Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to System Connectivity and Order Entry and Allocation Upon the Migration of the Exchange's Trading Platform to the Same System Used by the Cboe Affiliated Exchanges, 34963-34976 [2019-15338]

Download as PDF Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES small percentage of the overall market. Based on publicly available information, no single equities exchange has more than 23% of the market share.16 Therefore, no exchange possesses significant pricing power in the execution of option order flow. Indeed, participants can readily choose to send their orders to other exchange and offexchange venues if they deem fee levels at those other venues to be more favorable. Additionally, as discussed above, the market for Retail Orders in even more stark given the amount of Retail Orders that are routed to and executed on off-exchange venues. Moreover, the Commission has repeatedly expressed its preference for competition over regulatory intervention in determining prices, products, and services in the securities markets. Specifically, in Regulation NMS, the Commission highlighted the importance of market forces in determining prices and SRO revenues and, also, recognized that current regulation of the market system ‘‘has been remarkably successful in promoting market competition in its broader forms that are most important to investors and listed companies.’’ 17 The fact that this market is competitive has also long been recognized by the courts. In NetCoalition v. Securities and Exchange Commission, the D.C. Circuit stated as follows: ‘‘[n]o one disputes that competition for order flow is ‘fierce.’ . . . As the SEC explained, ‘[i]n the U.S. national market system, buyers and sellers of securities, and the brokerdealers that act as their order-routing agents, have a wide range of choices of where to route orders for execution’; [and] ‘no exchange can afford to take its market share percentages for granted’ because ‘no exchange possesses a monopoly, regulatory or otherwise, in the execution of order flow from broker dealers’. . . .’’.18 Accordingly, the Exchange does not believe its proposed fee change imposes any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. 16 See Cboe Global Markets U.S. Equities Market Volume Summary (June 28, 2019), available at https://markets.cboe.com/us/equities/market_share/. 17 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37499 (June 29, 2005). 18 NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010) (quoting Securities Exchange Act Release No. 59039 (December 2, 2008), 73 FR 74770, 74782– 83 (December 9, 2008) (SR–NYSEArca–2006–21)). VerDate Sep<11>2014 18:36 Jul 18, 2019 Jkt 247001 C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 19 and paragraph (f) of Rule 19b–4 20 thereunder. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission will institute proceedings to determine whether the proposed rule change should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– CboeEDGX–2019–045 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–2019–045. 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 PO 00000 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–2019–045 and should be submitted on or before August 9, 2019. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.21 Jill M. Peterson, Assistant Secretary. [FR Doc. 2019–15348 Filed 7–18–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–86374; File No. SR–CBOE– 2019–033] Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to System Connectivity and Order Entry and Allocation Upon the Migration of the Exchange’s Trading Platform to the Same System Used by the Cboe Affiliated Exchanges July 15, 2019. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on July 1, 2019, Cboe Exchange, Inc. (the ‘‘Exchange’’ or ‘‘Cboe Options’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Exchange filed the proposal as a ‘‘non-controversial’’ proposed rule change pursuant to Section 21 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 19 15 U.S.C. 78s(b)(3)(A). 20 17 CFR 240.19b–4(f). Frm 00115 Fmt 4703 1 15 Sfmt 4703 34963 E:\FR\FM\19JYN1.SGM 19JYN1 34964 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Notices 19(b)(3)(A)(iii) of the Act 3 and Rule 19b–4(f)(6) thereunder.4 The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Cboe Exchange, Inc. (the ‘‘Exchange’’ or ‘‘Cboe Options’’) proposes to amend and move certain current Rules related to System 5 connectivity and order entry and allocation from the Exchange’s currently effective Rulebook (‘‘current Rulebook’’) to the shell structure for the Exchange’s Rulebook that will become effective upon the migration of the Exchange’s trading platform to the same system used by the Cboe Affiliated Exchanges (as defined below) (‘‘shell Rulebook’’). The text of the proposed rule change is provided in Exhibit 5. The text of the proposed rule change is also available on the Exchange’s website (https://www.cboe.com/ AboutCBOE/ CBOELegalRegulatoryHome.aspx), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. 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. (formerly named CBOE Holdings, Inc.) (‘‘Cboe Global’’), which is also the parent company of Cboe C2 Exchange, 3 15 U.S.C. 78s(b)(3)(A)(iii). CFR 240.19b–4(f)(6). 5 The term ‘‘System’’ means the Exchange’s hybrid trading platform that integrates electronic and open outcry trading of option contracts on the Exchange, and includes any connectivity to the foregoing trading platform that is administered by or on behalf of the Exchange, such as a communications hub. See Rule 1.1 in the current Rulebook and the shell Rulebook. jbell on DSK3GLQ082PROD with NOTICES 4 17 VerDate Sep<11>2014 18:36 Jul 18, 2019 Jkt 247001 Inc. (‘‘C2’’), acquired Cboe EDGA Exchange, Inc. (‘‘EDGA’’), Cboe EDGX Exchange, Inc. (‘‘EDGX’’ or ‘‘EDGX Options’’), Cboe BZX Exchange, Inc. (‘‘BZX’’ or ‘‘BZX Options’’), and Cboe BYX Exchange, Inc. (‘‘BYX’’ and, together with Cboe Options, C2, EDGX, EDGA, and BZX, the ‘‘Cboe Affiliated Exchanges’’). The Cboe Affiliated Exchanges are working to align certain system functionality, retaining only intended differences between the Cboe Affiliated Exchanges, in the context of a technology migration. Cboe Options intends to migrate its trading platform to the same system used by the Cboe Affiliated Exchanges, which the Exchange expects to complete on October 7, 2019. Cboe Options believes offering similar functionality to the extent practicable will reduce potential confusion for market participants. In connection with this technology migration, the Exchange has a shell Rulebook that resides alongside its current Rulebook, which shell Rulebook will contain the Rules that will be in place upon completion of the Cboe Options technology migration. System Connectivity Current Rule 6.23A describes current provisions regarding System access and connectivity. The proposed rule change deletes current Rule 6.23A from the current Rulebook, and amends and moves relevant provisions to proposed Rule 5.5 in the shell Rulebook. Proposed Rule 5.5(a) states only authorized Users and associated persons of Users may establish connectivity to and access the Exchange to submit orders and quotes and enter auction responses in accordance with the Exchange’s System access procedures, technical specifications, and requirements.6 This is consistent with current Rule 6.23A(a), (d), and (e), which provides only authorized market participants (which may only be Trading Permit Holders, associated persons of Trading Permit Holders with authorized access, and Sponsored Users pursuant to current Rule 6.20A) may access the Exchange electronically to facilitate quote and order entry, as well as auction processing, in accordance with Exchange-prescribed technical specifications (to the extent any agreement is required to be signed, as indicated in current Rule 6.23A(d), that would be indicated in such specifications).7 6 These procedures, technical specifications, and requirements are available on the Exchange’s website. 7 See also C2 Rule 6.8(a). Users will continue to only be able to directly access the System from a jurisdiction expressly approved by the Exchange PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 Proposed Rule 5.5(b) describes Executing Firm IDs (‘‘EFIDs’’). A Trading Permit Holder may obtain one or more EFIDs from the Exchange (in a form and manner determined by the Exchange). The Exchange assigns an EFID to a Trading Permit Holder, which the System uses to identify the Trading Permit Holder and the clearing number for the execution of orders and quotes submitted to the System with that EFID. Each EFID corresponds to a single Trading Permit Holder and a single clearing number of a Clearing Trading Permit Holder with the Clearing Corporation.8 A Trading Permit Holder may obtain multiple EFIDs, which may be for the same or different clearing numbers. A Trading Permit Holder may only identify for any of its EFIDs the clearing number of a Clearing Trading Permit Holder that is a Designated Give Up or Guarantor of the Trading Permit Holder as set forth in current Rule 6.21.9 A Trading Permit Holder is able (in a form and manner determined by the Exchange) to designate which of its EFIDs may be used for each of its ports. If a User submits an order or quote through a port with an EFID not enabled for that port, the System cancels or rejects the order or quote. The proposed rule change regarding EFIDs is similar to the current use of acronyms on the Exchange and consistent with the use of EFIDs on the Cboe Affiliated Exchanges.10 The Exchange believes including a description of the use of EFIDs in the Rules adds transparency to the Rules. The proposed rule change defines the term port in proposed Rule 5.5.11 The Exchange will provide Users with access to the System through various ports, as is the case on the Cboe Affiliated Exchanges. A User may connect to the Exchange using a logical port available through an application programming interface (‘‘API’’), such as the industry-standard Financial Information eXchange (‘‘FIX’’) protocol or Binary Order Entry (‘‘BOE’’) protocol. pursuant to current Rule 3.4A (which rule the Exchange intends to move to Rule 3.5 in the shell Rulebook). See current Rule 6.23A(d) (proposed Rule 5.9(a)). BZX Options and EDGX Options Rules 11.3 and 20.1(a) also provide that only an Options Member or a person associated with an Options Member, as well as Sponsored Participants, may access the systems and effect any options transactions on those exchanges. 8 The Clearing Corporation is the Options Clearing Corporation. See Rule 1.1 in the shell Rulebook. 9 The Exchange intends to move current Rule 6.21 to Rule 5.9 in the shell Rulebook. 10 The proposed rule change is substantially the same as BZX Options Rule 21.1(k); C2 Rule 6.8(b); and EDGX Options Rule 21.1(k). 11 The proposed rule change also adds a reference to this definition in Rule 1.1 in the shell Rulebook. E:\FR\FM\19JYN1.SGM 19JYN1 jbell on DSK3GLQ082PROD with NOTICES Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Notices Users may use multiple logical ports. Cboe Market Interface will no longer be available following the technology migration, as that is an API on the Exchange’s current System while BOE is an API available on the new technology platform. This functionality is similar to bandwidth packets currently available on the Exchange, as described in current Rule 6.23B (and therefore the Exchange proposes to delete that rule from the current Rulebook). Bandwidth packets restrict the maximum number of orders and quotes per second in the same way logical ports do, and Users may similarly have multiple logical ports as they may have bandwidth packets to accommodate their order and quote entry needs. The Exchange believes it is reasonable to not limit bulk ports, as the purpose of these ports is to submit bids and offers in bulk (as further described below). As discussed below, the Exchange will have the authority to otherwise mitigate message traffic as necessary. There are three different types of ports: Physical ports, logical ports, and bulk ports. The Exchange notes that a bulk port is a type of logical port. • A ‘‘physical port’’ provides a physical connection to the System. A physical port may provide access to multiple logical ports. • A ‘‘logical port’’ or ‘‘logical session’’ provides Users with the ability within the System to accomplish a specific function through a connection, such as order entry, data receipt, or access to information. • A ‘‘bulk port’’ is a dedicated logical port that provides Users with the ability to submit bulk messages, single orders, or auction responses, as further discussed below. Port is the term the Exchange will use to describe the connection a User will use to connect to the System following the technology migration. Currently, the Exchange refers to System connections as logins, but the functionality is generally the same.12 The Exchange’s new technology platform is currently the trading platform for the other Cboe Affiliated Exchanges, and thus has an established disaster recovery plan. The proposed rule change moves the Exchange’s rule provisions regarding disaster recovery from Rule 6.18 in the current Rulebook to Rule 5.24 in the shell Rulebook.13 The proposed rule change amends the provisions regarding Trading Permit 12 The proposed rule change is substantially the same as BZX Options Rule 21.1(l); C2 Rule 6.8(c); and EDGX Options Rule 21.1(j). 13 The proposed rule change also deletes current Rule 6.19, which is currently reserved. VerDate Sep<11>2014 18:36 Jul 18, 2019 Jkt 247001 Holders that must connect to the Exchange’s backup systems and participate in functional and performance testing announced by the Exchange, which occurs at least once every 12 months.14 These requirements are similar to those of Cboe Affiliated Exchanges.15 Currently, the Exchange identifies Trading Permit Holders that must connect to backup systems and participate in testing based on criteria such as whether the TPH is an appointed DPM, LMM, or Market-Maker in a class and the quality of markets provided by the DPM, LMM, or MarketMaker, the amount of volume transacted by the market participant in a class or on the Exchange in general, operational capacity, trading experience, and historical contribution to fair and orderly markets on the Exchange. At a minimum, all Market-Makers in option classes exclusively listed on the Exchange that stream quotes in those classes and all DPMs in multiply listed options classes must connect to the backup systems.16 Proposed Rule 5.24(b) requires the following TPHs to connect to backup systems and participate in testing: • TPHs that the Exchange has determined contribute a meaningful percentage of the Exchange’s overall volume. • TPHs that the Exchange has determined contribute a meaningful percentage of the Exchange’s executed customer volume in SPX and VIX combined.17 • TPHs that participate as MarketMakers (including LMMs) in option classes exclusively listed on the 14 The Exchange currently requires designated Trading Permit Holders to participate in backup system testing on an annual basis pursuant to current Rules 6.18 and 6.23A(f). The proposed rule change deletes current Rule 6.23A(f), as it relates to mandatory testing, which is covered by proposed Rule 5.24. 15 See, e.g., BZX Options Rule 2.4; C2 Rule 6.34; and EDGX Rule 2.4. The Exchange notes BZX Options and C2 do not currently have DPMs or LMMs (BZX has LMMs with respect to equities listed on that exchange), and thus the rules of those exchanges do not require connectivity by corresponding market participants. Additionally, EDGX Options only has DPMs. Additionally, SPX and VIX options only trade on Cboe Options, and thus the rules of other exchanges do not impose requirements with respect to trading in those classes. The Exchange notes the other Cboe Affiliated Exchanges intend to update their disaster recovery rules regarding notice to the market participants that must connect to the backup systems to conform to the proposed rule change. 16 See current Rule 6.18(b)(iv). 17 The Exchange believes this requirement is appropriate since SPX and VIX options are exclusively listed on the Exchange, and there is significant trading in these options, and this proposed requirement will ensure that TPHs will be available to receive and submit to the Exchange orders when the Exchange’s primary system is inoperable. PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 34965 Exchange that submit continuous electronic quotes in those classes. • TPHs that participate as DPMs in multiply listed option classes.18 These requirements are consistent with the criteria listed in current Rule 6.24(b). This proposed rule includes more detail regarding which categories of TPHs must connect to the backup systems. Proposed Interpretation and Policy .01 states for purposes of determining which TPHs contribute a meaningful percentage of the Exchange’s overall volume and customer volume in SPX and VIX pursuant to proposed subparagraphs (b)(1) and (2), respectively, the Exchange measures volume executed on the Exchange during a specified calendar quarter (the ‘‘measurement quarter’’). The Exchange will provide TPHs with reasonable advance notice of the applicable meaningful percentage and measurement quarter.19 The Exchange will individually notify all TPHs that are subject to this connection requirement based on the applicable meaningful percentage following the completion of the applicable measurement quarter. The Exchange will provide these TPHs with reasonable advance notice that they must participate in the testing described above.20 Proposed Rule 5.24(a) through (c) are consistent with Regulation SCI requirements, which apply to certain self-regulatory organizations (including the Exchange), alternative trading systems (‘‘ATSs’’), plan processors, and exempt clearing agencies (collectively, ‘‘SCI entities’’), and requires these SCI entities to comply with requirements with respect to the automated systems central to the performance of their regulated activities. The Exchange takes pride in the reliability and availability of its systems. The Exchange and the Cboe Affiliated Exchanges have put extensive time and resources toward planning for system failures and already maintain robust business continuity and disaster recovery plans consistent with the proposed rule. The proposed rule change retains moves paragraphs (c) through (f) of current Rule 6.18 to proposed paragraphs (d) through (g) of proposed Rule 5.24, as they relate to the 18 Pursuant to proposed Rule 5.24(c), all TPHs may connect to the Exchange’s backup systems and participate in testing of these systems. 19 A meaningful percentage may not apply retroactively to any measurement quarter completed or in progress. 20 This is consistent the measurement and notice provision in Miami International Securities Exchange, Inc. (‘‘MIAX’’) Rule 321, Interpretation and Policy .01. E:\FR\FM\19JYN1.SGM 19JYN1 34966 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES Exchange’s trading floor. To conform to the corresponding rules of Cboe Affiliated Exchanges, the proposed rule change deletes the other provisions. The proposed rule change also makes nonsubstantive changes to some of the disaster recovery provisions, including updating paragraph lettering and numbering, making grammatical changes, simplifying certain provisions, and incorporating defined terms. Proposed Rule 5.25 describes steps the Exchange may take to mitigate message traffic, based on the Exchange’s traffic with respect to target traffic levels and in accordance with the Exchange’s overall objective of reducing both peak and overall traffic. First, the System will not send an outbound message 21 in a series that has not been but is about to be sent if a more current quote message for the same series is available for sending, but does not delay the sending of any messages (referred to in proposed Rule 5.25 as ‘‘replace on queue’’). Second, the System will prioritize price update messages over size update messages in all series and in conjunction with the replace on queue functionality described above. Current Rules contain various provisions the Exchange may use on its current technology platform to mitigate message traffic, such as current Rule 6.23A(b) (which permits the Exchange to limit the number of messages sent by TPHs accessing the Exchange electronically in order to protect the integrity of the trading system) and (c) (which provides the Exchange may utilize a mechanism so that newly received quotations and other changes to the Exchange’s best bid and offer are not disseminated for a period of up to, but not more than one second in order to control the number of quotations the Exchange disseminates), and Rule 6.23B (regarding bandwidth packets).22 The proposed rule change essentially replaces these provisions. The Exchange does not have unlimited capacity to support unlimited messages, and the technology platform onto which it will migrate contains the above functionality, which are reasonable measures the Exchange may take to 21 This refers to outbound messages being sent to data feeds and OPRA. 22 As noted above, the proposed rule change deletes current Rule 6.23B. The proposed Rule change also deletes the remainder of Rule 6.23A(b), which states the Exchange may impose restrictions on the use of a computer connected through an API if necessary to ensure the proper performance of the system. The proposed rules do not contain a similar provision; however, to the extent the Exchange wanted to impose any type of these restrictions in the future, it would similar submit a rule change to the Commission. VerDate Sep<11>2014 18:36 Jul 18, 2019 Jkt 247001 manage message traffic and protect the integrity of the System.23 The proposed rule moves the rule regarding back-up trading arrangements from Rule 6.16 in the current Rulebook to Rule 5.26 in the shell Rulebook. The proposed rule change deletes a crossreference to current Rule 8.87.01, which the proposed rule change deletes, and instead states the Exchange may establish a lower DPM 24 participation entitlement percentage applicable to trading on a Cboe Options’ facility on the Back-Up Exchange than the percentage applicable under the rules of the Back-Up Exchange, if Cboe Options and the Back-Up Exchange agree. This is consistent with the Exchange’s current authority under the Rules. The proposed rule change makes no changes to this rule, except nonubstantive changes, including updating paragraph lettering and numbering, making grammatical changes, updating crossreferences, and incorporating defined terms. Order and Quote Entry and Allocation The System currently begins accepting orders in quotes at 4:00 p.m. Central Time the previous trading day for the Global Trading Hours (‘‘GTH’’) trading session and at 6:30 a.m. Central Time for the Regular Trading Hours (‘‘RTH’’) trading session.25 Pursuant to proposed Rule 5.7, Users can enter orders and quotes into the System, or cancel previously entered orders, from 2:00 a.m. Eastern Time until RTH market close. While Users will have less time to submit orders and quotes prior to the GTH opening, the Exchange believes having one hour to submit orders and quotes in All Sessions Classes prior to the GTH opening is sufficient given that the Exchange lists fewer classes for trading during GTH, 23 The proposed rule change is substantially similar to BZX Options Rule 21.14, C2 Rule 6.35, and EDGX Options Rule 21.14. Note the BZX Options and EDGX Options rules also include a provision regarding their ability to periodically delist options with an average daily volume of less than 100 contracts. Current Exchange Rule 5.4, Interpretation and Policy .13 permits the Exchange to delist any class immediately if the class is open for trading on another national securities exchange, or to not open any additional series for trading in a class that is solely open for trading on the Exchange. This provision achieves the same purpose as the BZX Options and EDGX Options rules, and thus it is unnecessary to add that provision to the Exchange’s Rules. 24 The proposed rule change also adds the Exchange may do this for the LMM participation entitlement percentage, as LMMs and PMM serve substantially similar functions. 25 See current Rule 6.2(a); see also Cboe Options Regulatory Circular RG15–103 (July 13, 2015). The Exchange currently begins accepting orders and quotes at 7:30 a.m. Eastern Time for the RTH trading session, which time is not changing. PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 and it is the same amount of time they have to submit orders and quotes in RTH Only classes prior to the RTH trading session.26 Users may enter orders and quotes during that time, subject to the following requirements and conditions: • Users may transmit to the System multiple orders and quotes at a single price level or multiple price levels. • Each order and quote a User submits to the Exchange must contain the minimum information identified in the Exchange’s technical specifications. • The System timestamps an order or quote upon receipt, which determines the time ranking of the order or quote for purposes of processing the order or quote. • For each System Security,27 the System transmits to OPRA for display the aggregate size of all orders and quotes in the System eligible for display at the best price to buy and sell. • After the RTH market close, Users may cancel orders with Time-in-Force of good-til-cancelled (‘‘GTC’’) or goodtil-date (‘‘GTD’’) that remain on the Book until 4:45 p.m. Eastern Time.28 The proposed provisions described in the first four bullets above are consistent with current functionality, and the proposed rule change merely adds this detail to the Rules. The Exchange believes adding these provisions to the Rules provides additional transparency for market participants. The Exchange adds the provision in the fifth bullet above, which provides Users with additional flexibility to manage their orders that remain in the Book following the RTH market close. Cancelling a GTC or GTD order at 4:30 p.m. has the same effect as cancelling that order at 7:30 a.m. the following day—ultimately it accommodates the User’s goal of cancelling an order prior to it potentially executing during the Opening Process the following morning.29 26 Pursuant to C2 Options Rule 6.11(a) and EDGX Options Rule 21.7(a), the Queuing Period for the GTH trading session will similarly begin one hour prior to the beginning of that trading session on those exchanges. Current Rule 6.2(a) provides the Exchange with flexibility regarding when to begin the pre-opening period. The Exchange proposes to eliminate this flexibility from the Rules, as it does not believe it is necessary any more. If the Exchange determines to change the time at which the Queuing Period will begin, it will submit a rule filing. 