Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Add Stock-Option Order Functionality and Complex Qualified Contingent Cross (“QCC”) Order With Stock Functionality, and To Make Other Changes to its Rules, 34230-34241 [2019-15135]
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Federal Register / Vol. 84, No. 137 / Wednesday, July 17, 2019 / Notices
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 4–747 and should be submitted
on or before August 1, 2019.
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://markets.cboe.com/us/
options/regulation/rule_filings/edgx/),
at the Exchange’s Office of the
Secretary, and at the Commission’s
Public Reference Room.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
Eduardo A. Aleman,
Deputy Secretary.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[FR Doc. 2019–15144 Filed 7–16–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86353; File No. SR–
CboeEDGX–2019–039]
Self-Regulatory Organizations; Cboe
EDGX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Add StockOption Order Functionality and
Complex Qualified Contingent Cross
(‘‘QCC’’) Order With Stock
Functionality, and To Make Other
Changes to its Rules
July 11, 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 June 27,
2019, Cboe EDGX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGX’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Exchange filed the 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.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe EDGX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGX’’) proposes to
add stock-option order functionality and
complex qualified contingent cross
(‘‘QCC’’) order with stock functionality,
and to make other changes to its Rules.
16 17
CFR 200.30–3(a)(34).
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).
1 15
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In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
In 2016, the Exchange’s parent
company, Cboe Global Markets, Inc.
(‘‘Cboe Global’’), which is the parent
company of Cboe Exchange, Inc. (‘‘Cboe
Options’’) and Cboe C2 Exchange, Inc.
(‘‘C2’’), acquired the Exchange, Cboe
EDGA Exchange, Inc. (‘‘EDGA’’), Cboe
BZX Exchange, Inc. (‘‘BZX or BZX
Options’’), and Cboe BYX Exchange,
Inc. (‘‘BYX’’ and, together with C2, Cboe
Options, the Exchange, EDGA, and BZX,
the ‘‘Cboe Affiliated Exchanges’’). The
Cboe Affiliated Exchanges are working
to align certain system functionality,
retaining only intended differences
between the Cboe Affiliated Exchanges,
in the context of a technology migration.
Cboe Options intends to migrate its
technology to the same trading platform
used by the Exchange, C2, and BZX
Options in the fourth quarter of 2019.
The proposal set forth below is intended
to add certain functionality to the
Exchange’s System that is available on
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.
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The Exchange proposes to adopt
stock-option order functionality.5 Stockoption orders facilitate the execution of
the stock component of qualified
contingent trades (‘‘QCTs’’). The
proposed rule change defines a stockoption order as the purchase or sale of
a stated number of units of an
underlying stock or a security
convertible into the underlying stock
(‘‘convertible security’’) coupled with
the purchase or sale of an option
contract(s) 6 on the opposite side of the
market representing either (1) the same
number of units of the underlying stock
or convertible security or (2) the number
of units of the underlying stock
necessary to create a delta neutral
position, but in no case in a ratio greater
than eight-to-one (8.00), where the ratio
represents the total number of units of
the underlying stock or convertible
security in the option leg(s) to the total
number of units of the underlying stock
or convertible security in the stock leg.
Only those stock-option orders in the
classes designated by the Exchange 7
with no more than the applicable
number of legs are eligible for
processing.8 Stock-option orders
execute in the same manner as other
complex orders, except as otherwise
provided in Rule 21.20 as proposed.
Currently, to execute a QCT, a User
would need to submit an option order
to the Exchange and separately submit
the stock order to a stock execution
venue.9 The option order represents one
component of a QCT and must be paired
5 See
proposed Rule 21.20(b).
proposed definition permits stock-option
orders to have one or more option leg [sic], all of
which will be handled in the same manner.
7 Pursuant to Rule 16.3, the Exchange announces
all determinations it makes pursuant to the Rules
via specifications, Notices, or Regulatory Circulars
with appropriate advanced notice, which will be
posted on the Exchange’s website, or as otherwise
provided in the Rules; electronic message; or other
communication method as provided in the Rules.
All determinations the Exchange makes pursuant to
Rule 21.20 will be made in accordance with Rule
16.3.
8 See proposed Rule 21.20(b). This definition is
virtually identical to the Cboe Options definition,
except the proposed definition does not provide the
Exchange with flexibility to lower the permissible
ratio of stock-option orders like the Cboe Options
definition, as the Exchange does not believe it
needs this flexibility. See Cboe Options Rule
6.53C(a)(1). The proposed definition is also
substantially the same as the definition of stockoption order of other options exchanges. See, e.g.,
Miami International Securities Exchange, LLC
(‘‘MIAX’’) Rule 518(a)(5); and NASDAQ ISE, LLC
(‘‘ISE’’) Options 3, Section 14(a)(2) and (3). The
definition is also consistent with the definition of
a Complex Trade in the linkage rules in Rule
27.1(a)(4).
9 The Exchange currently permits the submission
of qualified contingent cross (‘‘QCC’’) orders with
stock, which is a specific type of stock-option order.
See current Rule 21.20(c)(7) (proposed Rule
21.20(l)(3)).
6 This
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with a stock order. When a User enters
the option component of a QCT, the
User is responsible for executing the
associated stock component of the QCT
within a reasonable period of time after
the option order is executed. The
Exchange conducts surveillance of
Users to ensure that Users execute the
stock component of a QCT at or near the
same time as the options component.
While the Exchange does not specify
how the User should go about executing
the stock component of the trade, this
process is often manual and is therefore
a compliance risk for Users if they do
not execute the stock component within
a reasonable time period of execution of
the options component. Thus, the
Exchange is proposing to offer stockoption order functionality, pursuant to
which the Exchange will automatically
communicate the stock component of a
QCT to a designated broker-dealer for
execution in connection with the
execution of the option order on the
Exchange. Use of stock-option order
functionality will be voluntary, and
Users may continue to execute
components of a QCT in the manner
they do today (as described above).
Pursuant to proposed Rule 21.20,
Interpretation and Policy .03, a User
may only submit a stock-option order
(including a QCC with Stock Order) if
it complies with the QCT exemption
from Rule 611(a) of Regulation NMS
(‘‘QCT exemption’’).10 A User
submitting a stock-option order
represents that it complies with the QCT
exemption. To submit a stock-option
order to the Exchange for execution, a
User must enter into a brokerage
agreement with one or more brokerdealers that are not affiliated with the
10 See Rule 21.1(d)(10)(A) for the definition of a
qualified contingent trade. A ‘‘qualified contingent
trade’’ is a transaction consisting of two or more
component orders, executed as agent or principal,
where: (1) At least one component is an NMS stock,
as defined in Rule 600 of Regulation NMS under the
Exchange Act; (2) all components are effected with
a product or price contingency that either has been
agreed to by all the respective counterparties or
arranged for by a broker-dealer as principal or
agent; (3) the execution of one component is
contingent upon the execution of all other
components at or near the same time; (4) the
specific relationship between the component orders
(e.g., the spread between the prices of the
component orders) is determined by the time the
contingent order is placed; (5) the component
orders bear a derivative relationship to one another,
represent different classes of shares of the same
issuer, or involve the securities of participants in
mergers or with intentions to merge that have been
announced or cancelled; and (6) the transaction is
fully hedged (without regard to any prior existing
position) as a result of other components of the
contingent trade. Other options exchanges impose
the same requirement. See, e.g., Cboe Options Rule
6.53C, Interpretation and Policy .06(a); MIAX Rule
518, Interpretation and Policy .01(a); and ISE
Options 3, Section 14, Supplemental Material .07.
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Exchange, which broker-dealer(s) the
Exchange has identified as having
connectivity to electronically
communicate the stock components of
stock-option orders to stock trading
venues.11
Proposed subparagraph (l)(1) states
when a User submits to the System a
stock-option order, it must designate a
specific broker-dealer with which it has
entered into a brokerage agreement
pursuant to proposed Interpretation and
Policy .03 (the ‘‘designated brokerdealer’’) to which the Exchange will
electronically communicate the stock
component of the stock-option order on
behalf of the User.12
Proposed Rule 21.20(l)(2) describes
how stock-option orders will execute. A
stock-option order may execute against
other stock-option orders (or COA
Responses, if applicable), but may not
execute against orders in the Simple
Book.13 A stock-option order may only
execute if the price complies with
proposed Rule 21.20(f)(2)(B).14 If a
stock-option order can execute upon
entry or following a COA, or if it can
execute following evaluation while
resting in the COB pursuant to Rule
21.20(i), the System executes the option
component (which may consist of one
or more option legs) of a stock-option
order against the option component of
11 Other options exchanges impose a similar
requirement. See Cboe Options Rule 6.53C,
Interpretation and Policy .06(a); see also MIAX Rule
518, Interpretation and Policy .01.
12 As is the case with all orders submitted to the
Exchange, a User must also designate a Clearing
Member that is a Designated Give-Up pursuant to
Rule 21.12 on a stock-option order submitted to the
Exchange for processing.
13 See proposed Rule 21.20(g)(5) and (l)(2) (the
Exchange does not list stock for trading, and
therefore, the stock leg would not be able to Leg).
A stock-option order may only execute if the stock
leg is executable at the price(s) necessary to achieve
the desired net price. See proposed Rule
21.20(f)(2)(B).
14 See current Rule 21.20(c)(1)(B) and (C)
(proposed Rule 21.20(f)(2)). The System will not
execute a complex order pursuant to Rule 21.20 at
a net price (i) that would cause any component of
the complex strategy to be executed at a price of
zero; (ii) worse than the SBBO or equal to the SBBO
when there is a Priority Customer Order at the
SBBO; (iii) that would cause any component of the
complex strategy to be executed at a price worse
than the individual component prices on the
Simple Book; (iv) worse than the price that would
be available if the complex order Legged into the
Simple Book; or (v) that would cause any
component of the complex strategy to be executed
at a price ahead of a Priority Customer Order on the
Simple Book without improving the BBO of at least
one component of the complex strategy. The
proposed rule change amends the definitions of
SBBO and SNBBO to provide that the NBBO of the
stock component of a stock-option order is used to
calculate the SBBO and SNBBO for a stock-option
order. See proposed Rule 21.20(a); see also Cboe
Options Rule 1.1 (definitions of national spread
market (equivalent to SNBBO) and exchange spread
market (equivalent to SBBO)).
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other stock-option orders resting in the
COB or COA responses (in time priority)
(which is consistent with how other
complex orders execute against each
other pursuant to proposed
subparagraphs (d)(5)(ii) and (e)(2)), as
applicable. However, the Exchange does
not immediately send the User a trade
execution report for this option
execution.15 Because the User submitted
a stock-option order to execute as a
package, the Exchange waits to send a
trade execution report to the User until
after it has determined whether all
components of the stock-option order
have executed, as described below.
After the option component is executed,
the Exchange will then automatically
communicate the stock component to
the designated broker-dealer for
execution, as further described below.
If the System receives an execution
report for the stock component of a
stock-option order from the designated
broker-dealer, the Exchange sends the
User the trade execution report for the
stock-option order, including execution
information for both the stock and
option components. However, if the
System receives a report from the
designated broker-dealer that the stock
component of the stock-option order
cannot execute,16 the Exchange nullifies
the option component trade and notifies
the User of the reason for the
nullification.17 If a stock-option order is
not marketable, it rests in the COB (if
eligible to rest), subject to a User’s
instructions. The proposed rule change
prevents execution of the option
component of a QCT where the stock
component has not been successfully
executed, just as the proposed rule
change prevents execution of the stock
component of a QCT where the option
component has not been successfully
executed by cancelling the stock
component if the option component
cannot execute. This proposed
execution process is the same process
the Exchange currently uses to execute
QCC with Stock Orders, which are a
type of stock-option order (and thus the
15 Even though the Exchange does not send the
User an execution report immediately following
execution of the option component, the Exchange
disseminates the trade at that time pursuant to the
OPRA Plan and creates a record to be sent to the
Clearing Corporation.
16 For example, if the stock execution venue to
which the designated broker-dealer routed the stock
component is experiencing system issues, the stock
component may not be able to execute.
Additionally, the Exchange understands certain
stock execution venues apply risk controls to the
stock components of QCTs, which may prevent
execution of the stock components at certain prices.
17 The Exchange will nullify the option
component trade in the same manner as it currently
nullifies any other trades (when nullification is
permitted under the Rules). See Rule 20.6.
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Exchange merely expands this process
to all stock-option orders, as all stockoption orders must satisfy the same QCT
Exemption).18 This proposed process is
also similar to that of other options
exchanges.19
Currently, whenever a stock trading
venue nullifies the stock leg of a QCT
or whenever the stock leg cannot
execute, the Exchange will nullify the
option leg upon request of one of the
parties to the transaction or on an
Exchange Official’s own motion in
accordance with the Rules.20 To qualify
as a QCT, the execution of one
component is contingent upon the
execution of all other components at or
near the same time.21 Given this
requirement, if the stock component
does not execute at or near the same
time as the option component, it is
reasonable to expect a User that
submitted a stock-option order to
request such nullification.22 If the stock
18 See current Rule 21.20(c)(7) (proposed Rule
21.20(l)(3)).
19 See, e.g., Cboe Options Rule 6.53C,
Interpretation and Policy .06(a), which states a
stock-option order will not be executed unless the
stock leg is executable at the price(s) necessary to
achieve the desired net price; see also ISE Options
3, Section14, Supplementary Material .02 (which
states a ‘‘trade’’ of a stock-option order or stockcomplex order will be automatically cancelled if
market conditions prevent the execution of the
stock or option leg(s) at the prices necessary to
achieve the agreed upon net price); and MIAX Rule
518, Interpretation and Policy .01(b) (pursuant to
which the stock components will attempt execution
prior to the option components, but ultimately
require both the stock and option components to
execute). The proposed rule change ensures the
option can trade before the stock can trade, rather
than potentially execute [sic] stock component and
not execute [sic] option component, which creates
compliance risk for Users.
20 See Rule 20.6, Interpretation and Policy .04(c).
21 See Securities Exchange Act Release No. 54389
(August 31, 2006), 71 FR 52829, 52831 (September
7, 2006) (Order Granting an Exemption for
Qualified Contingent Trades from Rule 611(a) of
Regulation NMS Under the Securities Exchange Act
of 1934) (‘‘QCT Exemption Order’’), which requires
the execution of one component of the QCT to be
contingent upon the execution of all other
components at or near the same time to qualify for
the exemption. In its Exemption Request, the
Securities Industry Association stated that for
contingent trades, the execution of one order is
contingent upon the execution of the other order.
SIA further stated that, by breaking up one or more
components of a contingent trade and requiring that
such components be separately executed, one or
more parties may trade ‘‘out of hedge.’’ See Letter
to Nancy M. Morris, Secretary, Commission, from
Andrew Madoff, SIA Trading Committee, SIA,
dated June 21, 2006 (‘‘SIA Exemption Request’’), at
3.
22 See QCT Exemption Order at 52831. In the SIA
Exemption Request, the SIA indicated parties to a
contingent transaction are focused on the spread or
ratio between the transaction prices for each of the
component instruments, rather than on the absolute
price of any single component instrument. The SIA
also noted the economics of a contingent trade are
based on the relationship between the prices of the
security and related derivative or security. See SIA
Exemption Request at 2.
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component does not execute, rather
than require the User that submitted the
stock-option order to contact the
Exchange to request the nullification of
the option component execution
pursuant to Rule 20.6, Interpretation
and Policy .04(c), the proposed rule
eliminates this requirement for the
submitting User to make such a request.
Instead, the proposed rule change
provides that the Exchange will
automatically nullify the option
transaction if the stock component does
not execute. The Exchange believes
such nullification without a request
from the User is consistent with the
definition of a QCT order. The proposed
rule change merely automates an
otherwise manual process for Users.
Additionally, the Exchange believes
this automatic nullification will reduce
any compliance risk for the User
associated with execution of a stockoption order and lack of execution of a
stock order at or near the same time.23
The Exchange conducts surveillance to
ensure a User executes the stock
component of a QCT, which will also
apply to QCC with Stock Orders, if the
option component executed. As a result,
if the stock component does not execute
when initially submitted to a stock
trading venue by the designated brokerdealer, a User may be subject to
compliance risk if it does not execute
the stock component within a
reasonable time period of the execution
of the option component. The proposed
rule change reduces this compliance
risk for Users.
If a stock-option order can execute,
the System executes the buy (sell) stock
leg of a stock-option order pursuant to
Rule 21.20 up to a buffer amount above
(below) the NBO (NBB), which amount
the Exchange determines.24 The
Exchange believes that Users may be
willing to trade a stock-option order
with the stock leg at a price outside of
the NBBO (which is permissible
pursuant to the QCT exemption) of the
stock leg in order to achieve the desired
net price. However, the buffer may
prevent execution with a stock price
‘‘too far’’ away from the market price,
which may be inconsistent with thencurrent market conditions. This may
23 In the SIA Exemption Request, the SIA stated
that parties to a contingent trade will not execute
one side of the trade without the other component
or components being executed in full (or in ratio)
and at the specified spread or ratio. See SIA
Exemption Request at 2. While a broker-dealer
could re-submit the stock component to a stock
trading venue or execution after it initially fails to
execute, there is a compliance risk that the time at
which the stock component executes is not close
enough to the time at which the option component
executed.
24 See proposed Rule 21.20(f)(2)(B).
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ultimately prevent execution at
potentially erroneous prices. This is
similar to the Exchange’s current fat
finger protection (which will not permit
a complex order to be more than a
specified amount outside of the SNBBO,
which will include the NBBO of the
stock leg, as described above),25 except
it also applies a buffer to the individual
stock leg as opposed to the net price.
