Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rules 21.20 and 21.22 in Connection With Stock-Options Orders, 46057-46061 [2019-18873]
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Federal Register / Vol. 84, No. 170 / Tuesday, September 3, 2019 / Notices
Commission takes such action, the
Commission shall 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–
CboeBZX–2019–077 on the subject line.
Paper Comments
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• 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–CboeBZX–2019–077. 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–CboeBZX–2019–077, and
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should be submitted on or before
September 24, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.37
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–18869 Filed 8–30–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86776; File No. SR–
CboeEDGX–2019–053]
Self-Regulatory Organizations; Cboe
EDGX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Amend
Rules 21.20 and 21.22 in Connection
With Stock-Options Orders
August 27, 2019.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on August
22, 2019, Cboe EDGX Exchange, Inc.
(the ‘‘Exchange’’ or ‘‘EDGX’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange. The
Exchange filed the proposed rule change
pursuant to Section 19(b)(3)(A)(iii) of
the Act 3 and Rule 19b–4(f)(6)
thereunder.4 The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe EDGX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGX’’) proposes to
amend Rules 21.20 and 21.22 in
connection with stock-options orders.
The text of the proposed rule change is
provided in Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
options/regulation/rule_filings/edgx/),
at the Exchange’s Office of the
Secretary, and at the Commission’s
Public Reference Room.
37 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(6).
1 15
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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
On April 26, 2019, the Exchange filed
a rule filing, SR–CboeEDGX–2019–028,
which was approved by the Securities
and Exchange Commission (the
‘‘Commission’’) on July 26, 2019, which
permits use of it Automated
Improvement Process (‘‘AIM’’) for
complex orders.5 Specifically, the filing
describes how complex orders may be
submitted to and will be processed in an
AIM Auction (‘‘C–AIM’’ or ‘‘C–AIM
Auction’’). Also, on June 27, 2019, the
Exchange filed SR–CboeEDGX–2019–
039, which adopts stock-option order
functionality on the Exchange.6 The
Exchange notes that it implemented the
proposed changes under SR–
CboeEDGX–2019–039 on August 16,
2019 as part of Feature Pack 9 7 in with
the migration of Cboe Exchange, Inc.
(‘‘Cboe Options’’) technology to the
same trading platform used by the
5 See Securities Exchange Act Release No. 85831
(May 10, 2019), 84 FR 22178 (May 16, 2019) (Notice
of Filing of a Proposed Rule Change To Adopt Rule
21.22 (Complex Automated Improvement
Mechanism)) (SR–CboeEDGX–2019–028); Securities
Exchange Act Release No. 86493 (July 26, 2019)
(Notice of Filing of Amendment No. 1 and Order
Granting Accelerated Approval of a Proposed Rule
Change, as Modified by Amendment No. 1, to
Adopt Rule 21.22 (Complex Automated
Improvement Mechanism)).
6 See Securities Exchange Act Release No. 86353
(July 11, 2019), 84 FR 34230 (July 17, 2019) (Notice
of Filing and Immediate Effectiveness of a Proposed
Rule Change To Add Stock-Option Order
Functionality and Complex Qualified Contingent
Cross (‘‘QCC’’) Order With Stock Functionality, and
To Make Other Changes to its Rules) (SR–
CboeEDGX–2019–039).
7 The Exchange notes that implementation of
these changes as a part of Feature Pack 9 was
recently postponed via Exchange notice from a rollout of August 5, 2019 to August 16, 2019. See
Exchange Notice No. C2019080200 (Updated
August 02, 2019). The changes under SR–
CboeEDGX–2019–028 have been postponed and are
planned to be implemented soon after August 16,
2019.
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Exchange, Cboe C2 Exchange, Inc.
(‘‘C2’’), and Cboe BZX Exchange, Inc.