27 A System Security is a class that currently trades on the Exchange. See Rule 1.1 in the shell Rulebook. 28 See proposed Rule 5.7(a)–(e). 29 This proposed change is also substantively the same as C2 Rule 6.9; and EDGX Options Rule 21.6(a)–(c) and (f). The proposed rule change is also similar to BZX Options Rule 21.6(a)–(c) (this rule does not contain the provision regarding when a E:\FR\FM\19JYN1.SGM 19JYN1 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES The proposed rule change also moves the provisions regarding the requirement to systematize an order from Rule 6.24 in the current Rulebook to Rule 5.7(f) and Interpretations .01 through .06, except the proposed rule change deletes current Interpretation and Policy .03. That provision describes the Exchange’s Telephone and Terminal Order Formats Manual, which the Exchange prescribes. This manual no longer exists, and any order formats regarding systemization are included in the Exchange’s technical specifications or otherwise disseminated to Trading Permit Holders by Regulatory Circular or Exchange Notice.30 The proposed rule change makes no other substantive changes to current Rule 6.24, and makes certain nonsubstantive changes, such as to reflect defined terms, update paragraph lettering and numbering, update cross-references, and make other grammatical changes. The Exchange currently offers quoting functionality to Market-Makers, which permits Market-Makers to update their electronic quotes in block quantities.31 Quotes on the Exchange do not route to other exchanges,32 and Market-Makers generally enter new quotes at the beginning of the trading day based on then-current market conditions.33 The Exchange proposes to replace quoting functionality with bulk message functionality. As noted above, a bulk port is a dedicated logical port that provides Users with the ability to submit bulk messages, single orders, or auction responses. The proposed rule change defines bulk message as a single electronic message a User submits to the Exchange in which the User may enter, modify, or cancel up to an Exchangespecified number of bids and offers.34 A User may cancel a GTC or GTD order; however, the Exchange understands this is consistent with BZX Options functionality). 30 See Rule 1.2 in current Rulebook (Rule 1.5 in shell Rulebook). 31 See Rule 1.1 (definition of quote). In other words, a Market-Maker may submit a single message to the Exchange, which message contains bids and offers in multiple series. 32 See current Rule 6.14B (which describes how the Exchange routes orders (specifically intermarket sweep orders) but not quotes to other exchanges); see also NYSE Arca, LLC (‘‘Arca’’) Rule 6.37– O(a)(3)(D) (which states quotes do not route). 33 The Exchange understands this to be common practice by Market-Makers throughout the industry, and is consistent with Cboe Options functionality, which cancels all unexecuted resting Market-Maker quotes at the close of each trading day. Additionally, it is consistent with Market-Makers’ obligation to update market quotations in response to changed market conditions. See current Rule 8.5(a)(4); see also Cboe Options Rule 8.7(b)(iii). 34 Pursuant to Rule 1.5 in the shell Rulebook, the Exchange will announce this number via Exchange Notice or publicly available technical specifications. The limit on bids and offers per VerDate Sep<11>2014 18:36 Jul 18, 2019 Jkt 247001 User may submit a bulk message through a bulk port as described below. The System handles a bulk message bid or offer in the same manner as it handles and order or quote, unless the Rules specify otherwise.35 Users may submit bulk messages through a bulk port, subject to the following: • A bulk message has a time-in-force of Day; 36 • a Market-Maker with an appointment in a class may designate a bulk message for that class as Post Only or Book Only, and other Users must designate a bulk message for that class as Post Only; and • a User may establish a default match trade prevention (‘‘MTP’’) modifier of MTP Cancel Newest (‘‘MCN’’), MTP Cancel Oldest (‘‘MCO’’), or MTP Cancel Both (‘‘MCB’’),37 and a default value of attributable or nonattributable, for a bulk port, each of which applies to all bulk messages submitted to the Exchange through that bulk port.38 Users may also submit single orders through a bulk port in the same manner as Users may submit orders to the Exchange through any other type of port, including designated with any order instruction and any time-in-force in proposed Rule 5.30, except a MarketMaker with an appointment in a class may designate an order for that class submitted through a bulk port only as Post Only or Book Only, and other Users must designate an order for that class submitted through a bulk port as Post Only.39 Users may also submit auction responses (using auction response messages) in the same manner as Users may submit auction responses to the message is a reasonable measure for the Exchange to use to manage message traffic and activity to protect the integrity of the System. 35 See Rule 1.1 in the shell Rulebook. In other words, a bulk message will be treated as an order (or quote if submitted by a Market-Maker) pursuant to the Rules, including with respect to priority and allocation. The proposed rule change identifies the rule provisions pursuant to which bulk messages will be handled in a different manner. The proposed rule change also amends the definition of quote in Rule 1.1 in the shell Rulebook to provide that a quote is a firm bid or offer a Market-Maker submits electronically in as an order or bulk message (as well as a firm bid or offer a MarketMaker represents in open outcry on the trading floor). 36 The proposed rule change adds to Rule 5.6(a) in the shell Rulebook that an order instruction or time-in-force applied to a bulk message applies to each bid and offer within that bulk message. For example, a Market-Maker cannot designate one bulk message bid within a single message as Post Only and designate another bulk message bid within the same message as Book Only. 37 See Rule 5.6(c) of the shell Rulebook for definitions of MTP modifiers. 38 See proposed Rule 5.5(c)(3)(A). 39 See proposed Rule 5.5(c)(3)(B). PO 00000 Frm 00119 Fmt 4703 Sfmt 4703 34967 Exchange through any other type of port.40 The proposed rule change restricts orders [sic] and bulk messages to Post Only and Book Only 41 with a time-inforce of Day. As a general matter, bulk ports are intended to be limited for the use of liquidity provision on the Exchange, particularly by, but not limited to, Market-Makers. In turn, the Exchange believes it is unnecessary to allow orders entered via bulk ports to be able to last beyond the trading day on which they were entered. Proposed Rule 5.5(c)(3)(A)(i) states that bulk messages have a time-in-force of Day. As discussed above, this is consistent with current Exchange quoting functionality, which cancels all resting quotes at the close of the trading day. This is also consistent with a Market-Maker’s obligation to update its quotes in response to changed market conditions in its appointed classes.42 Users will have the ability to cancel bulk message bids and offers at any time during the trading day, and may apply any other time-in-force designation to an order submitted through a bulk port (as further discussed below) or other type of port. Unlike current Exchange quoting functionality, which is only available to Market-Makers in their appointed classes, the proposed bulk messages will be available to all Users. While all Users will be able to use bulk messages, the primary purpose of quoting functionality and the proposed bulk message functionality is to encourage market-maker quoting on exchanges. The proposed rule change provides that a Market-Maker with an appointment in a class may designate a bulk message for that class as ‘‘Post Only’’ or ‘‘Book Only.’’ This will provide Exchange Market-Makers with substantially similar functionality that is currently available to them on the Exchange, which permits Market-Makers’ incoming quotes to execute against resting orders and quotes, except against the resting quote of another MarketMaker (see discussion below).43 The Exchange believes permitting MarketMakers to use bulk message to remove liquidity from the Book (if they so elect) will keep Exchange Market-Makers on 40 See proposed Rule 5.5(c)(3)(C). with the definitions of Post Only and Book Only (see Rule 5.6(c) in the shell Rulebook), bulk message bids and offers will not route. 42 See Rule 8.7(b)(iii). 43 Incoming market-maker quotes on some options exchanges may execute against interest resting in the book (see, e.g., Arca Rule 6.37A– O(a)(3)), while on other options exchanges they may not (see, e.g., Box Options Exchange, LLC (‘‘BOX’’) Rule 8050, IM–8050–3). 41 Consistent E:\FR\FM\19JYN1.SGM 19JYN1 jbell on DSK3GLQ082PROD with NOTICES 34968 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Notices an even playing field with marketmakers on other exchanges that offer quoting functionality. Additionally, Market-Makers are subject to various obligations, including obligations to provide two-sided quotes, to provide continuous quotes, and to trade at least 75% of its contracts each quarter in its appointed classes.44 The Exchange believes providing Market-Makers with flexibility to use the Post Only or Book Only instruction with respect to bulk messages will provide Market-Makers with additional tools, to meet their obligations in a manner they deem appropriate. The Exchange further believes this may encourage liquidity providers to register as Market-Makers. The proposed rule change provides that other Users (i.e., non-MarketMakers or Market-Makers without an appointment in the class) must designate a bulk message for that class as ‘‘Post Only.’’ Because these Users do not have access to quoting functionality today, the proposed rule change will provide these Users with functionality that is not available to them today. This will provide Users with flexibility avoid incurring certain fees for removing liquidity if their intent is to add liquidity to the Book. The Exchange notes that Users may apply the Book Only instruction to orders submitted to the Exchange through other ports. The proposed rule change also permits Users to establish a default MTP modifier of MCN, MCO, or MCB that would apply to all bulk messages submitted through a bulk port. Cboe Options currently offers a Market-Maker Trade Prevention Order, which would be cancelled if it would trade against a resting quote or order for the same Market-Maker, and also cancel the resting order or quote.45 This is equivalent to the MCBO modifier (except the MCB modifier may be used by all Users rather than just MarketMakers). The proposed rule change provides Users with the ability to apply the same trade prevention designation that is available for quotes on the Exchange to bulk messages (MCB), as well as two additional MTP options (MCN and MCO) (the Exchange notes there is currently no trade prevention functionality equivalent to MCN or MCO available on the Exchange for quotes). Allowing three MTP modifiers for bulk messages will provide Users with additional control over the circumstances in which their bulk message bids and offers (and resting orders (including bulk message bids and offers)) will interact with each other. The Exchange does not believe there is demand by Users for the MDC and MCS modifiers (which will be available on the Exchange for orders) for bulk messages. There is currently no trade prevention functionality equivalent to MDC or MCS available on the Exchange today. The Exchange notes all Users may continue to apply all MTP modifiers to orders submitted through a bulk port or any other type of port. Generally, the System will handle bulk message bids and offers in the same manner as it handles orders and quotes with the same order instructions and times-in-force that will be applied to bulk messages, including prioritizing, displaying, and executing them pursuant to proposed Rule 5.32.46 Current Rule 6.45(c) provides in the event a Market-Maker’s disseminated quote locks with another MarketMaker’s disseminated quote, a counting period begins during which MarketMakers whose quotes are locked may eliminate the locked market. If, at the end of the counting period, the quotes remain locked, the locked quotes automatically execute against each other.47 Proposed Rule 5.32(c)(6) states the System cancels or rejects a Book Only bulk message bid (offer) or order bid (offer) (or unexecuted portion) submitted by a Market-Maker with an appointment in the class through a bulk port if it would execute against a resting offer (bid) with a Capacity of M. This functionality is similar to the current quote-lock functionality. While current functionality permits locked quotes to execute against each other after a specified amount of time, it also provides Market-Makers with an opportunity to update their resting quotes, which would prevent execution of an incoming Market-Maker quote against a resting Market-Maker quote. As proposed, a Market-Maker bulk message or order bid or offer will be rejected if it would execute against resting Market-Maker interest. The Market-Maker may resubmit its bulk message or order bid or offer after being rejected, which would be able to rest in the Book if the Market-Maker repriced its resting bid or offer in the interim. Additionally, a Market-Maker may interact with resting Market-Maker interest by submitting an order to the Exchange through a different type of port. Proposed Rule 5.7(a) provides that a User may only enter one bid and one offer for a series per EFID per bulk port. The Exchange believes this will 46 See 44 See current Rule 8.7. 45 See Rule 6.53 in the current Rulebook. VerDate Sep<11>2014 18:36 Jul 18, 2019 Jkt 247001 proposed Rule 5.32(a). quotes would be handled in a similar manner pursuant to Rule 6.45(c). 47 Inverted PO 00000 Frm 00120 Fmt 4703 Sfmt 4703 encourage Users to submit their best bids and offers in series, and thus provide displayed liquidity to the market and contribute to price discovery. Note firms may have multiple EFIDs and multiple bulk ports, and thus will have the ability through separate ports or EFIDs to submit additional bids and offers using bulk messages in the same series if they choose. This provision is consistent with the Exchange’s current rule interpretation.48 As noted above, the proposed rule change will permit Users to submit single orders to the Exchange through bulk ports. The Exchange believes this will encourage Users that may not have quoting systems to provide liquidity to the Exchange. Proposed Rule 5.5(c)(3)(B) subjects single orders submitted through bulk ports to the same Book Only and Post Only restrictions described above for MarketMakers with appointments in a class and other Users. This will provide Users with additional functionality that is not currently available today, as orders may not be submitted through quoting connections on the Exchange. Because there are no time-in-force restrictions on orders submitted through bulk ports, Users may allow their liquidity to rest on the Exchange for multiple trading days, if Users so choose. This will also provide Users with additional control over the orders they use to provide liquidity to the Exchange through bulk ports. Additionally, proposed Rule 5.32(6) imposes the same prohibition on Market-Maker orders submitted through bulk ports from removing resting Market-Maker interest that applies to bulk messages, as described above. The Exchange believes it is appropriate for orders submitted through bulk ports be subject to the same restrictions on adding and removing liquidity as bulk messages submitted through bulk ports, so that orders submitted through bulk ports do not have an advantage over bulk messages, and vice versa. While liquidity providers are most commonly registered Market-Makers, other professional traders also provide liquidity to the options market, which contributes to price discovery. As a result, the Exchange believes it is appropriate to make bulk messages available to all Users to encourage them to provide liquidity, which is critical to the Exchange’s market. Additionally, permitting orders to be submitted 48 See Cboe Options Regulatory Circular RG18– 008 (March 6, 2018), which provides that each Market-Maker acronym (which is comparable to an EFID), may only have one quote (which is considered to be a two-sided quote) in each series at a time. E:\FR\FM\19JYN1.SGM 19JYN1 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES through bulk ports will provide all liquidity providers with additional flexibility with respect to functionality they may use to provide liquidity to the Exchange. The proposed rule change amends Rule 5.6(b), (c), and (d) in the shell Rulebook to provide that eligible order types, order instructions, and times-inforce, respectively, are subject to the proposed restrictions in proposed Rule 5.5(c) with respect to orders and bulk messages submitted through a bulk port, as well as to clarify which order types, order instructions, and times-in-force are and are not available for bulk messages.49 Rule 5.6(a) in the shell Rulebook permits the Exchange to make order types, order instructions, and times-inforce listed in that Rule available on a system, class, and trading session basis for electronic processing.50 Proposed Rule 5.30 provides that the Exchange may make the following order types, order instructions, and times-in-force 51 available during RTH: • Order types: Limit order and market order. • Order instructions: all-or-none (‘‘AON’’), attributable, book only, all sessions, cancel back, electronic only, MTP modifier, minimum quantity, nonattributable, post only, price adjust, qualified cross contingent (‘‘QCC’’),52 reserve order, RTH only, stop (stoploss), and stop limit. • Times-in-force: Day, fill-or-kill (‘‘FOK’’), GTC, GTD, immediate-orcancel (‘‘IOC’’), limit-on-close (‘‘LOC’’), market-on-close (‘‘MOC’’), and opening rotation (‘‘OPG’’).53 49 The Exchange notes a User may not designate a bulk message as AON. AON orders are not displayed, and thus do not contribute to price discovery. Additionally, the size contingency restricts the ability of an AON order to execute, and thus its purpose is not to provide liquidity, which contradicts the purpose of bulk messages. 50 Rule 6.1A(f) in the current Rulebook also provides that all order types that are available for electronic processing during RTH and as otherwise determined by the Exchange will be available for trading during GTH, except market orders, marketon-close orders (which includes limit-on-close orders pursuant to the current definition of marketon-close orders in current Rule 6.53), stop orders, and GTC orders. The proposed rule change deletes current Rule 6.1A(f), as proposed Rule 5.30 covers this information. 51 See Rule 5.6 in the shell Rulebook for definitions of each order type, order instruction, and time-in-force. 52 Note it is not specified in the current Rulebooks that QCC orders are not available during GTH; however, this is consistent with the fact that only index options are eligible for trading during GTH. 53 With the exception of order instructions and times-in-force that are not currently available on the Exchange but will be following the technology migration, these are the same order types, order instructions, and times-in-force the Exchange may currently make available during RTH. VerDate Sep<11>2014 18:36 Jul 18, 2019 Jkt 247001 Proposed Rule 5.30 provides that the Exchange may make the following order types, order instructions, and times-inforce available during GTH: 54 • Order types: Limit order. • Order instructions: AON, attributable, book only, all sessions, cancel back, electronic only, MTP modifier, minimum quantity, nonattributable, post only, price adjust, reserve order, and stop-limit. • Times-in-force: Day, FOK, GTC, GTD, IOC, and OPG.55 The proposed rule change updates the definition of QCC orders in Rule 5.6(c) of the Shell Rulebook to codify in the Rules certain functionality for QCC orders with more than one option leg (‘‘Complex QCC orders’’). The current definition does not explicitly state that each leg of a complex QCC order must be at least 1,000 standard option contracts (or 10,000 mini-option contracts). However, that requirement is set forth in Cboe Options Regulatory Circular RG13–102 (July 19, 2013). Additionally, the current rule does not explicitly state that the legs of complex QCC orders must execute at prices at or better than the NBBO of the series, at prices better than a priority customer order resting in the Simple Book, or that a Complex QCC order may not execute at the same price as complex orders resting on the complex order book, but the Exchange understands this is consistent with current Cboe Options functionality.56 The proposed rule change does not change the current functionality of QCC orders, but rather adds details regarding the functionality to the Rules. The proposed rule change moves the provisions regarding the electronic processing, display, priority, and execution of simple orders from the current Rulebook to proposed Rule 5.32 in the shell Rulebook.57 54 The Exchange notes it intends to indicate which order types, order instructions, and times-inforce the Exchange may make available for complex orders during each trading session in a separate rule filing. 55 With the exception of order instructions and times-in-force that are not currently available on the Exchange but will be following the technology migration, these are the same order types, order instructions, and times-in-force the Exchange may currently make available during GTH, except for GTC. Because the Exchange will use the same Book for GTH and RTH, the Exchange will make available the GTC time-in-force for GTH, as an order in an All Sessions class with that time-in-force can remain in the Book following the conclusion of the GTH trading session and be available for trading during the RTH trading session. 56 The proposed definition of a QCC order is virtually identical to the definition of a QCC order in EDGX Options Rule 21.1(d)(10). QCC orders are not currently available on BZX Options or C2. 57 The Exchange intends to move the provisions regarding the allocation and execution of orders in PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 34969 Current Rule 6.45(a)(i) provides that orders and quotes are allocated pursuant to the aggregated pro-rata base allocation algorithm, except in classes the Exchange determines to apply the price-time or pro-rata base allocation algorithm. Following the technology migration, the Exchange will determine to only apply the price-time or pro-rata base allocation algorithm, which are currently available on the Cboe Affiliated Exchanges.58 Therefore, the proposed rule change deletes aggregated pro-rata priority from the possible base allocation algorithms. Aggregated prorata is similar to standard pro-rata, except broker-dealer orders at the same price are aggregated prior to the pro-rata distribution and counted as a single order with the aggregated size. While these algorithms allocate orders and quotes in a different manner because of this aggregation, and may result in different allocations of orders and quotes, the resulting allocations are generally similar. Proposed Rule 5.32(a) states the Exchange determines which base allocation algorithm in proposed subparagraph (1), and whether one or more of the priority overlays in subparagraph (2), will apply on a classby-class basis. This is consistent with current Rule 6.45(a)(i).59 Proposed Rule 5.32(a)(1)(A) states resting orders and quotes on the Book with the highest bid and lowest offer have priority. If there are two or more resting orders or quotes at the same price, the System prioritizes them at the same price in the order in which the System received them (i.e., time priority).60 Proposed Rule 5.32(a)(1)(B) states resting orders and quotes on the Book with the highest bid and lowest offer have priority. If there are two or more resting orders at the same price, the System allocates orders proportionally according to size (i.e., on a pro-rata basis). The System allocates executable quantity to the nearest whole number, with fractions 1⁄2 or greater rounded up (in size-time priority) and fractions less than 1⁄2 rounded down. If the executable quantity cannot be evenly allocated, the System distributes remaining contracts one at a time in open outcry in current Rule 6.45(b) and Interpretation and Policy .06 to the shell Rulebook in a separate rule filing. 58 See BZX Options Rule 21.8(a) (price-time); C2 Options Rule 6.12(a) (price-time and pro-rata); and EDGX Options Rule 21.8(c) (pro-rata). 