The option component of a stockoption order executes in accordance
with same priority principles as any
other option order. For a stock-option
order with one option leg, the option leg
may not trade at a price worse than the
individual component price on the
Simple Book or at the same price as a
Priority Customer Order on the Simple
Book. For a stock-option order with
more than one option leg, the option
legs must trade at prices consistent with
priority applicable to a complex order
with all option legs.26
Proposed Rule 21.20(f)(1) states that
Users may express bids and offers for a
stock-option order (including a QCC
with Stock Order, as discussed below)
in any decimal price the Exchange
determines. The option leg(s) of a stockoption order may be executed in $0.01
increments, regardless of the minimum
increments otherwise applicable to the
option leg(s), and the stock leg of a
stock-option order may be executed in
any decimal price permitted in the
equity market.27 Smaller minimum
increments are appropriate for stockoption orders as the stock component
can trade at finer decimal increments
permitted by the equity market.
Furthermore, the Exchange notes that
even with the flexibility provided in the
proposed rule, the individual options
25 See supra note 15. Additionally, stock
exchanges provide similar protections for execution
prices of stock orders. See, e.g., NASDAQ Stock
Market Rule 4757(c) (which prevents stock limit
orders from being accepted at prices outside of preset standard limits, which is based on the NBBO).
26 See proposed Rule 21.20(f)(2)(B). The System
does not execute a complex order pursuant to this
Rule 21.20 at a net price (i) that would cause any
component of the complex strategy to be executed
at a price of zero; (ii) worse than the SBBO or equal
to the SBBO when there is a Priority Customer
Order at the SBBO, except AON complex orders
may only execute at prices better than the SBBO;
(iii) that would cause any component of the
complex strategy to be executed at a price worse
than the individual component prices on the
Simple Book; (iv) worse than the price that would
be available if the complex order Legged into the
Simple Book; or (v) that would cause any
component of the complex strategy to be executed
at a price ahead of a Priority Customer Order on the
Simple Book without improving the BBO of at least
one component of the complex strategy. See
proposed Rule 21.20(f)(2)(A).
27 Other options exchanges have the same
minimum increment requirements for stock-option
orders. See Cboe Options Rule 6.53C(c)(ii); and ISE
Options 3, Section 14(c)(1).
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and stock legs must trade at increments
allowed by the Commission in the
options and equities markets.
The proposed rule change moves the
provision regarding the execution of
QCC with Stock Orders from current
Rule 21.20(c)(7) to proposed Rule
21.20(l)(3). The proposed rule change
amends this provision to provide that
the QCC portion of a QCC with Stock
Order may consist of a QCC Order (with
one option leg) or a Complex QCC Order
(with multiple option legs).28 A QCC
with Stock Order with multiple option
legs will execute in the same manner as
a QCC with Stock Order with one option
leg. The option component of a
Complex QCC with Stock Order (i.e., a
Complex QCC Order) will be subject to
the same execution requirements as a
Complex QCC Order, including the
requirement that no option leg executes
at a price of zero or at the same price
as a Priority Customer Order in the
Simple Book, that each option leg must
execute at a price at or between the
NBBO for the applicable series, and the
execution price is better than the price
of an [sic] complex order resting in the
COB (unless the Complex QCC Order is
a Priority Customer Order and the
resting complex order is a non-Priority
Customer Order, in which case the
execution price may be the same as or
better than the price of the resting
complex order).29
The proposed rule change also
updates an inadvertent cross-reference
to Rule 21.8 regarding the execution of
the option component of a QCC Order,
as the option component of a QCC Order
(including a Complex QCC Order) will
automatically execute upon entry
pursuant to Rule 21.1(d)(10) if the
28 See Rule 21.1(d)(10) (which describes QCC and
Complex QCC Orders). Other options exchanges
have similar Complex QCC with Stock order
functionality. See, e.g., Cboe Options Rule 6.53C,
Interpretation and Policy .06(g)(1)(A) (which
provides a QCC with Stock Order may have
multiple option components); and ISE Options 3,
Section 12(f) (which describes complex QCC with
stock orders). In addition to the other changes to the
QCC with Stock rule provisions described below,
the proposed rule change makes nonsubstantive
changes, including changes to consolidate
provisions that apply to all stock-option orders in
Rule 21.20, update paragraph numbering and
lettering, conform cross-references, and adds certain
clarifying language.
29 See Rule 21.1(d)(10). The proposed rule change
deletes the reference to current Rule 21.20(c)(1)(C),
as that rule provides no component may execute at
a price of zero or ahead of a Priority Customer
Order on the Simple Book without improving the
BBO of at least one component of the complex
strategy. This second requirement is not necessary,
because each leg of a Complex QCC must improve
the price of a Priority Customer Order in any leg
(and may not be worse than the NBBO of any leg),
and the proposed rule change adds the requirement
that no component may execute at a price of zero
to proposed Rule 21.1(d)(10)(C).
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conditions are satisfied. The proposed
rule change deletes current Rule
21.20(c)(7)(A)(ii) regarding the need to
give up a Clearing Member in
accordance with Rule 21.12, as all
orders submitted to the Exchange
(including QCC Orders) must designate
a give up in accordance with Rule 21.12,
making this requirement redundant.
Additionally, as noted above, the
proposed rule change adopts Rule 21.20,
Interpretation .03, which requires a User
that submits a stock-option order to
designate a specific broker-dealer to
which the stock components will be
communicated when entering a stockoption order. Because a QCC with Stock
Order is a type of a stock-option order,
proposed Rule 21.20 will apply to QCC
with Stock Orders (including Complex
QCC with Stock Orders), and thus the
Exchange proposes to delete current
Rule 21.20(c)(7)(A)(iii), as it is
redundant.
The proposed rule change also adds
subparagraph (l)(4), which provides that
if a User submits to the System a stockoption order with a stock leg to sell, the
User must market the stock leg ‘‘long,’’
‘‘short,’’ or ‘‘short exempt’’ in
compliance with Regulation SHO under
the Exchange Act. Additionally, the
Exchange will only execute the stock leg
of a stock-option order at a price
permissible under Regulation SHO. If a
stock-option order cannot execute, the
System calculates the SBBO or SNBBO
with a price for the stock leg that would
be permissible under Regulation SHO,
and posts the stock-option order on the
COB at that price (if eligible to rest),
subject to a User’s instructions.30
Similarly, proposed subparagraph
(j)(3) provides that the Exchange will
only execute the stock leg of a stockoption order at a price permissible
under the Limit Up-Limit Down Plan. If
a stock-option order cannot execute, the
System calculates the SBBO or SNBBO
with a price for the stock leg that would
be permissible under that Plan, and
posts the stock-option order on the COB
at that price (if eligible to rest), subject
to a User’s instructions.31
30 Specifically, Rule 201 of Regulation SHO
provides that when the short sale price test is
triggered for an NMS stock, a trading center (such
as the Exchange) must comply with Rule 201. Other
options exchanges have similar marking
requirements. See Cboe Options Rule 6.53C,
Interpretation and Policy .06(e) (which requires
marking in accordance with Regulation SHO); see
also MIAX Rule 518, Interpretation and Policy
.01(b) (which requires marking and execution price
in accordance with Regulation SHO); and ISE
Options 3, Section 14, Supplementary Material .13
(which requires marking in accordance with
Regulation SHO).
31 Other options exchanges have similar
restrictions on stock leg execution prices. See Cboe
Options Rule 6.53C, Interpretation and Policy .06(f);
PO 00000
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34233
Current Rule 21.20, Interpretations
and Policies .04 and .06 describes price
protection mechanisms and risk
controls applicable to complex orders.
The proposed rule change moves these
to Rule 21.17(b) to consolidate all price
protection mechanisms and risk
controls available on the Exchange into
a single place within the Rules.32 The
price protection mechanisms and risk
controls will apply to stock-option
orders (or the options components of
stock-option orders, as applicable)
submitted to the Exchange. The
proposed rule change adds the buywrite/married put check, which will be
a price protection mechanism
applicable specifically to stock-option
orders.33 If the Exchange applies the
buy-write/married put check to a class,
the System cancels or rejects a stockoption order to buy the stock leg and
sell a call (buy a put) for the option leg
with a price that is more than the strike
price of the call (put) plus (minus) a
buffer amount (which the Exchange
determines on a class-by-class basis).34
The proposed rule change also
amends the debit/credit price
reasonability check in proposed Rule
21.17(b)(3)(B) to provide how that check
will apply to stock-option orders. If the
stock component of a stock-option order
is to buy, the stock-option order is a
debit, and if the stock component of a
stock-option order is to sell, the stockoption order is a credit. Pursuant to the
current debit/credit price reasonability
check, if all pairs and loners are a debit
(credit) (and a buy (sell) stock leg would
always be a loner and thus a debit
(credit), ultimately, whether the stock
leg is a buy or sell would dictate
whether a stock-option order is a debit
or credit. Therefore, the Exchange
believes this is a reasonable handling of
see also MIAX Rule 518, Interpretation and Policy
.01(f).
32 The proposed rule change makes
corresponding changes to the introductory language
and the paragraph lettering in Rule 21.17 (including
moving current price protections related to simple
orders into proposed paragraph (a)) and makes
corresponding changes to cross-references. The
proposed rule change also adds to the maximum
value acceptable price range check that it applies
to auction responses, as other price protections do.
Auction responses may execute in the same manner
as orders, and thus application of this check to
auction responses may prevent execution of an
auction response at a potentially erroneous price.
The proposed rule change makes no other
substantive changes to the complex order price
protections, and only makes nonsubstantive
changes to make the language plain English, to
simplify the rule provisions, and to conform the
language to the corresponding C2 rules. See C2 Rule
6.14(b).
33 See proposed Rule 21.17(b)(9).
34 The proposed buy-write/married put price
check is similar to the parity price protection in
MIAX Rule 518, Interpretation and Policy .01(g).
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stock-option orders designed to help
mitigate potential risks associated with
stock-option orders trading at prices that
are potentially erroneous. Additionally,
the proposed rule change deletes the
exception for complex orders with
European-style exercise. The Exchange
no longer believes this exception is
necessary and will expand this check to
index options with all exercise styles.
The proposed rule change adds detail
to the complex order drill-through
protection in proposed Rule 21.17(b)(6),
to provide that if the SBBO changes
while an order rests on the COB at the
drill-through price prior to the end of
the specified time period, if the complex
order cannot Leg, and the new SBO
(SBB) crosses the drill-through price,
the System changes the displayed price
of the buy (sell) complex order to the
new SBO (SBB) minus (plus) $0.01, and
the order is not cancelled at the end of
the time period. This proposed change
codifies current functionality, and
merely permits an order to remain on
the COB since the Exchange’s market
reflects interest to trade (but the order
is not currently executable due to
Legging Restrictions) that was not there
was not at the beginning of the time
period. This provides complex orders
with additional execution opportunities
prior to cancellation.
The proposed rule change makes
various changes to Rule 21.20 regarding
complex orders to simplify the Rule,
make certain clarifications, codify
certain functionality in the Rule, delete
redundant provisions, re-organize the
Rule, and conform the rule text to the
corresponding C2 rule regarding
complex orders.35 The proposed rule
change moves the provision stating that
trading of complex orders is subject to
all other Rules applicable to the trading
of orders, unless otherwise provided in
Rule 21.10 from current paragraph (c) to
the introduction of Rule 21.20. The
proposed rule change alphabetizes the
defined terms in Rule 21.20(a), makes
nonsubstantive changes to definitions to
conform the rule language to that of
corresponding definitions in C2 Rule
6.13, and removes the paragraph
lettering.
The proposed rule change amends the
definition of ‘‘BBO’’ to mean the best
bid or offer disseminated by the
Exchange. The term BBO generally
refers to the prices of quotes the
Exchange sends to OPRA. While the
bids and offers of most orders on the
Simple Book are sent to OPRA, certain
ones (such as the bids and offers of AON
35 See C2 Rule 6.13. The proposed rule change
also modifies a corresponding cross-reference in
Rule 21.1(d)(10)(E).
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orders, which are not displayed on the
Simple Book) 36 are not disseminated.
The proposed rule change updates the
term BBO to accurately reflect that it
represents displayed, disseminated
interest.37
The proposed rule change amends the
definition of ‘‘complex order’’ to
provide that it is an order involving the
concurrent purchase and/or sale of two
or more different series in the same
class. This merely accounts for the fact
that a complex order may be in an index
class (for which there is an underlying
index) as well as an equity option class
(for which there is an underlying
security).38 The proposed rule change
also deletes the Exchange’s flexibility to
designate in which classes complex
orders may be entered and that the
Exchange will determine the
permissible number of legs on a classby-class basis. Currently, the Exchange
makes complex order functionality
available in all classes that trade on the
Exchange and has the same limit on the
number of legs that may be submitted
for a complex order in all classes. The
proposed rule change codifies in
proposed paragraph (b) that complex
orders are available in all classes listed
for trading on the Exchange, which is
consistent with this current definition of
complex order, as well as current
paragraph (b), which permits the
Exchange to determine when complex
orders are available for use on the
Exchange.
The proposed rule change adds to
paragraph (b) that Users may designate
complex orders as Attributable or NonAttributable. These order instructions
are defined in Rule 21.1(c) and are
currently available for complex orders.
The proposed rule change codifies in
the Rules that these order instructions
are available for complex orders. This
provides Users with additional
functionality and flexibility with respect
to complex order entry that they
currently have for simple orders. The
proposed rule change is the same as the
C2 rule, which similarly permits Users
to designate complex orders as
Attributable or Non-Attributable.39
The proposed rule change moves the
provision regarding the Exchange
determining which Capacities 40 are
Rule 21.1(d)(4).
proposed definition of BBO is identical to
C2’s definition of BBO. See C2 Rule 1.1.
38 This is consistent with the definition of
complex order in C2 Rule 1.1.
39 See C2 Rule 6.13(b).
40 The Exchange notes the term ‘‘Capacity’’ refers
to origin code. The Exchange is submitting a
separate rule filing to add the definition of
Capacity, as well as the different Capacities
available on the Exchange. This is the term
PO 00000
36 See
37 This
Frm 00119
Fmt 4703
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eligible for entry onto the COB from
current paragraph (c) to proposed
paragraph (b), which includes all other
information regarding the Exchange’s
authority to limit the availability of
certain orders with respect to complex
order functionality.
The proposed rule change moves the
provisions regarding COA eligibility
from current subparagraph (d)(1) and
Interpretation and Policy .02 to the
definition of a COA-eligible order in
current paragraph (b)(2) (proposed
paragraph (b)) so that all terms regarding
COA eligibility of a complex order are
included in the same place within the
rule. The proposed rule change clarifies
in the definition of complex only order
in current subparagraph (b)(1) (proposed
paragraph (b)) that complex [sic] orders
may not leg into the Simple Book
(which is consistent with the definition
that currently states these orders will
only check against the COB).41 This is
also consistent with the definition of
COA-Eligible and Do-Not-COA Order in
the C2 Rules.42 The proposed rule
change makes no substantive changes to
what orders will and will not initiate a
COA.
The proposed rule change clarifies in
current subparagraph (b)(3) (proposed
paragraph (b)) that if a complex order
would execute against a complex order
in the COB with an MTP Modifier with
the same Unique Identifier, the System
handles the complex orders with an
MTP Modifier as described in Rule
21.1(g). This is consistent with current
functionality and adds detail to the
Rules of how the System handles these
orders. This is also consistent with the
definition of Complex Orders with MTP
Modifiers in the C2 Rules.43 The
proposed rule change makes no
substantive changes to how the System
handles complex orders with MTP
Modifiers.
The proposed rule change
alphabetizes the types of complex
orders available on the Exchange in
paragraph (b). The changes described
above, which do not modify any
existing functionality and merely add
detail and clarity to the Rules. The
proposed rule makes additional
nonsubstantive changes to these
definitions, including to make them
plain English, to reorganize certain
provisions, to simplify the language,
update paragraph lettering and
numbering and cross-references, and to
currently used in C2 Rules when referring to origin
code. See, e.g., C2 Rule 6.13(b).
41 The Commission notes that proposed
paragraph (b) provides that complex only orders
may not leg into the Simple Book (emphasis added).
42 See C2 Rule 6.13(b).
43 See C2 Rule 6.13(b).
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conform them to other portions of the
rule and to the corresponding C2 rule.44
The proposed rule change moves the
provisions regarding minimum
increments and trade prices for complex
orders from current paragraph (c)
(which is primarily about the COB
Opening Process) to proposed paragraph
(f)(1) and (2), respectively. The
proposed rule change makes no
substantive changes to these provisions,
and makes nonsubstantive changes,
including to make them plain English,
to reorganize certain provisions, to
simplify the language, update paragraph
lettering and numbering and crossreferences, and to conform them to other
portions of the rule and to the
corresponding C2 rule.45
The proposed rule change
consolidates all provisions regarding the
COB Opening Process into proposed
paragraph (c). Current subparagraph
(c)(2)(A) becomes the introductory
sentence for paragraph (c). The
provisions regarding when Users may
submit complex orders for participation
in the COB Opening Process, as well as
when the Exchange disseminates
messages with information regarding the
opening process, move from current
subparagraph (c)(2)(A) to proposed
subparagraph (c)(1). Current
subparagraph (c)(2)(B) states the COB
Opening Process will commence when
all legs of the complex strategy are open
on the Simple Book. However, pursuant
to proposed subparagraph (c)(2), the
System initiates the COB Opening
Process for a complex strategy after a
number of seconds (determined by the
Exchange) after all legs of the strategy in
the Simple Book are open for trading.46
The delay provides time for the market
prices to stabilize before trading may
begin.47 This is consistent with current
functionality as set forth in the technical
specifications for the COB opening
process available on the Exchange’s
website.48 The Exchange believes this is
a more accurate description of the time
when the COB opens.49 The rule
provisions regarding how the Exchange
determines the COB Opening Price, how
the Exchange transitions to Regular
Trading, and what happens if there are
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44 See
C2 Rule 6.13(b).
45 See C2 Rule 6.13(f). The Exchange notes C2 has
no Priority Customer overlay, and thus has different
execution price requirements regarding components
of complex orders with respect to the Simple Book.