(‘‘BZX Options’’) in the fourth quarter of
2019. The Exchange now proposes an
additional amendment under the rules
proposed by SR–CboeEDGX–2019–028
and under the rules proposed by SR–
CboeEDGX–2019–039. Specifically, the
Exchange proposes to add an additional
event under Rule 21.22(d)(1) (as
proposed under SR–CboeEDGX–2019–
028) that would cause a C–AIM Auction
to conclude early. The Exchange also
proposes to amend Rule 21.20(f)(2) (as
proposed under SR–CboeEDGX–2019–
039) to provide for how the Exchange
will handle a stock-option order with
one or multiple options legs when
different minimum trading increments
are allowed for the stock and options
legs of such trades. The Exchange
intends to implement these
amendments to the proposed rules
under SR–CboeEDGX–2019–028 and
SR–CboeEDGX–2019–039 to be effective
on August 22, 2019, or as close in time
as possible to the Feature Pack 9
implementation date of August 16,
2019, so that the proposed changes may
seamlessly coincide with the
implementation of the rule changes
under the two rule filings.
Currently, under Rule 21.22(d)(1) C–
AIM Auction concludes at the earliest to
occur of the following times:
(a) The end of the C–AIM Auction
period;
(b) upon receipt by the System of an
unrelated non-Priority Customer
complex order on the same side as the
Agency Order that would post to the
COB at a price better than the stop price;
(c) upon receipt by the System of an
unrelated Priority Customer complex
order on the same side as the Agency
Order that would post to the COB at a
price equal to or better than the stop
price;
(d) upon receipt by the System of an
unrelated non-Priority Customer order
or quote that would post to the Simple
Book and cause the SBBO on the same
side as the Agency Order to be better
than the stop price;
(e) upon receipt by the System of an
unrelated Priority Customer order in
any component of the complex strategy
that would post to the Simple Book and
cause the SBBO on the same side as the
Agency Order to be equal to or better
than the stop price;
(f) upon receipt by the System of a
simple non-Priority Customer order that
would cause the SBBO on the opposite
side of the Agency Order to be better
than the stop price, or a Priority
Customer order that would cause the
SBBO on the opposite side of the
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Agency Order to be equal to or better
than the stop price;
(g) the market close; and
(h) any time the Exchange halts
trading in the complex strategy or any
component of the complex strategy,
provided, however, that in such
instance, the C–AIM Auction concludes
without execution.
The Exchange now proposes to add an
event under Rule 21.22(g) 8 that would
conclude a C–AIM Auction in response
to an incoming order that would cause
the SBBO to be at a price not
permissible under the Limit Up-Limit
Down Plan or Regulation SHO,9 and
would conclude the C–AIM Auction
without execution. This will ensure that
the stock leg of a stock-option order
submitted into a C–AIM Auction does
not execute at a price not permissible
under that plan or regulation. This is
consistent with current C–AIM
functionality to ensure that stock legs do
not trade at prices not permissible under
the Limit Up-Limit Down Plan or
Regulation SHO.10
The Exchange proposes to amend
Rule 21.20(f)(2) to provide for how the
Exchange will handle a stock-option
order with one or multiple options legs
when different minimum trading
increments are allowed for the stock and
options legs of such trades. Pursuant to
SR–CboeEDGX–2019–039, Rule
21.20(f)(1)(B) provides that the option
leg(s) of a stock-option order may be
executed in $0.01 increments, regardless
of the minimum increments otherwise
applicable to the option leg(s), and the
stock leg of a stock-option order may be
executed in any decimal price permitted
in the equity market. In a small subset
of cases, generally as a result of unusual
leg ratios, in calculating the total
notional value a stock leg may result in
a price outside of the NBBO, thus
cannot execute pursuant to Rule
21.20(f)(2)(B).11 In order to allow for the
8 And subsequently re-letter the subparagraphs,
changing current subparagraph (g) to (h), and
current (h) to (i).
9 See Rule 21.20(j)(3).
10 Id.
11 Pursuant to Rule 21.20(f)(2)(B), the System will
only execute the stock leg of a stock-option order
up to a buffer amount outside of the stock leg NBBO
and that the execution price of the buy (sell) stock
leg of a QCC with Stock Order may be any price
(including outside the NBBO for the stock leg).