59 Pursuant to any allocation algorithm and priority overlay, the System only allocates to an order or quote up to the number of contracts of that order at the execution price. See current Rule 6.45(a)(i) and proposed Rule 5.32(a). 60 See current Rule 6.45(a)(i)(A). The proposed rule change makes no substantive changes to the price-time base allocation algorithm. E:\FR\FM\19JYN1.SGM 19JYN1 34970 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES size-time priority to orders that were rounded down.61 This differs from the current the pro-rata allocation algorithm, pursuant to which the System allocates contracts to the first resting order or quote proportionally according to size (based on the number of remaining contracts to be allocated and the size of the remaining resting orders and quotes), and allocates contracts to the next resting order or quote. The System repeats this process until it allocates all contracts from the incoming order or quote. The system rounds fractions 1⁄2 or greater up and fractions less than 1⁄2 down. The Exchange believes the proposed pro-rata algorithm is a fair, objective, and simple systematic process to allocate ‘‘extra’’ contracts when more than one market participant may be entitled to those extra contracts after rounding. It is also consistent with the pro-rata process on Cboe Affiliated Exchanges.62 Proposed Rule 5.32(a)(2) describes the priority overlays the Exchange may apply to a class, which are the same priority overlays the Exchange may apply today. The Exchange may apply one or more priority overlays to a class in any sequence,63 except if the Exchange applies any participation entitlement pursuant to proposed subparagraph (B) or the small order priority pursuant to proposed subparagraph (C), the Exchange must apply the Priority Customer overlay in proposed subparagraph (A) ahead of the participation entitlement and small-size priority in the priority sequence.64 After the System executes an incoming order subject to the applicable priority overlays, the System executes any remaining orders on the Book (which are non-Priority Customer orders if the Exchange applies any of the overlays in proposed subparagraphs (A) through (C)) pursuant to the applicable base allocation algorithm. This is consistent with current functionality, and the proposed rule change is adding this detail to the Rules.65 Proposed Rule 5.32(a)(2)(A) describes the Priority Customer overlay, pursuant to which a Priority Customer order at the highest bid or lowest offer has priority over orders and quotes of all other market participants (i.e., nonPriority Customers) at that price. If there are two or more Priority Customer orders at the same price, the System prioritizes them in the order in which 61 See also C2 Rule 6.12(a)(2)(B); and EDGX Options Rule 21.8(c). 62 See C2 Rule 6.12(a)(2)(B); and EDGX Options Rule 21.8(c). 63 See current Rule 6.45(a)(ii). 64 See current Rule 6.45(a)(ii)(B)(2) and (a)(ii)(c). 65 See also EDGX Options Rule 21.8(e). VerDate Sep<11>2014 18:36 Jul 18, 2019 Jkt 247001 the System received them (i.e., time priority).66 Proposed Rule 5.32(a)(2)(B) describes the Designated Primary Market-Maker (‘‘DPM’’), Lead Market-Maker (‘‘LMM’’), and Preferred Market-Maker (‘‘PMM’’) participations entitlements.67 The Exchange may apply one or more of the DPM, LMM, and PMM participation entitlements (in any sequence) to a class. If the DPM, LMM, or PMM, as applicable, has a quote at the highest bid or lowest offer, it will receive the greater of (1) the number of contracts it would receive pursuant to the applicable base allocation algorithm and (2) 50% of the contracts if there is one other non-Priority Customer order or quote, 40% of the contracts if there are two non-Priority Customer orders or quotes, or 30% of the contracts if there are three or more non-Priority Customer orders or quotes at that price.68 Only one participation entitlement may apply to a trade (e.g., if the Exchange applies a PMM participation entitlement and DPM participation entitlement to a class, with the PMM participation entitlement ahead of the DPM participation entitlement in the priority sequence, and both a PMM and DPM have a quote at the highest bid or lowest offer, the PMM will receive an entitlement on a trade and the DPM will not).69 The participation entitlement will be based on the number of nonPriority Customer contracts remaining 66 See current Rule 6.45(a)(ii)(A). The proposed rule change makes no substantive changes to the Priority Customer overlay. See also EDGX Options Rule 21.18(d)(1). 67 The provisions describing the current participation entitlements are in current Rules 6.45(b)(ii)(B), 8.13(c), 8.15(d), and 8.87, which the proposed rule change deletes. The proposed rule change also deletes Rule 8.87, Interpretation and Policy .01, as the Exchange does not intend to establish a different participation rate for newly listed products. Additionally, the proposed rule change deletes current Rule 8.87, Interpretations and Policies .02 and .03 (which contain exceptions to a DPM’s continuous electronic quoting obligations). The Exchange intends to move these provisions to the shell Rulebook in a future filing regarding Market-Maker quoting obligations. The proposed rule change also deletes Rule 8.15(c), which is currently reserved. 68 See current Rules 8.13(c), 8.15(d)(ii), and 8.87(b)(2). The proposed rule change deletes the provision that all broker-dealers at the same price will be treated as one broker-dealer order (with size consisting of the cumulative number of contracts in those non-Market-Maker broker-dealer orders). The System will treat each order as an individual order. The Exchange believes this will also be a fair, objective, and simple systematic process, and may provide other market participants with additional opportunities to participate in executions where a participation entitlement applies. The proposed rule change makes no other substantive changes to the participation entitlements. DPMs, LMMs, and PMMs are subject to the obligations set forth in current Rules 8.13, 8.15, and 8.17, respectively. 69 See current Rule 6.45(a)(ii)(B)(3) (proposed Rule 5.32(a)(2)(B)(i)). PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 after the Priority Customer overlay is applied.70 If the Exchange appoints both an On-Floor LMM or DPM and an OffFloor DPM or LMM to a class, the OnFloor LMM or DPM, as applicable, may receive a participation entitlement with respect to orders represented in open outcry but not for orders executed electronically, and an Off-Floor DPM or LMM, as applicable, may receive a participation entitlement with respect to orders executed electronically but not orders represented in open outcry.71 Additionally, the DPM/LMM/PMM participation entitlements do not apply during GTH.72 Proposed Rule 5.32(a)(2)(C) describes the small-size order entitlement (also referred to as the 1–5 lot entitlement).73 If an incoming order or quote has five or fewer contracts (a ‘‘small-size order’’), and the DPM or LMM, as applicable, in the class has a quote at the highest bid or lowest offer, it has priority to execute against the entire size of the order or quote that does not execute against any Priority Customer orders on the Book at that price.74 If a small-size order is preferred to a PMM, the PMM has a quote at the BBO, and the Exchange has applied the PMM participation entitlement to the class, the PMM receives its participation entitlement, and the small-size order entitlement does not apply to any execution of that order. If the PMM does not have a quote at the BBO, but the DPM or LMM, as applicable does, the DPM/LMM participation entitlement will apply to any execution of that order.75 If a smallsize order is preferred to a DPM or LMM, and the Exchange has applied the PMM and DPM or LMM participation entitlement, the DPM or LMM receives the small-size order entitlement, and the participation entitlement does not apply to execution of that order.76 The small70 See current Rule 6.45(a)(ii)(B)(2) (proposed Rule 5.32(a)(2)(B)(ii)). 71 See current Rules 8.15(d)(i) and 8.87(b)(iv) (proposed Rule 5.32(a)(2)(B)(iii)). 72 See current Rule 6.1A(e)(iii)(B) and 8.87(b)(iv) (proposed Rule 5.32(a)(2)(B)(iv)). Note the current rule only references the LMM participation entitlement. However, to the extent the Exchange appoints a DPM or PMM to a class for the GTH trading session, the Exchange would similarly not have the applicable participation entitlement apply during that trading session at this time. 73 See current Rule 6.45(a)(ii)(c). The proposed rule change makes no substantive changes to the small-size order entitlement. 74 See also EDGX Options Rule 21.8(g)(2). 75 See current Rule 6.45(a)(ii)(c)(3) and proposed Rule 5.32(a)(2)(C)(i); see also EDGX Options Rule 21.8(h)(1)(A). 76 See current Rule 6.45(a)(ii)(c) and proposed Rule 5.32(a)(2)(C)(ii); see also EDGX Options Rule 21.8(h)(1)(C). While this is not specified in the current Rule, the proposed rule change is consistent with current functionality and adds this detail to the Rules. E:\FR\FM\19JYN1.SGM 19JYN1 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES size order does not apply to executions following auctions.77 The Exchange will continue to review the small-size order entitlement on a quarterly basis, and will reduce the size of the small-size orders if they comprise more than 40% of the volume executed on the Exchange (excluding volume resulting from the execution of orders in the Automated Improvement Mechanism (‘‘AIM’’)).78 Proposed Rule 5.32(a)(2)(D) describes the Market Turner priority.79 A ‘‘Market Turner’’ is a TPH that first entered an order or quote at a better price than the previous highest bid or lowest offer, which order is continuously on the Book (and not modified in a manner that changes its priority) until it trades. A Market Turner has priority to execute against 50% of an incoming order or quote, or against the number of contracts remaining after any priority overlays ahead of the Market Turner priority are applied).80 There may be a Market Turner for each price at which a particular order or quote trades.81 Market-Turner priority remains with an order or quote once established (i.e., if the market moves in the same direction as the Market Turner’s order or quote moved the market, and then moves back to the Market Turner’s original price, the Market Turner retains priority at that original price).82 Any unexecuted portion of a Market Turner order or quote retains its Market Turner priority at its original price.83 Market Turner priority may not be established until after the market open. Once established, Market Turner priority remains in effect for an order or quote until the market close.84 The proposed rule change moves the following additional priority rules to proposed Rule 5.32(a)(3): • Displayed orders at a given price have priority over nondisplayed orders (current Rule 6.45(a)(v)(A)). 77 See current Rule 6.45(a)(ii)(c)(4) and proposed Rule 5.32(a)(2)(C)(iii). 78 See current Rule 6.45(a)(ii)(c)(1) and proposed Rule 5.32(a)(2)(C)(iv). 79 See current Rule 6.45(a)(ii)(D). The proposed rule change makes no substantive changes to the Market Turner priority. 80 This is consistent with current functionality, and the proposed rule change adds this detail to the Rules. Currently, the Exchange may receive priority against an entire incoming order or quote or a percentage of that order or quote. See current Rule 6.45(a)(ii)(D). The Exchange currently sets this percentage to 50%, and intends to maintain that percentage following the technology migration, so the proposed rule change specifies this in the Rules. 81 See current Rule 6.45(a)(ii)(D) and proposed Rule 5.32(a)(2)(D)(i). 82 See current Rule 6.45(a)(ii)(D) and proposed Rule 5.32(a)(2)(D)(ii). 83 See current Rule 6.45(a)(ii)(D) and proposed Rule 5.32(a)(2)(D)(iii). 84 See current Rule 6.45(a)(ii)(D) and proposed Rule 5.32(a)(2)(D)(iv). VerDate Sep<11>2014 18:36 Jul 18, 2019 Jkt 247001 • Priority Customer Reserve Quantities at the same price execute in time sequence, and non-Priority Customer Reserve Quantities execute in accordance with the applicable base allocation algorithm (current Rule 6.45(a)(v)(B)). • An AON order is always last in priority order (including after nondisplayed Reserve Quantity). The System allocates AON orders at the same price based on the time the System receives them (i.e., in time priority), except if the Exchange applies the Priority Customer overlay to a class, Priority Customer AON orders have priority over non-Priority Customer AON orders (current Rule 6.45(a)(v)(D)).85 A transaction may occur at the same price as an AON order resting on the EDGX Options Book without the AON order participating in the transaction. Notwithstanding proposed Rule 5.32(a)(1), a transaction may occur at a price lower (higher) than an AON order bid (offer) resting on the Book if the size of the resting AON order cannot be satisfied (current Rule 6.44, Interpretation and Policy .02). Other than the deletion of the aggregated pro rata base allocation algorithm (and the related aggregation provisions within the participation entitlement overlay) and how the System will round and allocate contracts when they cannot be divided evenly pursuant to the pro-rata base allocation algorithm, the System will allocate orders and quotes in the same manner as it does today. As noted above, the Exchange believes the proposed pro-rata base allocation (which the Exchange will apply to any classes to which the Exchange currently applies the aggregated pro-rata base allocation algorithm) is a fair, objective, and simple systematic process that is equivalent to the pro-rata base allocation algorithm available on Cboe Affiliated Exchanges. While the aggregated pro-rata and pro-rata algorithms each allocate orders and quotes in a different manner because of the aggregation of broker-dealer interest at the same price, and may result in different allocations of orders and quotes, the resulting allocations are generally similar. 85 The proposed rule change also states that a transaction may occur at the same price as an AON order resting on the Book without the AON participating in the transaction, and that notwithstanding proposed Rule 5.32(a)(1), a transaction may occur at a price lower (higher) than an AON order bid (offer) resting on the Book if the size of the resting AON order cannot be satisfied. See current Rule 6.44, Interpretation and Policy .02 (which was deleted from the current Rulebook pursuant to SR–CBOE–2019–027). PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 34971 Proposed Rule 5.32(b) describes a new Price Adjust process, which is a repricing mechanism offer to Users on BZX Options, C2, and EDGX Options.86 Orders designated to be subject to the Price Adjust process or not designated as Cancel Back (and thus not subject to the Price adjust process), will be handled pursuant to proposed Rule 5.32(b). The Price Adjust process (in addition to the Cancel Back order instruction) is an additional way in which the Exchange will ensure compliance with the locked and crossed market rules in current Chapter VI, Section E (which the proposed rule change moves to Chapter 5, Section E in the shell Rulebook). It will also provide Users with additional flexibility regarding how they want the System to handle their orders. Pursuant to proposed Rule 5.32(b)(1)(A), a buy (sell) non-AON order at the time of entry would lock or cross (1) a Protected Quotation of another exchange or the Exchange, the System ranks and displays the order at one minimum price variation below (above) the current NBO (NBB); or (2) the offer (bid) of a sell (buy) AON order resting on the Book at or better than the Exchange’s best offer (bid), the System ranks the resting AON order one minimum price variation above (below) the bid (offer) of the non-AON order. For example, if an AON order to buy 5 at 1.10 is resting on the Book (which is the NBB), and a non-AON order to sell 1 (which does not satisfy the size of the AON order) at 1.10 enters the Book, the System reprices the AON order to rest in the Book at 1.05 (assuming the minimum price variation for the class is $0.05). Proposed Rule 5.32(b)(1)(B) states if a buy (sell) AON order, at the time of order entry, would (1) cross a Protected Offer (Bid) of another options exchange or a sell (buy) AON order resting on the Book at or better than the Exchange’s best offer (bid), the System ranks the incoming AON order at a price equal to the Protected Offer (Bid) or the offer (bid) of the resting AON order, respectively; or (2) lock or cross a Protected Offer (Bid) of the Exchange, the System ranks the incoming AON order at a price one minimum price variation below (above) the Protected Offer (Bid). For example, if an AON order to buy 5 at 1.10 is resting on the Book (which 86 The proposed Price Adjust process is substantially the same as EDGX Options Rule 21.1(i). Note BZX Options and C2 do not have AON orders, and thus the Price Adjust process described in their rules do not account for AON orders (and are equivalent to proposed paragraph 5.32(b)(1)(A)(i)). See BZX Options Rule 21.1(i); and C2 Rule 6.12(b). E:\FR\FM\19JYN1.SGM 19JYN1 jbell on DSK3GLQ082PROD with NOTICES 34972 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Notices is the NBB), and a non-AON order to sell 1 (which does not satisfy the size of the AON order) at 1.10 enters the Book, the System reprices the AON order to rest in the Book at 1.05 (assuming the minimum price variation for the class is $0.05). As another example, if a nonAON order to buy 1 at 1.10 is resting at the top of the Book, and an AON order to sell 5 (which cannot satisfied by the resting interest) at 1.10 enters the Book, the System reprices the AON order to rest in the Book at 1.15 (assuming the minimum price variation for the class is $0.05). As a final example, if a buy AON order has a bid of 1.05 and enters the Book when the NBO is 1.00, the System ranks the AON order at a 1.00 bid. Or, if a sell AON order has an offer of 1.10 and enters the Book, where there is a resting AON order with a bid of 1.15, the System ranks the incoming AON order at a price of 1.15. The proposed Price Adjust process handles AON orders different than other orders, because AON orders are not displayed on the Book (and thus are not Protected Quotations). The Exchange believes the proposed process is reasonable, because non-AON orders will rest on the Book at prices that would not create a locked or crossed market, and AON orders will rest on the Book at executable prices. The proposed process will generally re-price the incoming (and thus later arriving order). However, the proposed rule change will reprice a resting AON order rather than an incoming non-AON order, because AON orders have last priority (as discussed above) and are not displayed, and thus should not cause the price of an incoming non-AON order to reprice. Because AONs are not displayed and have last priority on the Book, the Exchange believes it is appropriate to adjust the price of an AON rather than an incoming order that would be displayed and protected. The proposed rule change is consistent with linkage rules, because AONs are not be part of the BBO, and repricing an AON to lock an away exchange price or a resting (and nondisplayed) order on the Book will, therefore, not result in a displayed locked market. The proposed rule change also ensures that a resting AON order will not lock the price of a Protected Quotation on the Book. This prevents the situation in which an incoming order may execute ahead of the resting non-AON order. For example, if a nonAON order to buy 1 at 1.10 is resting on the Book, and an AON order to sell 5 (and thus is not satisfied by the resting interest) at 1.10 enters the Book, if the System permitted the AON order to rest at a price of 1.10 (rather than reprice the VerDate Sep<11>2014 18:36 Jul 18, 2019 Jkt 247001 AON to rest at 1.15 as proposed), if subsequently an AON to buy 5 at 1.10 was submitted to the Exchange, that AON would execute against the resting AON at 1.10, and thus ahead of the nonAON order to buy.87 The proposed rule change will also reprice an AON order to a more aggressive price up to the limit price at which it would be able to execute without causing a trade-through as the market changes.88 Proposed Rule 5.32(b)(2) states the circumstances that caused the System to adjust the price of an order pursuant to proposed subparagraph (1) change so that it would not lock or cross, as applicable, a Protected Quotation or an AON resting on the Book at a price at or better than the BBO, the System gives the Price Adjust order a new timestamp. The System ranks or displays the order at a price that locks or is one minimum price variation away from the new Protected Quotation or AON resting on the Book at or better than the BBO, as applicable. All Price Adjust orders that are re-ranked and re-displayed (if applicable) retain their priority as compared to other Price Adjust orders based upon the time the System initially received the orders. Following the initial ranking and display (if applicable) of a Price Adjust order, an order will only be re-ranked and redisplayed (if applicable) to the extent it achieves a more aggressive price up to its limit price. The System adjusts the ranked and displayed price of an order subject to Price Adjust once or multiple times depending upon the User’s instructions and changes to the prevailing NBBO. The System does not display a Price Adjust limit order at any price worse than its limit price. This proposed repricing mechanism is an additional way in which the Exchange will ensure compliance with intermarket linkage rules, while permitting resting orders to rest at the most aggressive, executable prices (subject to orders’ limit prices). It also provides Users with additional flexibility regarding how they want the System to handle their orders.89 87 Priority rules apply to orders resting in the Book, not incoming orders. Therefore, with respect to an incoming order, the System checks opposite side interest to see if the incoming order can execute. It does not check to see if there is sameside interest ahead of which it cannot trade, as there would only be marketable same-side interest (from a price perspective) that would not otherwise execute against opposite side interest if such opposite side interest was an AON order. 88 See current Rule 6.81 and proposed Rule 5.66 (which prohibits trade-throughs, subject to certain exceptions); and current Rule 6.82 and proposed Rule 5.67 (requires the Exchange to reasonably avoid displaying quotes that lock a Protected Quotation). 89 See also EDGX Options Rule 21.1(i). PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 The Exchange does not have functionality that corresponds to the Price Adjust process. However, the Exchange’s current Rules do not provide any special handling that applies to AON orders that lock or cross orders on the Exchange or the quote of an away options market. Therefore, pursuant to the Rules, if an AON order is unable to execute upon entry into the System (or after routing, if eligible for routing pursuant to the Rules), the AON order will rest at its price, even if it locks or crosses the Exchange’s BBO or the quote of an away options market.90 The proposed rule change will similarly permit an AON order to rest at a price that locks the quote of an away options market, as well as an AON order resting on the Book at a price at or better than the BBO. An AON order resting at a price that locks or crosses an order may only execute in accordance with the priority principles set forth in current Rule 6.45 and may not execute at prices that would cause a trade-through pursuant to current Rule 6.81. The Exchange believes the proposed rule change ultimately creates the same result for a resting AON order that would otherwise occur on the Exchange (the proposed rule change merely changes the price of an AON order upon entry rather than at the time of execution), and in some cases results in price improvement for an AON order. For example, as proposed, if the BBO was 1.15 × 1.30 (size of 50), and the NBBO was 1.15 × 1.20 (size of 50), and a User submitted an AON order for 100 to buy at 1.25, the AON order would rest on the Book with a price of 1.20 (which locks the Protected Offer of 1.20). If an order to sell 100 at 1.20 was later submitted to the Exchange, it would execute against the resting AON order at its ranked price of 1.20. Currently on the Exchange, the AON would rest at 1.25. If an order to sell 100 at 1.20 was later submitted to the Exchange it would execute against the resting AON order at a price of 1.20 (and thus the same price at which it would execute on the Exchange), as executions may only occur at or within the NBBO. Additionally, suppose the BBO was 1.15 × 1.25 (non-AON order with size of 50), and was also the NBBO, and a User submitted an AON order for 100 to buy at 1.25, the AON order would rest on the Book with a price of 1.20 (which is one minimum price variation below the resting non-AON order). If an order to 90 If the AON order submitted to the Exchange was a market order and was unable to execute for any reason, it would cancel in accordance with the terms of a market order. This is consistent with the handling of any other market order that was not able to execute on the Exchange. E:\FR\FM\19JYN1.SGM 19JYN1 jbell on DSK3GLQ082PROD with NOTICES Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Notices sell 100 at 1.20 was later submitted to the Exchange, it would execute against the resting AON order at a price of 1.20 (which results in price improvement for the AON order). Currently on the Exchange, the AON would rest at 1.25. If an order to sell 100 at 1.20 was later submitted to the Exchange, the AON would receive execution at a price of 1.25.91 The Exchange believes the proposed rule change is an enhancement that will prevent such incoming orders to trade against a resting AON at the same price as a resting non-AON order on the opposite side of the market that had insufficient size to trade against the AON order. As another example, if the BBO was 1.15 × 1.30 and was also the NBBO, and there was a sell AON order for 50 to sell at 1.25 resting on the Book, and a User submitted an AON order for 100 to buy at 1.25, the incoming AON order would rest on the Book at 1.25 (which locks the resting AON order). If an order to sell 100 at 1.25 was later submitted to the Exchange, it would execute against the resting AON order to buy at 1.25. This is the same result that would occur today on the Exchange. Proposed Rule 5.32(c) describes how the System handles orders and quotes in additional circumstances. Proposed subparagraph (1) states, subject to the exceptions contained in proposed Rule 5.66 (current Rule 6.81), the System does not execute an order at a price that trades through a Protected Quotation of another options exchange. The System routes an order a User designates as routable in compliance with applicable Trade-Through restrictions. The System cancels or rejects any order not eligible for routing or the Price Adjust process that is entered with a price that locks or crosses a Protected Quotation of another options exchange. The Exchange currently does not execute orders at trade-through prices, consistent with intermarket linkage rules.92 The proposed rule change adds proposed Rule 5.32(c)(2), which states the System cancels or rejects a buy (sell) stop or stop-limit order if the NBB (NBO) at the time the System receives the order is equal to or above (below) the stop price. The System accepts a buy (sell) stop or stop-limit order if the consolidated last sale price at the time the System receives the order is equal to or above (below) the stop price. This is consistent with the definitions of stop and stop-limit orders in Rule 5.7(c) of the shell Rulebook. Because the purpose of a stop or stop-limit order is to rest in 91 See current Rule 6.45 (proposed Rule 5.32). also C2 Rule 6.12(c)(1); and EDGX options Rule 21.6(e) and (f). 