Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Discontinue Bulk Order Functionality and Implement Bulk Message Functionality, 2598-2605 [2019-01392]
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Federal Register / Vol. 84, No. 26 / Thursday, February 7, 2019 / Notices
to intra-market competition, the
Exchange notes that the proposed
changes will apply to all Members on a
fair and equal basis. Furthermore,
market participants seeking to interact
in the Opening Process may continue to
enter other Cross Eligible Orders on fair
and equal terms. With respect to intermarket competition, the Exchange
believes that the proposed change does
not result in any burden on competition
that is not necessary or appropriate in
furtherance of the purposes of the Act.
To the contrary, the Exchange believes
that rejecting market orders with a timein-force of DAY to avoid causing an
opening match price that deviates from
the current market for the security will
support, and thereby promote
competition between the Exchange’s
Opening Process and the opening
mechanisms offered by other market
centers, while avoiding unnecessary
fragmentation of order flow intended for
the primary market’s opening auction.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
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
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 21 and Rule 19b–
4(f)(6) thereunder.22
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.
21 15
U.S.C. 78s(b)(3)(A)(iii).
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.
22 17
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IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
IEX–2019–01 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–IEX–2019–01. 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–IEX–2019–01, and should
be submitted on or before February 28,
2019.
23 17
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CFR 200.30–3(a)(12).
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–01390 Filed 2–6–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–85038; File No. SR–C2–
2018–025]
Self-Regulatory Organizations; Cboe
C2 Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Discontinue Bulk
Order Functionality and Implement
Bulk Message Functionality
February 1, 2019.
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, Cboe C2 Exchange, Inc. (the
‘‘Exchange’’ or ‘‘C2’’) 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 Exchange filed the
proposal as a ‘‘non-controversial’’
proposed rule change pursuant to
Section 19(b)(3)(A)(iii) of the Act 3 and
Rule 19b–4(f)(6) thereunder.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe C2 Exchange, Inc. (the
‘‘Exchange’’ or ‘‘C2’’) proposes to
discontinue bulk order functionality
and implement bulk message
functionality, and make other
nonsubstantive changes. The text of the
proposed rule change is provided in
Exhibit 5.
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.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(6).
2 17
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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 also the
parent company of Cboe Exchange, Inc.
(‘‘Cboe Options’’), acquired Cboe EDGX
Exchange, Inc. (‘‘EDGX’’), 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,
EDGX, 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 EDGX
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.5
Quotes on Cboe Options do not route to
other exchanges,6 and Market-Makers
5 See
Cboe Options Rule 1.1(ppp).
Cboe Options Rule 6.14B (which describes
how the Exchange routes orders (specifically
6 See
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generally enter new quotes at the
beginning of the trading day based onthen current market conditions.7 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.8
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 9 with a
Time-in-Force of Day 10 or Good-til-Date
(‘‘GTD’’) 11 with an expiration time on
that trading day.12 Like quotes, bulk
order messages do not route to other
exchanges because they include a Post
Only instruction.13 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.14
intermarket sweep orders) but not quotes route to
other exchanges); see also Nyse Arca, LLC (‘‘Arca’’)
Rule 6.37–O(a)(3)(D) (which states quotes do not
route).
7 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 8.5(a)(4);
see also Cboe Options Rule 8.7(b)(iii).
8 See Securities Exchange Act Release No. 83214
(May 11, 2018), 83 FR 22796 (May 16, 2018) (SR–
C2–2018–005). Prior to the migration of the C2
trading platform to the same technology platform as
EDGX and BZX, C2 quoting functionality
(substantially similar to the quoting functionality
being proposed in this rule filing) was limited to
Market-Makers.
9 See current Rule 1.1 (definition of Order
Instructions) and proposed Rule 6.10(c) for the
definition of ‘‘Post Only.’’ The proposed rule
change moves the definitions of order types, Order
Instructions, and Times-in-Force to Rule 6.10(b),
(c), and (d), respectively.
10 See current Rule 1.1 and proposed Rule 6.10(d)
for the definition of the Time-in-Force of ‘‘Day.’’
11 See current Rule 1.1 and proposed Rule 6.10(d)
for the definition of the Time-in-Force of ‘‘GTD.’’
12 See current Rule 1.1 for the current definition
of ‘‘bulk order ports.’’ Pursuant to current Rule 1.1,
Users may submit auction responses through bulk
order ports, and will continue to be able to submit
auction response through bulk ports. The proposed
rule change moves the definition of port to Rule
6.8(c).