While the QCT exemption permits a stock leg to
execute outside of the NBBO, the Exchange still
offers price protections to prevent execution too far
away from the NBBO, which it understands is
consistent with market participants’ desire.
Currently on EDGX, the buffer referenced in Rule
21.20(f)(2)(B) is set to zero, so the Exchange does
not permit execution of the stock leg of a stockoption order outside of the NBBO (other than a QCC
with stock order, which will execute immediately
without exposure and thus is unlikely to trade too
far outside of the NBBO). Current rules of other
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strategy to execute, the proposed rule
change would offer functionality that
allows the legs of the stock option order
to trade outside of their expected
notional value by a specified amount
determined by the Exchange.12
Therefore, the System could ensure that
options legs and stock leg were priced
in in line with Rule 21.20, which
includes ensuring that: (1) The option
leg of a stock-option order with one
option leg does not trade at a price
worse than the individual component
price on the Simple Book or at the same
price as a Priority Customer Order on
the Simple Book; (2) that the option
leg(s) of a stock-option order with more
than one option leg trades does not
execute at a net price (i) that would
cause a leg to execute at a price of zero,
(ii) worse than the SBBO or equal to the
SBBO when there is a Priority Customer
Order at the SBBO, except AON
complex orders may only execute at
prices better than the SBBO, (ii) that
would cause a leg to be executed at a
price worse than the individual
component prices on the Simple Book,
(iv) worse than the price that would be
available if the complex order Legged
into the Simple Book, or (v) that would
cause any component of the complex
strategy to be executed at a price ahead
of a Priority Customer Order on the
Simple Book without improving the
BBO of at least one component of the
complex strategy; and (3) that a stock leg
does not execute above (below) the
buffer amount that is above (below) the
NBBO.13 Although this would result in
a negligible difference (i.e. residual
amount) between the expected notional
value of the trade and the actual trade
value, Users generally prefer not to forgo
an execution for their stock-option
strategies when the residual amount is
miniscule compared to the total value of
the trade. The value allowance would
work, for example, as follows:
• Assume the Exchange has
determined a trade value allowance of
$0.50 from the expected trade value.
• Assume also that:
(Equity) NBBO: 10.00 × 11.00
(Option) NBBO: 1.00 × 1.05, BBO: 1.00
× 1.05
SNBBO: 7.70 × 8.32 (i.e., bid = (47 ×
10.00 / 100) + (3 × 1.00) = 7.70, and
exchanges (such as Cboe Options) prevent
execution of the stock component from being too far
away from the NBBO, as do the rules of stock
exchanges.
12 Pursuant to Rule 16.3, the Exchange announces
to Options Members all determinations it makes
pursuant to the Rules via specifications, Notices, or
Regulatory Circulars with appropriate advanced
notice, which will be posted on the Exchange’s
website, or electronic message.
13 See supra note 11.
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offer = (47 × 11.00 / 100) + (3 × 1.05)
= 8.32)
• A User enters a stock-option order
to Buy 47 shares of XYZ stock and Buy
3 June 10 XYZ calls with a net price of
8.30 and a quantity of 3.
• The order matches with
corresponding contra order on the
complex order book.
• The expected trade value based on
the order’s limit price, quantity and a
contract multiplier of 100 is $2,490.00
(i.e., 8.30 × 3 × 100).
• The calculated options match price
is 1.00 based on market prices and the
stock match price is 11.2766 (rounded
four decimals), therefore, outside of the
NBBO.
• The trade value allowance then
calculates the stock match price that
results in a total notional trade value of
$2489.9934:
Options leg notional = $1.05 × 100 × 3
× 3 = $945
Stock Leg notional = $10.9574 × 47 × 3
= $1,544.9934
Notional trade value = $2,489.9934,
which is within the $0.50 trade
value allowance.