92 See VerDate Sep<11>2014 18:36 Jul 18, 2019 Jkt 247001 the Book until a specified price is reached, the Exchange believes rejecting a stop or stop-limit order entered above or below, as applicable, that price may be erroneous, as entry at that time would be inconsistent with the purpose of the order.93 The proposed rule change adds proposed Rule 5.32(c)(3), which states the System cancels or rejects a GTC or GTD order in an adjusted series.94 Pursuant to current Rule 5.7, options contracts are subject to adjustments in accordance with the Rules of the Options Clearing Corporation (‘‘OCC’’). Generally, due to a corporate action by the issuer of an underlying, OCC may adjust the price of an option. After a corporate action and a subsequent adjustment to the existing options, OPRA and OCC identify the series in question with a separate symbol consisting of the underlying symbol and a numerical appendage. As a standard procedure, exchanges listing options on an underlying security that undergoes a corporate action resulting in adjusted series will list new standard option series across all expiration months the day after the existing series are adjusted. The adjusted series are generally actively traded for a short period of time following adjustment, but prices of those series may have been impacted by the adjustment. As a result, any GTC or GTD orders submitted prior to the adjustment may no longer reflect the market price of the adjusted series, as the prices of the GTC or GTD orders do not factor in the adjustment. The Exchange believes any executions of these GTC or GTD orders would be at erroneous prices, and thus believes it is appropriate for the System to cancel these orders, which will permit Users to resubmit orders in the adjust series at prices that reflect the adjustment and to submit orders in the new series. The proposed rule change adds proposed Rule 5.32(c)(4), which states the System does not execute an order with an MTP Modifier entered into the System against an order entered with an MTP Modifier and the same unique identifier, and instead handles them in accordance with Rule 5.7(c) in the shell Rulebook. This provision reflects the definitions of the MTP Modifiers in Rule 5.7(c) in the shell Rulebook. The proposed rule change moves the provisions regarding handling of market orders, market-on-close orders, and stop orders when the underlying security is in a limit up-limit down state from Rule 6.45(d) in the current Rulebook to Rule also C2 Rule 6.12(c)(3). is true on any trading day on which the adjusted series continues to trade. PO 00000 93 See 94 This Frm 00125 Fmt 4703 Sfmt 4703 34973 5.32(c)(5) in the shell Rulebook. The proposed rule change only makes nonsubstantive changes to these provisions, including updating crossreferences (and adding references to the Exchange’s electronic crossing mechanisms), making grammatical changes, and updating paragraph numbering and lettering. The proposed rule change moves the provision regarding the decrementation of an order or quote following partial execution from Rule 6.45(a)(iii) in the current Rulebook to Rule 5.32(d) in the shell Rulebook. The proposed rule change also moves the provision regarding the modification of orders and quotes from Rule 6.45(a)(iv) in the current Rulebook to Rule 5.32(e) in the shell Rulebook. The proposed rule change deletes the provision regarding two-sided quotes, as the functionality on Bats technology will not have an equivalent of two-sided quotes. Through bulk messages (the proposed equivalent to quoting technology), Users may submit bids and offers in the same series; however, they are individual quotes. The proposed rule change only makes nonsubstantive changes to these provisions, including updating crossreferences (and adding references to the Exchange’s electronic crossing mechanisms), making grammatical changes, and updating paragraph numbering and lettering. The proposed rule change deletes current Rule 6.45(v) regarding contingency orders. As discussed above, certain provisions regarding AONs and Reserve orders were moved to other parts of the rule. The Exchange does not believe the introductory language and remaining provisions are necessary, as the order instruction definitions in Rule 5.6 of the shell Rulebook and order handling provisions described above contain sufficient detail regarding how the System will handle contingency orders. Additionally, the Exchange believes FOK and IOC orders relate to the time of execution of orders rather than a contingency, and thus these terms are described in Rule 5.6(d) of the shell Rulebook. The proposed rule change moves the provisions regarding order exposure requirements from Rule 6.45, Interpretations and Policies .01 through .03 in the current Rulebook to Rule 5.8 in the shell Rulebook. The proposed rule change only makes nonsubstantive changes to these provisions, including updating cross-references (and adding references to the Exchange’s electronic crossing mechanisms), making grammatical changes, and updating paragraph numbering and lettering. E:\FR\FM\19JYN1.SGM 19JYN1 34974 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES The proposed rule change deletes current Rule 6.45, Interpretation and Policy .04, as it is redundant of Rule 1.2 in the current Rulebook (Rule 1.5 in the shell Rulebook). The proposed rule change moves current Interpretation and Policy .05 to proposed Interpretation and Policy .01. The proposed rule change deletes current Interpretations and Policies .05 and .06, and intends to add those provisions to Chapter 5, Section G of the shell Rulebook to keep all Rules related to open outcry trading in the same rule. The proposed rule change moves the Rules regarding intermarket linkage, including order protection and locked and crossed market rules, from current Rules 6.80 to 6.82 in the current Rulebook to proposed Rules 5.65 to 5.67 in the shell Rulebook. The proposed rule change only makes nonsubstantive changes to these provisions, including updating cross-references and paragraph numbering and lettering.95 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.96 Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 97 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) 98 requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. The proposed rule changes are generally intended to add or align certain system functionality offered by the Exchange and the Cboe Affiliated Exchanges in order to provide a consistent technology offering for the Cboe Affiliated Exchanges. A consistent 95 The proposed rule change also deletes current Rules 6.83 and 6.84, which were reserved or previously deleted. 96 15 U.S.C. 78f(b). 97 15 U.S.C. 78f(b)(5). 98 Id. VerDate Sep<11>2014 18:36 Jul 18, 2019 Jkt 247001 technology, in turn, will simplify the technology implementation, changes, and maintenance by Users of the Exchange that are also participants on Cboe Affiliated Exchanges. The proposed rule changes would also provide Users with access to functionality that is generally available on markets other than the Cboe Affiliated Exchanges and may result in the efficient execution of such orders and will provide additional flexibility as well as increased functionality to the Exchange’s System and its Users. The proposed rule change does not propose to implement new or unique functionality that has not been previously filed with the Securities and Exchange Commission (the ‘‘Commission’’) or is not available on Cboe Affiliated Exchanges. There are a number of rules to which the proposed rule change only makes nonsubstantive changes. The proposed rule text is generally based on the rules of Cboe Affiliated Exchanges and is different only to the extent necessary to conform to the Exchange’s current Rules, retain intended differences based on the Exchange’s market, or make other nonsubstantive changes to simplify, clarify, eliminate duplicative language, or make rule provisions plain English. To the extent a proposed rule change is based on an existing Cboe Affiliated Exchange rule, the language of the Rules and Cboe Affiliated Exchange rules may differ to 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 Exchange 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 Trading Permit Holders that are also participants on the Exchange. The proposed rule change will 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 Exchange’s rules easier to understand. PO 00000 Frm 00126 Fmt 4703 Sfmt 4703 The proposed rule change regarding connectivity to the Exchange, including the definition of ports, will reduce complexity and increase understanding of the Exchange’s operations for all Users of the Exchange following migration. As the ports are the same as used on the Cboe Affiliated Exchanges, Users of the Exchange and these other exchanges will have access to similar functionality on all Cboe Affiliated Exchanges. As such, the proposed rule change will 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 proposed changes to the Exchange’s disaster recovery rules, including the requirements regarding which TPHs must connect to the Exchange’s back-up system and participate in testing, are consistent with Regulation SCI requirements applicable to the Exchange and other SCI entities, which require these SCI entities to comply with requirements with respect to the automated systems central to the performance of their regulated activities. The Exchange takes pride in the reliability and availability of its systems. The Exchange and the Cboe Affiliated Exchanges have put extensive time and resources toward planning for system failures and already maintain robust business continuity and disaster recovery plans consistent with the proposed rule. The proposed rule change is also substantially similar to the rules of the Cboe Affiliated Exchanges, as well as another options exchange.99 The proposed rule regarding message traffic mitigation replaces the current Rules that permit the Exchange to similar mitigate message traffic. The Exchange does not have unlimited capacity to support unlimited messages, and the Exchange believes the proposed rule change provides the Exchange with reasonable measures to take to manage message traffic and protect the integrity of the System. The proposed rule change is also substantially similar to the rules of the Cboe Affiliated Exchanges.100 99 See BZX Options Rule 2.4; C2 Rule 6.34; and EDGX Rule 2.4; see also MIAX Rule 321, Interpretation and Policy .01. 100 The proposed rule change is substantially similar to BZX Options Rule 21.14, C2 Rule 6.35, and EDGX Options Rule 21.14. Note the BZX Options and EDGX Options rules also include a provision regarding their ability to periodically delist options with an average daily volume of less than 100 contracts. Current Exchange Rule 5.4, Interpretation and Policy .13 permits the Exchange to delist any class immediately if the class is open for trading on another national securities exchange, E:\FR\FM\19JYN1.SGM 19JYN1 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES The proposed bulk message functionality is substantially similar to the Exchange’s current quoting functionality. The Exchange believes this will provide Market-Makers with a more seamless transition to the Exchange’s new technology, and will provide Market-Maker with a means to contribute liquidity to the Exchange’s market continuously during the technology migration, which benefits investors. Additionally, the proposed rule change provides other liquidity providers with an additional method of providing liquidity to the Exchange. This may result in the efficient execution of quotes and orders and will provide Users with additional flexibility and increased functionality on the Exchange’s System, which may benefit all investors. The proposed bulk message functionality is also substantially similar to functionality currently available on Cboe Affiliated Exchanges.101 The proposed rule change to update the definition of QCC orders merely codifies in the Rules certain functionality for Complex QCC orders, but makes no proposes changes to the actual functionality or how Complex QCC orders execute. The proposed definition is substantially the same as a rule of a Cboe Affiliated Exchange.102 The proposed price adjust process is consistent with intermarket linkage rules, which require the Exchange to reasonably avoid displaying quotations that lock or cross any Protected Quotation. This proposed functionality will assist Users by displaying orders and quotes at permissible, executable prices, while also providing Users with flexibility to not have their orders and quotes subject to the Price Adjust process if they prefer. This proposed functionality is substantially similar to or to not open any additional series for trading in a class that is solely open for trading on the Exchange. This provision achieves the same purpose as the BZX Options and EDGX Options rules, and thus it is unnecessary to add that provision to the Exchange’s Rules. 101 See C2 Rules 1.1, 6.8(c)(3), 6.10, and 6.12(b); and EDGX Options Rules 16.1, 21.1(c), (d), (f), (g), (i), and (j)(3). The proposed rule change is also similar to BZX Options Rules 16.1(a)(4), 21.1(c), (d), (f), (g), and (l)(3). However, the BZX Options rules differ, because the BZX Options price adjust process does not apply to bulk messages (pursuant to the proposed rule change and the C2 and EDGX Options rules, Users may determine whether their bulk messages will be subject to the Price Adjust process), and the BZX Options rule permits all Users to designate a bulk message as Post Only or Book Only (pursuant to the proposed rule change and the C2 and EDGX Options rules, appointed Market-Makers may designate bulk messages as Post Only or Book Only, while other Users may only designate bulk messages as Post Only). These differences are intended to account for the different market models of the Exchange and BZX Options. 102 See EDGX Options Rule 21.1(d)(10). VerDate Sep<11>2014 18:36 Jul 18, 2019 Jkt 247001 functionality available on Cboe Affiliated Exchanges.103 As discussed above, other than the deletion of the aggregated pro-rata base allocation algorithm (and the related aggregation provisions within the participation entitlement overlay) and how the System will round and allocate contracts when they cannot be divided evenly pursuant to the pro-rata base allocation algorithm, the System will allocate orders and quotes in the same manner as it does today. While the prorata algorithm may result in a different allocation of contracts than the aggregated pro-rata algorithm because of the aggregation of broker-dealer interest at the same price, the resulting allocations are generally similar. The Exchange believes the proposed pro-rata base allocation (which the Exchange will apply to any classes to which the Exchange currently applies the aggregated pro-rata base allocation algorithm) is a fair, objective, and simple systematic process. Additionally, it is equivalent to the pro-rata base allocation algorithm available on Cboe Affiliated Exchanges.104 The majority of the changes are nonsubstantive changes or provide additional detail in the rule regarding current functionality. The Exchange believes these changes and transparency will protect investors, as they provide more clarity within the rule and more harmonized rule language across the rules of the Cboe Affiliated Exchanges. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange does not believe the proposed rule change will impose any burden on intramarket competition. The Exchange believes the proposed rule changes to the disaster recovery rules will further contribute to the Exchange’s continuous operation of a competitive market in the event of a systems failure or other disaster event. The Exchange notes that the proposed rule change is designed to provide the Exchange with authority to require certain market participants to participate in, and provide necessary liquidity to, the market to ensure that 103 See BZX Options Rule 21.1(i); C2 Rule 6.12(b); and EDGX Options Rule 21.1(i). The Exchange notes EDGX Options is the only other Cboe Affiliated Exchange with AON order functionality, and therefore the Price Adjust rules of BZX Options and C2 do not account for the presence of AON orders, as the proposed rule change and the EDGX Options rule do. 104 See C2 Options Rule 6.12(a); and EDGX Options Rule 21.8(c). PO 00000 Frm 00127 Fmt 4703 Sfmt 4703 34975 the Exchange functions in a fair and orderly manner in the event of a significant systems failure, disaster, or other unusual circumstances. The proposed rule changes regarding connectivity to the Exchange (including the description of ports and EFIDs) will apply to all Users in the same manner, and are similar to the manner in which Users may connect to the Exchange today. Additionally, the proposed rule regarding message traffic mitigation replaces the current measures the Exchange may use to mitigate message traffic. The proposed rule will apply to messages of all Users in the same manner. The proposed bulk message functionality will be available to all Users, and will be voluntary. While only Market-Makers may submit Book Only bulk messages (and orders submitted through bulk ports), the Exchange believes this is appropriate given the various obligations Market-Makers must satisfy under the Rules and the unique and critical role Market-Makers play in the options market, as discussed above. The Exchange believes providing Market-Makers with flexibility to use the Post Only or Book Only instruction with respect to bulk messages (and orders submitted through bulk ports) will provide Market-Makers with tools to meet their obligations in a manner they deem appropriate, as they are currently able to do today using current quoting functionality on the Exchange. The Exchange notes all other Users may continue to use the Book Only instruction on orders submitted to the Exchange through other types of ports. The proposed rule change expands the availability of this functionality to all Users (currently, only appointed Market-Makers may use the Exchange’s quoting functionality). The availability of bulk message functionality (including the use of the Post Only instruction on those bulk messages) will be available for all Users, which may encourage Users that may not have quoting systems to provide liquidity to the Exchange. The proposed Price Adjust process will apply to the orders and quotes of all Users in the same manner. Because Users may opt out their orders and quotes out of the Price Adjust process by designating them as Cancel Back, the Price Adjust process is voluntary, and will provide all Users with flexibility with respect to, and additional control over, the executions of their orders and quotes on the Exchange. The proposed distinction between AON orders and non-AON orders is consistent with the fact that AON orders are not displayed E:\FR\FM\19JYN1.SGM 19JYN1 34976 Federal Register / Vol. 84, No. 139 / Friday, July 19, 2019 / Notices on the Exchange’s Book or disseminated to OPRA. The proposed pro-rata base allocation algorithm will apply to the orders and quotes of all Users in the same manner in the classes to which the Exchange applies that algorithm (subject to the application of any priority overlays, which will operate in the same manner as they do today). The proposed rule change to prevent Market-Maker bulk message executions against other resting Market-Maker interest is similar to the Exchange’s current quote lock functionality, and is intended to protect Market-Makers from executions due to technology disparities rather than the intention of MarketMakers to trade with one another at that price. The Exchange believes this functionality and protection for MarketMakers may continue to encourage Market-Makers to quote tighter and deeper markets, which will increase liquidity and enhance competition. The Exchange does not believe the proposed rule change will impose any burden on intermarket competition that is not necessary or appropriate in furtherance of the purposes of the Act, because, as discussed above, the basis for the majority of the proposed changes to the Rules are the rules of the Cboe Affiliated Exchanges, which have been previously filed with the Commission as consistent with the Act. The proposed substantive rule changes are based on the following rules of the Cboe Affiliated Exchanges: • The proposed changes to the Exchange’s disaster recovery rule are substantively the same as BZX Rule 2.4; C2 Rule 6.34; and EDGX Rule 2.4.105 • The proposed rules regarding connectivity are substantively the same as C2 Rule 6.8.106 • The proposed message traffic mitigation rule is substantively the same as BZX Options Rule 21.14; C2 Rule 6.35; and EDGX Options Rule 21.14. • The proposed bulk message functionality is substantively the same as C2 Rules 1.1, 6.8(c)(3), 6.10, and 6.12(b); and EDGX Options Rules 16.1, 21.1(c), (d), (f), (g), (i), and (j)(3).107 • The proposed price adjust functionality is substantively the same as EDGX Options Rule 21.1(i).108 • The proposed changes to the prorata allocation algorithm are jbell on DSK3GLQ082PROD with NOTICES 105 See MIAX Rule 321, Interpretation and Policy .01. 106 See also BZX Options Rules 5.5(a), 11.3, 20.1(a), and 21.1(k) and (l); and EDGX Options Rules 5.5(a), 11.3, 20.1(a), and 21.1(j) and (k). 107 See also BZX Options Rules 16.1(a)(4), 21.1(c), (d), (f), (g), and (l)(3). 108 See also BZX Options Rule 21.1(i); and C2 Rule 6.12(b). VerDate Sep<11>2014 18:36 Jul 18, 2019 Jkt 247001 substantively the same as C2 Rule 6.12(a); and EDGX Options Rule 21.8(c). • The proposed changes to the QCC rule are substantively the same as EDGX Options Rule 21.1(d)(10). The Exchange reiterates that the proposed rule change is being proposed in the context of the technology integration of the Cboe Affiliated Exchanges. Thus, the Exchange believes this proposed rule change is necessary to permit fair competition among national securities. In addition, the Exchange believes the proposed rule change will benefit Exchange participants in that it will provide a consistent technology offering, as well as consistent rules, for Users by the Cboe Affiliated Exchanges. Following the technology migration, the System will apply to all Users and orders and quotes submitted by Users in the same manner. 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 109 and Rule 19b–4(f)(6) 110 thereunder. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission will institute proceedings to determine whether the proposed rule change should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, PO 00000 including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– CBOE–2019–033 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–CBOE–2019–033. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–CBOE–2019–033 and should be submitted on or before August 9, 2019. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.111 Jill M. Peterson, Assistant Secretary. [FR Doc. 2019–15338 Filed 7–18–19; 8:45 am] BILLING CODE 8011–01–P 109 15 U.S.C. 78s(b)(3)(A). 110 17 CFR 240.19b–4(f)(6). Frm 00128 Fmt 4703 Sfmt 9990 111 17 E:\FR\FM\19JYN1.SGM CFR 200.30–3(a)(12). 19JYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 139 (Friday, July 19, 2019)]
[Notices]
[Pages 34963-34976]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15338]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86374; File No. SR-CBOE-2019-033]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Relating 
to System Connectivity and Order Entry and Allocation Upon the 
Migration of the Exchange's Trading Platform to the Same System Used by 
the Cboe Affiliated Exchanges