46 See proposed Rule 21.20(c)(2).
47 The Exchange notes it applies a similar delay
after occurrence of the opening rotation trigger for
the simple market opening auction process. See
Rule 21.7(d)(1).
48 See https://cdn.cboe.com/resources/
membership/US_Options_Opening_Process.pdf.
49 This is also the same as the COB opening
process for C2. See C2 Rule 6.13(c)(2).
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no matching complex orders or no valid
COB Opening Price move from current
subparagraphs (c)(2)(C) through (D) to
proposed subparagraphs (c)(2)(A)
through (C). The proposed rule change
makes no substantive changes to how
the COB opening process occurs, and
makes nonsubstantive changes,
including to make them plain English,
to reorganize certain provisions, to
simplify the language, update paragraph
lettering and numbering and crossreferences, and to conform them to other
portions of the rule and to the
corresponding C2 rule.50
The proposed rule change moves the
provisions in current subparagraph
(c)(2)(E) regarding prices for complex
strategy executions to proposed
paragraph (f)(2) (along with the
provisions in current (c)(1)(B) and (C) as
discussed above) and (3) so that all
provisions regarding prices at which
complex orders may execute in any
manner are included in a single place
within Rule 21.20. The proposed rule
change makes no substantive changes to
the prices at which complex orders may
execute, and makes nonsubstantive
changes, including to make them plain
English, to reorganize certain
provisions, to simplify the language,
update paragraph lettering and
numbering and cross-references, and to
conform them to other portions of the
rule and to the corresponding C2 rule.51
The proposed rule change moves the
provision regarding incoming complex
orders with prices that do not satisfy the
pricing requirements described in the
previous paragraph from current
subparagraph (c)(2)(E) to proposed
subparagraph (d)(5) and (e), to include
all provisions regarding System
handling of complex orders that are
unable to execute (either following a
COA or upon submission to the COB,
respectively) in a single place with in
Rule 21.20. The proposed rule change
makes no substantive changes to this
provision.
The proposed rule change moves
provisions regarding restrictions on the
Legging 52 of complex orders into the
Simple Book from current paragraph
C2 Rule 6.13(c).
C2 Rule 6.13(f).
52 The proposed rule change also adds to Rule
21.20(a) a defined term for Legging, which is
defined in proposed paragraph (g) as a complex
order executing against orders an quotes in the
Simple Book if it can execute in full or in a
permissible ratio and if it has [sic] more than a
maximum number of legs (which the Exchange
determines on a class-by-class basis and may two,
three, or four). This is consistent with current Rule
21.20(c)(1)(F) and merely adds a defined term. The
Commission notes that such execution occurs if the
complex order has no more than a maximum
number of legs (emphasis added).
PO 00000
50 See
51 See
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34235
(c)(2)(F) to proposed paragraph (g). The
proposed rule change makes no
substantive changes to the Legging
restrictions on complex orders, and
makes nonsubstantive changes,
including to make them plain English,
to reorganize certain provisions, to
simplify the language, update paragraph
lettering and numbering and crossreferences, and to conform them to other
portions of the rule and to the
corresponding C2 rule.53
The proposed rule change moves and
combines the provisions regarding
initial and continual evaluation of
complex orders from current
subparagraphs (c)(1)(G) and (c)(5) to
proposed paragraph (i) so that all
provisions regarding evaluation of
complex orders are included in a single
place and in a simple manner within
Rule 21.20. The proposed rule change
makes no substantive changes to the
evaluation process, and makes
nonsubstantive changes to these
provisions, including to make them
plain English, to reorganize certain
provisions, to simplify the language and
delete redundant language, update
paragraph lettering and numbering and
cross-references, and to conform them to
other portions of the rule and to the
corresponding C2 rule.54
The proposed rule change moves the
provisions in subparagraph (c)(4)(A) and
(B) regarding the repricing of complex
orders on the COB in certain situations
and the handling of Post Only complex
orders that lock or cross a resting
complex order in the COB or the thencurrent opposite side SBBO to proposed
subparagraph (h)(1). The proposed rule
change modifies the reference to
applicable price protections in current
subparagraph (c)(4)(B) to the drillthrough protection in proposed
subparagraph (h)(1), as this is the only
applicable price protection in the
context of this Rule. The proposed rule
change moves current subparagraph
(c)(4)(C) to proposed subparagraph
(h)(2). The proposed rule change deletes
the remainder of current subparagraph
(c)(4) regarding the managed interest
process, as the provisions in that
subparagraph are covered in various
other parts of Rule 21.20 (currently and
as proposed), including proposed
paragraphs (d) through (h),55 making
53 See
C2 Rule 6.13(g).
C2 Rule 6.13(i).
55 For example, the first portion of current
subparagraph (c)(5)(A) describes the System
evaluation of an order and whether it is COAeligible, can execute against the COB or Leg into the
Simple Book. As discussed above, this is described
in proposed paragraph (g). Additionally, current
subparagraph (c)(5)(A) describes pricing
54 See
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these provisions of the managed interest
process redundant. The proposed rule
change makes no substantive changes to
the evaluation process, and makes
nonsubstantive changes to these
provisions, including to make them
plain English, to reorganize certain
provisions, to simplify the language and
delete redundant language, update
paragraph lettering and numbering and
cross-references, and to conform them to
other portions of the rule and to the
corresponding C2 rule.56
The proposed rule change deletes
current subparagraph (c)(4)(A), as
proposed subparagraph (f)(2)(A)
includes a provision that requires a
complex order to execute at a price at
least equal to the SBBO (i.e., the bids
and offers established in the
marketplace that are no better than the
bids or offers comprising the complex
order price) or better than the SBBO
when there is a Priority Customer Order
at the SBBO,57 and thus this provision
is redundant. The proposed rule change
moves the provision in current
subparagraph (c)(4)(B) to proposed
paragraph (e), which describes the
allocation and priority in which a
complex order may execute against
other interest. The proposed rule change
does not change the priority order in
which, or the prices at which, complex
orders currently execute. The proposed
rule change makes nonsubstantive
changes to these provisions, including
to make them plain English, to
reorganize certain provisions, to
simplify the language and delete
redundant language, update paragraph
lettering and numbering and crossreferences, and to conform them to other
portions of the rule and to the
corresponding C2 rules.58
The proposed rule change moves the
description of how a non-COA-eligible
order will be handled from current
subparagraph (c)(5)(D) to proposed
paragraph (e). The proposed rule change
deletes current subparagraph (c)(5)(D)(i),
as the definitions of times-in-force that
are not allowed to rest in the COB (for
example, an immediate-or-cancel order
is defined as being cancelled if it does
not execute upon entry) include that
requirements for complex orders, which are
included in paragraph (f), as described above.
Current subparagraph (c)(5)(C) regarding whether
an order is determined to be COA-eligible (and thus
initiates a COA) is included in proposed
subparagraph (d)(1) and paragraph (e).
56 See C2 Rule 6.13(h).
57 Proposed paragraph (e) clarifies that a complex
order must execute against any Priority Customer
orders in the Simple Book at the same price, which
is consistent with the current Rule that a complex
order must improve the SBBO if there is a Priority
Customer order at the BBO of any component.
58 See C2 Rule 6.13(e) and (f).
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fact, making this provision redundant.
The proposed rule change makes no
substantive changes to how the System
handles non-COA-eligible orders. The
proposed rule change makes
nonsubstantive changes to these
provisions, including to make them
plain English, to reorganize certain
provisions, to simplify the language and
delete redundant language, update
paragraph lettering and numbering and
cross-references, and to conform them to
other portions of the rule and to the
corresponding C2 rule.59
The proposed rule change deletes
current subparagraph (c)(6)(A) regarding
complex market orders that may initiate
a COA, because the definition of COAeligible in proposed paragraph (b)
permits market orders to be designated
as COA-eligible (there is no prohibition
on a User from designating a market
order as COA-eligible), and because
proposed subparagraph (d)(1) describes
the auction price that will be used for
a COA-eligible market order. Therefore,
this provision is redundant. The
proposed rule change deletes current
subparagraph (c)(6)(B) regarding
complex market orders that do not
initiate a COA, because those will be
handled in the same manner as any donot-COA order pursuant to proposed
paragraph (e), making this provision
redundant. The proposed rule change
makes no substantive changes to how
the System handles complex market
orders. The proposed rule change makes
nonsubstantive changes to these
provisions, including to make them
plain English, to reorganize certain
provisions, to simplify the language and
delete redundant language, update
paragraph lettering and numbering and
cross-references, and to conform them to
other portions of the rule and to the
corresponding C2 rule.60
The proposed rule change clarifies in
proposed subparagraph (d)(1) that the
COA price for a complex order may be
the drill-through price if the order is
subject to the drill-through protection in
Rule 21.17(b). This is consistent with
current functionality and the drillthrough protection, which ensures that
a complex order will not execute at a
price too far away from the SNBBO. The
current Rule states the price of a COA
is subject to applicable price
protections. However, the only
applicable one is the drill-through
protection, so the Exchange believes the
proposed rule change provides
additional specificity consistent with
the current Rule.
PO 00000
59 See
60 See
C2 Rule 6.13(e).
C2 Rule 6.13(b), (d), and (e).
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The proposed rule change moves the
provisions regarding when a COA may
terminate early from current
subparagraph (d)(5)(C) to proposed
subparagraph (d)(3) so that all
provisions regarding the length of time
for which a COA lasts are included in
the same place within Rule 21.20. The
proposed rule change clarifies in
subparagraph (d)(4)(B) that the System
aggregates the size of COA Responses
submitted at the same price for an EFID,
and caps the size of the aggregated COA
Responses at the size of the COAeligible order. Current subparagraph
(d)(4) permits multiple COA Responses
from the same Member. The proposed
rule change is consistent with current
System entry requirements for COA
Responses, and the proposed rule
change merely adds this detail to the
Rules. The System aggregates the size of
COA Responses submitted at the same
price for an EFID, and caps the size of
the aggregated COA Responses at the
size of the COA-eligible order. This
provision prevents Users from taking
advantage of a pro-rata allocation by
submitting responses larger than the
COA-eligible order to obtain a larger
allocation from that order. The proposed
rule change in subparagraph (d)(4)(C)
that provides that a modification of a
COA Response to decrease its size will
not result in loss of priority, as that is
consistent with current the current Rule
and System functionality.61 The
Exchange believes decreasing the size of
a COA Response (similar to
decrementation of an order or quote
after partial execution), should not
impact priority, as such a modification
would potentially decrease the
allocation to that response. The
proposed rule change clarifies that COA
Responses may only execute against the
COA-eligible order for the COA to
which a User submitted the COA
Response, which is consistent with the
current rules that require COA
Responses to include a COA auction ID
for the COA to which the User is
submitting the COA Responses.
The proposed rule change states that
unexecuted COA Responses are
cancelled at the conclusion of the COA
rather than immediately if they are not
executable based on the price of the
COA. The Exchange believes this
proposed change will ensure that all
Users participating in COAs have the
same information regarding COAs if the
Exchange determines to not include the
price of a COA on the COA notification
message pursuant to proposed
subparagraph (d)(1). If the Exchange
determines to not include the price of a
61 See
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COA on the COA notification message
pursuant to proposed subparagraph
(d)(1), rejection of unmarketable COA
Responses may provide the submitting
User with the ability to determine the
COA price, which was not available to
other Users.
The proposed rule change deletes
current subparagraph (d)(6) regarding
COA pricing, as it is redundant of the
rule provisions in proposed (f)(2). The
proposed rule change moves the
provision from current subparagraph
(d)(7) regarding the allocation of COAeligible orders to proposed
subparagraph (d)(5).
The proposed rule change adds detail
to the current rule provisions regarding
COAs, as well as codifies current
functionality and consolidates all
provisions regarding COAs within a
single paragraph in Rule 21.20
(including moving rule provision
regarding concurrent COAs from current
Interpretation and Policy .02 to
proposed subparagraph (d)(2)). The
proposed rule change makes no changes
to how COAs occur or how the System
allocates orders at the conclusion of a
COA. The proposed rule change makes
nonsubstantive changes to the COA
provisions in paragraph (d), including to
make them plain English, to reorganize
certain provisions, to simplify the
language and delete redundant
language, update paragraph lettering
and numbering and cross-references,
and to conform them to other portions
of the rule and to the corresponding C2
rule.62
The proposed rule change adds
proposed subparagraph (h)(3), which
states if there is a zero NBO for any leg,
the System replaces the zero with a
price $0.01 above NBB to calculate the
SNBBO, and complex orders with any
buy legs do not Leg into the Simple
Book. If there is a zero NBB, the System
replaces the zero with a price of $0.01,
and complex orders with any sell legs
do not Leg into the Simple Book. If there
is a zero NBB and zero NBO, the System
replaces the zero NBB with a price of
$0.01 and replaces the zero NBO with
a price of $0.02, and complex orders do
not Leg into the Simple Book. The
SBBO and SNBBO may not be
calculated if the NBB or NBO is zero (as
noted above, if the best bid or offer on
the Exchange is not available, the
System uses the NBB or NBO when
calculating the SBBO). As discussed
above, permissible execution prices are
based on the SBBO. If the SBBO is not
available, the System cannot determine
permissible posting or execution pricing
for a complex order (which are based on
the SBBO), which could reduce
execution opportunities for complex
orders. If the System were to use the
zero bid or offer when calculating the
SBBO, it may also result in executions
at erroneous prices (since there is no
market indication for the price at which
the leg should execute). For example, if
a complex order has a buy leg in a series
with no offer, there is no order in the
leg markets against which this leg
component could execute. This is
consistent with current System
functionality, and the proposed rule
change is codifying this detail in the
Rules. This is also consistent with the
current Rule 21.20(c)(1)(C) and
proposed Rule 21.20(f)(2) that states
complex order executions are not
permitted if the price of a leg would be
zero. Additionally, this is similar to the
proposed rule change described above
to improve the posting price of a
complex order by $0.01 if it would
otherwise lock the SBBO. The proposed
rule change is a reasonable process to
ensure complex orders receive
execution opportunities, even if there is
no interest in the leg markets.
Additionally, a User may always cancel
a complex order if the User does not
wish to have its order rest in the COB
at that price. This proposed rule change
is also identical to the corresponding C2
Rule.63
The proposed rule change moves
provisions regarding how the System
handles complex orders during trading
halt from Interpretation and Policy .05
to proposed paragraph (k). The
proposed rule change makes no
substantive changes to how the System
handles complex orders during a trading
halt, and makes nonsubstantive changes
to these provisions, including to make
them plain English, to reorganize certain
provisions, to simplify the language and
delete redundant language, update
paragraph lettering and numbering and
cross-references, and to conform them to
other portions of the rule and to the
corresponding C2 rule.64
The proposed rule change makes no
substantive changes to the rules
regarding how complex orders execute,
including rules related to priority.
Complex orders will continue to trade
in the same manner as they do today.
The proposed rule change makes
nonsubstantive changes to these
provisions, including to make the rule
text plain English, reorganize the Rule,
simplify the language and delete
redundant provisions, update paragraph
lettering and numbering and cross63 See
62 See
C2 Rule 6.13(d).
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C2 Rule 6.13(k).
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references, and conform to the
corresponding C2 rule.65
Throughout Rule 21.20, the proposed
rule change replaces references to
Members with Users. An Options
Member means a firm or organization
that is registered with the Exchange
pursuant to Chapter XVII of the Rules
for purposes of participating in options
trading on EDGX Options as an
‘‘Options Order Entry Firm’’ or
‘‘Options Market Maker.’’ 66 A User is
any Options Member or Sponsored
Participant who is authorized to obtain
access to the System pursuant to Rule
11.3.67 While the Exchange currently
has no Sponsored Participants, a
Sponsored Participant would have the
ability to submit complex orders.
Therefore, the term ‘‘User’’ in the
context of Rule 21.20 is more
appropriate.
The proposed rule change amends
Rule 21.1(d)(10) to delete the crossreference to Rule 21.20(c)(1)(C), which
the Exchange proposes to move as
described above, and replaces it to state
that no option leg may execute at a price
of zero. The Rule currently provides that
no option leg may execute at the same
price as a Priority Customer Order in the
Simple Book, which makes the other
provision of Rule 21.20(c)(1)(C)
unnecessary to reference. This proposed
change makes no change to the
functionality of Complex QCC Orders.
The proposed rule change deletes
provisions that state the Exchange will
make certain determinations and
announcements via Regulatory
Circular.68 Pursuant to Rule 16.3, the
Exchange announces all determinations
it makes pursuant to the Rules via
specifications, Notices, or Regulatory
Circulars with appropriate advanced
notice, which will be posted on the
Exchange’s website, or as otherwise
provided in the Rules; electronic
message; or other communication
method as provided in the Rules. All
determinations the Exchange makes
pursuant to Rule 21.20 will be made in
accordance with Rule 16.3.
The proposed rule change makes
additional nonsubstantive changes
throughout Rule 21.20, including to
make them plain English, to reorganize
certain provisions and consolidate
65 See C2 Rule 6.13(d) and (e). Note C2 has
different priority provisions, as it does not have
Priority Customer priority and instead prioritizes all
orders and quotes on the Simple Book (and
allocates them pursuant to the applicable allocation
algorithm pursuant to C2 Rule 6.12) ahead of all
complex orders.
66 See Rule 16.1.
67 See Rule 16.1.
68 See Rules 21.17 (in the introductory paragraph
and proposed paragraph (b)) and 21.20 (various
provisions).
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related provisions within a single
portion of the Rule, to simplify the
language and delete redundant
language, update paragraph lettering
and numbering and cross-references,
and to conform them to other portions
of the rule and to the corresponding C2
rule.69 The proposed rule change makes
no changes to the allocation or priority
of complex orders.