The Exchange notes that a valid trade
price within the NBBO for the stock leg
with the smallest residual between the
difference in actual trade value and
expected notional trade value is
$10.9574. Therefore, in this example,
the corresponding options leg match
price would be $1.05 because it is the
options match price that could be paired
with a valid stock trade price that would
also allow for the smallest residual
between the difference in actual trade
value and expected notional trade value.
If, for example, the next allowable
options increment 14 within the BBO
($1.04) was used, the stock leg notional
trade value matched to meet the
notional value closest to the expected
trade value would be $11.0213, and
therefore still outside of the NBBO.15
The Exchange also notes that $1.05 is
consistent with the BBO in this
example.
Under the proposed rule, the System
will not apply the trade value allowance
to orders with a ‘‘C’’ capacity code (for
the account of a Priority Customer).16
14 See Rule 21.20(f)(1)(B), which states that the
option leg(s) of a stock-option order may be
executed in $0.01 increments.
15 The notional trade value would be: ($1.04 × 100
× 3 × 3) + ($11.0213 × 47 × 3) = $2,490.0033.
16 See Rule 16.1, which states that a Priority
Customer means any person or entity that is not a
broker or dealer in securities or a Professional. See
also Securities Exchange Act Release No. 86415
(July 19, 2019), 84 FR 35905 (July 25, 2019) (Notice
of Filing and Immediate Effectiveness of a Proposed
Rule Change Relating To Update Rule 16.1 To
Include the Definition of Capacity, as well as
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This limitation is intended to function
as an additional protection for
customers who may not have the same
levels of trading sophistication or
technological and informational
advantages as that of Professionals or
broker-dealers. Therefore, customers
may not have measures in place to
assume any level of risk that may be
associated with trading outside of the
expected trade value (which risk the
Exchange believes is de minimis given
that the Exchange will impose a
reasonable cap, as described below, on
the amount by which the actual trade
value may differ from the expected trade
level). As a result, the Exchange believes
that not applying the trade value
allowance to customer orders will
further protect customers from assuming
this potential risk for which they may
not have calculated.
Overall, this proposed functionality is
a helpful feature which will allow Users
to receive an expeditious execution, and
trade the stock and options components
of a stock-option strategy in a moving
market without introducing legging risk.
Without this functionality members
would be forced to resubmit their orders
and potentially receive a much worse
price or miss an execution. The
Exchange will announce to all market
participants the determined trade value
allowance amount pursuant to Rule 1.5.
The Exchange would determine an
allowance amount that would
reasonably account for the average
differences in notional trade values as
well as the cost benefit to market
participants between the differences in
actual trade value versus expected
notional trade value and the imposition
of resubmitting their orders and
potentially receiving a much worse
price or missing an execution.17 The
Exchange notes that, if, however, a User
determines that the trade value
allowance is more attractive or favorable
on another venue, Users are free to
execute on other such venues. The
proposed Exchange determination of a
value allowance outside of the expected
notional value is currently in place on
other exchanges.18
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
Amend Its Fee Schedule To Reflect This Update)
(SR–CboeEDGX–2019–046).
17 The Exchange expects this value to be initially
set at $0.50 as represented in the example above.
18 See Nasdaq ISE Rules, Supplementary Material
.03 to Options 3, Section 14; and Nasdaq MRX
Rules, Supplementary Material .03 to Options 3,
Section 14.
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46059
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.19 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 20 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) 21 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the proposed additional
event that will conclude a C–AIM
Auction is reasonable and promotes a
fair and orderly market and national
market system, because it will ensure
that executions at the conclusion of a C–
AIM Auction occur at permissible
prices, specifically, that the stock leg of
a stock-option order submitted into a C–
AIM Auction does not execute at a price
not permissible under the Limit UpLimit Down Plan or Regulation SHO.