July 15, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on July 1, 2019, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Exchange filed the proposal as a ``non-controversial'' proposed rule 
change pursuant to Section

[[Page 34964]]

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

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend and move certain current Rules related to System \5\ 
connectivity and order entry and allocation from the Exchange's 
currently effective Rulebook (``current Rulebook'') to the shell 
structure for the Exchange's Rulebook that will become effective upon 
the migration of the Exchange's trading platform to the same system 
used by the Cboe Affiliated Exchanges (as defined below) (``shell 
Rulebook''). The text of the proposed rule change is provided in 
Exhibit 5.
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    \5\ The term ``System'' means the Exchange's hybrid trading 
platform that integrates electronic and open outcry trading of 
option contracts on the Exchange, and includes any connectivity to 
the foregoing trading platform that is administered by or on behalf 
of the Exchange, such as a communications hub. See Rule 1.1 in the 
current Rulebook and the shell Rulebook.
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    The text of the proposed rule change is also available on the 
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    In 2016, the Exchange's parent company, Cboe Global Markets, Inc. 
(formerly named CBOE Holdings, Inc.) (``Cboe Global''), which is also 
the parent company of Cboe C2 Exchange, Inc. (``C2''), acquired Cboe 
EDGA Exchange, Inc. (``EDGA''), Cboe EDGX Exchange, Inc. (``EDGX'' or 
``EDGX Options''), Cboe BZX Exchange, Inc. (``BZX'' or ``BZX 
Options''), and Cboe BYX Exchange, Inc. (``BYX'' and, together with 
Cboe Options, C2, EDGX, EDGA, and BZX, the ``Cboe Affiliated 
Exchanges''). The Cboe Affiliated Exchanges are working to align 
certain system functionality, retaining only intended differences 
between the Cboe Affiliated Exchanges, in the context of a technology 
migration. Cboe Options intends to migrate its trading platform to the 
same system used by the Cboe Affiliated Exchanges, which the Exchange 
expects to complete on October 7, 2019. Cboe Options believes offering 
similar functionality to the extent practicable will reduce potential 
confusion for market participants. In connection with this technology 
migration, the Exchange has a shell Rulebook that resides alongside its 
current Rulebook, which shell Rulebook will contain the Rules that will 
be in place upon completion of the Cboe Options technology migration.
System Connectivity
    Current Rule 6.23A describes current provisions regarding System 
access and connectivity. The proposed rule change deletes current Rule 
6.23A from the current Rulebook, and amends and moves relevant 
provisions to proposed Rule 5.5 in the shell Rulebook. Proposed Rule 
5.5(a) states only authorized Users and associated persons of Users may 
establish connectivity to and access the Exchange to submit orders and 
quotes and enter auction responses in accordance with the Exchange's 
System access procedures, technical specifications, and 
requirements.\6\ This is consistent with current Rule 6.23A(a), (d), 
and (e), which provides only authorized market participants (which may 
only be Trading Permit Holders, associated persons of Trading Permit 
Holders with authorized access, and Sponsored Users pursuant to current 
Rule 6.20A) may access the Exchange electronically to facilitate quote 
and order entry, as well as auction processing, in accordance with 
Exchange-prescribed technical specifications (to the extent any 
agreement is required to be signed, as indicated in current Rule 
6.23A(d), that would be indicated in such specifications).\7\
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    \6\ These procedures, technical specifications, and requirements 
are available on the Exchange's website.
    \7\ See also C2 Rule 6.8(a). Users will continue to only be able 
to directly access the System from a jurisdiction expressly approved 
by the Exchange pursuant to current Rule 3.4A (which rule the 
Exchange intends to move to Rule 3.5 in the shell Rulebook). See 
current Rule 6.23A(d) (proposed Rule 5.9(a)). BZX Options and EDGX 
Options Rules 11.3 and 20.1(a) also provide that only an Options 
Member or a person associated with an Options Member, as well as 
Sponsored Participants, may access the systems and effect any 
options transactions on those exchanges.
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    Proposed Rule 5.5(b) describes Executing Firm IDs (``EFIDs''). A 
Trading Permit Holder may obtain one or more EFIDs from the Exchange 
(in a form and manner determined by the Exchange). The Exchange assigns 
an EFID to a Trading Permit Holder, which the System uses to identify 
the Trading Permit Holder and the clearing number for the execution of 
orders and quotes submitted to the System with that EFID. Each EFID 
corresponds to a single Trading Permit Holder and a single clearing 
number of a Clearing Trading Permit Holder with the Clearing 
Corporation.\8\ A Trading Permit Holder may obtain multiple EFIDs, 
which may be for the same or different clearing numbers. A Trading 
Permit Holder may only identify for any of its EFIDs the clearing 
number of a Clearing Trading Permit Holder that is a Designated Give Up 
or Guarantor of the Trading Permit Holder as set forth in current Rule 
6.21.\9\ A Trading Permit Holder is able (in a form and manner 
determined by the Exchange) to designate which of its EFIDs may be used 
for each of its ports. If a User submits an order or quote through a 
port with an EFID not enabled for that port, the System cancels or 
rejects the order or quote. The proposed rule change regarding EFIDs is 
similar to the current use of acronyms on the Exchange and consistent 
with the use of EFIDs on the Cboe Affiliated Exchanges.\10\ The 
Exchange believes including a description of the use of EFIDs in the 
Rules adds transparency to the Rules.
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    \8\ The Clearing Corporation is the Options Clearing 
Corporation. See Rule 1.1 in the shell Rulebook.
    \9\ The Exchange intends to move current Rule 6.21 to Rule 5.9 
in the shell Rulebook.
    \10\ The proposed rule change is substantially the same as BZX 
Options Rule 21.1(k); C2 Rule 6.8(b); and EDGX Options Rule 21.1(k).
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    The proposed rule change defines the term port in proposed Rule 
5.5.\11\ The Exchange will provide Users with access to the System 
through various ports, as is the case on the Cboe Affiliated Exchanges. 
A User may connect to the Exchange using a logical port available 
through an application programming interface (``API''), such as the 
industry-standard Financial Information eXchange (``FIX'') protocol or 
Binary Order Entry (``BOE'') protocol.

[[Page 34965]]

Users may use multiple logical ports. Cboe Market Interface will no 
longer be available following the technology migration, as that is an 
API on the Exchange's current System while BOE is an API available on 
the new technology platform. This functionality is similar to bandwidth 
packets currently available on the Exchange, as described in current 
Rule 6.23B (and therefore the Exchange proposes to delete that rule 
from the current Rulebook). Bandwidth packets restrict the maximum 
number of orders and quotes per second in the same way logical ports 
do, and Users may similarly have multiple logical ports as they may 
have bandwidth packets to accommodate their order and quote entry 
needs. The Exchange believes it is reasonable to not limit bulk ports, 
as the purpose of these ports is to submit bids and offers in bulk (as 
further described below). As discussed below, the Exchange will have 
the authority to otherwise mitigate message traffic as necessary.
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    \11\ The proposed rule change also adds a reference to this 
definition in Rule 1.1 in the shell Rulebook.
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    There are three different types of ports: Physical ports, logical 
ports, and bulk ports. The Exchange notes that a bulk port is a type of 
logical port.
     A ``physical port'' provides a physical connection to the 
System. A physical port may provide access to multiple logical ports.
     A ``logical port'' or ``logical session'' provides Users 
with the ability within the System to accomplish a specific function 
through a connection, such as order entry, data receipt, or access to 
information.
     A ``bulk port'' is a dedicated logical port that provides 
Users with the ability to submit bulk messages, single orders, or 
auction responses, as further discussed below.

Port is the term the Exchange will use to describe the connection a 
User will use to connect to the System following the technology 
migration. Currently, the Exchange refers to System connections as 
logins, but the functionality is generally the same.\12\
---------------------------------------------------------------------------

    \12\ The proposed rule change is substantially the same as BZX 
Options Rule 21.1(l); C2 Rule 6.8(c); and EDGX Options Rule 21.1(j).
---------------------------------------------------------------------------

    The Exchange's new technology platform is currently the trading 
platform for the other Cboe Affiliated Exchanges, and thus has an 
established disaster recovery plan. The proposed rule change moves the 
Exchange's rule provisions regarding disaster recovery from Rule 6.18 
in the current Rulebook to Rule 5.24 in the shell Rulebook.\13\ The 
proposed rule change amends the provisions regarding Trading Permit 
Holders that must connect to the Exchange's backup systems and 
participate in functional and performance testing announced by the 
Exchange, which occurs at least once every 12 months.\14\ These 
requirements are similar to those of Cboe Affiliated Exchanges.\15\ 
Currently, the Exchange identifies Trading Permit Holders that must 
connect to backup systems and participate in testing based on criteria 
such as whether the TPH is an appointed DPM, LMM, or Market-Maker in a 
class and the quality of markets provided by the DPM, LMM, or Market-
Maker, the amount of volume transacted by the market participant in a 
class or on the Exchange in general, operational capacity, trading 
experience, and historical contribution to fair and orderly markets on 
the Exchange. At a minimum, all Market-Makers in option classes 
exclusively listed on the Exchange that stream quotes in those classes 
and all DPMs in multiply listed options classes must connect to the 
backup systems.\16\ Proposed Rule 5.24(b) requires the following TPHs 
to connect to backup systems and participate in testing:
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    \13\ The proposed rule change also deletes current Rule 6.19, 
which is currently reserved.
    \14\ The Exchange currently requires designated Trading Permit 
Holders to participate in backup system testing on an annual basis 
pursuant to current Rules 6.18 and 6.23A(f). The proposed rule 
change deletes current Rule 6.23A(f), as it relates to mandatory 
testing, which is covered by proposed Rule 5.24.
    \15\ See, e.g., BZX Options Rule 2.4; C2 Rule 6.34; and EDGX 
Rule 2.4. The Exchange notes BZX Options and C2 do not currently 
have DPMs or LMMs (BZX has LMMs with respect to equities listed on 
that exchange), and thus the rules of those exchanges do not require 
connectivity by corresponding market participants. Additionally, 
EDGX Options only has DPMs. Additionally, SPX and VIX options only 
trade on Cboe Options, and thus the rules of other exchanges do not 
impose requirements with respect to trading in those classes. The 
Exchange notes the other Cboe Affiliated Exchanges intend to update 
their disaster recovery rules regarding notice to the market 
participants that must connect to the backup systems to conform to 
the proposed rule change.
    \16\ See current Rule 6.18(b)(iv).
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     TPHs that the Exchange has determined contribute a 
meaningful percentage of the Exchange's overall volume.
     TPHs that the Exchange has determined contribute a 
meaningful percentage of the Exchange's executed customer volume in SPX 
and VIX combined.\17\
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    \17\ The Exchange believes this requirement is appropriate since 
SPX and VIX options are exclusively listed on the Exchange, and 
there is significant trading in these options, and this proposed 
requirement will ensure that TPHs will be available to receive and 
submit to the Exchange orders when the Exchange's primary system is 
inoperable.
---------------------------------------------------------------------------

     TPHs that participate as Market-Makers (including LMMs) in 
option classes exclusively listed on the Exchange that submit 
continuous electronic quotes in those classes.
     TPHs that participate as DPMs in multiply listed option 
classes.\18\
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    \18\ Pursuant to proposed Rule 5.24(c), all TPHs may connect to 
the Exchange's backup systems and participate in testing of these 
systems.
---------------------------------------------------------------------------

    These requirements are consistent with the criteria listed in 
current Rule 6.24(b). This proposed rule includes more detail regarding 
which categories of TPHs must connect to the backup systems. Proposed 
Interpretation and Policy .01 states for purposes of determining which 
TPHs contribute a meaningful percentage of the Exchange's overall 
volume and customer volume in SPX and VIX pursuant to proposed 
subparagraphs (b)(1) and (2), respectively, the Exchange measures 
volume executed on the Exchange during a specified calendar quarter 
(the ``measurement quarter''). The Exchange will provide TPHs with 
reasonable advance notice of the applicable meaningful percentage and 
measurement quarter.\19\ The Exchange will individually notify all TPHs 
that are subject to this connection requirement based on the applicable 
meaningful percentage following the completion of the applicable 
measurement quarter. The Exchange will provide these TPHs with 
reasonable advance notice that they must participate in the testing 
described above.\20\
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    \19\ A meaningful percentage may not apply retroactively to any 
measurement quarter completed or in progress.
    \20\ This is consistent the measurement and notice provision in 
Miami International Securities Exchange, Inc. (``MIAX'') Rule 321, 
Interpretation and Policy .01.
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    Proposed Rule 5.24(a) through (c) are consistent with Regulation 
SCI requirements, which apply to certain self-regulatory organizations 
(including the Exchange), alternative trading systems (``ATSs''), plan 
processors, and exempt clearing agencies (collectively, ``SCI 
entities''), and requires these SCI entities to comply with 
requirements with respect to the automated systems central to the 
performance of their regulated activities. The Exchange takes pride in 
the reliability and availability of its systems. The Exchange and the 
Cboe Affiliated Exchanges have put extensive time and resources toward 
planning for system failures and already maintain robust business 
continuity and disaster recovery plans consistent with the proposed 
rule.
    The proposed rule change retains moves paragraphs (c) through (f) 
of current Rule 6.18 to proposed paragraphs (d) through (g) of proposed 
Rule 5.24, as they relate to the

[[Page 34966]]

Exchange's trading floor. To conform to the corresponding rules of Cboe 
Affiliated Exchanges, the proposed rule change deletes the other 
provisions. The proposed rule change also makes nonsubstantive changes 
to some of the disaster recovery provisions, including updating 
paragraph lettering and numbering, making grammatical changes, 
simplifying certain provisions, and incorporating defined terms.
    Proposed Rule 5.25 describes steps the Exchange may take to 
mitigate message traffic, based on the Exchange's traffic with respect 
to target traffic levels and in accordance with the Exchange's overall 
objective of reducing both peak and overall traffic. First, the System 
will not send an outbound message \21\ in a series that has not been 
but is about to be sent if a more current quote message for the same 
series is available for sending, but does not delay the sending of any 
messages (referred to in proposed Rule 5.25 as ``replace on queue''). 
Second, the System will prioritize price update messages over size 
update messages in all series and in conjunction with the replace on 
queue functionality described above. Current Rules contain various 
provisions the Exchange may use on its current technology platform to 
mitigate message traffic, such as current Rule 6.23A(b) (which permits 
the Exchange to limit the number of messages sent by TPHs accessing the 
Exchange electronically in order to protect the integrity of the 
trading system) and (c) (which provides the Exchange may utilize a 
mechanism so that newly received quotations and other changes to the 
Exchange's best bid and offer are not disseminated for a period of up 
to, but not more than one second in order to control the number of 
quotations the Exchange disseminates), and Rule 6.23B (regarding 
bandwidth packets).\22\ The proposed rule change essentially replaces 
these provisions. The Exchange does not have unlimited capacity to 
support unlimited messages, and the technology platform onto which it 
will migrate contains the above functionality, which are reasonable 
measures the Exchange may take to manage message traffic and protect 
the integrity of the System.\23\
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    \21\ This refers to outbound messages being sent to data feeds 
and OPRA.
    \22\ As noted above, the proposed rule change deletes current 
Rule 6.23B. The proposed Rule change also deletes the remainder of 
Rule 6.23A(b), which states the Exchange may impose restrictions on 
the use of a computer connected through an API if necessary to 
ensure the proper performance of the system. The proposed rules do 
not contain a similar provision; however, to the extent the Exchange 
wanted to impose any type of these restrictions in the future, it 
would similar submit a rule change to the Commission.
    \23\ The proposed rule change is substantially similar to BZX 
Options Rule 21.14, C2 Rule 6.35, and EDGX Options Rule 21.14. Note 
the BZX Options and EDGX Options rules also include a provision 
regarding their ability to periodically delist options with an 
average daily volume of less than 100 contracts. Current Exchange 
Rule 5.4, Interpretation and Policy .13 permits the Exchange to 
delist any class immediately if the class is open for trading on 
another national securities exchange, or to not open any additional 
series for trading in a class that is solely open for trading on the 
Exchange. This provision achieves the same purpose as the BZX 
Options and EDGX Options rules, and thus it is unnecessary to add 
that provision to the Exchange's Rules.
---------------------------------------------------------------------------

    The proposed rule moves the rule regarding back-up trading 
arrangements from Rule 6.16 in the current Rulebook to Rule 5.26 in the 
shell Rulebook. The proposed rule change deletes a cross-reference to 
current Rule 8.87.01, which the proposed rule change deletes, and 
instead states the Exchange may establish a lower DPM \24\ 
participation entitlement percentage applicable to trading on a Cboe 
Options' facility on the Back-Up Exchange than the percentage 
applicable under the rules of the Back-Up Exchange, if Cboe Options and 
the Back-Up Exchange agree. This is consistent with the Exchange's 
current authority under the Rules. The proposed rule change makes no 
changes to this rule, except nonubstantive changes, including updating 
paragraph lettering and numbering, making grammatical changes, updating 
cross-references, and incorporating defined terms.
---------------------------------------------------------------------------

    \24\ The proposed rule change also adds the Exchange may do this 
for the LMM participation entitlement percentage, as LMMs and PMM 
serve substantially similar functions.
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Order and Quote Entry and Allocation
    The System currently begins accepting orders in quotes at 4:00 p.m. 
Central Time the previous trading day for the Global Trading Hours 
(``GTH'') trading session and at 6:30 a.m. Central Time for the Regular 
Trading Hours (``RTH'') trading session.\25\ Pursuant to proposed Rule 
5.7, Users can enter orders and quotes into the System, or cancel 
previously entered orders, from 2:00 a.m. Eastern Time until RTH market 
close. While Users will have less time to submit orders and quotes 
prior to the GTH opening, the Exchange believes having one hour to 
submit orders and quotes in All Sessions Classes prior to the GTH 
opening is sufficient given that the Exchange lists fewer classes for 
trading during GTH, and it is the same amount of time they have to 
submit orders and quotes in RTH Only classes prior to the RTH trading 
session.\26\
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    \25\ See current Rule 6.2(a); see also Cboe Options Regulatory 
Circular RG15-103 (July 13, 2015). The Exchange currently begins 
accepting orders and quotes at 7:30 a.m. Eastern Time for the RTH 
trading session, which time is not changing.
    \26\ Pursuant to C2 Options Rule 6.11(a) and EDGX Options Rule 
21.7(a), the Queuing Period for the GTH trading session will 
similarly begin one hour prior to the beginning of that trading 
session on those exchanges. Current Rule 6.2(a) provides the 
Exchange with flexibility regarding when to begin the pre-opening 
period. The Exchange proposes to eliminate this flexibility from the 
Rules, as it does not believe it is necessary any more. If the 
Exchange determines to change the time at which the Queuing Period 
will begin, it will submit a rule filing.
---------------------------------------------------------------------------

    Users may enter orders and quotes during that time, subject to the 
following requirements and conditions:
     Users may transmit to the System multiple orders and 
quotes at a single price level or multiple price levels.
     Each order and quote a User submits to the Exchange must 
contain the minimum information identified in the Exchange's technical 
specifications.
     The System timestamps an order or quote upon receipt, 
which determines the time ranking of the order or quote for purposes of 
processing the order or quote.
     For each System Security,\27\ the System transmits to OPRA 
for display the aggregate size of all orders and quotes in the System 
eligible for display at the best price to buy and sell.
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    \27\ A System Security is a class that currently trades on the 
Exchange. See Rule 1.1 in the shell Rulebook.
---------------------------------------------------------------------------

     After the RTH market close, Users may cancel orders with 
Time-in-Force of good-til-cancelled (``GTC'') or good-til-date 
(``GTD'') that remain on the Book until 4:45 p.m. Eastern Time.\28\
---------------------------------------------------------------------------

    \28\ See proposed Rule 5.7(a)-(e).
---------------------------------------------------------------------------

    The proposed provisions described in the first four bullets above 
are consistent with current functionality, and the proposed rule change 
merely adds this detail to the Rules. The Exchange believes adding 
these provisions to the Rules provides additional transparency for 
market participants. The Exchange adds the provision in the fifth 
bullet above, which provides Users with additional flexibility to 
manage their orders that remain in the Book following the RTH market 
close. Cancelling a GTC or GTD order at 4:30 p.m. has the same effect 
as cancelling that order at 7:30 a.m. the following day--ultimately it 
accommodates the User's goal of cancelling an order prior to it 
potentially executing during the Opening Process the following 
morning.\29\
---------------------------------------------------------------------------

    \29\ This proposed change is also substantively the same as C2 
Rule 6.9; and EDGX Options Rule 21.6(a)-(c) and (f). The proposed 
rule change is also similar to BZX Options Rule 21.6(a)-(c) (this 
rule does not contain the provision regarding when a User may cancel 
a GTC or GTD order; however, the Exchange understands this is 
consistent with BZX Options functionality).