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.70 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 71 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 72 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
The proposed rule change benefits
investors and promote just and
equitable principles of trade because it
provides investors with greater
opportunities to manage risk through
trading of additional types of complex
orders. The proposed stock-option order
and Complex QCC with Stock Order
functionality are each optional for Users
and will help them facilitate execution
of components of a QCT. Currently, if a
User wanted to execute a QCT, it could
do so by entering the options
components on the Exchange and
separately executing the stock
component of the QCT on another
venue. Users will have the option to
continue do this, or build their own
technology to electronically
communicate the stock component of
any QCT to a broker-dealer for
execution. However, the addition of
stock-option order and Complex QCC
69 See
C2 Rule 6.13.
U.S.C. 78f(b).
71 15 U.S.C. 78f(b)(5).
72 Id.
with Stock Order functionality will
provide Users with an optional,
alternative means to execute the stock
component of their QCTs.
The Exchange believes these proposed
order types will reduce Users’
compliance burden because it [sic]
allows for the automatic submission of
the stock component of a QCT in
connection with the execution of the
options component(s) as a stock-option
order on the Exchange. The proposed
functionality also provides benefits to
the Exchange by establishing an audit
trail for the execution all option
components of a QCT with [sic] a
reasonable period of time of each other,
and of the stock component of a QCT
within a reasonable period of time after
the execution of the option components.
The proposed rule change further
reduces Users’ compliance risk by
providing that the Exchange will, in
addition to cancelling the stock
component if the option component
cannot execute, nullify any option
component execution when the stock
component does not execute without a
request from the User. Nullification of
the option trade is consistent with the
requirement that a User must execute
the stock component of a QCT within a
reasonable period of time after
executing the option component on the
Exchange. The proposed rule change
simply eliminates the requirement that
one party to the transaction request
nullification of the option component
trade before the Exchange nullifies the
option trade, because such nullification
is consistent with the definition of QCT.
The proposed rule change merely
automates a process that Users can
manually do today. As noted above, to
qualify as a QCT, the execution of one
component is contingent upon the
execution of all other components at or
near the same time.73 Since the purpose
of stock-option orders is for all
components to trade at or near the same
time, if the stock component does not
execute at or near the same time as the
option component(s), it is reasonable to
expect a User that submitted one of
these orders to request such
nullification to avoid any compliance
risk associated with execution of the
option components of these orders and
lack of execution of a stock order at or
near the same time.74 This proposed
execution process is the same process
the Exchange currently uses to execute
QCC with Stock Orders, which are a
type of stock-option order (and thus the
Exchange merely expands this process
to all stock-option orders, as all stock-
70 15
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73 See
supra notes 10 and 18.
74 See supra note 12.
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option orders must satisfy the same QCT
Exemption).75 This proposed process is
also similar to that of other options
exchanges.76
The Exchange conducts surveillance
to ensure a User executes the stock
component of a QCT, which will also
apply to all of the proposed
functionality, if the option component
executed. As a result, if the stock
component does not execute when
initially submitted to a stock trading
venue by the designated broker-dealer, a
User may be subject to compliance risk
if it does not execute the stock
component within a reasonable time
period of the execution of the option
component. The proposed rule change
reduces this compliance risk for Users.
The Exchange therefore believes the
proposed rule change removes
impediments to and perfects the
mechanisms of a free and open market
and a national market system, and in
general, protects investors and the
public interest.
The Exchange believes the proposed
stock leg execution buffer, debit/credit
reasonability check amendment, and
buy-write/married put check for stockoption orders (in addition to the other
existing price protection mechanisms
applicable to complex orders that will
apply to stock-option orders) will
protect investors and the public interest
and maintain fair and orderly markets
by mitigating potential risks associated
with market participants entering orders
at clearly unintended prices and orders
trading at prices that are extreme and
potentially erroneous, which may likely
have resulted from human or
operational error. The Exchange
believes these proposed price protection
mechanisms will remove impediments
to and perfects the mechanisms of a free
and open market and a national market
system, because they are similar to price
protection mechanisms available on
other exchanges. The proposed buywrite/married put price check is similar
to the parity price protection in MIAX
Rule 518, Interpretation and Policy
.01(g). The proposed application of the
debit/credit price reasonability check to
stock-option orders is similar to Cboe
Options Rule 6.53C, Interpretation and
Policy .08(c). The proposed stock leg
buffer is similar to the Exchange’s
current fat finger protection (which will
not permit a complex order to be more
than a specified amount outside of the
SNBBO, which will include the NBBO
of the stock leg, as described above),
except it also applies a buffer to the
75 See current Rule 21.20(c)(7) (proposed Rule
21.20(l)(3)).
76 See supra note 19.
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individual stock leg as opposed to the
net price. Additionally, stock exchanges
provide similar protections for
execution prices of stock orders.77
The proposed rule change to require
Users to mark stock-option orders as
required by Regulation SHO, and to
execute stock-option orders at prices
permitted by Regulation SHO (a
Regulation adopted pursuant to the Act)
and the Limit Up-Limit Down Plan
(Regulation NMS Plan adopted pursuant
to the Act), promote just and equitable
principles of trade, as they are intended
to ensure the Exchange will execute
stock-option orders in accordance with
these regulations, which are intended to
reduce the negative impacts of sudden,
unanticipated price movements in NMS
stocks and protect investors.
The proposed rule change would also
provide Users with access to stockoption order functionality and Complex
QCC with Stock order functionality that
is generally available on options
exchanges, including Cboe Affiliated
Exchanges, which may result in the
more efficient execution of QCTs and
provide Users with additional flexibility
and increased functionality on the
Exchange’s System.78 Additionally, the
proposed functionality is consistent
with the QCT exemption previously
approved by the Commission.79 The
Exchange believes this consistency will
promote a fair and orderly national
options market system. The proposed
rule change does not propose to
implement new or unique functionality
that has not been previously filed with
the Commission or is not available on
Cboe Affiliated Exchanges (or other
options exchanges).
The proposed rule change to codify
the delay for a complex strategy to open
after the legs have opened will benefit
investors, as it will provide time for the
market prices to stabilize before trading
may begin in complex strategies.80 This
is consistent with current functionality
as set forth in the technical
specifications for the COB opening
process available on the Exchange’s
77 See, e.g., NASDAQ Stock Market Rule 4757(c)
(which prevents stock limit orders from being
accepted at prices outside of pre-set standard limits,
which is based on the NBBO).
78 See, e.g., Cboe Options Rule 6.53C and
Interpretation and Policy .06; MIAX Rule 518; and
ISE Options 3, Section 14 (stock-option order
functionality); and Cboe Options Rule 6.53C,
Interpretation and Policy .06(g); and ISE Options 3,
Section 12(f) (Complex QCC with Stock
functionality).
79 See QCT Exemption Order.
80 The Exchange notes it applies a similar delay
after occurrence of the opening rotation trigger for
the simple market opening auction process. See
Rule 21.7(d)(1).
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website.81 The Exchange believes this is
a more accurate description of the time
when the COB opens, and this
additional transparency will benefit
investors. Additionally, another options
exchange has the same delay for its COB
opening process.82
The proposed rule change to codify
current functionality in the drillthrough complex order protection will
benefit investors, as it provides
additional transparency in the Rules.
Additionally, the proposed rule change
provides complex orders with
additional execution opportunities
rather than cancels them when market
prices reflect interest to trade at the
price, but the order is not currently
executable due to Legging Restrictions.
Additionally, this functionality is the
same as the drill-through complex order
protection of another options
exchange.83
The proposed rule change to codify
current functionality regarding how the
System determines possible execution
prices for complex orders if the NBB or
NBO of any component leg is zero will
benefit investors, because it is a
reasonable process provide complex
orders with execution opportunities,
even if there is no interest in the leg
markets in a manner consistent with the
pricing requirements of complex orders.
A User may always cancel a complex
order if the User does not wish to have
its order rest in the COB at a price
determined as set forth in the proposed
rule change. Additionally, another
options exchange offers the same
functionality.84
The proposed rule change to permit
Users to designate complex orders as
Attributable or Non-Attributable will
benefit investors, as it codifies current
functionality and thus provides
investors with transparency in the
Rules. These instructions merely apply
to information that is displayed for the
orders (in the discretion of the User),
and have no impact on the execution of
complex orders. The Exchange believes
this provides Users with greater control
and flexibility over the manner in which
they may submit complex orders, and
provides them with functionality that is
currently available for simple orders.
Additionally, another options exchange
offers investors the ability to designate
complex orders as Attributable or NonAttributable.85
81 See https://cdn.cboe.com/resources/
membership/US_Options_Opening_Process.pdf.
82 See C2 Rule 6.13(c)(2).
83 See C2 Rule 6.14(b)(6).
84 See C2 Rule 6.13(h)(3).
85 See C2 Rule 6.13(b).
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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. 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. Differences remain to the
extent necessary to conform to the
Exchange’s current rules, retain
intended differences based on the
Exchange’s market model, or make other
nonsubstantive changes to simplify,
clarify, eliminate duplicative language,
or make the rule provisions plain
English. 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.
To the extent a proposed rule change
is based on an existing Cboe Affiliated
Exchange rule, the language of Exchange
Rules and Cboe Affiliated Exchange
rules may differ to [sic] extent necessary
to conform with existing Exchange rule
text or to account for details or
descriptions included in the Exchange’s
Rules but not in the applicable EDGX
rule. Where possible, the Exchange has
substantively mirrored Cboe Affiliated
Exchange rules, because consistent rules
will simplify the regulatory
requirements and increase the
understanding of the Exchange’s
operations for participants on other
Cboe Affiliated Exchanges that are also
EDGX Users. The proposed rule change
would provide greater harmonization
between the rules of the Cboe Affiliated
Exchanges, resulting in greater
uniformity and less burdensome and
more efficient regulatory compliance.
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.
The Exchange also believes that the
proposed amendments will contribute
to the protection of investors and the
public interest by making the
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Exchange’s rules easier to understand.
Where necessary, the Exchange has
proposed language consistent with the
Exchange’s operations on EDGX
technology, even if there are specific
details not contained in the current
structure of EDGX rules. The Exchange
believes it is consistent with the Act to
maintain its current structure and such
detail, rather than removing such details
simply to conform to the structure or
format of EDGX rules, again because the
Exchange believes this will increase the
understanding of the Exchange’s
operations for all Users of the Exchange.
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
stock-option order or Complex QCC
with Stock Order functionality will
impose any burden on intramarket
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act. Stock-option orders
and Complex QCC with Stock orders
facilitate Users’ compliance with the
requirements associated with executing
QCTs, and are not designed to impose
any unnecessary burden on
competition. These proposed order
types will be available to all Users on a
voluntary basis, and Users are not
required to use either order type when
executing QCTs. The proposed rule
change has no impact on Users that
elect to execute QCTs without using the
proposed functionality. Those Users
may continue to execute QCTs in the
same manner as they do today by
entering an option order on the
Exchange and separately executing the
stock component of the QCT another
venue. A User can also build its own
technology to electronically
communicate the stock component of
any QCT to a broker-dealer for
execution.
For Users that elect to use proposed
functionality to execute QCTs, the
proposed rule change reduces those
Users’ compliance burdens to satisfy
their obligation to execute all of the
components of a QCT at or near the
same time, as this functionality provides
an automated means for satisfying this
obligation. The proposed functionality
will be available to all Users either [sic]
through a User’s electronic connection
to the Exchange.
The Exchange does not believe stockoption orders or Complex QCC with
Stock Order functionality will impose
any burden on intermarket competition
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that is not necessary or appropriate in
furtherance of the purposes of the Act,
because it is consistent with the QCT
exemption previously approved by the
Commission.86 Additionally, the
proposed functionality is similar to
functionality offered by other options
exchanges.87
The Exchange does not believe the
proposed stock leg execution buffer,
debit/credit reasonability check
amendment, and buy-write/married put
check for stock-option orders will
impose any burden on intramarket
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act. These proposed
price protection mechanisms will apply
to stock-option orders of all Users in the
same manner. The Exchange does not
believe these price protection
mechanisms will impose any burden on
intermarket competition that is not
necessary or appropriate in furtherance
of the purposes of the Act, because they
are similar to price protection
mechanisms available on other
exchanges.88 These price protection
mechanisms are intended to prevent
executions of stock-option orders at
potentially erroneous prices.
The Exchange does not believe the
proposed rule change to permit Users to
designate complex orders as
Attributable or Non-Attributable will
impose any burden on intramarket
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act, because this
proposed rule change codifies existing
functionality. These designations will
be available to all Users, and use of
these designations will be voluntary.
The Exchange does not believe the
proposed rule change to permit Users to
designate complex orders as
Attributable or Non-Attributable will
impose any burden on intermarket
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act, because another
Exchange makes these designations
available for complex orders.89
The Exchange does not believe the
proposed changes to the complex order
drill-through, the pricing of orders when
the NBBO in a leg of a complex strategy
QCT Exemption Order.
Cboe Options Rule 6.53C; ISE Options 3,
Sections 12(f) and 14, and Supplementary Material
.02 and .07; and MIAX Rule 518.
88 See MIAX Rule 518, Interpretation and Policy
.01(g) (buy-write/married put check); Cboe Options
Rule 6.53C, Interpretation and Policy .08(c) (debit/
credit price reasonability check to stock-option
orders); and NASDAQ Stock Market Rule 4757(c)
(which prevents stock limit orders from being
accepted at prices outside of pre-set standard limits,
which is based on the NBBO).
89 See C2 Rule 6.13(b).
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87 See
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is zero, and to the COB Opening Process
(to delay the opening of a complex
strategy for a time period after the legs
open) will impose any burden on
intramarket competition that is not
necessary or appropriate in furtherance
of the purposes of the Act, because these
changes codify existing functionality.
They apply in the same manner
complex orders of all Users in the same
manner. The Exchange does not believe
these proposed rules changes will
impose any burden on intermarket
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act, because they are
the same as the rules of another options
exchange.90
The proposed nonsubstantive changes
to the Rules will have no impact on
competition, as they do not modify any
functionality. Rather, these proposed
changes add clarity and transparency to
the Rules and conform rule language
with the corresponding rules of a Cboe
Affiliated Exchange.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not:
A. Significantly affect the protection
of investors or the public interest;
B. impose any significant burden on
competition; and
C. become operative for 30 days from
the date on which it was filed, or such
shorter time as the Commission may
designate, it has become effective
pursuant to Section 19(b)(3)(A) of the
Act 91 and Rule 19b–4(f)(6) 92
thereunder. At any time within 60 days
of the filing of the proposed rule change,
the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
90 See C2 Rules 6.13(c)(2) (COB Opening Process)
and (h)(3) (pricing of orders when the NBBO in a
leg of a complex strategy is zero); and 6.14(b)(6)(A)
(complex order drill-through).
91 15 U.S.C. 78s(b)(3)(A).
92 17 CFR 240.19b–4(f)(6).
E:\FR\FM\17JYN1.SGM
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Federal Register / Vol. 84, No. 137 / Wednesday, July 17, 2019 / Notices
change 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:
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CboeEDGX–2019–039 on the subject
line.
Paper Comments
jbell on DSK3GLQ082PROD with NOTICES
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CboeEDGX–2019–039. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CboeEDGX–2019–039 and
should be submitted on or before
August 7, 2019.
18:05 Jul 16, 2019
[FR Doc. 2019–15135 Filed 7–16–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86359; File No. SR–ICEEU–
2019–010]
Electronic Comments
VerDate Sep<11>2014
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.93
Eduardo A. Aleman,
Deputy Secretary.
Jkt 247001
Self-Regulatory Organizations; ICE
Clear Europe Limited; Order Approving
Proposed Rule Change to Clearing
Membership Policy
July 11, 2019.
I. Introduction
On May 13, 2019, ICE Clear Europe
Limited (‘‘ICE Clear Europe’’ or
‘‘Clearing House’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’),1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend its Clearing Membership Policy.
The proposed rule change was
published for comment in the Federal
Register on May 28, 2019.3 The
Commission did not receive comments
on the proposed rule change. For the
reasons discussed below, the
Commission is approving the proposed
rule change.
II. Description of the Proposed Rule
Change
ICE Clear Europe’s proposed rule
change would make three amendments
to its Clearing Membership Policy.4
First, the proposed rule change would
specify that applications for
membership are formally considered
and, as appropriate, approved and
rejected by, the Executive Risk
Committee, through a delegation of
authority from the ICE Clear Europe
Board of Directors, rather than the F&O
and CDS Product Risk Committees
(collectively, the ‘‘Product Risk
Committees’’). The proposed rule
change would also specify that the
Product Risk Committees would be
notified of approved applications. The
Executive Risk Committee is made up of
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Securities Exchange Act Release No. 85908 (May
21, 2019), 84 FR 24573 (May 28, 2019) (SR–ICEEU–
2019–010) (‘‘Notice’’).
4 Notice, 84 FR at 24574. Capitalized terms not
otherwise defined herein have the meanings given
to them in the ICE Clear Europe Rules or the
Clearing Membership Policy.
PO 00000
93 17
1 15
Frm 00126
Fmt 4703
Sfmt 4703
34241
ICE Clear Europe management and
advises management on all key aspects
of risk management and produces
proposals for review by the Board Risk
Committee, Product Risk Committees,
and ICE Clear Europe Board, as
appropriate.5 The Product Risk
Committees are made up of appointees
nominated by ICE Clear Europe’s
Clearing Members.6
Second, the proposed rule change
would add a requirement that a person
applying to become a CDS Clearing
Member (an ‘‘Applicant’’) prove its
ability to determine and submit end-ofday prices for CDS instruments to fulfill
the pricing capabilities requirements set
out in ICE Clear Europe’s CDS End-OfDay Price Discovery Policy. The
proposed rule change would further
specify how ICE Clear Europe’s Clearing
Risk Department would review and
determine Applicants’ pricing
capabilities. Thus, the proposed rule
change would provide the Executive
Risk Committee, as the delegated
committee responsible for approving or
rejecting an Applicant, with authority to
reject an Applicant that cannot
demonstrate such pricing capabilities.