Moreover, the Exchanges notes that this
is consistent with current C–AIM
functionality to ensure that stock legs do
not trade at prices not permissible under
the Limit Up-Limit Down Plan or
Regulation SHO, therefore, the
Exchange believes it is appropriate to
conclude a C–AIM Auction if the
proposed circumstance occurs.22 The
proposed rule change will also benefit
investors by providing additional clarity
regarding what will cause C–AIM
Auction to conclude.
The proposed Exchange
determination to set an allowable value
outside of the expected notional trade
value for the legs of a stock-option order
removes impediments to and perfects
the mechanism of a free and open
market and a national market system
because it provides Users with
functionality that allows a User’s stockoption strategies to trade outside of their
specified net prices when the executable
stock match price results in a small
difference between the expected
notional value of the trade and the
19 15
20 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
21 Id.
22 See
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actual trade value. Users generally
prefer not to forgo an execution for their
stock-option strategies when this occurs,
as the residual amount is miniscule
compared to the value of the trade. As
a result of the proposed rule, Users will
be able to receive an expeditious
execution, and trade the stock and
options components of a stock-option
strategy in a moving market without
introducing legging risk, instead of
resubmitting their orders and
potentially receiving a much worse
price or missing an execution. In
addition to this, the Exchange also
believes that not permitting the trade
value allowance to apply to customer
orders will remove impediments to and
perfect the mechanism of a free and
open market and national market
system, and, in general protect
investors, in that it prevents customers
from assuming potential risk (which the
Exchange believes is de minimis given
that the Exchange will impose a
reasonable variance, as reiterated
below). The Exchange believes the
proposed rule will protect customers
because customers may not have the
same levels of trading sophistication or
technological and informational
advantages as that of Professionals or
broker-dealers and, thus, may not have
the measures in place to assume any
level of risk that may be associated with
trading outside of the expected trade
value.
As stated above, the proposed
Exchange determination of a value
allowance outside of the expected
notional value is currently in place on
other exchanges.23 The Exchange
believes that the differences between the
proposed rule and the rules of other
exchanges will remove impediments to
and perfect the mechanism of a free and
open market and national market
system, and, in general, protect
investors. The other exchanges’ rules
allow for a notional variance based on
a percentage, while the proposed rule
will allow for a specific dollar amount
which the exchange believes is more
straightforward and less confusing for
investors than the calculation of a
percentage. The other exchanges’ rules
allow for Member determination or a
default to Exchange determination of
the notional variance, while the
proposed rule will allow only for
Exchange determination, which the
Exchange believes will also simplify the
implementation of this functionality
and mitigate any potential investor
confusion by setting just one Exchangedetermined notional variance. The other
exchanges rules also do not differentiate
23 See
supra note 17.
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between the trade value application to
customer and non-customer orders,
however, as described herein this filing,
the Exchange believes this implements
an additional protection for customer
orders. Finally, unlike other exchanges’
rules, the proposed rule does not
provide for a User opt-out function.
Because the difference between the
expected notional value of the trade and
the actual trade value is
inconsequential, especially as compared
to the overall benefit to investors of an
expeditious execution, this proposed
difference will not have any significant
impact on the Exchange’s participants
and, instead, will benefit participants
overall. As stated, the Exchange would
determine an allowance amount that
would reasonably account for the
average differences in notional trade
values as well as the cost benefit to
market participants between the
differences in actual trade value versus
expected notional trade value and the
imposition of resubmitting their orders
and potentially receiving a much worse
price or missing an execution. The
Exchange notes that, if, however, a User
determines that the trade value
allowance is more attractive or favorable
on another venue, Users are free to
execute on other such venues.
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 to add an additional event
that would conclude a C–AIM Auction
will impose any burden on intramarket
competition, as this event, if it is the
earliest to occur of the list of events that
would conclude a C–AIM Auction, will
conclude a C–AIM Auction in the
manner which already occurs for the
other events currently listed under the
rule, and a manner which is consistent
with current C–AIM functionality that
ensures stock legs do not trade at prices
not permissible under the Limit UpLimit Down Plan or Regulation SHO.
