prices. Additionally, the proposed
rule change to cancel a User's resting bulk message when the System
rejects a bulk message intended to update that resting bulk message
provides Users with an additional safeguard that causes Users to
reevaluate their bids and offers in the series before attempting to
update them again. Additionally, when a User submits a new bulk
message, it is implicitly instructing the Exchange to cancel any
resting bulk message. Thus, even if the new bulk message is rejected,
the Market-Maker's implicit instruction to cancel the resting bulk
message remains valid nonetheless.
---------------------------------------------------------------------------
\44\ See Cboe Options Rule 6.14(b) and (c); see also Rule 6.37A-
O(a)(3).
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The options markets are quote driven markets and thus dependent on
liquidity providers, which are most commonly registered market-makers
but also other professional traders, for liquidity and price discovery.
The Exchange believes the proposed enhanced functionality, including
the additional flexibility for Market-Makers
[[Page 67791]]
to manage their risk exposure and provide additional control over
interactions with contra-side liquidity, for these liquidity providers
to more efficiently enter and update bids and offers. This may
encourage the provision of more aggressive liquidity, which may result
in more trading opportunities and tighter spreads, which contributes to
price discovery. This may improve overall market quality and enhance
competition on the Exchange, which benefits all investors.
The proposed rule change is generally intended to align system
functionality currently offered by the Exchange with Cboe Options
functionality in order to provide a consistent technology offering for
the Cboe Affiliated Exchanges. A consistent technology offering, in
turn, will simplify the technology implementation, changes, and
maintenance by Users of the Exchange that are also participants on Cboe
Affiliated Exchanges. The proposed rule change would also provide Users
with access to functionality that is generally available on markets
other than the Cboe Affiliated Exchanges, which may result in the
efficient execution of quotes and orders and provide Users with
additional flexibility and increased functionality on the Exchange's
System.
When Cboe Options migrates to the same technology as that of the
Exchange and other Cboe Affiliated Exchanges, Users of the Exchange and
other Cboe Affiliated Exchanges will have access to similar
functionality on all Cboe Affiliated Exchanges. As such, the proposed
rule change would foster cooperation and coordination with persons
engaged in facilitating transactions in securities and would remove
impediments to and perfect the mechanism of a free and open market and
a national market system.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe the proposed rule change will impose any burden on intramarket
competition that is not necessary or appropriate in furtherance of the
purposes of the Act, as the proposed bulk messages, like the current
bulk orders, are optional for all Users. While only Market-Makers may
submit Book Only bulk messages, the Exchange believes this is
appropriate given the various obligations Market-Makers must satisfy
under the Rules and the unique and critical role Market-Makers play in
the options market, as discussed above. The Exchange believes providing
Market-Makers with flexibility to use the Post Only or Book Only
instruction with respect to bulk messages will provide Market-Makers
with additional tools to meet their obligations in a manner they deem
appropriate. The Exchange believes the proposed functionality for
Market-Makers adds value to market-making on the Exchange and provides
them with greater control over how their quotes interact with contra-
side liquidity both on the Exchange. The Exchange notes all other Users
may continue to use the Book Only instruction on orders submitted to
the Exchange through other types of ports. The Post Only instruction
for bulk messages will be available to all Users, and is substantially
similar to the bulk orders currently available to all Users.
Additionally, all Users may submit single orders with all other Times-
in-Force and Order Types (subject to the same Post Only and Book Only
restrictions applicable to bulk messages) not available for bulk
messages through bulk ports, which may encourage Users that may not
have quoting systems to provide liquidity to the Exchange.
The proposed rule change to prevent Market-Maker bulk message
executions against other resting Market-Maker interest is intended to
protect Market-Makers from executions due to technology disparities
rather than the intention of Market-Makers to trade with one another at
that price. The Exchange believes this functionality and protection for
Market-Makers may encourage Market-Makers to quote tighter and deeper
markets, which will increase liquidity and enhance competition. The
proposed price protection mechanisms and risk controls applicable to
bulk messages will apply in the same manner to all bulk messages
submitted by market participants. The Exchange believes this protection
for bulk messages provides liquidity providers with additional
protection from anomalous or erroneous executions. Generally, once bulk
messages are resting on the Book, the System will handle them no
differently than resting orders--this includes how the System
prioritizes orders and quotes when executing them against incoming
orders or quotes. Bulk messages that are available to all Users will
work in the same manner for all Users, and the additional bulk message
functionality available to appointed Market-Makers will work in the
same manner for all such Market-Makers. The Exchange believes it is
reasonable to provide additional functionality to Market-Makers given
their unique and critical role in the options market and the various
obligations that Market-Makers must satisfy.
The Exchange does not believe the propose rule change will impose
any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act, because it will
provide Market-Makers with bulk message functionality that is similar
to that quoting available to market-makers on other options exchanges.
The Exchange believes the proposed functionality will permit the
Exchange to operate on an even playing field relative to other
exchanges that have similar functionality. As discussed above, the
options markets are quote driven markets and thus dependent on
liquidity providers, which are most commonly registered market-makers
but also other professional traders, for liquidity and price discovery.
The Exchange believes the proposed enhanced functionality, including
the additional flexibility for Market-Makers to manage their risk
exposure and provide additional control over interactions with contra-
side liquidity, for these liquidity providers to more efficiently enter
and update bids and offers. This may encourage the provision of more
aggressive liquidity, which may result in more trading opportunities
and tighter spreads, which contributes to price discovery. This may
improve overall market quality and enhance competition on the Exchange,
which benefits all investors.
The Exchange reiterates that the proposed rule change is being
proposed in the context of the technology integration of the Cboe
Affiliated Exchanges. Thus, the Exchange believes this proposed rule
change permits fair competition among national securities exchanges. In
addition, the Exchange believes the proposed rule change will benefit
Exchange participants in that it will provide a consistent technology
offering for Users by the Cboe Affiliated Exchanges.
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: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant
[[Page 67792]]
burden on competition; and (iii) become operative for 30 days after the
date of the filing, or such shorter time as the Commission may
designate, it has become effective pursuant to 19(b)(3)(A) of the Act
\45\ and Rule 19b-4(f)(6) \46\ thereunder.
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\45\ 15 U.S.C. 78s(b)(3)(A).
\46\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-CboeEDGX-2018-060 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-CboeEDGX-2018-060. 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-CboeEDGX-2018-060 and should be
submitted on or before January 22, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
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\47\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2018-28395 Filed 12-28-18; 8:45 am]
BILLING CODE 8011-01-P