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

[[Page 34967]]

    The proposed rule change also moves the provisions regarding the 
requirement to systematize an order from Rule 6.24 in the current 
Rulebook to Rule 5.7(f) and Interpretations .01 through .06, except the 
proposed rule change deletes current Interpretation and Policy .03. 
That provision describes the Exchange's Telephone and Terminal Order 
Formats Manual, which the Exchange prescribes. This manual no longer 
exists, and any order formats regarding systemization are included in 
the Exchange's technical specifications or otherwise disseminated to 
Trading Permit Holders by Regulatory Circular or Exchange Notice.\30\ 
The proposed rule change makes no other substantive changes to current 
Rule 6.24, and makes certain nonsubstantive changes, such as to reflect 
defined terms, update paragraph lettering and numbering, update cross-
references, and make other grammatical changes.
---------------------------------------------------------------------------

    \30\ See Rule 1.2 in current Rulebook (Rule 1.5 in shell 
Rulebook).
---------------------------------------------------------------------------

    The Exchange currently offers quoting functionality to Market-
Makers, which permits Market-Makers to update their electronic quotes 
in block quantities.\31\ Quotes on the Exchange do not route to other 
exchanges,\32\ and Market-Makers generally enter new quotes at the 
beginning of the trading day based on then-current market 
conditions.\33\ The Exchange proposes to replace quoting functionality 
with bulk message functionality. As noted above, a bulk port is a 
dedicated logical port that provides Users with the ability to submit 
bulk messages, single orders, or auction responses. The proposed rule 
change defines bulk message as a single electronic message a User 
submits to the Exchange in which the User may enter, modify, or cancel 
up to an Exchange-specified number of bids and offers.\34\ A User may 
submit a bulk message through a bulk port as described below. The 
System handles a bulk message bid or offer in the same manner as it 
handles and order or quote, unless the Rules specify otherwise.\35\
---------------------------------------------------------------------------

    \31\ See Rule 1.1 (definition of quote). In other words, a 
Market-Maker may submit a single message to the Exchange, which 
message contains bids and offers in multiple series.
    \32\ See current Rule 6.14B (which describes how the Exchange 
routes orders (specifically intermarket sweep orders) but not quotes 
to other exchanges); see also NYSE Arca, LLC (``Arca'') Rule 6.37-
O(a)(3)(D) (which states quotes do not route).
    \33\ The Exchange understands this to be common practice by 
Market-Makers throughout the industry, and is consistent with Cboe 
Options functionality, which cancels all unexecuted resting Market-
Maker quotes at the close of each trading day. Additionally, it is 
consistent with Market-Makers' obligation to update market 
quotations in response to changed market conditions. See current 
Rule 8.5(a)(4); see also Cboe Options Rule 8.7(b)(iii).
    \34\ Pursuant to Rule 1.5 in the shell Rulebook, the Exchange 
will announce this number via Exchange Notice or publicly available 
technical specifications. The limit on bids and offers per message 
is a reasonable measure for the Exchange to use to manage message 
traffic and activity to protect the integrity of the System.
    \35\ See Rule 1.1 in the shell Rulebook. In other words, a bulk 
message will be treated as an order (or quote if submitted by a 
Market-Maker) pursuant to the Rules, including with respect to 
priority and allocation. The proposed rule change identifies the 
rule provisions pursuant to which bulk messages will be handled in a 
different manner. The proposed rule change also amends the 
definition of quote in Rule 1.1 in the shell Rulebook to provide 
that a quote is a firm bid or offer a Market-Maker submits 
electronically in as an order or bulk message (as well as a firm bid 
or offer a Market-Maker represents in open outcry on the trading 
floor).
---------------------------------------------------------------------------

    Users may submit bulk messages through a bulk port, subject to the 
following:
     A bulk message has a time-in-force of Day; \36\
---------------------------------------------------------------------------

    \36\ The proposed rule change adds to Rule 5.6(a) in the shell 
Rulebook that an order instruction or time-in-force applied to a 
bulk message applies to each bid and offer within that bulk message. 
For example, a Market-Maker cannot designate one bulk message bid 
within a single message as Post Only and designate another bulk 
message bid within the same message as Book Only.
---------------------------------------------------------------------------

     a Market-Maker with an appointment in a class may 
designate a bulk message for that class as Post Only or Book Only, and 
other Users must designate a bulk message for that class as Post Only; 
and
     a User may establish a default match trade prevention 
(``MTP'') modifier of MTP Cancel Newest (``MCN''), MTP Cancel Oldest 
(``MCO''), or MTP Cancel Both (``MCB''),\37\ and a default value of 
attributable or non-attributable, for a bulk port, each of which 
applies to all bulk messages submitted to the Exchange through that 
bulk port.\38\
---------------------------------------------------------------------------

    \37\ See Rule 5.6(c) of the shell Rulebook for definitions of 
MTP modifiers.
    \38\ See proposed Rule 5.5(c)(3)(A).
---------------------------------------------------------------------------

    Users may also submit single orders through a bulk port in the same 
manner as Users may submit orders to the Exchange through any other 
type of port, including designated with any order instruction and any 
time-in-force in proposed Rule 5.30, except a Market-Maker with an 
appointment in a class may designate an order for that class submitted 
through a bulk port only as Post Only or Book Only, and other Users 
must designate an order for that class submitted through a bulk port as 
Post Only.\39\ Users may also submit auction responses (using auction 
response messages) in the same manner as Users may submit auction 
responses to the Exchange through any other type of port.\40\
---------------------------------------------------------------------------

    \39\ See proposed Rule 5.5(c)(3)(B).
    \40\ See proposed Rule 5.5(c)(3)(C).
---------------------------------------------------------------------------

    The proposed rule change restricts orders [sic] and bulk messages 
to Post Only and Book Only \41\ with a time-in-force of Day. As a 
general matter, bulk ports are intended to be limited for the use of 
liquidity provision on the Exchange, particularly by, but not limited 
to, Market-Makers. In turn, the Exchange believes it is unnecessary to 
allow orders entered via bulk ports to be able to last beyond the 
trading day on which they were entered.
---------------------------------------------------------------------------

    \41\ Consistent with the definitions of Post Only and Book Only 
(see Rule 5.6(c) in the shell Rulebook), bulk message bids and 
offers will not route.
---------------------------------------------------------------------------

    Proposed Rule 5.5(c)(3)(A)(i) states that bulk messages have a 
time-in-force of Day. As discussed above, this is consistent with 
current Exchange quoting functionality, which cancels all resting 
quotes at the close of the trading day. This is also consistent with a 
Market-Maker's obligation to update its quotes in response to changed 
market conditions in its appointed classes.\42\ Users will have the 
ability to cancel bulk message bids and offers at any time during the 
trading day, and may apply any other time-in-force designation to an 
order submitted through a bulk port (as further discussed below) or 
other type of port.
---------------------------------------------------------------------------

    \42\ See Rule 8.7(b)(iii).
---------------------------------------------------------------------------

    Unlike current Exchange quoting functionality, which is only 
available to Market-Makers in their appointed classes, the proposed 
bulk messages will be available to all Users. While all Users will be 
able to use bulk messages, the primary purpose of quoting functionality 
and the proposed bulk message functionality is to encourage market-
maker quoting on exchanges. The proposed rule change provides that a 
Market-Maker with an appointment in a class may designate a bulk 
message for that class as ``Post Only'' or ``Book Only.'' This will 
provide Exchange Market-Makers with substantially similar functionality 
that is currently available to them on the Exchange, which permits 
Market-Makers' incoming quotes to execute against resting orders and 
quotes, except against the resting quote of another Market-Maker (see 
discussion below).\43\ The Exchange believes permitting Market-Makers 
to use bulk message to remove liquidity from the Book (if they so 
elect) will keep Exchange Market-Makers on

[[Page 34968]]

an even playing field with market-makers on other exchanges that offer 
quoting functionality. Additionally, Market-Makers are subject to 
various obligations, including obligations to provide two-sided quotes, 
to provide continuous quotes, and to trade at least 75% of its 
contracts each quarter in its appointed classes.\44\ The Exchange 
believes providing Market-Makers with flexibility to use the Post Only 
or Book Only instruction with respect to bulk messages will provide 
Market-Makers with additional tools, to meet their obligations in a 
manner they deem appropriate. The Exchange further believes this may 
encourage liquidity providers to register as Market-Makers.
---------------------------------------------------------------------------

    \43\ Incoming market-maker quotes on some options exchanges may 
execute against interest resting in the book (see, e.g., Arca Rule 
6.37A-O(a)(3)), while on other options exchanges they may not (see, 
e.g., Box Options Exchange, LLC (``BOX'') Rule 8050, IM-8050-3).
    \44\ See current Rule 8.7.
---------------------------------------------------------------------------

    The proposed rule change provides that other Users (i.e., non-
Market-Makers or Market-Makers without an appointment in the class) 
must designate a bulk message for that class as ``Post Only.'' Because 
these Users do not have access to quoting functionality today, the 
proposed rule change will provide these Users with functionality that 
is not available to them today. This will provide Users with 
flexibility avoid incurring certain fees for removing liquidity if 
their intent is to add liquidity to the Book. The Exchange notes that 
Users may apply the Book Only instruction to orders submitted to the 
Exchange through other ports.
    The proposed rule change also permits Users to establish a default 
MTP modifier of MCN, MCO, or MCB that would apply to all bulk messages 
submitted through a bulk port. Cboe Options currently offers a Market-
Maker Trade Prevention Order, which would be cancelled if it would 
trade against a resting quote or order for the same Market-Maker, and 
also cancel the resting order or quote.\45\ This is equivalent to the 
MCBO modifier (except the MCB modifier may be used by all Users rather 
than just Market-Makers). The proposed rule change provides Users with 
the ability to apply the same trade prevention designation that is 
available for quotes on the Exchange to bulk messages (MCB), as well as 
two additional MTP options (MCN and MCO) (the Exchange notes there is 
currently no trade prevention functionality equivalent to MCN or MCO 
available on the Exchange for quotes). Allowing three MTP modifiers for 
bulk messages will provide Users with additional control over the 
circumstances in which their bulk message bids and offers (and resting 
orders (including bulk message bids and offers)) will interact with 
each other. The Exchange does not believe there is demand by Users for 
the MDC and MCS modifiers (which will be available on the Exchange for 
orders) for bulk messages. There is currently no trade prevention 
functionality equivalent to MDC or MCS available on the Exchange today. 
The Exchange notes all Users may continue to apply all MTP modifiers to 
orders submitted through a bulk port or any other type of port.
---------------------------------------------------------------------------

    \45\ See Rule 6.53 in the current Rulebook.
---------------------------------------------------------------------------

    Generally, the System will handle bulk message bids and offers in 
the same manner as it handles orders and quotes with the same order 
instructions and times-in-force that will be applied to bulk messages, 
including prioritizing, displaying, and executing them pursuant to 
proposed Rule 5.32.\46\ Current Rule 6.45(c) provides in the event a 
Market-Maker's disseminated quote locks with another Market-Maker's 
disseminated quote, a counting period begins during which Market-Makers 
whose quotes are locked may eliminate the locked market. If, at the end 
of the counting period, the quotes remain locked, the locked quotes 
automatically execute against each other.\47\ Proposed Rule 5.32(c)(6) 
states the System cancels or rejects a Book Only bulk message bid 
(offer) or order bid (offer) (or unexecuted portion) submitted by a 
Market-Maker with an appointment in the class through a bulk port if it 
would execute against a resting offer (bid) with a Capacity of M. This 
functionality is similar to the current quote-lock functionality. While 
current functionality permits locked quotes to execute against each 
other after a specified amount of time, it also provides Market-Makers 
with an opportunity to update their resting quotes, which would prevent 
execution of an incoming Market-Maker quote against a resting Market-
Maker quote. As proposed, a Market-Maker bulk message or order bid or 
offer will be rejected if it would execute against resting Market-Maker 
interest. The Market-Maker may resubmit its bulk message or order bid 
or offer after being rejected, which would be able to rest in the Book 
if the Market-Maker repriced its resting bid or offer in the interim. 
Additionally, a Market-Maker may interact with resting Market-Maker 
interest by submitting an order to the Exchange through a different 
type of port.
---------------------------------------------------------------------------

    \46\ See proposed Rule 5.32(a).
    \47\ Inverted quotes would be handled in a similar manner 
pursuant to Rule 6.45(c).
---------------------------------------------------------------------------

    Proposed Rule 5.7(a) provides that a User may only enter one bid 
and one offer for a series per EFID per bulk port. The Exchange 
believes this will encourage Users to submit their best bids and offers 
in series, and thus provide displayed liquidity to the market and 
contribute to price discovery. Note firms may have multiple EFIDs and 
multiple bulk ports, and thus will have the ability through separate 
ports or EFIDs to submit additional bids and offers using bulk messages 
in the same series if they choose. This provision is consistent with 
the Exchange's current rule interpretation.\48\
---------------------------------------------------------------------------

    \48\ See Cboe Options Regulatory Circular RG18-008 (March 6, 
2018), which provides that each Market-Maker acronym (which is 
comparable to an EFID), may only have one quote (which is considered 
to be a two-sided quote) in each series at a time.
---------------------------------------------------------------------------

    As noted above, the proposed rule change will permit Users to 
submit single orders to the Exchange through bulk ports. The Exchange 
believes this will encourage Users that may not have quoting systems to 
provide liquidity to the Exchange. Proposed Rule 5.5(c)(3)(B) subjects 
single orders submitted through bulk ports to the same Book Only and 
Post Only restrictions described above for Market-Makers with 
appointments in a class and other Users. This will provide Users with 
additional functionality that is not currently available today, as 
orders may not be submitted through quoting connections on the 
Exchange. Because there are no time-in-force restrictions on orders 
submitted through bulk ports, Users may allow their liquidity to rest 
on the Exchange for multiple trading days, if Users so choose. This 
will also provide Users with additional control over the orders they 
use to provide liquidity to the Exchange through bulk ports. 
Additionally, proposed Rule 5.32(6) imposes the same prohibition on 
Market-Maker orders submitted through bulk ports from removing resting 
Market-Maker interest that applies to bulk messages, as described 
above. The Exchange believes it is appropriate for orders submitted 
through bulk ports be subject to the same restrictions on adding and 
removing liquidity as bulk messages submitted through bulk ports, so 
that orders submitted through bulk ports do not have an advantage over 
bulk messages, and vice versa.
    While liquidity providers are most commonly registered Market-
Makers, other professional traders also provide liquidity to the 
options market, which contributes to price discovery. As a result, the 
Exchange believes it is appropriate to make bulk messages available to 
all Users to encourage them to provide liquidity, which is critical to 
the Exchange's market. Additionally, permitting orders to be submitted

[[Page 34969]]

through bulk ports will provide all liquidity providers with additional 
flexibility with respect to functionality they may use to provide 
liquidity to the Exchange.
    The proposed rule change amends Rule 5.6(b), (c), and (d) in the 
shell Rulebook to provide that eligible order types, order 
instructions, and times-in-force, respectively, are subject to the 
proposed restrictions in proposed Rule 5.5(c) with respect to orders 
and bulk messages submitted through a bulk port, as well as to clarify 
which order types, order instructions, and times-in-force are and are 
not available for bulk messages.\49\
---------------------------------------------------------------------------

    \49\ The Exchange notes a User may not designate a bulk message 
as AON. AON orders are not displayed, and thus do not contribute to 
price discovery. Additionally, the size contingency restricts the 
ability of an AON order to execute, and thus its purpose is not to 
provide liquidity, which contradicts the purpose of bulk messages.
---------------------------------------------------------------------------

    Rule 5.6(a) in the shell Rulebook permits the Exchange to make 
order types, order instructions, and times-in-force listed in that Rule 
available on a system, class, and trading session basis for electronic 
processing.\50\ Proposed Rule 5.30 provides that the Exchange may make 
the following order types, order instructions, and times-in-force \51\ 
available during RTH:
---------------------------------------------------------------------------

    \50\ Rule 6.1A(f) in the current Rulebook also provides that all 
order types that are available for electronic processing during RTH 
and as otherwise determined by the Exchange will be available for 
trading during GTH, except market orders, market-on-close orders 
(which includes limit-on-close orders pursuant to the current 
definition of market-on-close orders in current Rule 6.53), stop 
orders, and GTC orders. The proposed rule change deletes current 
Rule 6.1A(f), as proposed Rule 5.30 covers this information.
    \51\ See Rule 5.6 in the shell Rulebook for definitions of each 
order type, order instruction, and time-in-force.
---------------------------------------------------------------------------

     Order types: Limit order and market order.
     Order instructions: all-or-none (``AON''), attributable, 
book only, all sessions, cancel back, electronic only, MTP modifier, 
minimum quantity, non-attributable, post only, price adjust, qualified 
cross contingent (``QCC''),\52\ reserve order, RTH only, stop (stop-
loss), and stop limit.
---------------------------------------------------------------------------

    \52\ Note it is not specified in the current Rulebooks that QCC 
orders are not available during GTH; however, this is consistent 
with the fact that only index options are eligible for trading 
during GTH.
---------------------------------------------------------------------------

     Times-in-force: Day, fill-or-kill (``FOK''), GTC, GTD, 
immediate-or-cancel (``IOC''), limit-on-close (``LOC''), market-on-
close (``MOC''), and opening rotation (``OPG'').\53\
---------------------------------------------------------------------------

    \53\ With the exception of order instructions and times-in-force 
that are not currently available on the Exchange but will be 
following the technology migration, these are the same order types, 
order instructions, and times-in-force the Exchange may currently 
make available during RTH.
---------------------------------------------------------------------------

    Proposed Rule 5.30 provides that the Exchange may make the 
following order types, order instructions, and times-in-force available 
during GTH: \54\
---------------------------------------------------------------------------

    \54\ The Exchange notes it intends to indicate which order 
types, order instructions, and times-in-force the Exchange may make 
available for complex orders during each trading session in a 
separate rule filing.
---------------------------------------------------------------------------

     Order types: Limit order.
     Order instructions: AON, attributable, book only, all 
sessions, cancel back, electronic only, MTP modifier, minimum quantity, 
non-attributable, post only, price adjust, reserve order, and stop-
limit.
     Times-in-force: Day, FOK, GTC, GTD, IOC, and OPG.\55\
---------------------------------------------------------------------------

    \55\ With the exception of order instructions and times-in-force 
that are not currently available on the Exchange but will be 
following the technology migration, these are the same order types, 
order instructions, and times-in-force the Exchange may currently 
make available during GTH, except for GTC. Because the Exchange will 
use the same Book for GTH and RTH, the Exchange will make available 
the GTC time-in-force for GTH, as an order in an All Sessions class 
with that time-in-force can remain in the Book following the 
conclusion of the GTH trading session and be available for trading 
during the RTH trading session.
---------------------------------------------------------------------------

    The proposed rule change updates the definition of QCC orders in 
Rule 5.6(c) of the Shell Rulebook to codify in the Rules certain 
functionality for QCC orders with more than one option leg (``Complex 
QCC orders''). The current definition does not explicitly state that 
each leg of a complex QCC order must be at least 1,000 standard option 
contracts (or 10,000 mini-option contracts). However, that requirement 
is set forth in Cboe Options Regulatory Circular RG13-102 (July 19, 
2013). Additionally, the current rule does not explicitly state that 
the legs of complex QCC orders must execute at prices at or better than 
the NBBO of the series, at prices better than a priority customer order 
resting in the Simple Book, or that a Complex QCC order may not execute 
at the same price as complex orders resting on the complex order book, 
but the Exchange understands this is consistent with current Cboe 
Options functionality.\56\ The proposed rule change does not change the 
current functionality of QCC orders, but rather adds details regarding 
the functionality to the Rules.
---------------------------------------------------------------------------

    \56\ The proposed definition of a QCC order is virtually 
identical to the definition of a QCC order in EDGX Options Rule 
21.1(d)(10). QCC orders are not currently available on BZX Options 
or C2.
---------------------------------------------------------------------------

    The proposed rule change moves the provisions regarding the 
electronic processing, display, priority, and execution of simple 
orders from the current Rulebook to proposed Rule 5.32 in the shell 
Rulebook.\57\
---------------------------------------------------------------------------

    \57\ The Exchange intends to move the provisions regarding the 
allocation and execution of orders in open outcry in current Rule 
6.45(b) and Interpretation and Policy .06 to the shell Rulebook in a 
separate rule filing.
---------------------------------------------------------------------------

    Current Rule 6.45(a)(i) provides that orders and quotes are 
allocated pursuant to the aggregated pro-rata base allocation 
algorithm, except in classes the Exchange determines to apply the 
price-time or pro-rata base allocation algorithm. Following the 
technology migration, the Exchange will determine to only apply the 
price-time or pro-rata base allocation algorithm, which are currently 
available on the Cboe Affiliated Exchanges.\58\ Therefore, the proposed 
rule change deletes aggregated pro-rata priority from the possible base 
allocation algorithms. Aggregated pro-rata is similar to standard pro-
rata, except broker-dealer orders at the same price are aggregated 
prior to the pro-rata distribution and counted as a single order with 
the aggregated size. While these algorithms allocate orders and quotes 
in a different manner because of this aggregation, and may result in 
different allocations of orders and quotes, the resulting allocations 
are generally similar.
---------------------------------------------------------------------------

    \58\ See BZX Options Rule 21.8(a) (price-time); C2 Options Rule 
6.12(a) (price-time and pro-rata); and EDGX Options Rule 21.8(c) 
(pro-rata).
---------------------------------------------------------------------------

    Proposed Rule 5.32(a) states the Exchange determines which base 
allocation algorithm in proposed subparagraph (1), and whether one or 
more of the priority overlays in subparagraph (2), will apply on a 
class-by-class basis. This is consistent with current Rule 
6.45(a)(i).\59\ Proposed Rule 5.32(a)(1)(A) states resting orders and 
quotes on the Book with the highest bid and lowest offer have priority. 
If there are two or more resting orders or quotes at the same price, 
the System prioritizes them at the same price in the order in which the 
System received them (i.e., time priority).\60\ Proposed Rule 
5.32(a)(1)(B) states resting orders and quotes on the Book with the 
highest bid and lowest offer have priority. If there are two or more 
resting orders at the same price, the System allocates orders 
proportionally according to size (i.e., on a pro-rata basis). The 
System allocates executable quantity to the nearest whole number, with 
fractions \1/2\ or greater rounded up (in size-time priority) and 
fractions less than \1/2\ rounded down. If the executable quantity 
cannot be evenly allocated, the System distributes remaining contracts 
one at a time in

[[Page 34970]]

size-time priority to orders that were rounded down.\61\ This differs 
from the current the pro-rata allocation algorithm, pursuant to which 
the System allocates contracts to the first resting order or quote 
proportionally according to size (based on the number of remaining 
contracts to be allocated and the size of the remaining resting orders 
and quotes), and allocates contracts to the next resting order or 
quote. The System repeats this process until it allocates all contracts 
from the incoming order or quote. The system rounds fractions \1/2\ or 
greater up and fractions less than \1/2\ down. The Exchange believes 
the proposed pro-rata algorithm is a fair, objective, and simple 
systematic process to allocate ``extra'' contracts when more than one 
market participant may be entitled to those extra contracts after 
rounding. It is also consistent with the pro-rata process on Cboe 
Affiliated Exchanges.\62\
---------------------------------------------------------------------------

    \59\ Pursuant to any allocation algorithm and priority overlay, 
the System only allocates to an order or quote up to the number of 
contracts of that order at the execution price. See current Rule 
6.45(a)(i) and proposed Rule 5.32(a).
    \60\ See current Rule 6.45(a)(i)(A). The proposed rule change 
makes no substantive changes to the price-time base allocation 
algorithm.
    \61\ See also C2 Rule 6.12(a)(2)(B); and EDGX Options Rule 
21.8(c).
    \62\ See C2 Rule 6.12(a)(2)(B); and EDGX Options Rule 21.8(c).
---------------------------------------------------------------------------

    Proposed Rule 5.32(a)(2) describes the priority overlays the 
Exchange may apply to a class, which are the same priority overlays the 
Exchange may apply today. The Exchange may apply one or more priority 
overlays to a class in any sequence,\63\ except if the Exchange applies 
any participation entitlement pursuant to proposed subparagraph (B) or 
the small order priority pursuant to proposed subparagraph (C), the 
Exchange must apply the Priority Customer overlay in proposed 
subparagraph (A) ahead of the participation entitlement and small-size 
priority in the priority sequence.\64\ After the System executes an 
incoming order subject to the applicable priority overlays, the System 
executes any remaining orders on the Book (which are non-Priority 
Customer orders if the Exchange applies any of the overlays in proposed 
subparagraphs (A) through (C)) pursuant to the applicable base 
allocation algorithm. This is consistent with current functionality, 
and the proposed rule change is adding this detail to the Rules.\65\
---------------------------------------------------------------------------