The subsequent conclusion of a C–AIM
Auction applies in the same manner to
all Users. The Exchange does not
believe the proposed change to allow
option legs of a stock-option strategy to
trade outside of their expected notional
value by a specified amount determined
by the Exchange and communicated to
Members via specifications and/or
Regulatory Circular will impose any
burden on intramarket competition
because the amount will apply to all
User’s non-customer stock-option
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strategies equally. As described above,
the Exchange does not believe that
excluding customer orders from the
trade value allowance functionality
would impose any significant burden on
completion as customers generally do
not have the same levels of trading
sophistication or technological and
informational advantages as that of
Professionals or broker-dealers in order
to take on any level of risk associated
with trading outside the expected trade
value. Rather, the proposed rule benefits
customers by ensuring that customers
will not assume potential risk for which
they have not calculated.
The Exchange does not believe the
proposed rule change to add an
additional event that would conclude a
C–AIM Auction will impose any burden
on intermarket competition because the
proposed change is designed as a
protection intended to ensure that the
stock leg of a stock-option order
submitted into a C–AIM Auction does
not execute at a price not permissible
under the Limit Up-Limit Down Plan or
Regulation SHO. As stated, current C–
AIM functionality already exists which
ensures stock legs do not trade at prices
not permissible under this plan or
regulation. The Exchange does not
believe the proposed rule change to
allow option legs of a stock-option
strategy to trade outside of their
expected notional value by a specified
amount determined by the Exchange
and communicated to Members via
specifications and/or Regulatory
Circular will impose any burden on
intermarket competition because it is
substantially similar to other options
exchanges’ rules, previously filed with
the Commission.24
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, the
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
24 See
E:\FR\FM\03SEN1.SGM
supra note 17.
03SEN1
Federal Register / Vol. 84, No. 170 / Tuesday, September 3, 2019 / Notices
of the Act 25 and Rule 19b–4(f)(6)
thereunder.26
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 27 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 28
permits the Commission to designate a
shorter time if such action is consistent
with the protection of investors and the
public interest. The Exchange has asked
the Commission to waive the 30-day
operative delay so that the proposal may
become operative immediately upon
filing. The Exchange notes that waiver
of the operative delay would allow it to
implement the proposal immediately
and as close in time as possible to the
implementation date of other rule
changes regarding stock-option orders.29
The Commission believes that waiving
the 30-day operative delay is consistent
with the protection of investors and the
public interest because the proposed
rule change is designed to benefit
investors by allowing stock-option
strategies to trade outside of their
specified net price when the executable
match price results in a small difference
between the expected notional value of
the trade and the actual trade value,
instead of forgoing an execution for
their stock-option strategies when this
occurs. The Commission also notes that
the proposed rule change is consistent
with the practices of other options
exchanges, which provide for similar
notional variance for legs in a stockoption strategy.30 Accordingly, the
Commission hereby waives the
operative delay and designates the
proposal operative upon filing.31
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
25 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change, along with a brief
description and the text of the proposed rule
change, at least five business days prior to the date
of filing of the proposed rule change, or such
shorter time as designated by the Commission. The
Exchange has satisfied this requirement.
27 17 CFR 240.19b–4(f)(6).
28 17 CFR 240.19b–4(f)(6)(iii).
29 See supra note 7.
30 See supra note 18.
31 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
khammond on DSKBBV9HB2PROD with NOTICES
26 17
VerDate Sep<11>2014
16:24 Aug 30, 2019
Jkt 247001
Commission shall 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–2019–053 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–2019–053. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CboeEDGX–2019–053 and
should be submitted on or before
September 24, 2019.
PO 00000
Frm 00118
Fmt 4703
Sfmt 4703
46061
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.32
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–18873 Filed 8–30–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release Nos. 33–10676; 34–86785; File No.
265–28]
Investor Advisory Committee Meeting
Securities and Exchange
Commission.
ACTION: Notice of meeting of Securities
and Exchange Commission Dodd-Frank
Investor Advisory Committee.