13 See current Rule 1.1 (definition of Order
Instructions) and proposed Rule 6.10(c), which
provides that an order with a Post Only instruction
may not route away to another exchange.
14 See supra note 7.
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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 message 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.15 A ‘‘bulk port’’ is a
dedicated logical port that, as proposed,
would provide Users with the ability to
submit:
(1) bulk messages,16 subject to the
following:
(a) a bulk message has a Time-inForce of Day;
(b) a Market-Maker with an
appointment in a class may designate a
bulk message for that class 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), 17 and other
Users must designate a bulk message for
that class 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;
15 See supra note 8 (the Exchange adopted bulk
order functionality to simulate quoting
functionality).
16 Proposed Rule 1.1 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 Exchangespecified number of bids and offers. Pursuant to
Rule 1.2, the Exchange will announce this number
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 1.1 also states that a User may
submit a bulk message through a bulk port as set
forth in proposed Rule 6.8(c)(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.
17 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.
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(2) single orders in the same manner
as Users may submit orders to the
Exchange through any other type of
port,18 including designated with any
Order Instruction and any Time-inForce in Rule 6.10(c) and (d),19
respectively, except a Market-Maker
with an appointment in a class may
designate an order for that class
submitted through a bulk port as Post
Only or Book Only, and other Users
must designate a bulk message for that
class submitted through a bulk port as
Post Only; and
(3) auction responses (using auction
response messages) in the same manner
as Users may submit auction responses
to the Exchange through any other type
of port.20
Proposed Rule 6.8(c)(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
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.21 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 Instruction 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
18 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.
19 The proposed rule change moves the
definitions of Order Instructions and Times-inForce from Rule 1.1 to Rule 6.10.
20 See proposed Rule 6.8(c)(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.
21 See Rule 8.5(a)(3).
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market-maker quoting on exchanges.22
The proposed rule change provides that
a Market-Maker with an appointment in
a class may designate a bulk message for
that class 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).23 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
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-Market-Makers or
Market-Makers without an appointment
in a class) must designate a quote for
that class 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 6.15 to make
clear that bulk messages (like current
bulk orders) are not eligible for routing
(which is consistent with the Order
Instructions of Post Only and Book
Only, which do not route to other
options markets).24
The proposed rule change also
permits Users to establish a default MTP
22 See
supra notes 8 and 15.
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).
24 See also Cboe Options Rule 6.14B; and Arca
Rule 6.37A–O(a)(3)(D).
23 Incoming
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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.25 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.
Generally, the System will handle
bulk messages in the same manner as it
handles orders with the same Order
Instructions and Times-in-Force that
will be available for bulk messages,
including prioritizing, displaying, and
executing them pursuant to Rule 6.12.
Proposed Rule 6.12(c)(6) adds detail
regarding how the System will handle
bulk messages and orders submitted
through bulk ports. Specifically,
proposed subparagraph (c)(6)(A) 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).26 This
is consistent with how the System
would handle a Post Only order not
subject to the Price Adjust process.27
25 See
Cboe Options Rule 6.53(v).
ABBO means the best bid (offer)
disseminated by other exchanges.
27 See Rule 6.12(b). 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
26 The
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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.28 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.29
Similarly, proposed subparagraph
(c)(6)(B) 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 (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 contraside 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.30 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 (c)(6)(A) and
(B) are substantially the same as another
exchange’s handling rules applicable to
quotes.31
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 6.82, 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 6.82). 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 Rules 6.10(c) and 6.12(b)
(which clarify that the Price Adjust Process will not
apply to bulk messages).
28 See Chapter XXVII of the Rules; see also
Options Order Protection and Locked/Crossed
Market Plan (the ‘‘Linkage Plan’’).
29 See id.
30 See id.
31 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
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Proposed subparagraph (c)(6)(C) states
the System will cancel or reject a Book
Only bulk message bid (offer) or order
bid (offer) (or unexecuted portion)
submitted by a Market-Maker with an
appointment in the class through a bulk
port if it would execute against a resting
offer (bid) with a Capacity of M (MarketMaker). The options market is driven by
Market-Maker quotes, and thus MarketMaker 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 MarketMaker’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 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
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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2601
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.32 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 6.9(a) provides that a
User may only enter one bid and one
offer for a series per EFID 33 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.34
32 See
33 An
Cboe Options Rule 6.45(c).