    \63\ See current Rule 6.45(a)(ii).
    \64\ See current Rule 6.45(a)(ii)(B)(2) and (a)(ii)(c).
    \65\ See also EDGX Options Rule 21.8(e).
---------------------------------------------------------------------------

    Proposed Rule 5.32(a)(2)(A) describes the Priority Customer 
overlay, pursuant to which a Priority Customer order at the highest bid 
or lowest offer has priority over orders and quotes of all other market 
participants (i.e., non-Priority Customers) at that price. If there are 
two or more Priority Customer orders at the same price, the System 
prioritizes them in the order in which the System received them (i.e., 
time priority).\66\
---------------------------------------------------------------------------

    \66\ See current Rule 6.45(a)(ii)(A). The proposed rule change 
makes no substantive changes to the Priority Customer overlay. See 
also EDGX Options Rule 21.18(d)(1).
---------------------------------------------------------------------------

    Proposed Rule 5.32(a)(2)(B) describes the Designated Primary 
Market-Maker (``DPM''), Lead Market-Maker (``LMM''), and Preferred 
Market-Maker (``PMM'') participations entitlements.\67\ The Exchange 
may apply one or more of the DPM, LMM, and PMM participation 
entitlements (in any sequence) to a class. If the DPM, LMM, or PMM, as 
applicable, has a quote at the highest bid or lowest offer, it will 
receive the greater of (1) the number of contracts it would receive 
pursuant to the applicable base allocation algorithm and (2) 50% of the 
contracts if there is one other non-Priority Customer order or quote, 
40% of the contracts if there are two non-Priority Customer orders or 
quotes, or 30% of the contracts if there are three or more non-Priority 
Customer orders or quotes at that price.\68\
---------------------------------------------------------------------------

    \67\ The provisions describing the current participation 
entitlements are in current Rules 6.45(b)(ii)(B), 8.13(c), 8.15(d), 
and 8.87, which the proposed rule change deletes. The proposed rule 
change also deletes Rule 8.87, Interpretation and Policy .01, as the 
Exchange does not intend to establish a different participation rate 
for newly listed products. Additionally, the proposed rule change 
deletes current Rule 8.87, Interpretations and Policies .02 and .03 
(which contain exceptions to a DPM's continuous electronic quoting 
obligations). The Exchange intends to move these provisions to the 
shell Rulebook in a future filing regarding Market-Maker quoting 
obligations. The proposed rule change also deletes Rule 8.15(c), 
which is currently reserved.
    \68\ See current Rules 8.13(c), 8.15(d)(ii), and 8.87(b)(2). The 
proposed rule change deletes the provision that all broker-dealers 
at the same price will be treated as one broker-dealer order (with 
size consisting of the cumulative number of contracts in those non-
Market-Maker broker-dealer orders). The System will treat each order 
as an individual order. The Exchange believes this will also be a 
fair, objective, and simple systematic process, and may provide 
other market participants with additional opportunities to 
participate in executions where a participation entitlement applies. 
The proposed rule change makes no other substantive changes to the 
participation entitlements. DPMs, LMMs, and PMMs are subject to the 
obligations set forth in current Rules 8.13, 8.15, and 8.17, 
respectively.
---------------------------------------------------------------------------

    Only one participation entitlement may apply to a trade (e.g., if 
the Exchange applies a PMM participation entitlement and DPM 
participation entitlement to a class, with the PMM participation 
entitlement ahead of the DPM participation entitlement in the priority 
sequence, and both a PMM and DPM have a quote at the highest bid or 
lowest offer, the PMM will receive an entitlement on a trade and the 
DPM will not).\69\ The participation entitlement will be based on the 
number of non-Priority Customer contracts remaining after the Priority 
Customer overlay is applied.\70\ If the Exchange appoints both an On-
Floor LMM or DPM and an Off-Floor DPM or LMM to a class, the On-Floor 
LMM or DPM, as applicable, may receive a participation entitlement with 
respect to orders represented in open outcry but not for orders 
executed electronically, and an Off-Floor DPM or LMM, as applicable, 
may receive a participation entitlement with respect to orders executed 
electronically but not orders represented in open outcry.\71\ 
Additionally, the DPM/LMM/PMM participation entitlements do not apply 
during GTH.\72\
---------------------------------------------------------------------------

    \69\ See current Rule 6.45(a)(ii)(B)(3) (proposed Rule 
5.32(a)(2)(B)(i)).
    \70\ See current Rule 6.45(a)(ii)(B)(2) (proposed Rule 
5.32(a)(2)(B)(ii)).
    \71\ See current Rules 8.15(d)(i) and 8.87(b)(iv) (proposed Rule 
5.32(a)(2)(B)(iii)).
    \72\ See current Rule 6.1A(e)(iii)(B) and 8.87(b)(iv) (proposed 
Rule 5.32(a)(2)(B)(iv)). Note the current rule only references the 
LMM participation entitlement. However, to the extent the Exchange 
appoints a DPM or PMM to a class for the GTH trading session, the 
Exchange would similarly not have the applicable participation 
entitlement apply during that trading session at this time.
---------------------------------------------------------------------------

    Proposed Rule 5.32(a)(2)(C) describes the small-size order 
entitlement (also referred to as the 1-5 lot entitlement).\73\ If an 
incoming order or quote has five or fewer contracts (a ``small-size 
order''), and the DPM or LMM, as applicable, in the class has a quote 
at the highest bid or lowest offer, it has priority to execute against 
the entire size of the order or quote that does not execute against any 
Priority Customer orders on the Book at that price.\74\ If a small-size 
order is preferred to a PMM, the PMM has a quote at the BBO, and the 
Exchange has applied the PMM participation entitlement to the class, 
the PMM receives its participation entitlement, and the small-size 
order entitlement does not apply to any execution of that order. If the 
PMM does not have a quote at the BBO, but the DPM or LMM, as applicable 
does, the DPM/LMM participation entitlement will apply to any execution 
of that order.\75\ If a small-size order is preferred to a DPM or LMM, 
and the Exchange has applied the PMM and DPM or LMM participation 
entitlement, the DPM or LMM receives the small-size order entitlement, 
and the participation entitlement does not apply to execution of that 
order.\76\ The small-

[[Page 34971]]

size order does not apply to executions following auctions.\77\ The 
Exchange will continue to review the small-size order entitlement on a 
quarterly basis, and will reduce the size of the small-size orders if 
they comprise more than 40% of the volume executed on the Exchange 
(excluding volume resulting from the execution of orders in the 
Automated Improvement Mechanism (``AIM'')).\78\
---------------------------------------------------------------------------

    \73\ See current Rule 6.45(a)(ii)(c). The proposed rule change 
makes no substantive changes to the small-size order entitlement.
    \74\ See also EDGX Options Rule 21.8(g)(2).
    \75\ See current Rule 6.45(a)(ii)(c)(3) and proposed Rule 
5.32(a)(2)(C)(i); see also EDGX Options Rule 21.8(h)(1)(A).
    \76\ See current Rule 6.45(a)(ii)(c) and proposed Rule 
5.32(a)(2)(C)(ii); see also EDGX Options Rule 21.8(h)(1)(C). While 
this is not specified in the current Rule, the proposed rule change 
is consistent with current functionality and adds this detail to the 
Rules.
    \77\ See current Rule 6.45(a)(ii)(c)(4) and proposed Rule 
5.32(a)(2)(C)(iii).
    \78\ See current Rule 6.45(a)(ii)(c)(1) and proposed Rule 
5.32(a)(2)(C)(iv).
---------------------------------------------------------------------------

    Proposed Rule 5.32(a)(2)(D) describes the Market Turner 
priority.\79\ A ``Market Turner'' is a TPH that first entered an order 
or quote at a better price than the previous highest bid or lowest 
offer, which order is continuously on the Book (and not modified in a 
manner that changes its priority) until it trades. A Market Turner has 
priority to execute against 50% of an incoming order or quote, or 
against the number of contracts remaining after any priority overlays 
ahead of the Market Turner priority are applied).\80\ There may be a 
Market Turner for each price at which a particular order or quote 
trades.\81\ Market-Turner priority remains with an order or quote once 
established (i.e., if the market moves in the same direction as the 
Market Turner's order or quote moved the market, and then moves back to 
the Market Turner's original price, the Market Turner retains priority 
at that original price).\82\ Any unexecuted portion of a Market Turner 
order or quote retains its Market Turner priority at its original 
price.\83\ Market Turner priority may not be established until after 
the market open. Once established, Market Turner priority remains in 
effect for an order or quote until the market close.\84\
---------------------------------------------------------------------------

    \79\ See current Rule 6.45(a)(ii)(D). The proposed rule change 
makes no substantive changes to the Market Turner priority.
    \80\ This is consistent with current functionality, and the 
proposed rule change adds this detail to the Rules. Currently, the 
Exchange may receive priority against an entire incoming order or 
quote or a percentage of that order or quote. See current Rule 
6.45(a)(ii)(D). The Exchange currently sets this percentage to 50%, 
and intends to maintain that percentage following the technology 
migration, so the proposed rule change specifies this in the Rules.
    \81\ See current Rule 6.45(a)(ii)(D) and proposed Rule 
5.32(a)(2)(D)(i).
    \82\ See current Rule 6.45(a)(ii)(D) and proposed Rule 
5.32(a)(2)(D)(ii).
    \83\ See current Rule 6.45(a)(ii)(D) and proposed Rule 
5.32(a)(2)(D)(iii).
    \84\ See current Rule 6.45(a)(ii)(D) and proposed Rule 
5.32(a)(2)(D)(iv).
---------------------------------------------------------------------------

    The proposed rule change moves the following additional priority 
rules to proposed Rule 5.32(a)(3):
     Displayed orders at a given price have priority over 
nondisplayed orders (current Rule 6.45(a)(v)(A)).
     Priority Customer Reserve Quantities at the same price 
execute in time sequence, and non-Priority Customer Reserve Quantities 
execute in accordance with the applicable base allocation algorithm 
(current Rule 6.45(a)(v)(B)).
     An AON order is always last in priority order (including 
after nondisplayed Reserve Quantity). The System allocates AON orders 
at the same price based on the time the System receives them (i.e., in 
time priority), except if the Exchange applies the Priority Customer 
overlay to a class, Priority Customer AON orders have priority over 
non-Priority Customer AON orders (current Rule 6.45(a)(v)(D)).\85\ A 
transaction may occur at the same price as an AON order resting on the 
EDGX Options Book without the AON order participating in the 
transaction. Notwithstanding proposed Rule 5.32(a)(1), a transaction 
may occur at a price lower (higher) than an AON order bid (offer) 
resting on the Book if the size of the resting AON order cannot be 
satisfied (current Rule 6.44, Interpretation and Policy .02).
---------------------------------------------------------------------------

    \85\ The proposed rule change also states that a transaction may 
occur at the same price as an AON order resting on the Book without 
the AON participating in the transaction, and that notwithstanding 
proposed Rule 5.32(a)(1), a transaction may occur at a price lower 
(higher) than an AON order bid (offer) resting on the Book if the 
size of the resting AON order cannot be satisfied. See current Rule 
6.44, Interpretation and Policy .02 (which was deleted from the 
current Rulebook pursuant to SR-CBOE-2019-027).
---------------------------------------------------------------------------

    Other than the deletion of the aggregated pro rata base allocation 
algorithm (and the related aggregation provisions within the 
participation entitlement overlay) and how the System will round and 
allocate contracts when they cannot be divided evenly pursuant to the 
pro-rata base allocation algorithm, the System will allocate orders and 
quotes in the same manner as it does today. As noted above, the 
Exchange believes the proposed pro-rata base allocation (which the 
Exchange will apply to any classes to which the Exchange currently 
applies the aggregated pro-rata base allocation algorithm) is a fair, 
objective, and simple systematic process that is equivalent to the pro-
rata base allocation algorithm available on Cboe Affiliated Exchanges. 
While the aggregated pro-rata and pro-rata algorithms each allocate 
orders and quotes in a different manner because of the aggregation of 
broker-dealer interest at the same price, and may result in different 
allocations of orders and quotes, the resulting allocations are 
generally similar.
    Proposed Rule 5.32(b) describes a new Price Adjust process, which 
is a repricing mechanism offer to Users on BZX Options, C2, and EDGX 
Options.\86\ Orders designated to be subject to the Price Adjust 
process or not designated as Cancel Back (and thus not subject to the 
Price adjust process), will be handled pursuant to proposed Rule 
5.32(b). The Price Adjust process (in addition to the Cancel Back order 
instruction) is an additional way in which the Exchange will ensure 
compliance with the locked and crossed market rules in current Chapter 
VI, Section E (which the proposed rule change moves to Chapter 5, 
Section E in the shell Rulebook). It will also provide Users with 
additional flexibility regarding how they want the System to handle 
their orders.
---------------------------------------------------------------------------

    \86\ The proposed Price Adjust process is substantially the same 
as EDGX Options Rule 21.1(i). Note BZX Options and C2 do not have 
AON orders, and thus the Price Adjust process described in their 
rules do not account for AON orders (and are equivalent to proposed 
paragraph 5.32(b)(1)(A)(i)). See BZX Options Rule 21.1(i); and C2 
Rule 6.12(b).
---------------------------------------------------------------------------

    Pursuant to proposed Rule 5.32(b)(1)(A), a buy (sell) non-AON order 
at the time of entry would lock or cross (1) a Protected Quotation of 
another exchange or the Exchange, the System ranks and displays the 
order at one minimum price variation below (above) the current NBO 
(NBB); or (2) the offer (bid) of a sell (buy) AON order resting on the 
Book at or better than the Exchange's best offer (bid), the System 
ranks the resting AON order one minimum price variation above (below) 
the bid (offer) of the non-AON order. For example, if an AON order to 
buy 5 at 1.10 is resting on the Book (which is the NBB), and a non-AON 
order to sell 1 (which does not satisfy the size of the AON order) at 
1.10 enters the Book, the System reprices the AON order to rest in the 
Book at 1.05 (assuming the minimum price variation for the class is 
$0.05). Proposed Rule 5.32(b)(1)(B) states if a buy (sell) AON order, 
at the time of order entry, would (1) cross a Protected Offer (Bid) of 
another options exchange or a sell (buy) AON order resting on the Book 
at or better than the Exchange's best offer (bid), the System ranks the 
incoming AON order at a price equal to the Protected Offer (Bid) or the 
offer (bid) of the resting AON order, respectively; or (2) lock or 
cross a Protected Offer (Bid) of the Exchange, the System ranks the 
incoming AON order at a price one minimum price variation below (above) 
the Protected Offer (Bid).
    For example, if an AON order to buy 5 at 1.10 is resting on the 
Book (which

[[Page 34972]]

is the NBB), and a non-AON order to sell 1 (which does not satisfy the 
size of the AON order) at 1.10 enters the Book, the System reprices the 
AON order to rest in the Book at 1.05 (assuming the minimum price 
variation for the class is $0.05). As another example, if a non-AON 
order to buy 1 at 1.10 is resting at the top of the Book, and an AON 
order to sell 5 (which cannot satisfied by the resting interest) at 
1.10 enters the Book, the System reprices the AON order to rest in the 
Book at 1.15 (assuming the minimum price variation for the class is 
$0.05). As a final example, if a buy AON order has a bid of 1.05 and 
enters the Book when the NBO is 1.00, the System ranks the AON order at 
a 1.00 bid. Or, if a sell AON order has an offer of 1.10 and enters the 
Book, where there is a resting AON order with a bid of 1.15, the System 
ranks the incoming AON order at a price of 1.15.
    The proposed Price Adjust process handles AON orders different than 
other orders, because AON orders are not displayed on the Book (and 
thus are not Protected Quotations). The Exchange believes the proposed 
process is reasonable, because non-AON orders will rest on the Book at 
prices that would not create a locked or crossed market, and AON orders 
will rest on the Book at executable prices. The proposed process will 
generally re-price the incoming (and thus later arriving order). 
However, the proposed rule change will reprice a resting AON order 
rather than an incoming non-AON order, because AON orders have last 
priority (as discussed above) and are not displayed, and thus should 
not cause the price of an incoming non-AON order to reprice. Because 
AONs are not displayed and have last priority on the Book, the Exchange 
believes it is appropriate to adjust the price of an AON rather than an 
incoming order that would be displayed and protected. The proposed rule 
change is consistent with linkage rules, because AONs are not be part 
of the BBO, and repricing an AON to lock an away exchange price or a 
resting (and nondisplayed) order on the Book will, therefore, not 
result in a displayed locked market.
    The proposed rule change also ensures that a resting AON order will 
not lock the price of a Protected Quotation on the Book. This prevents 
the situation in which an incoming order may execute ahead of the 
resting non-AON order. For example, if a non-AON order to buy 1 at 1.10 
is resting on the Book, and an AON order to sell 5 (and thus is not 
satisfied by the resting interest) at 1.10 enters the Book, if the 
System permitted the AON order to rest at a price of 1.10 (rather than 
reprice the AON to rest at 1.15 as proposed), if subsequently an AON to 
buy 5 at 1.10 was submitted to the Exchange, that AON would execute 
against the resting AON at 1.10, and thus ahead of the non-AON order to 
buy.\87\ The proposed rule change will also reprice an AON order to a 
more aggressive price up to the limit price at which it would be able 
to execute without causing a trade-through as the market changes.\88\
---------------------------------------------------------------------------

    \87\ Priority rules apply to orders resting in the Book, not 
incoming orders. Therefore, with respect to an incoming order, the 
System checks opposite side interest to see if the incoming order 
can execute. It does not check to see if there is same-side interest 
ahead of which it cannot trade, as there would only be marketable 
same-side interest (from a price perspective) that would not 
otherwise execute against opposite side interest if such opposite 
side interest was an AON order.
    \88\ See current Rule 6.81 and proposed Rule 5.66 (which 
prohibits trade-throughs, subject to certain exceptions); and 
current Rule 6.82 and proposed Rule 5.67 (requires the Exchange to 
reasonably avoid displaying quotes that lock a Protected Quotation).
---------------------------------------------------------------------------

    Proposed Rule 5.32(b)(2) states the circumstances that caused the 
System to adjust the price of an order pursuant to proposed 
subparagraph (1) change so that it would not lock or cross, as 
applicable, a Protected Quotation or an AON resting on the Book at a 
price at or better than the BBO, the System gives the Price Adjust 
order a new timestamp. The System ranks or displays the order at a 
price that locks or is one minimum price variation away from the new 
Protected Quotation or AON resting on the Book at or better than the 
BBO, as applicable. All Price Adjust orders that are re-ranked and re-
displayed (if applicable) retain their priority as compared to other 
Price Adjust orders based upon the time the System initially received 
the orders. Following the initial ranking and display (if applicable) 
of a Price Adjust order, an order will only be re-ranked and re-
displayed (if applicable) to the extent it achieves a more aggressive 
price up to its limit price. The System adjusts the ranked and 
displayed price of an order subject to Price Adjust once or multiple 
times depending upon the User's instructions and changes to the 
prevailing NBBO. The System does not display a Price Adjust limit order 
at any price worse than its limit price. This proposed repricing 
mechanism is an additional way in which the Exchange will ensure 
compliance with intermarket linkage rules, while permitting resting 
orders to rest at the most aggressive, executable prices (subject to 
orders' limit prices). It also provides Users with additional 
flexibility regarding how they want the System to handle their 
orders.\89\
---------------------------------------------------------------------------

    \89\ See also EDGX Options Rule 21.1(i).
---------------------------------------------------------------------------

    The Exchange does not have functionality that corresponds to the 
Price Adjust process. However, the Exchange's current Rules do not 
provide any special handling that applies to AON orders that lock or 
cross orders on the Exchange or the quote of an away options market. 
Therefore, pursuant to the Rules, if an AON order is unable to execute 
upon entry into the System (or after routing, if eligible for routing 
pursuant to the Rules), the AON order will rest at its price, even if 
it locks or crosses the Exchange's BBO or the quote of an away options 
market.\90\ The proposed rule change will similarly permit an AON order 
to rest at a price that locks the quote of an away options market, as 
well as an AON order resting on the Book at a price at or better than 
the BBO. An AON order resting at a price that locks or crosses an order 
may only execute in accordance with the priority principles set forth 
in current Rule 6.45 and may not execute at prices that would cause a 
trade-through pursuant to current Rule 6.81. The Exchange believes the 
proposed rule change ultimately creates the same result for a resting 
AON order that would otherwise occur on the Exchange (the proposed rule 
change merely changes the price of an AON order upon entry rather than 
at the time of execution), and in some cases results in price 
improvement for an AON order.
---------------------------------------------------------------------------

    \90\ If the AON order submitted to the Exchange was a market 
order and was unable to execute for any reason, it would cancel in 
accordance with the terms of a market order. This is consistent with 
the handling of any other market order that was not able to execute 
on the Exchange.
---------------------------------------------------------------------------

    For example, as proposed, if the BBO was 1.15 x 1.30 (size of 50), 
and the NBBO was 1.15 x 1.20 (size of 50), and a User submitted an AON 
order for 100 to buy at 1.25, the AON order would rest on the Book with 
a price of 1.20 (which locks the Protected Offer of 1.20). If an order 
to sell 100 at 1.20 was later submitted to the Exchange, it would 
execute against the resting AON order at its ranked price of 1.20. 
Currently on the Exchange, the AON would rest at 1.25. If an order to 
sell 100 at 1.20 was later submitted to the Exchange it would execute 
against the resting AON order at a price of 1.20 (and thus the same 
price at which it would execute on the Exchange), as executions may 
only occur at or within the NBBO.
    Additionally, suppose the BBO was 1.15 x 1.25 (non-AON order with 
size of 50), and was also the NBBO, and a User submitted an AON order 
for 100 to buy at 1.25, the AON order would rest on the Book with a 
price of 1.20 (which is one minimum price variation below the resting 
non-AON order). If an order to