Finally, the proposed rule change
would add an explicit requirement that,
in evaluating applications for
membership, the Clearing Risk
Department consider the performance of
Applicants in a Default Management
Test and review Applicants’ internal
policies and procedures to assess the
efficacy of their default management
process. Thus, the proposed rule change
would provide the Executive Risk
Committee, as the delegated committee
responsible for approving or rejecting an
Applicant, with authority to reject an
Applicant that cannot demonstrate the
efficacy of its default management
process.
III. Commission Findings
Section 19(b)(2)(C) of the Act directs
the Commission to approve a proposed
rule change of a self-regulatory
organization if it finds that the proposed
rule change is consistent with the
requirements of the Act and the rules
5 See ICE Clear Europe Disclosure Framework,
available at https://www.theice.com/publicdocs/
clear_europe/ICE_Clear_Europe_Disclosure_
Framework.pdf (‘‘The role of the ERC is to advise
the management team on all key aspects of risk
management and produce proposals for review by
the Board Risk Committee, the Product Risk
Committees, the Client Risk Committee, the Audit
Committee and the Board as appropriate.’’).
6 See ICE Clear Europe Disclosure Framework,
available at https://www.theice.com/publicdocs/
clear_europe/ICE_Clear_Europe_Disclosure_
Framework.pdf (‘‘The CDS PRC is comprised of
appointees nominated by CDS Clearing Members,
Independent Non-Executives and representatives of
ICEU.’’).
E:\FR\FM\17JYN1.SGM
17JYN1
]]>Agencies
[Federal Register Volume 84, Number 137 (Wednesday, July 17, 2019)]
[Notices]
[Pages 34230-34241]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15135]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86353; File No. SR-CboeEDGX-2019-039]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change To Add
Stock-Option Order Functionality and Complex Qualified Contingent Cross
(``QCC'') Order With Stock Functionality, and To Make Other Changes to
its Rules
July 11, 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 June 27, 2019, Cboe EDGX Exchange, Inc. (the ``Exchange'' or
``EDGX'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Exchange filed the 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 EDGX Exchange, Inc. (the ``Exchange'' or ``EDGX'') proposes to
add stock-option order functionality and complex qualified contingent
cross (``QCC'') order with stock functionality, and to make other
changes to its Rules. 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://markets.cboe.com/us/options/regulation/rule_filings/edgx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
In 2016, the Exchange's parent company, Cboe Global Markets, Inc.
(``Cboe Global''), which is the parent company of Cboe Exchange, Inc.
(``Cboe Options'') and Cboe C2 Exchange, Inc. (``C2''), acquired the
Exchange, Cboe EDGA Exchange, Inc. (``EDGA''), Cboe BZX Exchange, Inc.
(``BZX or BZX Options''), and Cboe BYX Exchange, Inc. (``BYX'' and,
together with C2, Cboe Options, the Exchange, EDGA, and BZX, the ``Cboe
Affiliated Exchanges''). The Cboe Affiliated Exchanges are working to
align certain system functionality, retaining only intended differences
between the Cboe Affiliated Exchanges, in the context of a technology
migration. Cboe Options intends to migrate its technology to the same
trading platform used by the Exchange, C2, and BZX Options in the
fourth quarter of 2019. The proposal set forth below is intended to add
certain functionality to the Exchange's System that is available on
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.
The Exchange proposes to adopt stock-option order functionality.\5\
Stock-option orders facilitate the execution of the stock component of
qualified contingent trades (``QCTs''). The proposed rule change
defines a stock-option order as the purchase or sale of a stated number
of units of an underlying stock or a security convertible into the
underlying stock (``convertible security'') coupled with the purchase
or sale of an option contract(s) \6\ on the opposite side of the market
representing either (1) the same number of units of the underlying
stock or convertible security or (2) the number of units of the
underlying stock necessary to create a delta neutral position, but in
no case in a ratio greater than eight-to-one (8.00), where the ratio
represents the total number of units of the underlying stock or
convertible security in the option leg(s) to the total number of units
of the underlying stock or convertible security in the stock leg. Only
those stock-option orders in the classes designated by the Exchange \7\
with no more than the applicable number of legs are eligible for
processing.\8\ Stock-option orders execute in the same manner as other
complex orders, except as otherwise provided in Rule 21.20 as proposed.
---------------------------------------------------------------------------
\5\ See proposed Rule 21.20(b).
\6\ This proposed definition permits stock-option orders to have
one or more option leg [sic], all of which will be handled in the
same manner.
\7\ Pursuant to Rule 16.3, the Exchange announces all
determinations it makes pursuant to the Rules via specifications,
Notices, or Regulatory Circulars with appropriate advanced notice,
which will be posted on the Exchange's website, or as otherwise
provided in the Rules; electronic message; or other communication
method as provided in the Rules. All determinations the Exchange
makes pursuant to Rule 21.20 will be made in accordance with Rule
16.3.
\8\ See proposed Rule 21.20(b). This definition is virtually
identical to the Cboe Options definition, except the proposed
definition does not provide the Exchange with flexibility to lower
the permissible ratio of stock-option orders like the Cboe Options
definition, as the Exchange does not believe it needs this
flexibility. See Cboe Options Rule 6.53C(a)(1). The proposed
definition is also substantially the same as the definition of
stock-option order of other options exchanges. See, e.g., Miami
International Securities Exchange, LLC (``MIAX'') Rule 518(a)(5);
and NASDAQ ISE, LLC (``ISE'') Options 3, Section 14(a)(2) and (3).
The definition is also consistent with the definition of a Complex
Trade in the linkage rules in Rule 27.1(a)(4).
---------------------------------------------------------------------------
Currently, to execute a QCT, a User would need to submit an option
order to the Exchange and separately submit the stock order to a stock
execution venue.\9\ The option order represents one component of a QCT
and must be paired
[[Page 34231]]
with a stock order. When a User enters the option component of a QCT,
the User is responsible for executing the associated stock component of
the QCT within a reasonable period of time after the option order is
executed. The Exchange conducts surveillance of Users to ensure that
Users execute the stock component of a QCT at or near the same time as
the options component. While the Exchange does not specify how the User
should go about executing the stock component of the trade, this
process is often manual and is therefore a compliance risk for Users if
they do not execute the stock component within a reasonable time period
of execution of the options component. Thus, the Exchange is proposing
to offer stock-option order functionality, pursuant to which the
Exchange will automatically communicate the stock component of a QCT to
a designated broker-dealer for execution in connection with the
execution of the option order on the Exchange. Use of stock-option
order functionality will be voluntary, and Users may continue to
execute components of a QCT in the manner they do today (as described
above).
---------------------------------------------------------------------------
\9\ The Exchange currently permits the submission of qualified
contingent cross (``QCC'') orders with stock, which is a specific
type of stock-option order. See current Rule 21.20(c)(7) (proposed
Rule 21.20(l)(3)).
---------------------------------------------------------------------------
Pursuant to proposed Rule 21.20, Interpretation and Policy .03, a
User may only submit a stock-option order (including a QCC with Stock
Order) if it complies with the QCT exemption from Rule 611(a) of
Regulation NMS (``QCT exemption'').\10\ A User submitting a stock-
option order represents that it complies with the QCT exemption. To
submit a stock-option order to the Exchange for execution, a User must
enter into a brokerage agreement with one or more broker-dealers that
are not affiliated with the Exchange, which broker-dealer(s) the
Exchange has identified as having connectivity to electronically
communicate the stock components of stock-option orders to stock
trading venues.\11\
---------------------------------------------------------------------------
\10\ See Rule 21.1(d)(10)(A) for the definition of a qualified
contingent trade. A ``qualified contingent trade'' is a transaction
consisting of two or more component orders, executed as agent or
principal, where: (1) At least one component is an NMS stock, as
defined in Rule 600 of Regulation NMS under the Exchange Act; (2)
all components are effected with a product or price contingency that
either has been agreed to by all the respective counterparties or
arranged for by a broker-dealer as principal or agent; (3) the
execution of one component is contingent upon the execution of all
other components at or near the same time; (4) the specific
relationship between the component orders (e.g., the spread between
the prices of the component orders) is determined by the time the
contingent order is placed; (5) the component orders bear a
derivative relationship to one another, represent different classes
of shares of the same issuer, or involve the securities of
participants in mergers or with intentions to merge that have been
announced or cancelled; and (6) the transaction is fully hedged
(without regard to any prior existing position) as a result of other
components of the contingent trade. Other options exchanges impose
the same requirement. See, e.g., Cboe Options Rule 6.53C,
Interpretation and Policy .06(a); MIAX Rule 518, Interpretation and
Policy .01(a); and ISE Options 3, Section 14, Supplemental Material
.07.
\11\ Other options exchanges impose a similar requirement. See
Cboe Options Rule 6.53C, Interpretation and Policy .06(a); see also
MIAX Rule 518, Interpretation and Policy .01.
---------------------------------------------------------------------------
Proposed subparagraph (l)(1) states when a User submits to the
System a stock-option order, it must designate a specific broker-dealer
with which it has entered into a brokerage agreement pursuant to
proposed Interpretation and Policy .03 (the ``designated broker-
dealer'') to which the Exchange will electronically communicate the
stock component of the stock-option order on behalf of the User.\12\
---------------------------------------------------------------------------
\12\ As is the case with all orders submitted to the Exchange, a
User must also designate a Clearing Member that is a Designated
Give-Up pursuant to Rule 21.12 on a stock-option order submitted to
the Exchange for processing.
---------------------------------------------------------------------------
Proposed Rule 21.20(l)(2) describes how stock-option orders will
execute. A stock-option order may execute against other stock-option
orders (or COA Responses, if applicable), but may not execute against
orders in the Simple Book.\13\ A stock-option order may only execute if
the price complies with proposed Rule 21.20(f)(2)(B).\14\ If a stock-
option order can execute upon entry or following a COA, or if it can
execute following evaluation while resting in the COB pursuant to Rule
21.20(i), the System executes the option component (which may consist
of one or more option legs) of a stock-option order against the option
component of other stock-option orders resting in the COB or COA
responses (in time priority) (which is consistent with how other
complex orders execute against each other pursuant to proposed
subparagraphs (d)(5)(ii) and (e)(2)), as applicable. However, the
Exchange does not immediately send the User a trade execution report
for this option execution.\15\ Because the User submitted a stock-
option order to execute as a package, the Exchange waits to send a
trade execution report to the User until after it has determined
whether all components of the stock-option order have executed, as
described below. After the option component is executed, the Exchange
will then automatically communicate the stock component to the
designated broker-dealer for execution, as further described below.
---------------------------------------------------------------------------
\13\ See proposed Rule 21.20(g)(5) and (l)(2) (the Exchange does
not list stock for trading, and therefore, the stock leg would not
be able to Leg). A stock-option order may only execute if the stock
leg is executable at the price(s) necessary to achieve the desired
net price. See proposed Rule 21.20(f)(2)(B).
\14\ See current Rule 21.20(c)(1)(B) and (C) (proposed Rule
21.20(f)(2)). The System will not execute a complex order pursuant
to Rule 21.20 at a net price (i) that would cause any component of
the complex strategy to be executed at a price of zero; (ii) worse
than the SBBO or equal to the SBBO when there is a Priority Customer
Order at the SBBO; (iii) that would cause any component of the
complex strategy to be executed at a price worse than the individual
component prices on the Simple Book; (iv) worse than the price that
would be available if the complex order Legged into the Simple Book;
or (v) that would cause any component of the complex strategy to be
executed at a price ahead of a Priority Customer Order on the Simple
Book without improving the BBO of at least one component of the
complex strategy. The proposed rule change amends the definitions of
SBBO and SNBBO to provide that the NBBO of the stock component of a
stock-option order is used to calculate the SBBO and SNBBO for a
stock-option order. See proposed Rule 21.20(a); see also Cboe
Options Rule 1.1 (definitions of national spread market (equivalent
to SNBBO) and exchange spread market (equivalent to SBBO)).
\15\ Even though the Exchange does not send the User an
execution report immediately following execution of the option
component, the Exchange disseminates the trade at that time pursuant
to the OPRA Plan and creates a record to be sent to the Clearing
Corporation.
---------------------------------------------------------------------------
If the System receives an execution report for the stock component
of a stock-option order from the designated broker-dealer, the Exchange
sends the User the trade execution report for the stock-option order,
including execution information for both the stock and option
components. However, if the System receives a report from the
designated broker-dealer that the stock component of the stock-option
order cannot execute,\16\ the Exchange nullifies the option component
trade and notifies the User of the reason for the nullification.\17\ If
a stock-option order is not marketable, it rests in the COB (if
eligible to rest), subject to a User's instructions. The proposed rule
change prevents execution of the option component of a QCT where the
stock component has not been successfully executed, just as the
proposed rule change prevents execution of the stock component of a QCT
where the option component has not been successfully executed by
cancelling the stock component if the option component cannot execute.
This proposed execution process is the same process the Exchange
currently uses to execute QCC with Stock Orders, which are a type of
stock-option order (and thus the
[[Page 34232]]
Exchange merely expands this process to all stock-option orders, as all
stock-option orders must satisfy the same QCT Exemption).\18\ This
proposed process is also similar to that of other options
exchanges.\19\
---------------------------------------------------------------------------
\16\ For example, if the stock execution venue to which the
designated broker-dealer routed the stock component is experiencing
system issues, the stock component may not be able to execute.
Additionally, the Exchange understands certain stock execution
venues apply risk controls to the stock components of QCTs, which
may prevent execution of the stock components at certain prices.
\17\ The Exchange will nullify the option component trade in the
same manner as it currently nullifies any other trades (when
nullification is permitted under the Rules). See Rule 20.6.
\18\ See current Rule 21.20(c)(7) (proposed Rule 21.20(l)(3)).
\19\ See, e.g., Cboe Options Rule 6.53C, Interpretation and
Policy .06(a), which states a stock-option order will not be
executed unless the stock leg is executable at the price(s)
necessary to achieve the desired net price; see also ISE Options 3,
Section14, Supplementary Material .02 (which states a ``trade'' of a
stock-option order or stock-complex order will be automatically
cancelled if market conditions prevent the execution of the stock or
option leg(s) at the prices necessary to achieve the agreed upon net
price); and MIAX Rule 518, Interpretation and Policy .01(b)
(pursuant to which the stock components will attempt execution prior
to the option components, but ultimately require both the stock and
option components to execute). The proposed rule change ensures the
option can trade before the stock can trade, rather than potentially
execute [sic] stock component and not execute [sic] option
component, which creates compliance risk for Users.
---------------------------------------------------------------------------
Currently, whenever a stock trading venue nullifies the stock leg
of a QCT or whenever the stock leg cannot execute, the Exchange will
nullify the option leg upon request of one of the parties to the
transaction or on an Exchange Official's own motion in accordance with
the Rules.\20\ To qualify as a QCT, the execution of one component is
contingent upon the execution of all other components at or near the
same time.\21\ Given this requirement, if the stock component does not
execute at or near the same time as the option component, it is
reasonable to expect a User that submitted a stock-option order to
request such nullification.\22\ If the stock component does not
execute, rather than require the User that submitted the stock-option
order to contact the Exchange to request the nullification of the
option component execution pursuant to Rule 20.6, Interpretation and
Policy .04(c), the proposed rule eliminates this requirement for the
submitting User to make such a request. Instead, the proposed rule
change provides that the Exchange will automatically nullify the option
transaction if the stock component does not execute. The Exchange
believes such nullification without a request from the User is
consistent with the definition of a QCT order. The proposed rule change
merely automates an otherwise manual process for Users.
---------------------------------------------------------------------------
\20\ See Rule 20.6, Interpretation and Policy .04(c).
\21\ See Securities Exchange Act Release No. 54389 (August 31,
2006), 71 FR 52829, 52831 (September 7, 2006) (Order Granting an
Exemption for Qualified Contingent Trades from Rule 611(a) of
Regulation NMS Under the Securities Exchange Act of 1934) (``QCT
Exemption Order''), which requires the execution of one component of
the QCT to be contingent upon the execution of all other components
at or near the same time to qualify for the exemption. In its
Exemption Request, the Securities Industry Association stated that
for contingent trades, the execution of one order is contingent upon
the execution of the other order. SIA further stated that, by
breaking up one or more components of a contingent trade and
requiring that such components be separately executed, one or more
parties may trade ``out of hedge.'' See Letter to Nancy M. Morris,
Secretary, Commission, from Andrew Madoff, SIA Trading Committee,
SIA, dated June 21, 2006 (``SIA Exemption Request''), at 3.
\22\ See QCT Exemption Order at 52831. In the SIA Exemption
Request, the SIA indicated parties to a contingent transaction are
focused on the spread or ratio between the transaction prices for
each of the component instruments, rather than on the absolute price
of any single component instrument. The SIA also noted the economics
of a contingent trade are based on the relationship between the
prices of the security and related derivative or security. See SIA
Exemption Request at 2.
---------------------------------------------------------------------------
Additionally, the Exchange believes this automatic nullification
will reduce any compliance risk for the User associated with execution
of a stock-option order and lack of execution of a stock order at or
near the same time.\23\ The Exchange conducts surveillance to ensure a
User executes the stock component of a QCT, which will also apply to
QCC with Stock Orders, if the option component executed. As a result,
if the stock component does not execute when initially submitted to a
stock trading venue by the designated broker-dealer, a User may be
subject to compliance risk if it does not execute the stock component
within a reasonable time period of the execution of the option
component. The proposed rule change reduces this compliance risk for
Users.
---------------------------------------------------------------------------
\23\ In the SIA Exemption Request, the SIA stated that parties
to a contingent trade will not execute one side of the trade without
the other component or components being executed in full (or in
ratio) and at the specified spread or ratio. See SIA Exemption
Request at 2. While a broker-dealer could re-submit the stock
component to a stock trading venue or execution after it initially
fails to execute, there is a compliance risk that the time at which
the stock component executes is not close enough to the time at
which the option component executed.