‘‘EFID’’ is an Executing Firm ID. See Rule
1.1.
34 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
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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 6.8(c)(3)(B)
will permit Users to designate these
orders with any Order Instruction and
any Time-in-Force in proposed Rule
6.10(c) and (d), respectively, subject to
the Book Only and Post Only
restrictions described above for MarketMakers with appointments in a class
and other Users. 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.
Additionally, proposed Rule
6.12(c)(6)(A) imposes the same
prohibition on Market-Maker orders
submitted through bulk ports from
removing resting Market-Maker 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
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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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 that is similar to the fat finger
check the Exchange currently provides
for orders.35 Proposed Rule 6.14(a)(5)
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.36
Quotes 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.37
Proposed Rule 6.14(c)(6)(B) 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 and quotes (as
currently defined as bids and offers
from Market-Makers), which is
optional.38 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
35 The proposed rule change also amends Rule
6.14(a) and (c) (and the introductory language to
that rule) to make clear which price protections and
risk controls in those paragraphs will not apply to
bulk messages.
36 See Rule 6.14(c)(1). Orders submitted through
bulk ports will be subject to the current order price
protection mechanisms, such as limit fat finger
check in Rule 6.14.
37 See, e.g., Cboe Options Rule 6.14(a) and (b);
Arca Rule 6.37A–O(a)(3).
38 See current Rule 6.14(c)(6) and proposed Rule
6.14(c)(6)(A).
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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.39
The proposed rule change amends
proposed Rules 6.10(c) and (d) to
provide that eligible Order Instructions
and Times-in-Force, respectively, are
subject to the proposed restrictions in
Rule 6.8(c) with respect to orders and
bulk messages submitted through bulk
ports, and clarify which Order
Instructions, and Times-in-Force are
available and not available for bulk
messages, as described above. The
proposed rule change also amends the
definitions of order types, Order
Instructions, and Times-in-Force in Rule
6.10(b), (c), and (d), respectively, in
accordance with proposed Rule
6.8(c)(3). Additionally, Rule 6.13 to
make clear that Users may not submit
complex orders through bulk ports.40
The proposed rule change also makes
nonsubstantive changes to move the
definitions of order types, Order
Instructions, and Times-in-Force (as
amended to accommodate bulk
messages as discussed above) to Rule
6.10 and add cross-references to that
Rule in the definitions of those terms in
Rule 1.1. The proposed rule change also
moves the definitions of physical port
and logical port (and the proposed
definition of bulk port) to Rule 6.8(c).
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.41 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 42 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
39 See, e.g., Cboe Options Rule 6.14(b); Arca Rule
6.37A–O(a)(3)(C).
40 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.
41 15 U.S.C. 78f(b).
42 15 U.S.C. 78f(b)(5).
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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) 43 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.44
With respect to all Users, the
proposed bulk messages are
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.45 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.46
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
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.47
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
45 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).
46 See id. and Box Options Exchange, LLC
(‘‘BOX’’) Rule 8050, IM–8050–3.
47 See Cboe Options Rule 6.45(c).
43 Id.
44 See Cboe Options Rule 1.1(ppp), which
provides that electronic quotes may be updated in
block quantities.
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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.48 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
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
48 See Cboe Options Rule 6.14(b) and (c); see also
Rule 6.37A–O(a)(3).
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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
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 Instructions (subject to
the same Post Only and Book Only
restrictions applicable to bulk messages)
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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 MarketMakers 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
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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
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 49 and Rule 19b–4(f)(6) 50
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.
49 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.
50 17
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IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments:
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
C2–2018–025 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–C2–2018–025. 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–C2–2018–025 and should
be submitted on or before February 22,
2019.
51 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00119
Fmt 4703
Sfmt 4703
2605
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.51
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–01392 Filed 2–6–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Submission for OMB Review;
Comment Request
Upon Written Request Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736
Extension:
Rule 17g–4, SEC File No. 270–566, OMB
Control No. 3235–0627.
Notice is hereby given that pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.) (‘‘PRA’’), the
Securities and Exchange Commission
(‘‘Commission’’) has submitted to the
Office of Management and Budget
(‘‘OMB’’) a request for approval of
extension of the previously approved
collection of information provided for in
Rule 17g–4 (17 CFR 240.17g–4) under
the Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.) (‘‘Exchange Act’’).