[[Page 34973]]

sell 100 at 1.20 was later submitted to the Exchange, it would execute 
against the resting AON order at a price of 1.20 (which results in 
price improvement for the AON order). Currently on the Exchange, the 
AON would rest at 1.25. If an order to sell 100 at 1.20 was later 
submitted to the Exchange, the AON would receive execution at a price 
of 1.25.\91\ The Exchange believes the proposed rule change is an 
enhancement that will prevent such incoming orders to trade against a 
resting AON at the same price as a resting non-AON order on the 
opposite side of the market that had insufficient size to trade against 
the AON order.
---------------------------------------------------------------------------

    \91\ See current Rule 6.45 (proposed Rule 5.32).
---------------------------------------------------------------------------

    As another example, if the BBO was 1.15 x 1.30 and was also the 
NBBO, and there was a sell AON order for 50 to sell at 1.25 resting on 
the Book, and a User submitted an AON order for 100 to buy at 1.25, the 
incoming AON order would rest on the Book at 1.25 (which locks the 
resting AON order). If an order to sell 100 at 1.25 was later submitted 
to the Exchange, it would execute against the resting AON order to buy 
at 1.25. This is the same result that would occur today on the 
Exchange.
    Proposed Rule 5.32(c) describes how the System handles orders and 
quotes in additional circumstances. Proposed subparagraph (1) states, 
subject to the exceptions contained in proposed Rule 5.66 (current Rule 
6.81), the System does not execute an order at a price that trades 
through a Protected Quotation of another options exchange. The System 
routes an order a User designates as routable in compliance with 
applicable Trade-Through restrictions. The System cancels or rejects 
any order not eligible for routing or the Price Adjust process that is 
entered with a price that locks or crosses a Protected Quotation of 
another options exchange. The Exchange currently does not execute 
orders at trade-through prices, consistent with intermarket linkage 
rules.\92\
---------------------------------------------------------------------------

    \92\ See also C2 Rule 6.12(c)(1); and EDGX options Rule 21.6(e) 
and (f).
---------------------------------------------------------------------------

    The proposed rule change adds proposed Rule 5.32(c)(2), which 
states the System cancels or rejects a buy (sell) stop or stop-limit 
order if the NBB (NBO) at the time the System receives the order is 
equal to or above (below) the stop price. The System accepts a buy 
(sell) stop or stop-limit order if the consolidated last sale price at 
the time the System receives the order is equal to or above (below) the 
stop price. This is consistent with the definitions of stop and stop-
limit orders in Rule 5.7(c) of the shell Rulebook. Because the purpose 
of a stop or stop-limit order is to rest in the Book until a specified 
price is reached, the Exchange believes rejecting a stop or stop-limit 
order entered above or below, as applicable, that price may be 
erroneous, as entry at that time would be inconsistent with the purpose 
of the order.\93\
---------------------------------------------------------------------------

    \93\ See also C2 Rule 6.12(c)(3).
---------------------------------------------------------------------------

    The proposed rule change adds proposed Rule 5.32(c)(3), which 
states the System cancels or rejects a GTC or GTD order in an adjusted 
series.\94\ Pursuant to current Rule 5.7, options contracts are subject 
to adjustments in accordance with the Rules of the Options Clearing 
Corporation (``OCC''). Generally, due to a corporate action by the 
issuer of an underlying, OCC may adjust the price of an option. After a 
corporate action and a subsequent adjustment to the existing options, 
OPRA and OCC identify the series in question with a separate symbol 
consisting of the underlying symbol and a numerical appendage. As a 
standard procedure, exchanges listing options on an underlying security 
that undergoes a corporate action resulting in adjusted series will 
list new standard option series across all expiration months the day 
after the existing series are adjusted. The adjusted series are 
generally actively traded for a short period of time following 
adjustment, but prices of those series may have been impacted by the 
adjustment. As a result, any GTC or GTD orders submitted prior to the 
adjustment may no longer reflect the market price of the adjusted 
series, as the prices of the GTC or GTD orders do not factor in the 
adjustment. The Exchange believes any executions of these GTC or GTD 
orders would be at erroneous prices, and thus believes it is 
appropriate for the System to cancel these orders, which will permit 
Users to resubmit orders in the adjust series at prices that reflect 
the adjustment and to submit orders in the new series.
---------------------------------------------------------------------------

    \94\ This is true on any trading day on which the adjusted 
series continues to trade.
---------------------------------------------------------------------------

    The proposed rule change adds proposed Rule 5.32(c)(4), which 
states the System does not execute an order with an MTP Modifier 
entered into the System against an order entered with an MTP Modifier 
and the same unique identifier, and instead handles them in accordance 
with Rule 5.7(c) in the shell Rulebook. This provision reflects the 
definitions of the MTP Modifiers in Rule 5.7(c) in the shell Rulebook.
    The proposed rule change moves the provisions regarding handling of 
market orders, market-on-close orders, and stop orders when the 
underlying security is in a limit up-limit down state from Rule 6.45(d) 
in the current Rulebook to Rule 5.32(c)(5) in the shell Rulebook. The 
proposed rule change only makes nonsubstantive changes to these 
provisions, including updating cross-references (and adding references 
to the Exchange's electronic crossing mechanisms), making grammatical 
changes, and updating paragraph numbering and lettering.
    The proposed rule change moves the provision regarding the 
decrementation of an order or quote following partial execution from 
Rule 6.45(a)(iii) in the current Rulebook to Rule 5.32(d) in the shell 
Rulebook. The proposed rule change also moves the provision regarding 
the modification of orders and quotes from Rule 6.45(a)(iv) in the 
current Rulebook to Rule 5.32(e) in the shell Rulebook. The proposed 
rule change deletes the provision regarding two-sided quotes, as the 
functionality on Bats technology will not have an equivalent of two-
sided quotes. Through bulk messages (the proposed equivalent to quoting 
technology), Users may submit bids and offers in the same series; 
however, they are individual quotes. The proposed rule change only 
makes nonsubstantive changes to these provisions, including updating 
cross-references (and adding references to the Exchange's electronic 
crossing mechanisms), making grammatical changes, and updating 
paragraph numbering and lettering.
    The proposed rule change deletes current Rule 6.45(v) regarding 
contingency orders. As discussed above, certain provisions regarding 
AONs and Reserve orders were moved to other parts of the rule. The 
Exchange does not believe the introductory language and remaining 
provisions are necessary, as the order instruction definitions in Rule 
5.6 of the shell Rulebook and order handling provisions described above 
contain sufficient detail regarding how the System will handle 
contingency orders. Additionally, the Exchange believes FOK and IOC 
orders relate to the time of execution of orders rather than a 
contingency, and thus these terms are described in Rule 5.6(d) of the 
shell Rulebook.
    The proposed rule change moves the provisions regarding order 
exposure requirements from Rule 6.45, Interpretations and Policies .01 
through .03 in the current Rulebook to Rule 5.8 in the shell Rulebook. 
The proposed rule change only makes nonsubstantive changes to these 
provisions, including updating cross-references (and adding references 
to the Exchange's electronic crossing mechanisms), making grammatical 
changes, and updating paragraph numbering and lettering.

[[Page 34974]]

    The proposed rule change deletes current Rule 6.45, Interpretation 
and Policy .04, as it is redundant of Rule 1.2 in the current Rulebook 
(Rule 1.5 in the shell Rulebook). The proposed rule change moves 
current Interpretation and Policy .05 to proposed Interpretation and 
Policy .01. The proposed rule change deletes current Interpretations 
and Policies .05 and .06, and intends to add those provisions to 
Chapter 5, Section G of the shell Rulebook to keep all Rules related to 
open outcry trading in the same rule.
    The proposed rule change moves the Rules regarding intermarket 
linkage, including order protection and locked and crossed market 
rules, from current Rules 6.80 to 6.82 in the current Rulebook to 
proposed Rules 5.65 to 5.67 in the shell Rulebook. The proposed rule 
change only makes nonsubstantive changes to these provisions, including 
updating cross-references and paragraph numbering and lettering.\95\
---------------------------------------------------------------------------

    \95\ The proposed rule change also deletes current Rules 6.83 
and 6.84, which were reserved or previously deleted.
---------------------------------------------------------------------------

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.\96\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \97\ 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) \98\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \96\ 15 U.S.C. 78f(b).
    \97\ 15 U.S.C. 78f(b)(5).
    \98\ Id.
---------------------------------------------------------------------------

    The proposed rule changes are generally intended to add or align 
certain system functionality offered by the Exchange and the Cboe 
Affiliated Exchanges in order to provide a consistent technology 
offering for the Cboe Affiliated Exchanges. A consistent technology, in 
turn, will simplify the technology implementation, changes, and 
maintenance by Users of the Exchange that are also participants on Cboe 
Affiliated Exchanges. The proposed rule changes would also provide 
Users with access to functionality that is generally available on 
markets other than the Cboe Affiliated Exchanges and may result in the 
efficient execution of such orders and will provide additional 
flexibility as well as increased functionality to the Exchange's System 
and its Users. The proposed rule change does not propose to implement 
new or unique functionality that has not been previously filed with the 
Securities and Exchange Commission (the ``Commission'') or is not 
available on Cboe Affiliated Exchanges. There are a number of rules to 
which the proposed rule change only makes nonsubstantive changes. The 
proposed rule text is generally based on the rules of Cboe Affiliated 
Exchanges and is different only to the extent necessary to conform to 
the Exchange's current Rules, retain intended differences based on the 
Exchange's market, or make other nonsubstantive changes to simplify, 
clarify, eliminate duplicative language, or make rule provisions plain 
English.
    To the extent a proposed rule change is based on an existing Cboe 
Affiliated Exchange rule, the language of the Rules and Cboe Affiliated 
Exchange rules may differ to 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 Exchange 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 Trading Permit Holders that are also participants on the 
Exchange. The proposed rule change will 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 Exchange's rules 
easier to understand.
    The proposed rule change regarding connectivity to the Exchange, 
including the definition of ports, will reduce complexity and increase 
understanding of the Exchange's operations for all Users of the 
Exchange following migration. As the ports are the same as used on the 
Cboe Affiliated Exchanges, Users of the Exchange and these other 
exchanges will have access to similar functionality on all Cboe 
Affiliated Exchanges. As such, the proposed rule change will 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 proposed changes to the Exchange's disaster recovery rules, 
including the requirements regarding which TPHs must connect to the 
Exchange's back-up system and participate in testing, are consistent 
with Regulation SCI requirements applicable to the Exchange and other 
SCI entities, which require these SCI entities to comply with 
requirements with respect to the automated systems central to the 
performance of their regulated activities. The Exchange takes pride in 
the reliability and availability of its systems. The Exchange and the 
Cboe Affiliated Exchanges have put extensive time and resources toward 
planning for system failures and already maintain robust business 
continuity and disaster recovery plans consistent with the proposed 
rule. The proposed rule change is also substantially similar to the 
rules of the Cboe Affiliated Exchanges, as well as another options 
exchange.\99\
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    \99\ See BZX Options Rule 2.4; C2 Rule 6.34; and EDGX Rule 2.4; 
see also MIAX Rule 321, Interpretation and Policy .01.
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    The proposed rule regarding message traffic mitigation replaces the 
current Rules that permit the Exchange to similar mitigate message 
traffic. The Exchange does not have unlimited capacity to support 
unlimited messages, and the Exchange believes the proposed rule change 
provides the Exchange with reasonable measures to take to manage 
message traffic and protect the integrity of the System. The proposed 
rule change is also substantially similar to the rules of the Cboe 
Affiliated Exchanges.\100\
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    \100\ The proposed rule change is substantially similar to BZX 
Options Rule 21.14, C2 Rule 6.35, and EDGX Options Rule 21.14. Note 
the BZX Options and EDGX Options rules also include a provision 
regarding their ability to periodically delist options with an 
average daily volume of less than 100 contracts. Current Exchange 
Rule 5.4, Interpretation and Policy .13 permits the Exchange to 
delist any class immediately if the class is open for trading on 
another national securities exchange, or to not open any additional 
series for trading in a class that is solely open for trading on the 
Exchange. This provision achieves the same purpose as the BZX 
Options and EDGX Options rules, and thus it is unnecessary to add 
that provision to the Exchange's Rules.

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[[Page 34975]]

    The proposed bulk message functionality is substantially similar to 
the Exchange's current quoting functionality. The Exchange believes 
this will provide Market-Makers with a more seamless transition to the 
Exchange's new technology, and will provide Market-Maker with a means 
to contribute liquidity to the Exchange's market continuously during 
the technology migration, which benefits investors. Additionally, the 
proposed rule change provides other liquidity providers with an 
additional method of providing liquidity to the Exchange. This may 
result in the efficient execution of quotes and orders and will provide 
Users with additional flexibility and increased functionality on the 
Exchange's System, which may benefit all investors. The proposed bulk 
message functionality is also substantially similar to functionality 
currently available on Cboe Affiliated Exchanges.\101\
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    \101\ See C2 Rules 1.1, 6.8(c)(3), 6.10, and 6.12(b); and EDGX 
Options Rules 16.1, 21.1(c), (d), (f), (g), (i), and (j)(3). The 
proposed rule change is also similar to BZX Options Rules 
16.1(a)(4), 21.1(c), (d), (f), (g), and (l)(3). However, the BZX 
Options rules differ, because the BZX Options price adjust process 
does not apply to bulk messages (pursuant to the proposed rule 
change and the C2 and EDGX Options rules, Users may determine 
whether their bulk messages will be subject to the Price Adjust 
process), and the BZX Options rule permits all Users to designate a 
bulk message as Post Only or Book Only (pursuant to the proposed 
rule change and the C2 and EDGX Options rules, appointed Market-
Makers may designate bulk messages as Post Only or Book Only, while 
other Users may only designate bulk messages as Post Only). These 
differences are intended to account for the different market models 
of the Exchange and BZX Options.
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    The proposed rule change to update the definition of QCC orders 
merely codifies in the Rules certain functionality for Complex QCC 
orders, but makes no proposes changes to the actual functionality or 
how Complex QCC orders execute. The proposed definition is 
substantially the same as a rule of a Cboe Affiliated Exchange.\102\
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    \102\ See EDGX Options Rule 21.1(d)(10).
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    The proposed price adjust process is consistent with intermarket 
linkage rules, which require the Exchange to reasonably avoid 
displaying quotations that lock or cross any Protected Quotation. This 
proposed functionality will assist Users by displaying orders and 
quotes at permissible, executable prices, while also providing Users 
with flexibility to not have their orders and quotes subject to the 
Price Adjust process if they prefer. This proposed functionality is 
substantially similar to functionality available on Cboe Affiliated 
Exchanges.\103\
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    \103\ See BZX Options Rule 21.1(i); C2 Rule 6.12(b); and EDGX 
Options Rule 21.1(i). The Exchange notes EDGX Options is the only 
other Cboe Affiliated Exchange with AON order functionality, and 
therefore the Price Adjust rules of BZX Options and C2 do not 
account for the presence of AON orders, as the proposed rule change 
and the EDGX Options rule do.
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    As discussed above, other than the deletion of the aggregated pro-
rata base allocation algorithm (and the related aggregation provisions 
within the participation entitlement overlay) and how the System will 
round and allocate contracts when they cannot be divided evenly 
pursuant to the pro-rata base allocation algorithm, the System will 
allocate orders and quotes in the same manner as it does today. While 
the pro-rata algorithm may result in a different allocation of 
contracts than the aggregated pro-rata algorithm because of the 
aggregation of broker-dealer interest at the same price, the resulting 
allocations are generally similar. The Exchange believes the proposed 
pro-rata base allocation (which the Exchange will apply to any classes 
to which the Exchange currently applies the aggregated pro-rata base 
allocation algorithm) is a fair, objective, and simple systematic 
process. Additionally, it is equivalent to the pro-rata base allocation 
algorithm available on Cboe Affiliated Exchanges.\104\
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    \104\ See C2 Options Rule 6.12(a); and EDGX Options Rule 
21.8(c).
---------------------------------------------------------------------------

    The majority of the changes are nonsubstantive changes or provide 
additional detail in the rule regarding current functionality. The 
Exchange believes these changes and transparency will protect 
investors, as they provide more clarity within the rule and more 
harmonized rule language across the rules of the Cboe Affiliated 
Exchanges.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe the proposed rule change will impose any burden on intramarket 
competition. The Exchange believes the proposed rule changes to the 
disaster recovery rules will further contribute to the Exchange's 
continuous operation of a competitive market in the event of a systems 
failure or other disaster event. The Exchange notes that the proposed 
rule change is designed to provide the Exchange with authority to 
require certain market participants to participate in, and provide 
necessary liquidity to, the market to ensure that the Exchange 
functions in a fair and orderly manner in the event of a significant 
systems failure, disaster, or other unusual circumstances.
    The proposed rule changes regarding connectivity to the Exchange 
(including the description of ports and EFIDs) will apply to all Users 
in the same manner, and are similar to the manner in which Users may 
connect to the Exchange today. Additionally, the proposed rule 
regarding message traffic mitigation replaces the current measures the 
Exchange may use to mitigate message traffic. The proposed rule will 
apply to messages of all Users in the same manner.
    The proposed bulk message functionality will be available to all 
Users, and will be voluntary. While only Market-Makers may submit Book 
Only bulk messages (and orders submitted through bulk ports), the 
Exchange believes this is appropriate given the various obligations 
Market-Makers must satisfy under the Rules and the unique and critical 
role Market-Makers play in the options market, as discussed above. The 
Exchange believes providing Market-Makers with flexibility to use the 
Post Only or Book Only instruction with respect to bulk messages (and 
orders submitted through bulk ports) will provide Market-Makers with 
tools to meet their obligations in a manner they deem appropriate, as 
they are currently able to do today using current quoting functionality 
on the Exchange. The Exchange notes all other Users may continue to use 
the Book Only instruction on orders submitted to the Exchange through 
other types of ports. The proposed rule change expands the availability 
of this functionality to all Users (currently, only appointed Market-
Makers may use the Exchange's quoting functionality). The availability 
of bulk message functionality (including the use of the Post Only 
instruction on those bulk messages) will be available for all Users, 
which may encourage Users that may not have quoting systems to provide 
liquidity to the Exchange.
    The proposed Price Adjust process will apply to the orders and 
quotes of all Users in the same manner. Because Users may opt out their 
orders and quotes out of the Price Adjust process by designating them 
as Cancel Back, the Price Adjust process is voluntary, and will provide 
all Users with flexibility with respect to, and additional control 
over, the executions of their orders and quotes on the Exchange. The 
proposed distinction between AON orders and non-AON orders is 
consistent with the fact that AON orders are not displayed

[[Page 34976]]

on the Exchange's Book or disseminated to OPRA.
    The proposed pro-rata base allocation algorithm will apply to the 
orders and quotes of all Users in the same manner in the classes to 
which the Exchange applies that algorithm (subject to the application 
of any priority overlays, which will operate in the same manner as they 
do today).
    The proposed rule change to prevent Market-Maker bulk message 
executions against other resting Market-Maker interest is similar to 
the Exchange's current quote lock functionality, and is intended to 
protect Market-Makers from executions due to technology disparities 
rather than the intention of Market-Makers to trade with one another at 
that price. The Exchange believes this functionality and protection for 
Market-Makers may continue to encourage Market-Makers to quote tighter 
and deeper markets, which will increase liquidity and enhance 
competition.
    The Exchange does not believe the proposed rule change will impose 
any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, because, as 
discussed above, the basis for the majority of the proposed changes to 
the Rules are the rules of the Cboe Affiliated Exchanges, which have 
been previously filed with the Commission as consistent with the Act. 
The proposed substantive rule changes are based on the following rules 
of the Cboe Affiliated Exchanges:
     The proposed changes to the Exchange's disaster recovery 
rule are substantively the same as BZX Rule 2.4; C2 Rule 6.34; and EDGX 
Rule 2.4.\105\
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    \105\ See MIAX Rule 321, Interpretation and Policy .01.
---------------------------------------------------------------------------

     The proposed rules regarding connectivity are 
substantively the same as C2 Rule 6.8.\106\
---------------------------------------------------------------------------

    \106\ See also BZX Options Rules 5.5(a), 11.3, 20.1(a), and 
21.1(k) and (l); and EDGX Options Rules 5.5(a), 11.3, 20.1(a), and 
21.1(j) and (k).
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     The proposed message traffic mitigation rule is 
substantively the same as BZX Options Rule 21.14; C2 Rule 6.35; and 
EDGX Options Rule 21.14.
     The proposed bulk message functionality is substantively 
the same as C2 Rules 1.1, 6.8(c)(3), 6.10, and 6.12(b); and EDGX 
Options Rules 16.1, 21.1(c), (d), (f), (g), (i), and (j)(3).\107\
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    \107\ See also BZX Options Rules 16.1(a)(4), 21.1(c), (d), (f), 
(g), and (l)(3).
---------------------------------------------------------------------------

     The proposed price adjust functionality is substantively 
the same as EDGX Options Rule 21.1(i).\108\
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    \108\ See also BZX Options Rule 21.1(i); and C2 Rule 6.12(b).
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     The proposed changes to the pro-rata allocation algorithm 
are substantively the same as C2 Rule 6.12(a); and EDGX Options Rule 
21.8(c).
     The proposed changes to the QCC rule are substantively the 
same as EDGX Options Rule 21.1(d)(10).
    The Exchange reiterates that the proposed rule change is being 
proposed in the context of the technology integration of the Cboe 
Affiliated Exchanges. Thus, the Exchange believes this proposed rule 
change is necessary to permit fair competition among national 
securities. In addition, the Exchange believes the proposed rule change 
will benefit Exchange participants in that it will provide a consistent 
technology offering, as well as consistent rules, for Users by the Cboe 
Affiliated Exchanges. Following the technology migration, the System 
will apply to all Users and orders and quotes submitted by Users in the 
same manner.

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 \109\ and 
Rule 19b-4(f)(6) \110\ thereunder. At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
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    \109\ 15 U.S.C. 78s(b)(3)(A).
    \110\ 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-CBOE-2019-033 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2019-033. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CBOE-2019-033 and should be submitted on 
or before August 9, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\111\
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    \111\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-15338 Filed 7-18-19; 8:45 am]
 BILLING CODE 8011-01-P

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