---------------------------------------------------------------------------
If a stock-option order can execute, the System executes the buy
(sell) stock leg of a stock-option order pursuant to Rule 21.20 up to a
buffer amount above (below) the NBO (NBB), which amount the Exchange
determines.\24\ The Exchange believes that Users may be willing to
trade a stock-option order with the stock leg at a price outside of the
NBBO (which is permissible pursuant to the QCT exemption) of the stock
leg in order to achieve the desired net price. However, the buffer may
prevent execution with a stock price ``too far'' away from the market
price, which may be inconsistent with then-current market conditions.
This may ultimately prevent execution at potentially erroneous prices.
This is similar to the Exchange's current fat finger protection (which
will not permit a complex order to be more than a specified amount
outside of the SNBBO, which will include the NBBO of the stock leg, as
described above),\25\ except it also applies a buffer to the individual
stock leg as opposed to the net price.
---------------------------------------------------------------------------
\24\ See proposed Rule 21.20(f)(2)(B).
\25\ See supra note 15. Additionally, stock exchanges provide
similar protections for execution prices of stock orders. See, e.g.,
NASDAQ Stock Market Rule 4757(c) (which prevents stock limit orders
from being accepted at prices outside of pre-set standard limits,
which is based on the NBBO).
---------------------------------------------------------------------------
The option component of a stock-option order executes in accordance
with same priority principles as any other option order. For a stock-
option order with one option leg, the option leg may not trade at a
price worse than the individual component price on the Simple Book or
at the same price as a Priority Customer Order on the Simple Book. For
a stock-option order with more than one option leg, the option legs
must trade at prices consistent with priority applicable to a complex
order with all option legs.\26\
---------------------------------------------------------------------------
\26\ See proposed Rule 21.20(f)(2)(B). The System does not
execute a complex order pursuant to this Rule 21.20 at a net price
(i) that would cause any component of the complex strategy to be
executed at a price of zero; (ii) worse than the SBBO or equal to
the SBBO when there is a Priority Customer Order at the SBBO, except
AON complex orders may only execute at prices better than the SBBO;
(iii) that would cause any component of the complex strategy to be
executed at a price worse than the individual component prices on
the Simple Book; (iv) worse than the price that would be available
if the complex order Legged into the Simple Book; or (v) that would
cause any component of the complex strategy to be executed at a
price ahead of a Priority Customer Order on the Simple Book without
improving the BBO of at least one component of the complex strategy.
See proposed Rule 21.20(f)(2)(A).
---------------------------------------------------------------------------
Proposed Rule 21.20(f)(1) states that Users may express bids and
offers for a stock-option order (including a QCC with Stock Order, as
discussed below) in any decimal price the Exchange determines. The
option leg(s) of a stock-option order may be executed in $0.01
increments, regardless of the minimum increments otherwise applicable
to the option leg(s), and the stock leg of a stock-option order may be
executed in any decimal price permitted in the equity market.\27\
Smaller minimum increments are appropriate for stock-option orders as
the stock component can trade at finer decimal increments permitted by
the equity market. Furthermore, the Exchange notes that even with the
flexibility provided in the proposed rule, the individual options
[[Page 34233]]
and stock legs must trade at increments allowed by the Commission in
the options and equities markets.
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\27\ Other options exchanges have the same minimum increment
requirements for stock-option orders. See Cboe Options Rule
6.53C(c)(ii); and ISE Options 3, Section 14(c)(1).
---------------------------------------------------------------------------
The proposed rule change moves the provision regarding the
execution of QCC with Stock Orders from current Rule 21.20(c)(7) to
proposed Rule 21.20(l)(3). The proposed rule change amends this
provision to provide that the QCC portion of a QCC with Stock Order may
consist of a QCC Order (with one option leg) or a Complex QCC Order
(with multiple option legs).\28\ A QCC with Stock Order with multiple
option legs will execute in the same manner as a QCC with Stock Order
with one option leg. The option component of a Complex QCC with Stock
Order (i.e., a Complex QCC Order) will be subject to the same execution
requirements as a Complex QCC Order, including the requirement that no
option leg executes at a price of zero or at the same price as a
Priority Customer Order in the Simple Book, that each option leg must
execute at a price at or between the NBBO for the applicable series,
and the execution price is better than the price of an [sic] complex
order resting in the COB (unless the Complex QCC Order is a Priority
Customer Order and the resting complex order is a non-Priority Customer
Order, in which case the execution price may be the same as or better
than the price of the resting complex order).\29\
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\28\ See Rule 21.1(d)(10) (which describes QCC and Complex QCC
Orders). Other options exchanges have similar Complex QCC with Stock
order functionality. See, e.g., Cboe Options Rule 6.53C,
Interpretation and Policy .06(g)(1)(A) (which provides a QCC with
Stock Order may have multiple option components); and ISE Options 3,
Section 12(f) (which describes complex QCC with stock orders). In
addition to the other changes to the QCC with Stock rule provisions
described below, the proposed rule change makes nonsubstantive
changes, including changes to consolidate provisions that apply to
all stock-option orders in Rule 21.20, update paragraph numbering
and lettering, conform cross-references, and adds certain clarifying
language.
\29\ See Rule 21.1(d)(10). The proposed rule change deletes the
reference to current Rule 21.20(c)(1)(C), as that rule provides no
component may execute at a price of zero or ahead of a Priority
Customer Order on the Simple Book without improving the BBO of at
least one component of the complex strategy. This second requirement
is not necessary, because each leg of a Complex QCC must improve the
price of a Priority Customer Order in any leg (and may not be worse
than the NBBO of any leg), and the proposed rule change adds the
requirement that no component may execute at a price of zero to
proposed Rule 21.1(d)(10)(C).
---------------------------------------------------------------------------
The proposed rule change also updates an inadvertent cross-
reference to Rule 21.8 regarding the execution of the option component
of a QCC Order, as the option component of a QCC Order (including a
Complex QCC Order) will automatically execute upon entry pursuant to
Rule 21.1(d)(10) if the conditions are satisfied. The proposed rule
change deletes current Rule 21.20(c)(7)(A)(ii) regarding the need to
give up a Clearing Member in accordance with Rule 21.12, as all orders
submitted to the Exchange (including QCC Orders) must designate a give
up in accordance with Rule 21.12, making this requirement redundant.
Additionally, as noted above, the proposed rule change adopts Rule
21.20, Interpretation .03, which requires a User that submits a stock-
option order to designate a specific broker-dealer to which the stock
components will be communicated when entering a stock-option order.
Because a QCC with Stock Order is a type of a stock-option order,
proposed Rule 21.20 will apply to QCC with Stock Orders (including
Complex QCC with Stock Orders), and thus the Exchange proposes to
delete current Rule 21.20(c)(7)(A)(iii), as it is redundant.
The proposed rule change also adds subparagraph (l)(4), which
provides that if a User submits to the System a stock-option order with
a stock leg to sell, the User must market the stock leg ``long,''
``short,'' or ``short exempt'' in compliance with Regulation SHO under
the Exchange Act. Additionally, the Exchange will only execute the
stock leg of a stock-option order at a price permissible under
Regulation SHO. If a stock-option order cannot execute, the System
calculates the SBBO or SNBBO with a price for the stock leg that would
be permissible under Regulation SHO, and posts the stock-option order
on the COB at that price (if eligible to rest), subject to a User's
instructions.\30\
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\30\ Specifically, Rule 201 of Regulation SHO provides that when
the short sale price test is triggered for an NMS stock, a trading
center (such as the Exchange) must comply with Rule 201. Other
options exchanges have similar marking requirements. See Cboe
Options Rule 6.53C, Interpretation and Policy .06(e) (which requires
marking in accordance with Regulation SHO); see also MIAX Rule 518,
Interpretation and Policy .01(b) (which requires marking and
execution price in accordance with Regulation SHO); and ISE Options
3, Section 14, Supplementary Material .13 (which requires marking in
accordance with Regulation SHO).
---------------------------------------------------------------------------
Similarly, proposed subparagraph (j)(3) provides that the Exchange
will only execute the stock leg of a stock-option order at a price
permissible under the Limit Up-Limit Down Plan. If a stock-option order
cannot execute, the System calculates the SBBO or SNBBO with a price
for the stock leg that would be permissible under that Plan, and posts
the stock-option order on the COB at that price (if eligible to rest),
subject to a User's instructions.\31\
---------------------------------------------------------------------------
\31\ Other options exchanges have similar restrictions on stock
leg execution prices. See Cboe Options Rule 6.53C, Interpretation
and Policy .06(f); see also MIAX Rule 518, Interpretation and Policy
.01(f).
---------------------------------------------------------------------------
Current Rule 21.20, Interpretations and Policies .04 and .06
describes price protection mechanisms and risk controls applicable to
complex orders. The proposed rule change moves these to Rule 21.17(b)
to consolidate all price protection mechanisms and risk controls
available on the Exchange into a single place within the Rules.\32\ The
price protection mechanisms and risk controls will apply to stock-
option orders (or the options components of stock-option orders, as
applicable) submitted to the Exchange. The proposed rule change adds
the buy-write/married put check, which will be a price protection
mechanism applicable specifically to stock-option orders.\33\ If the
Exchange applies the buy-write/married put check to a class, the System
cancels or rejects a stock-option order to buy the stock leg and sell a
call (buy a put) for the option leg with a price that is more than the
strike price of the call (put) plus (minus) a buffer amount (which the
Exchange determines on a class-by-class basis).\34\
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\32\ The proposed rule change makes corresponding changes to the
introductory language and the paragraph lettering in Rule 21.17
(including moving current price protections related to simple orders
into proposed paragraph (a)) and makes corresponding changes to
cross-references. The proposed rule change also adds to the maximum
value acceptable price range check that it applies to auction
responses, as other price protections do. Auction responses may
execute in the same manner as orders, and thus application of this
check to auction responses may prevent execution of an auction
response at a potentially erroneous price. The proposed rule change
makes no other substantive changes to the complex order price
protections, and only makes nonsubstantive changes to make the
language plain English, to simplify the rule provisions, and to
conform the language to the corresponding C2 rules. See C2 Rule
6.14(b).
\33\ See proposed Rule 21.17(b)(9).
\34\ The proposed buy-write/married put price check is similar
to the parity price protection in MIAX Rule 518, Interpretation and
Policy .01(g).
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The proposed rule change also amends the debit/credit price
reasonability check in proposed Rule 21.17(b)(3)(B) to provide how that
check will apply to stock-option orders. If the stock component of a
stock-option order is to buy, the stock-option order is a debit, and if
the stock component of a stock-option order is to sell, the stock-
option order is a credit. Pursuant to the current debit/credit price
reasonability check, if all pairs and loners are a debit (credit) (and
a buy (sell) stock leg would always be a loner and thus a debit
(credit), ultimately, whether the stock leg is a buy or sell would
dictate whether a stock-option order is a debit or credit. Therefore,
the Exchange believes this is a reasonable handling of
[[Page 34234]]
stock-option orders designed to help mitigate potential risks
associated with stock-option orders trading at prices that are
potentially erroneous. Additionally, the proposed rule change deletes
the exception for complex orders with European-style exercise. The
Exchange no longer believes this exception is necessary and will expand
this check to index options with all exercise styles.
The proposed rule change adds detail to the complex order drill-
through protection in proposed Rule 21.17(b)(6), to provide that if the
SBBO changes while an order rests on the COB at the drill-through price
prior to the end of the specified time period, if the complex order
cannot Leg, and the new SBO (SBB) crosses the drill-through price, the
System changes the displayed price of the buy (sell) complex order to
the new SBO (SBB) minus (plus) $0.01, and the order is not cancelled at
the end of the time period. This proposed change codifies current
functionality, and merely permits an order to remain on the COB since
the Exchange's market reflects interest to trade (but the order is not
currently executable due to Legging Restrictions) that was not there
was not at the beginning of the time period. This provides complex
orders with additional execution opportunities prior to cancellation.
The proposed rule change makes various changes to Rule 21.20
regarding complex orders to simplify the Rule, make certain
clarifications, codify certain functionality in the Rule, delete
redundant provisions, re-organize the Rule, and conform the rule text
to the corresponding C2 rule regarding complex orders.\35\ The proposed
rule change moves the provision stating that trading of complex orders
is subject to all other Rules applicable to the trading of orders,
unless otherwise provided in Rule 21.10 from current paragraph (c) to
the introduction of Rule 21.20. The proposed rule change alphabetizes
the defined terms in Rule 21.20(a), makes nonsubstantive changes to
definitions to conform the rule language to that of corresponding
definitions in C2 Rule 6.13, and removes the paragraph lettering.
---------------------------------------------------------------------------
\35\ See C2 Rule 6.13. The proposed rule change also modifies a
corresponding cross-reference in Rule 21.1(d)(10)(E).
---------------------------------------------------------------------------
The proposed rule change amends the definition of ``BBO'' to mean
the best bid or offer disseminated by the Exchange. The term BBO
generally refers to the prices of quotes the Exchange sends to OPRA.
While the bids and offers of most orders on the Simple Book are sent to
OPRA, certain ones (such as the bids and offers of AON orders, which
are not displayed on the Simple Book) \36\ are not disseminated. The
proposed rule change updates the term BBO to accurately reflect that it
represents displayed, disseminated interest.\37\
---------------------------------------------------------------------------
\36\ See Rule 21.1(d)(4).
\37\ This proposed definition of BBO is identical to C2's
definition of BBO. See C2 Rule 1.1.
---------------------------------------------------------------------------
The proposed rule change amends the definition of ``complex order''
to provide that it is an order involving the concurrent purchase and/or
sale of two or more different series in the same class. This merely
accounts for the fact that a complex order may be in an index class
(for which there is an underlying index) as well as an equity option
class (for which there is an underlying security).\38\ The proposed
rule change also deletes the Exchange's flexibility to designate in
which classes complex orders may be entered and that the Exchange will
determine the permissible number of legs on a class-by-class basis.
Currently, the Exchange makes complex order functionality available in
all classes that trade on the Exchange and has the same limit on the
number of legs that may be submitted for a complex order in all
classes. The proposed rule change codifies in proposed paragraph (b)
that complex orders are available in all classes listed for trading on
the Exchange, which is consistent with this current definition of
complex order, as well as current paragraph (b), which permits the
Exchange to determine when complex orders are available for use on the
Exchange.
---------------------------------------------------------------------------
\38\ This is consistent with the definition of complex order in
C2 Rule 1.1.
---------------------------------------------------------------------------
The proposed rule change adds to paragraph (b) that Users may
designate complex orders as Attributable or Non-Attributable. These
order instructions are defined in Rule 21.1(c) and are currently
available for complex orders. The proposed rule change codifies in the
Rules that these order instructions are available for complex orders.
This provides Users with additional functionality and flexibility with
respect to complex order entry that they currently have for simple
orders. The proposed rule change is the same as the C2 rule, which
similarly permits Users to designate complex orders as Attributable or
Non-Attributable.\39\
---------------------------------------------------------------------------
\39\ See C2 Rule 6.13(b).
---------------------------------------------------------------------------
The proposed rule change moves the provision regarding the Exchange
determining which Capacities \40\ are eligible for entry onto the COB
from current paragraph (c) to proposed paragraph (b), which includes
all other information regarding the Exchange's authority to limit the
availability of certain orders with respect to complex order
functionality.
---------------------------------------------------------------------------
\40\ The Exchange notes the term ``Capacity'' refers to origin
code. The Exchange is submitting a separate rule filing to add the
definition of Capacity, as well as the different Capacities
available on the Exchange. This is the term currently used in C2
Rules when referring to origin code. See, e.g., C2 Rule 6.13(b).
---------------------------------------------------------------------------
The proposed rule change moves the provisions regarding COA
eligibility from current subparagraph (d)(1) and Interpretation and
Policy .02 to the definition of a COA-eligible order in current
paragraph (b)(2) (proposed paragraph (b)) so that all terms regarding
COA eligibility of a complex order are included in the same place
within the rule. The proposed rule change clarifies in the definition
of complex only order in current subparagraph (b)(1) (proposed
paragraph (b)) that complex [sic] orders may not leg into the Simple
Book (which is consistent with the definition that currently states
these orders will only check against the COB).\41\ This is also
consistent with the definition of COA-Eligible and Do-Not-COA Order in
the C2 Rules.\42\ The proposed rule change makes no substantive changes
to what orders will and will not initiate a COA.
---------------------------------------------------------------------------
\41\ The Commission notes that proposed paragraph (b) provides
that complex only orders may not leg into the Simple Book (emphasis
added).
\42\ See C2 Rule 6.13(b).
---------------------------------------------------------------------------
The proposed rule change clarifies in current subparagraph (b)(3)
(proposed paragraph (b)) that if a complex order would execute against
a complex order in the COB with an MTP Modifier with the same Unique
Identifier, the System handles the complex orders with an MTP Modifier
as described in Rule 21.1(g). This is consistent with current
functionality and adds detail to the Rules of how the System handles
these orders. This is also consistent with the definition of Complex
Orders with MTP Modifiers in the C2 Rules.\43\ The proposed rule change
makes no substantive changes to how the System handles complex orders
with MTP Modifiers.
---------------------------------------------------------------------------
\43\ See C2 Rule 6.13(b).
---------------------------------------------------------------------------
The proposed rule change alphabetizes the types of complex orders
available on the Exchange in paragraph (b). The changes described
above, which do not modify any existing functionality and merely add
detail and clarity to the Rules. The proposed rule makes additional
nonsubstantive changes to these definitions, including to make them
plain English, to reorganize certain provisions, to simplify the
language, update paragraph lettering and numbering and cross-
references, and to
[[Page 34235]]
conform them to other portions of the rule and to the corresponding C2
rule.\44\
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\44\ See C2 Rule 6.13(b).