The Credit Rating Agency Reform Act
of 2006 added a new section 15E,
‘‘Registration of Nationally Recognized
Statistical Rating Organizations,’’ 1 to
the Exchange Act. Pursuant to the
authority granted under section 15E of
the Exchange Act, the Commission
adopted Rule 17g–4, which requires that
a nationally recognized statistical rating
organization (‘‘NRSRO’’) establish,
maintain, and enforce written policies
and procedures to prevent the misuse of
material nonpublic information,
including policies and procedures
reasonably designed to prevent: (a) The
inappropriate dissemination of material
nonpublic information obtained in
connection with the performance of
credit rating services; (b) a person
within the NRSRO from trading on
material nonpublic information; and (c)
the inappropriate dissemination of a
pending credit rating action.2
There are 10 credit rating agencies
registered with the Commission as
NRSROs under section 15E of the
Exchange Act, which have already
established the policies and procedures
required by Rule 17g–4. Based on staff
1 15
U.S.C. 78o–7.
17 CFR 240.17g–4; Release No. 34–55231
(Feb. 2, 2007), 72 FR 6378 (Feb. 9, 2007); Release
No. 34–55857 (June 5, 2007), 72 FR 33564 (June 18,
2007).
2 See
E:\FR\FM\07FEN1.SGM
07FEN1
]]>Agencies
[Federal Register Volume 84, Number 26 (Thursday, February 7, 2019)]
[Notices]
[Pages 2598-2605]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-01392]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85038; File No. SR-C2-2018-025]
Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To
Discontinue Bulk Order Functionality and Implement Bulk Message
Functionality
February 1, 2019.
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, Cboe C2 Exchange, Inc. (the ``Exchange'' or
``C2'') 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 Exchange
filed the proposal as a ``non-controversial'' proposed rule change
pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-
4(f)(6) thereunder.\4\ The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe C2 Exchange, Inc. (the ``Exchange'' or ``C2'') proposes to
discontinue bulk order functionality and implement bulk message
functionality, and make other nonsubstantive changes. The text of the
proposed rule change is provided in Exhibit 5.
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.
[[Page 2599]]
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 also the parent company of Cboe Exchange,
Inc. (``Cboe Options''), acquired Cboe EDGX Exchange, Inc. (``EDGX''),
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, EDGX, 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 EDGX 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.\5\ Quotes on Cboe Options do not route to other
exchanges,\6\ and Market-Makers generally enter new quotes at the
beginning of the trading day based on-then current market
conditions.\7\ 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.\8\
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 \9\ with a Time-in-Force of Day \10\ or Good-til-Date (``GTD'')
\11\ with an expiration time on that trading day.\12\ Like quotes, bulk
order messages do not route to other exchanges because they include a
Post Only instruction.\13\ 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.\14\ 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.
---------------------------------------------------------------------------
\5\ See Cboe Options Rule 1.1(ppp).
\6\ See Cboe Options Rule 6.14B (which describes how the
Exchange routes orders (specifically intermarket sweep orders) but
not quotes route to other exchanges); see also Nyse Arca, LLC
(``Arca'') Rule 6.37-O(a)(3)(D) (which states quotes do not route).
\7\ 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
8.5(a)(4); see also Cboe Options Rule 8.7(b)(iii).
\8\ See Securities Exchange Act Release No. 83214 (May 11,
2018), 83 FR 22796 (May 16, 2018) (SR-C2-2018-005). Prior to the
migration of the C2 trading platform to the same technology platform
as EDGX and BZX, C2 quoting functionality (substantially similar to
the quoting functionality being proposed in this rule filing) was
limited to Market-Makers.
\9\ See current Rule 1.1 (definition of Order Instructions) and
proposed Rule 6.10(c) for the definition of ``Post Only.'' The
proposed rule change moves the definitions of order types, Order
Instructions, and Times-in-Force to Rule 6.10(b), (c), and (d),
respectively.
\10\ See current Rule 1.1 and proposed Rule 6.10(d) for the
definition of the Time-in-Force of ``Day.''
\11\ See current Rule 1.1 and proposed Rule 6.10(d) for the
definition of the Time-in-Force of ``GTD.''
\12\ See current Rule 1.1 for the current definition of ``bulk
order ports.'' Pursuant to current Rule 1.1, Users may submit
auction responses through bulk order ports, and will continue to be
able to submit auction response through bulk ports. The proposed
rule change moves the definition of port to Rule 6.8(c).
\13\ See current Rule 1.1 (definition of Order Instructions) and
proposed Rule 6.10(c), which provides that an order with a Post Only
instruction may not route away to another exchange.
\14\ See supra note 7.
---------------------------------------------------------------------------
The Exchange proposes to replace bulk order message 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.\15\ A ``bulk port'' is a dedicated logical
port that, as proposed, would provide Users with the ability to submit:
---------------------------------------------------------------------------
\15\ See supra note 8 (the Exchange adopted bulk order
functionality to simulate quoting functionality).
---------------------------------------------------------------------------
(1) bulk messages,\16\ subject to the following:
---------------------------------------------------------------------------
\16\ Proposed Rule 1.1 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. Pursuant to Rule 1.2,
the Exchange will announce this number 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 1.1 also states that a User may submit a bulk message
through a bulk port as set forth in proposed Rule 6.8(c)(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.
---------------------------------------------------------------------------
(a) a bulk message has a Time-in-Force of Day;
(b) a Market-Maker with an appointment in a class may designate a
bulk message for that class 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), \17\ and other Users must
designate a bulk message for that class as Post Only; and
---------------------------------------------------------------------------
\17\ 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;
[[Page 2600]]
(2) single orders in the same manner as Users may submit orders to
the Exchange through any other type of port,\18\ including designated
with any Order Instruction and any Time-in-Force in Rule 6.10(c) and
(d),\19\ respectively, except a Market-Maker with an appointment in a
class may designate an order for that class submitted through a bulk
port as Post Only or Book Only, and other Users must designate a bulk
message for that class submitted through a bulk port as Post Only; and
---------------------------------------------------------------------------
\18\ 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.
\19\ The proposed rule change moves the definitions of Order
Instructions and Times-in-Force from Rule 1.1 to Rule 6.10.
---------------------------------------------------------------------------
(3) auction responses (using auction response messages) in the same
manner as Users may submit auction responses to the Exchange through
any other type of port.\20\
---------------------------------------------------------------------------
\20\ See proposed Rule 6.8(c)(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 6.8(c)(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 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.\21\ 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 Instruction to orders
submitted through a bulk port (as further discussed below) or other
type of port.
---------------------------------------------------------------------------
\21\ See Rule 8.5(a)(3).
---------------------------------------------------------------------------
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.\22\ The
proposed rule change provides that a Market-Maker with an appointment
in a class may designate a bulk message for that class 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).\23\ 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. The proposed rule change
provides that other Users (i.e., non-Market-Makers or Market-Makers
without an appointment in a class) must designate a quote for that
class 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 6.15 to make clear
that bulk messages (like current bulk orders) are not eligible for
routing (which is consistent with the Order Instructions of Post Only
and Book Only, which do not route to other options markets).\24\
---------------------------------------------------------------------------
\22\ See supra notes 8 and 15.
\23\ 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).
\24\ 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.\25\ 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.
---------------------------------------------------------------------------
\25\ 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 Instructions and Times-in-
Force that will be available for bulk messages, including prioritizing,
displaying, and executing them pursuant to Rule 6.12. Proposed Rule
6.12(c)(6) adds detail regarding how the System will handle bulk
messages and orders submitted through bulk ports. Specifically,
proposed subparagraph (c)(6)(A) 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).\26\ This is consistent
with how the System would handle a Post Only order not subject to the
Price Adjust process.\27\
[[Page 2601]]
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.\28\ 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.\29\
---------------------------------------------------------------------------
\26\ The ABBO means the best bid (offer) disseminated by other
exchanges.
\27\ See Rule 6.12(b). 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 6.82, 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 6.82). 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 Rules 6.10(c) and 6.12(b) (which clarify that the Price
Adjust Process will not apply to bulk messages).
\28\ See Chapter XXVII of the Rules; see also Options Order
Protection and Locked/Crossed Market Plan (the ``Linkage Plan'').
\29\ See id.
---------------------------------------------------------------------------
Similarly, proposed subparagraph (c)(6)(B) 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 (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.\30\
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
(c)(6)(A) and (B) are substantially the same as another exchange's
handling rules applicable to quotes.\31\
---------------------------------------------------------------------------
\30\ See id.