---------------------------------------------------------------------------
The proposed rule change moves the provisions regarding minimum
increments and trade prices for complex orders from current paragraph
(c) (which is primarily about the COB Opening Process) to proposed
paragraph (f)(1) and (2), respectively. The proposed rule change makes
no substantive changes to these provisions, and makes nonsubstantive
changes, including to make them plain English, to reorganize certain
provisions, to simplify the language, update paragraph lettering and
numbering and cross-references, and to conform them to other portions
of the rule and to the corresponding C2 rule.\45\
---------------------------------------------------------------------------
\45\ See C2 Rule 6.13(f). The Exchange notes C2 has no Priority
Customer overlay, and thus has different execution price
requirements regarding components of complex orders with respect to
the Simple Book.
---------------------------------------------------------------------------
The proposed rule change consolidates all provisions regarding the
COB Opening Process into proposed paragraph (c). Current subparagraph
(c)(2)(A) becomes the introductory sentence for paragraph (c). The
provisions regarding when Users may submit complex orders for
participation in the COB Opening Process, as well as when the Exchange
disseminates messages with information regarding the opening process,
move from current subparagraph (c)(2)(A) to proposed subparagraph
(c)(1). Current subparagraph (c)(2)(B) states the COB Opening Process
will commence when all legs of the complex strategy are open on the
Simple Book. However, pursuant to proposed subparagraph (c)(2), the
System initiates the COB Opening Process for a complex strategy after a
number of seconds (determined by the Exchange) after all legs of the
strategy in the Simple Book are open for trading.\46\ The delay
provides time for the market prices to stabilize before trading may
begin.\47\ This is consistent with current functionality as set forth
in the technical specifications for the COB opening process available
on the Exchange's website.\48\ The Exchange believes this is a more
accurate description of the time when the COB opens.\49\ The rule
provisions regarding how the Exchange determines the COB Opening Price,
how the Exchange transitions to Regular Trading, and what happens if
there are no matching complex orders or no valid COB Opening Price move
from current subparagraphs (c)(2)(C) through (D) to proposed
subparagraphs (c)(2)(A) through (C). The proposed rule change makes no
substantive changes to how the COB opening process occurs, and makes
nonsubstantive changes, including to make them plain English, to
reorganize certain provisions, to simplify the language, update
paragraph lettering and numbering and cross-references, and to conform
them to other portions of the rule and to the corresponding C2
rule.\50\
---------------------------------------------------------------------------
\46\ See proposed Rule 21.20(c)(2).
\47\ The Exchange notes it applies a similar delay after
occurrence of the opening rotation trigger for the simple market
opening auction process. See Rule 21.7(d)(1).
\48\ See https://cdn.cboe.com/resources/membership/US_Options_Opening_Process.pdf.
\49\ This is also the same as the COB opening process for C2.
See C2 Rule 6.13(c)(2).
\50\ See C2 Rule 6.13(c).
---------------------------------------------------------------------------
The proposed rule change moves the provisions in current
subparagraph (c)(2)(E) regarding prices for complex strategy executions
to proposed paragraph (f)(2) (along with the provisions in current
(c)(1)(B) and (C) as discussed above) and (3) so that all provisions
regarding prices at which complex orders may execute in any manner are
included in a single place within Rule 21.20. The proposed rule change
makes no substantive changes to the prices at which complex orders may
execute, and makes nonsubstantive changes, including to make them plain
English, to reorganize certain provisions, to simplify the language,
update paragraph lettering and numbering and cross-references, and to
conform them to other portions of the rule and to the corresponding C2
rule.\51\
---------------------------------------------------------------------------
\51\ See C2 Rule 6.13(f).
---------------------------------------------------------------------------
The proposed rule change moves the provision regarding incoming
complex orders with prices that do not satisfy the pricing requirements
described in the previous paragraph from current subparagraph (c)(2)(E)
to proposed subparagraph (d)(5) and (e), to include all provisions
regarding System handling of complex orders that are unable to execute
(either following a COA or upon submission to the COB, respectively) in
a single place with in Rule 21.20. The proposed rule change makes no
substantive changes to this provision.
The proposed rule change moves provisions regarding restrictions on
the Legging \52\ of complex orders into the Simple Book from current
paragraph (c)(2)(F) to proposed paragraph (g). The proposed rule change
makes no substantive changes to the Legging restrictions on complex
orders, and makes nonsubstantive changes, including to make them plain
English, to reorganize certain provisions, to simplify the language,
update paragraph lettering and numbering and cross-references, and to
conform them to other portions of the rule and to the corresponding C2
rule.\53\
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\52\ The proposed rule change also adds to Rule 21.20(a) a
defined term for Legging, which is defined in proposed paragraph (g)
as a complex order executing against orders an quotes in the Simple
Book if it can execute in full or in a permissible ratio and if it
has [sic] more than a maximum number of legs (which the Exchange
determines on a class-by-class basis and may two, three, or four).
This is consistent with current Rule 21.20(c)(1)(F) and merely adds
a defined term. The Commission notes that such execution occurs if
the complex order has no more than a maximum number of legs
(emphasis added).
\53\ See C2 Rule 6.13(g).
---------------------------------------------------------------------------
The proposed rule change moves and combines the provisions
regarding initial and continual evaluation of complex orders from
current subparagraphs (c)(1)(G) and (c)(5) to proposed paragraph (i) so
that all provisions regarding evaluation of complex orders are included
in a single place and in a simple manner within Rule 21.20. The
proposed rule change makes no substantive changes to the evaluation
process, and makes nonsubstantive changes to these provisions,
including to make them plain English, to reorganize certain provisions,
to simplify the language and delete redundant language, update
paragraph lettering and numbering and cross-references, and to conform
them to other portions of the rule and to the corresponding C2
rule.\54\
---------------------------------------------------------------------------
\54\ See C2 Rule 6.13(i).
---------------------------------------------------------------------------
The proposed rule change moves the provisions in subparagraph
(c)(4)(A) and (B) regarding the repricing of complex orders on the COB
in certain situations and the handling of Post Only complex orders that
lock or cross a resting complex order in the COB or the then-current
opposite side SBBO to proposed subparagraph (h)(1). The proposed rule
change modifies the reference to applicable price protections in
current subparagraph (c)(4)(B) to the drill-through protection in
proposed subparagraph (h)(1), as this is the only applicable price
protection in the context of this Rule. The proposed rule change moves
current subparagraph (c)(4)(C) to proposed subparagraph (h)(2). The
proposed rule change deletes the remainder of current subparagraph
(c)(4) regarding the managed interest process, as the provisions in
that subparagraph are covered in various other parts of Rule 21.20
(currently and as proposed), including proposed paragraphs (d) through
(h),\55\ making
[[Page 34236]]
these provisions of the managed interest process redundant. The
proposed rule change makes no substantive changes to the evaluation
process, and makes nonsubstantive changes to these provisions,
including to make them plain English, to reorganize certain provisions,
to simplify the language and delete redundant language, update
paragraph lettering and numbering and cross-references, and to conform
them to other portions of the rule and to the corresponding C2
rule.\56\
---------------------------------------------------------------------------
\55\ For example, the first portion of current subparagraph
(c)(5)(A) describes the System evaluation of an order and whether it
is COA-eligible, can execute against the COB or Leg into the Simple
Book. As discussed above, this is described in proposed paragraph
(g). Additionally, current subparagraph (c)(5)(A) describes pricing
requirements for complex orders, which are included in paragraph
(f), as described above. Current subparagraph (c)(5)(C) regarding
whether an order is determined to be COA-eligible (and thus
initiates a COA) is included in proposed subparagraph (d)(1) and
paragraph (e).
\56\ See C2 Rule 6.13(h).
---------------------------------------------------------------------------
The proposed rule change deletes current subparagraph (c)(4)(A), as
proposed subparagraph (f)(2)(A) includes a provision that requires a
complex order to execute at a price at least equal to the SBBO (i.e.,
the bids and offers established in the marketplace that are no better
than the bids or offers comprising the complex order price) or better
than the SBBO when there is a Priority Customer Order at the SBBO,\57\
and thus this provision is redundant. The proposed rule change moves
the provision in current subparagraph (c)(4)(B) to proposed paragraph
(e), which describes the allocation and priority in which a complex
order may execute against other interest. The proposed rule change does
not change the priority order in which, or the prices at which, complex
orders currently execute. The proposed rule change makes nonsubstantive
changes to these provisions, including to make them plain English, to
reorganize certain provisions, to simplify the language and delete
redundant language, update paragraph lettering and numbering and cross-
references, and to conform them to other portions of the rule and to
the corresponding C2 rules.\58\
---------------------------------------------------------------------------
\57\ Proposed paragraph (e) clarifies that a complex order must
execute against any Priority Customer orders in the Simple Book at
the same price, which is consistent with the current Rule that a
complex order must improve the SBBO if there is a Priority Customer
order at the BBO of any component.
\58\ See C2 Rule 6.13(e) and (f).
---------------------------------------------------------------------------
The proposed rule change moves the description of how a non-COA-
eligible order will be handled from current subparagraph (c)(5)(D) to
proposed paragraph (e). The proposed rule change deletes current
subparagraph (c)(5)(D)(i), as the definitions of times-in-force that
are not allowed to rest in the COB (for example, an immediate-or-cancel
order is defined as being cancelled if it does not execute upon entry)
include that fact, making this provision redundant. The proposed rule
change makes no substantive changes to how the System handles non-COA-
eligible orders. The proposed rule change makes nonsubstantive changes
to these provisions, including to make them plain English, to
reorganize certain provisions, to simplify the language and delete
redundant language, update paragraph lettering and numbering and cross-
references, and to conform them to other portions of the rule and to
the corresponding C2 rule.\59\
---------------------------------------------------------------------------
\59\ See C2 Rule 6.13(e).
---------------------------------------------------------------------------
The proposed rule change deletes current subparagraph (c)(6)(A)
regarding complex market orders that may initiate a COA, because the
definition of COA-eligible in proposed paragraph (b) permits market
orders to be designated as COA-eligible (there is no prohibition on a
User from designating a market order as COA-eligible), and because
proposed subparagraph (d)(1) describes the auction price that will be
used for a COA-eligible market order. Therefore, this provision is
redundant. The proposed rule change deletes current subparagraph
(c)(6)(B) regarding complex market orders that do not initiate a COA,
because those will be handled in the same manner as any do-not-COA
order pursuant to proposed paragraph (e), making this provision
redundant. The proposed rule change makes no substantive changes to how
the System handles complex market orders. The proposed rule change
makes nonsubstantive changes to these provisions, including to make
them plain English, to reorganize certain provisions, to simplify the
language and delete redundant language, update paragraph lettering and
numbering and cross-references, and to conform them to other portions
of the rule and to the corresponding C2 rule.\60\
---------------------------------------------------------------------------
\60\ See C2 Rule 6.13(b), (d), and (e).
---------------------------------------------------------------------------
The proposed rule change clarifies in proposed subparagraph (d)(1)
that the COA price for a complex order may be the drill-through price
if the order is subject to the drill-through protection in Rule
21.17(b). This is consistent with current functionality and the drill-
through protection, which ensures that a complex order will not execute
at a price too far away from the SNBBO. The current Rule states the
price of a COA is subject to applicable price protections. However, the
only applicable one is the drill-through protection, so the Exchange
believes the proposed rule change provides additional specificity
consistent with the current Rule.
The proposed rule change moves the provisions regarding when a COA
may terminate early from current subparagraph (d)(5)(C) to proposed
subparagraph (d)(3) so that all provisions regarding the length of time
for which a COA lasts are included in the same place within Rule 21.20.
The proposed rule change clarifies in subparagraph (d)(4)(B) that the
System aggregates the size of COA Responses submitted at the same price
for an EFID, and caps the size of the aggregated COA Responses at the
size of the COA-eligible order. Current subparagraph (d)(4) permits
multiple COA Responses from the same Member. The proposed rule change
is consistent with current System entry requirements for COA Responses,
and the proposed rule change merely adds this detail to the Rules. The
System aggregates the size of COA Responses submitted at the same price
for an EFID, and caps the size of the aggregated COA Responses at the
size of the COA-eligible order. This provision prevents Users from
taking advantage of a pro-rata allocation by submitting responses
larger than the COA-eligible order to obtain a larger allocation from
that order. The proposed rule change in subparagraph (d)(4)(C) that
provides that a modification of a COA Response to decrease its size
will not result in loss of priority, as that is consistent with current
the current Rule and System functionality.\61\ The Exchange believes
decreasing the size of a COA Response (similar to decrementation of an
order or quote after partial execution), should not impact priority, as
such a modification would potentially decrease the allocation to that
response. The proposed rule change clarifies that COA Responses may
only execute against the COA-eligible order for the COA to which a User
submitted the COA Response, which is consistent with the current rules
that require COA Responses to include a COA auction ID for the COA to
which the User is submitting the COA Responses.
---------------------------------------------------------------------------
\61\ See current subparagraph (d)(4).
---------------------------------------------------------------------------
The proposed rule change states that unexecuted COA Responses are
cancelled at the conclusion of the COA rather than immediately if they
are not executable based on the price of the COA. The Exchange believes
this proposed change will ensure that all Users participating in COAs
have the same information regarding COAs if the Exchange determines to
not include the price of a COA on the COA notification message pursuant
to proposed subparagraph (d)(1). If the Exchange determines to not
include the price of a
[[Page 34237]]
COA on the COA notification message pursuant to proposed subparagraph
(d)(1), rejection of unmarketable COA Responses may provide the
submitting User with the ability to determine the COA price, which was
not available to other Users.
The proposed rule change deletes current subparagraph (d)(6)
regarding COA pricing, as it is redundant of the rule provisions in
proposed (f)(2). The proposed rule change moves the provision from
current subparagraph (d)(7) regarding the allocation of COA-eligible
orders to proposed subparagraph (d)(5).
The proposed rule change adds detail to the current rule provisions
regarding COAs, as well as codifies current functionality and
consolidates all provisions regarding COAs within a single paragraph in
Rule 21.20 (including moving rule provision regarding concurrent COAs
from current Interpretation and Policy .02 to proposed subparagraph
(d)(2)). The proposed rule change makes no changes to how COAs occur or
how the System allocates orders at the conclusion of a COA. The
proposed rule change makes nonsubstantive changes to the COA provisions
in paragraph (d), including to make them plain English, to reorganize
certain provisions, to simplify the language and delete redundant
language, update paragraph lettering and numbering and cross-
references, and to conform them to other portions of the rule and to
the corresponding C2 rule.\62\
---------------------------------------------------------------------------
\62\ See C2 Rule 6.13(d).
---------------------------------------------------------------------------
The proposed rule change adds proposed subparagraph (h)(3), which
states if there is a zero NBO for any leg, the System replaces the zero
with a price $0.01 above NBB to calculate the SNBBO, and complex orders
with any buy legs do not Leg into the Simple Book. If there is a zero
NBB, the System replaces the zero with a price of $0.01, and complex
orders with any sell legs do not Leg into the Simple Book. If there is
a zero NBB and zero NBO, the System replaces the zero NBB with a price
of $0.01 and replaces the zero NBO with a price of $0.02, and complex
orders do not Leg into the Simple Book. The SBBO and SNBBO may not be
calculated if the NBB or NBO is zero (as noted above, if the best bid
or offer on the Exchange is not available, the System uses the NBB or
NBO when calculating the SBBO). As discussed above, permissible
execution prices are based on the SBBO. If the SBBO is not available,
the System cannot determine permissible posting or execution pricing
for a complex order (which are based on the SBBO), which could reduce
execution opportunities for complex orders. If the System were to use
the zero bid or offer when calculating the SBBO, it may also result in
executions at erroneous prices (since there is no market indication for
the price at which the leg should execute). For example, if a complex
order has a buy leg in a series with no offer, there is no order in the
leg markets against which this leg component could execute. This is
consistent with current System functionality, and the proposed rule
change is codifying this detail in the Rules. This is also consistent
with the current Rule 21.20(c)(1)(C) and proposed Rule 21.20(f)(2) that
states complex order executions are not permitted if the price of a leg
would be zero. Additionally, this is similar to the proposed rule
change described above to improve the posting price of a complex order
by $0.01 if it would otherwise lock the SBBO. The proposed rule change
is a reasonable process to ensure complex orders receive execution
opportunities, even if there is no interest in the leg markets.
Additionally, a User may always cancel a complex order if the User does
not wish to have its order rest in the COB at that price. This proposed
rule change is also identical to the corresponding C2 Rule.\63\
---------------------------------------------------------------------------
\63\ See C2 Rule 6.13(h)(3).
---------------------------------------------------------------------------
The proposed rule change moves provisions regarding how the System
handles complex orders during trading halt from Interpretation and
Policy .05 to proposed paragraph (k). The proposed rule change makes no
substantive changes to how the System handles complex orders during a
trading halt, and makes nonsubstantive changes to these provisions,
including to make them plain English, to reorganize certain provisions,
to simplify the language and delete redundant language, update
paragraph lettering and numbering and cross-references, and to conform
them to other portions of the rule and to the corresponding C2
rule.\64\
---------------------------------------------------------------------------
\64\ See C2 Rule 6.13(k).
---------------------------------------------------------------------------
The proposed rule change makes no substantive changes to the rules
regarding how complex orders execute, including rules related to
priority. Complex orders will continue to trade in the same manner as
they do today. The proposed rule change makes nonsubstantive changes to
these provisions, including to make the rule text plain English,
reorganize the Rule, simplify the language and delete redundant
provisions, update paragraph lettering and numbering and cross-
references, and conform to the corresponding C2 rule.\65\
---------------------------------------------------------------------------
\65\ See C2 Rule 6.13(d) and (e). Note C2 has different priority
provisions, as it does not have Priority Customer priority and
instead prioritizes all orders and quotes on the Simple Book (and
allocates them pursuant to the applicable allocation algorithm
pursuant to C2 Rule 6.12) ahead of all complex orders.