\31\ 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 (c)(6)(C) states the System will cancel or
reject a Book Only bulk message bid (offer) or order bid (offer) (or
unexecuted portion) submitted by a Market-Maker with an appointment in
the class 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.\32\ 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.
---------------------------------------------------------------------------
\32\ See Cboe Options Rule 6.45(c).
---------------------------------------------------------------------------
Proposed Rule 6.9(a) provides that a User may only enter one bid
and one offer for a series per EFID \33\ 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.\34\
---------------------------------------------------------------------------
\33\ An ``EFID'' is an Executing Firm ID. See Rule 1.1.
\34\ 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).
---------------------------------------------------------------------------
[[Page 2602]]
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 6.8(c)(3)(B) will permit Users to designate these
orders with any Order Instruction and any Time-in-Force in proposed
Rule 6.10(c) and (d), respectively, subject to the Book Only and Post
Only restrictions described above for Market-Makers with appointments
in a class and other Users. 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. Additionally, proposed Rule
6.12(c)(6)(A) imposes the same prohibition on Market-Maker orders
submitted through bulk ports from removing resting Market-Maker
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 that is similar to the fat finger check the Exchange currently
provides for orders.\35\ Proposed Rule 6.14(a)(5) 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.\36\ Quotes 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.\37\
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\35\ The proposed rule change also amends Rule 6.14(a) and (c)
(and the introductory language to that rule) to make clear which
price protections and risk controls in those paragraphs will not
apply to bulk messages.
\36\ See Rule 6.14(c)(1). Orders submitted through bulk ports
will be subject to the current order price protection mechanisms,
such as limit fat finger check in Rule 6.14.
\37\ See, e.g., Cboe Options Rule 6.14(a) and (b); Arca Rule
6.37A-O(a)(3).
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Proposed Rule 6.14(c)(6)(B) 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 and
quotes (as currently defined as bids and offers from Market-Makers),
which is optional.\38\ 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.\39\
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\38\ See current Rule 6.14(c)(6) and proposed Rule
6.14(c)(6)(A).
\39\ 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 proposed Rules 6.10(c) and (d) to
provide that eligible Order Instructions and Times-in-Force,
respectively, are subject to the proposed restrictions in Rule 6.8(c)
with respect to orders and bulk messages submitted through bulk ports,
and clarify which Order Instructions, and Times-in-Force are available
and not available for bulk messages, as described above. The proposed
rule change also amends the definitions of order types, Order
Instructions, and Times-in-Force in Rule 6.10(b), (c), and (d),
respectively, in accordance with proposed Rule 6.8(c)(3). Additionally,
Rule 6.13 to make clear that Users may not submit complex orders
through bulk ports.\40\
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\40\ 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.
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The proposed rule change also makes nonsubstantive changes to move
the definitions of order types, Order Instructions, and Times-in-Force
(as amended to accommodate bulk messages as discussed above) to Rule
6.10 and add cross-references to that Rule in the definitions of those
terms in Rule 1.1. The proposed rule change also moves the definitions
of physical port and logical port (and the proposed definition of bulk
port) to Rule 6.8(c).
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.\41\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \42\ 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
[[Page 2603]]
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) \43\ requirement that the rules
of an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\41\ 15 U.S.C. 78f(b).
\42\ 15 U.S.C. 78f(b)(5).
\43\ 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.\44\
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\44\ 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
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.\45\ 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.
---------------------------------------------------------------------------
\45\ 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.\46\ 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.
---------------------------------------------------------------------------
\46\ 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.\47\
---------------------------------------------------------------------------
\47\ See Cboe Options Rule 6.45(c).
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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
[[Page 2604]]
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.\48\ 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.
---------------------------------------------------------------------------
\48\ See Cboe Options Rule 6.14(b) and (c); see also Rule 6.37A-
O(a)(3).
---------------------------------------------------------------------------
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 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 Instructions (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
[[Page 2605]]
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 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 \49\ and Rule 19b-4(f)(6) \50\
thereunder.
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\49\ 15 U.S.C. 78s(b)(3)(A).
\50\ 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.
---------------------------------------------------------------------------
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-C2-2018-025 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-C2-2018-025. 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-C2-2018-025 and should be submitted on
or before February 22, 2019.
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\51\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\51\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-01392 Filed 2-6-19; 8:45 am]
BILLING CODE 8011-01-P