---------------------------------------------------------------------------
Throughout Rule 21.20, the proposed rule change replaces references
to Members with Users. An Options Member means a firm or organization
that is registered with the Exchange pursuant to Chapter XVII of the
Rules for purposes of participating in options trading on EDGX Options
as an ``Options Order Entry Firm'' or ``Options Market Maker.'' \66\ A
User is any Options Member or Sponsored Participant who is authorized
to obtain access to the System pursuant to Rule 11.3.\67\ While the
Exchange currently has no Sponsored Participants, a Sponsored
Participant would have the ability to submit complex orders. Therefore,
the term ``User'' in the context of Rule 21.20 is more appropriate.
---------------------------------------------------------------------------
\66\ See Rule 16.1.
\67\ See Rule 16.1.
---------------------------------------------------------------------------
The proposed rule change amends Rule 21.1(d)(10) to delete the
cross-reference to Rule 21.20(c)(1)(C), which the Exchange proposes to
move as described above, and replaces it to state that no option leg
may execute at a price of zero. The Rule currently provides that no
option leg may execute at the same price as a Priority Customer Order
in the Simple Book, which makes the other provision of Rule
21.20(c)(1)(C) unnecessary to reference. This proposed change makes no
change to the functionality of Complex QCC Orders.
The proposed rule change deletes provisions that state the Exchange
will make certain determinations and announcements via Regulatory
Circular.\68\ Pursuant to Rule 16.3, the Exchange announces all
determinations it makes pursuant to the Rules via specifications,
Notices, or Regulatory Circulars with appropriate advanced notice,
which will be posted on the Exchange's website, or as otherwise
provided in the Rules; electronic message; or other communication
method as provided in the Rules. All determinations the Exchange makes
pursuant to Rule 21.20 will be made in accordance with Rule 16.3.
---------------------------------------------------------------------------
\68\ See Rules 21.17 (in the introductory paragraph and proposed
paragraph (b)) and 21.20 (various provisions).
---------------------------------------------------------------------------
The proposed rule change makes additional nonsubstantive changes
throughout Rule 21.20, including to make them plain English, to
reorganize certain provisions and consolidate
[[Page 34238]]
related provisions within a single portion of the Rule, to simplify the
language and delete redundant language, update paragraph lettering and
numbering and cross-references, and to conform them to other portions
of the rule and to the corresponding C2 rule.\69\ The proposed rule
change makes no changes to the allocation or priority of complex
orders.
---------------------------------------------------------------------------
\69\ See C2 Rule 6.13.
---------------------------------------------------------------------------
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.\70\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \71\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \72\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------
\70\ 15 U.S.C. 78f(b).
\71\ 15 U.S.C. 78f(b)(5).
\72\ Id.
---------------------------------------------------------------------------
The proposed rule change benefits investors and promote just and
equitable principles of trade because it provides investors with
greater opportunities to manage risk through trading of additional
types of complex orders. The proposed stock-option order and Complex
QCC with Stock Order functionality are each optional for Users and will
help them facilitate execution of components of a QCT. Currently, if a
User wanted to execute a QCT, it could do so by entering the options
components on the Exchange and separately executing the stock component
of the QCT on another venue. Users will have the option to continue do
this, or build their own technology to electronically communicate the
stock component of any QCT to a broker-dealer for execution. However,
the addition of stock-option order and Complex QCC with Stock Order
functionality will provide Users with an optional, alternative means to
execute the stock component of their QCTs.
The Exchange believes these proposed order types will reduce Users'
compliance burden because it [sic] allows for the automatic submission
of the stock component of a QCT in connection with the execution of the
options component(s) as a stock-option order on the Exchange. The
proposed functionality also provides benefits to the Exchange by
establishing an audit trail for the execution all option components of
a QCT with [sic] a reasonable period of time of each other, and of the
stock component of a QCT within a reasonable period of time after the
execution of the option components. The proposed rule change further
reduces Users' compliance risk by providing that the Exchange will, in
addition to cancelling the stock component if the option component
cannot execute, nullify any option component execution when the stock
component does not execute without a request from the User.
Nullification of the option trade is consistent with the requirement
that a User must execute the stock component of a QCT within a
reasonable period of time after executing the option component on the
Exchange. The proposed rule change simply eliminates the requirement
that one party to the transaction request nullification of the option
component trade before the Exchange nullifies the option trade, because
such nullification is consistent with the definition of QCT. The
proposed rule change merely automates a process that Users can manually
do today. As noted above, to qualify as a QCT, the execution of one
component is contingent upon the execution of all other components at
or near the same time.\73\ Since the purpose of stock-option orders is
for all components to trade at or near the same time, if the stock
component does not execute at or near the same time as the option
component(s), it is reasonable to expect a User that submitted one of
these orders to request such nullification to avoid any compliance risk
associated with execution of the option components of these orders and
lack of execution of a stock order at or near the same time.\74\ This
proposed execution process is the same process the Exchange currently
uses to execute QCC with Stock Orders, which are a type of stock-option
order (and thus the Exchange merely expands this process to all stock-
option orders, as all stock-option orders must satisfy the same QCT
Exemption).\75\ This proposed process is also similar to that of other
options exchanges.\76\
---------------------------------------------------------------------------
\73\ See supra notes 10 and 18.
\74\ See supra note 12.
\75\ See current Rule 21.20(c)(7) (proposed Rule 21.20(l)(3)).
\76\ See supra note 19.
---------------------------------------------------------------------------
The Exchange conducts surveillance to ensure a User executes the
stock component of a QCT, which will also apply to all of the proposed
functionality, if the option component executed. As a result, if the
stock component does not execute when initially submitted to a stock
trading venue by the designated broker-dealer, a User may be subject to
compliance risk if it does not execute the stock component within a
reasonable time period of the execution of the option component. The
proposed rule change reduces this compliance risk for Users. The
Exchange therefore believes the proposed rule change removes
impediments to and perfects the mechanisms of a free and open market
and a national market system, and in general, protects investors and
the public interest.
The Exchange believes the proposed stock leg execution buffer,
debit/credit reasonability check amendment, and buy-write/married put
check for stock-option orders (in addition to the other existing price
protection mechanisms applicable to complex orders that will apply to
stock-option orders) will protect investors and the public interest and
maintain fair and orderly markets by mitigating potential risks
associated with market participants entering orders at clearly
unintended prices and orders trading at prices that are extreme and
potentially erroneous, which may likely have resulted from human or
operational error. The Exchange believes these proposed price
protection mechanisms will remove impediments to and perfects the
mechanisms of a free and open market and a national market system,
because they are similar to price protection mechanisms available on
other exchanges. The proposed buy-write/married put price check is
similar to the parity price protection in MIAX Rule 518, Interpretation
and Policy .01(g). The proposed application of the debit/credit price
reasonability check to stock-option orders is similar to Cboe Options
Rule 6.53C, Interpretation and Policy .08(c). The proposed stock leg
buffer is similar to the Exchange's current fat finger protection
(which will not permit a complex order to be more than a specified
amount outside of the SNBBO, which will include the NBBO of the stock
leg, as described above), except it also applies a buffer to the
[[Page 34239]]
individual stock leg as opposed to the net price. Additionally, stock
exchanges provide similar protections for execution prices of stock
orders.\77\
---------------------------------------------------------------------------
\77\ See, e.g., NASDAQ Stock Market Rule 4757(c) (which prevents
stock limit orders from being accepted at prices outside of pre-set
standard limits, which is based on the NBBO).
---------------------------------------------------------------------------
The proposed rule change to require Users to mark stock-option
orders as required by Regulation SHO, and to execute stock-option
orders at prices permitted by Regulation SHO (a Regulation adopted
pursuant to the Act) and the Limit Up-Limit Down Plan (Regulation NMS
Plan adopted pursuant to the Act), promote just and equitable
principles of trade, as they are intended to ensure the Exchange will
execute stock-option orders in accordance with these regulations, which
are intended to reduce the negative impacts of sudden, unanticipated
price movements in NMS stocks and protect investors.
The proposed rule change would also provide Users with access to
stock-option order functionality and Complex QCC with Stock order
functionality that is generally available on options exchanges,
including Cboe Affiliated Exchanges, which may result in the more
efficient execution of QCTs and provide Users with additional
flexibility and increased functionality on the Exchange's System.\78\
Additionally, the proposed functionality is consistent with the QCT
exemption previously approved by the Commission.\79\ The Exchange
believes this consistency will promote a fair and orderly national
options market system. The proposed rule change does not propose to
implement new or unique functionality that has not been previously
filed with the Commission or is not available on Cboe Affiliated
Exchanges (or other options exchanges).
---------------------------------------------------------------------------
\78\ See, e.g., Cboe Options Rule 6.53C and Interpretation and
Policy .06; MIAX Rule 518; and ISE Options 3, Section 14 (stock-
option order functionality); and Cboe Options Rule 6.53C,
Interpretation and Policy .06(g); and ISE Options 3, Section 12(f)
(Complex QCC with Stock functionality).
\79\ See QCT Exemption Order.
---------------------------------------------------------------------------
The proposed rule change to codify the delay for a complex strategy
to open after the legs have opened will benefit investors, as it will
provide time for the market prices to stabilize before trading may
begin in complex strategies.\80\ This is consistent with current
functionality as set forth in the technical specifications for the COB
opening process available on the Exchange's website.\81\ The Exchange
believes this is a more accurate description of the time when the COB
opens, and this additional transparency will benefit investors.
Additionally, another options exchange has the same delay for its COB
opening process.\82\
---------------------------------------------------------------------------
\80\ The Exchange notes it applies a similar delay after
occurrence of the opening rotation trigger for the simple market
opening auction process. See Rule 21.7(d)(1).
\81\ See https://cdn.cboe.com/resources/membership/US_Options_Opening_Process.pdf.
\82\ See C2 Rule 6.13(c)(2).
---------------------------------------------------------------------------
The proposed rule change to codify current functionality in the
drill-through complex order protection will benefit investors, as it
provides additional transparency in the Rules. Additionally, the
proposed rule change provides complex orders with additional execution
opportunities rather than cancels them when market prices reflect
interest to trade at the price, but the order is not currently
executable due to Legging Restrictions. Additionally, this
functionality is the same as the drill-through complex order protection
of another options exchange.\83\
---------------------------------------------------------------------------
\83\ See C2 Rule 6.14(b)(6).
---------------------------------------------------------------------------
The proposed rule change to codify current functionality regarding
how the System determines possible execution prices for complex orders
if the NBB or NBO of any component leg is zero will benefit investors,
because it is a reasonable process provide complex orders with
execution opportunities, even if there is no interest in the leg
markets in a manner consistent with the pricing requirements of complex
orders. A User may always cancel a complex order if the User does not
wish to have its order rest in the COB at a price determined as set
forth in the proposed rule change. Additionally, another options
exchange offers the same functionality.\84\
---------------------------------------------------------------------------
\84\ See C2 Rule 6.13(h)(3).
---------------------------------------------------------------------------
The proposed rule change to permit Users to designate complex
orders as Attributable or Non-Attributable will benefit investors, as
it codifies current functionality and thus provides investors with
transparency in the Rules. These instructions merely apply to
information that is displayed for the orders (in the discretion of the
User), and have no impact on the execution of complex orders. The
Exchange believes this provides Users with greater control and
flexibility over the manner in which they may submit complex orders,
and provides them with functionality that is currently available for
simple orders. Additionally, another options exchange offers investors
the ability to designate complex orders as Attributable or Non-
Attributable.\85\
---------------------------------------------------------------------------
\85\ See C2 Rule 6.13(b).
---------------------------------------------------------------------------
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. 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. Differences
remain to the extent necessary to conform to the Exchange's current
rules, retain intended differences based on the Exchange's market
model, or make other nonsubstantive changes to simplify, clarify,
eliminate duplicative language, or make the rule provisions plain
English. 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.
To the extent a proposed rule change is based on an existing Cboe
Affiliated Exchange rule, the language of Exchange Rules and Cboe
Affiliated Exchange rules may differ to [sic] extent necessary to
conform with existing Exchange rule text or to account for details or
descriptions included in the Exchange's Rules but not in the applicable
EDGX rule. Where possible, the Exchange has substantively mirrored Cboe
Affiliated Exchange rules, because consistent rules will simplify the
regulatory requirements and increase the understanding of the
Exchange's operations for participants on other Cboe Affiliated
Exchanges that are also EDGX Users. The proposed rule change would
provide greater harmonization between the rules of the Cboe Affiliated
Exchanges, resulting in greater uniformity and less burdensome and more
efficient regulatory compliance. 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.
The Exchange also believes that the proposed amendments will
contribute to the protection of investors and the public interest by
making the
[[Page 34240]]
Exchange's rules easier to understand. Where necessary, the Exchange
has proposed language consistent with the Exchange's operations on EDGX
technology, even if there are specific details not contained in the
current structure of EDGX rules. The Exchange believes it is consistent
with the Act to maintain its current structure and such detail, rather
than removing such details simply to conform to the structure or format
of EDGX rules, again because the Exchange believes this will increase
the understanding of the Exchange's operations for all Users of the
Exchange.
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 stock-option order or Complex QCC with Stock Order
functionality will impose any burden on intramarket competition that is
not necessary or appropriate in furtherance of the purposes of the Act.
Stock-option orders and Complex QCC with Stock orders facilitate Users'
compliance with the requirements associated with executing QCTs, and
are not designed to impose any unnecessary burden on competition. These
proposed order types will be available to all Users on a voluntary
basis, and Users are not required to use either order type when
executing QCTs. The proposed rule change has no impact on Users that
elect to execute QCTs without using the proposed functionality. Those
Users may continue to execute QCTs in the same manner as they do today
by entering an option order on the Exchange and separately executing
the stock component of the QCT another venue. A User can also build its
own technology to electronically communicate the stock component of any
QCT to a broker-dealer for execution.
For Users that elect to use proposed functionality to execute QCTs,
the proposed rule change reduces those Users' compliance burdens to
satisfy their obligation to execute all of the components of a QCT at
or near the same time, as this functionality provides an automated
means for satisfying this obligation. The proposed functionality will
be available to all Users either [sic] through a User's electronic
connection to the Exchange.
The Exchange does not believe stock-option orders or Complex QCC
with Stock Order functionality will impose any burden on intermarket
competition that is not necessary or appropriate in furtherance of the
purposes of the Act, because it is consistent with the QCT exemption
previously approved by the Commission.\86\ Additionally, the proposed
functionality is similar to functionality offered by other options
exchanges.\87\
---------------------------------------------------------------------------
\86\ See QCT Exemption Order.
\87\ See Cboe Options Rule 6.53C; ISE Options 3, Sections 12(f)
and 14, and Supplementary Material .02 and .07; and MIAX Rule 518.
---------------------------------------------------------------------------
The Exchange does not believe the proposed stock leg execution
buffer, debit/credit reasonability check amendment, and buy-write/
married put check for stock-option orders will impose any burden on
intramarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act. These proposed price protection
mechanisms will apply to stock-option orders of all Users in the same
manner. The Exchange does not believe these price protection mechanisms
will impose any burden on intermarket competition that is not necessary
or appropriate in furtherance of the purposes of the Act, because they
are similar to price protection mechanisms available on other
exchanges.\88\ These price protection mechanisms are intended to
prevent executions of stock-option orders at potentially erroneous
prices.
---------------------------------------------------------------------------
\88\ See MIAX Rule 518, Interpretation and Policy .01(g) (buy-
write/married put check); Cboe Options Rule 6.53C, Interpretation
and Policy .08(c) (debit/credit price reasonability check to stock-
option orders); and NASDAQ Stock Market Rule 4757(c) (which prevents
stock limit orders from being accepted at prices outside of pre-set
standard limits, which is based on the NBBO).
---------------------------------------------------------------------------
The Exchange does not believe the proposed rule change to permit
Users to designate complex orders as Attributable or Non-Attributable
will impose any burden on intramarket competition that is not necessary
or appropriate in furtherance of the purposes of the Act, because this
proposed rule change codifies existing functionality. These
designations will be available to all Users, and use of these
designations will be voluntary. The Exchange does not believe the
proposed rule change to permit Users to designate complex orders as
Attributable or Non-Attributable will impose any burden on intermarket
competition that is not necessary or appropriate in furtherance of the
purposes of the Act, because another Exchange makes these designations
available for complex orders.\89\
---------------------------------------------------------------------------
\89\ See C2 Rule 6.13(b).
---------------------------------------------------------------------------
The Exchange does not believe the proposed changes to the complex
order drill-through, the pricing of orders when the NBBO in a leg of a
complex strategy is zero, and to the COB Opening Process (to delay the
opening of a complex strategy for a time period after the legs open)
will impose any burden on intramarket competition that is not necessary
or appropriate in furtherance of the purposes of the Act, because these
changes codify existing functionality. They apply in the same manner
complex orders of all Users in the same manner. The Exchange does not
believe these proposed rules changes will impose any burden on
intermarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act, because they are the same as
the rules of another options exchange.\90\
---------------------------------------------------------------------------
\90\ See C2 Rules 6.13(c)(2) (COB Opening Process) and (h)(3)
(pricing of orders when the NBBO in a leg of a complex strategy is
zero); and 6.14(b)(6)(A) (complex order drill-through).
---------------------------------------------------------------------------
The proposed nonsubstantive changes to the Rules will have no
impact on competition, as they do not modify any functionality. Rather,
these proposed changes add clarity and transparency to the Rules and
conform rule language with the corresponding rules of a Cboe Affiliated
Exchange.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not:
A. Significantly affect the protection of investors or the public
interest;
B. impose any significant burden on competition; and
C. become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act \91\ and
Rule 19b-4(f)(6) \92\ thereunder. At any time within 60 days of the
filing of the proposed rule change, the Commission summarily may
temporarily suspend such rule change if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission will institute proceedings to determine whether the proposed
rule
[[Page 34241]]
change should be approved or disapproved.
---------------------------------------------------------------------------
\91\ 15 U.S.C. 78s(b)(3)(A).
\92\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CboeEDGX-2019-039 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CboeEDGX-2019-039. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CboeEDGX-2019-039 and should be
submitted on or before August 7, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\93\
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\93\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-15135 Filed 7-16-19; 8:45 am]
BILLING CODE 8011-01-P