AGENCY:
The Securities and Exchange
Commission Investor Advisory
Committee, established pursuant to
Section 911 of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act of 2010, is providing notice that it
will hold a public meeting. The public
is invited to submit written statements
to the Committee.
DATES: The meeting will be held on
Thursday, September 19, 2019 from 9:30
a.m. until 3:15 p.m. (ET). Written
statements should be received on or
before September 19, 2019.
ADDRESSES: The meeting will be held in
Multi-Purpose Room LL–006 at the
Commission’s headquarters, 100 F
Street NE, Washington, DC 20549. The
meeting will be webcast on the
Commission’s website at www.sec.gov.
Written statements may be submitted by
any of the following methods:
SUMMARY:
Electronic Statements
D Use the Commission’s internet
submission form (https://www.sec.gov/
rules/other.shtml); or
D Send an email message to rulescomments@sec.gov. Please include File
No. 265–28 on the subject line; or
Paper Statements
D Send paper statements to Vanessa
A. Countryman, Secretary, Securities
and Exchange Commission, 100 F Street
NE, Washington, DC 20549–1090.
All submissions should refer to File No.
265–28. This file number should be
included on the subject line if email is
used. To help us process and review
your statement more efficiently, please
use only one method.
Statements also will be available for
website viewing and printing in the
Commission’s Public Reference Room,
32 17
E:\FR\FM\03SEN1.SGM
CFR 200.30–3(a)(12).
03SEN1
]]>Agencies
[Federal Register Volume 84, Number 170 (Tuesday, September 3, 2019)]
[Notices]
[Pages 46057-46061]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18873]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86776; File No. SR-CboeEDGX-2019-053]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend Rules 21.20 and 21.22 in Connection With Stock-Options Orders
August 27, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 22, 2019, Cboe EDGX Exchange, Inc. (the ``Exchange'' or
``EDGX'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The Exchange
filed the proposed rule change pursuant to Section 19(b)(3)(A)(iii) of
the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe EDGX Exchange, Inc. (the ``Exchange'' or ``EDGX'') proposes to
amend Rules 21.20 and 21.22 in connection with stock-options orders.
The text of the proposed rule change is provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (https://markets.cboe.com/us/options/regulation/rule_filings/edgx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
On April 26, 2019, the Exchange filed a rule filing, SR-CboeEDGX-
2019-028, which was approved by the Securities and Exchange Commission
(the ``Commission'') on July 26, 2019, which permits use of it
Automated Improvement Process (``AIM'') for complex orders.\5\
Specifically, the filing describes how complex orders may be submitted
to and will be processed in an AIM Auction (``C-AIM'' or ``C-AIM
Auction''). Also, on June 27, 2019, the Exchange filed SR-CboeEDGX-
2019-039, which adopts stock-option order functionality on the
Exchange.\6\ The Exchange notes that it implemented the proposed
changes under SR-CboeEDGX-2019-039 on August 16, 2019 as part of
Feature Pack 9 \7\ in with the migration of Cboe Exchange, Inc. (``Cboe
Options'') technology to the same trading platform used by the
[[Page 46058]]
Exchange, Cboe C2 Exchange, Inc. (``C2''), and Cboe BZX Exchange, Inc.
(``BZX Options'') in the fourth quarter of 2019. The Exchange now
proposes an additional amendment under the rules proposed by SR-
CboeEDGX-2019-028 and under the rules proposed by SR-CboeEDGX-2019-039.
Specifically, the Exchange proposes to add an additional event under
Rule 21.22(d)(1) (as proposed under SR-CboeEDGX-2019-028) that would
cause a C-AIM Auction to conclude early. The Exchange also proposes to
amend Rule 21.20(f)(2) (as proposed under SR-CboeEDGX-2019-039) to
provide for how the Exchange will handle a stock-option order with one
or multiple options legs when different minimum trading increments are
allowed for the stock and options legs of such trades. The Exchange
intends to implement these amendments to the proposed rules under SR-
CboeEDGX-2019-028 and SR-CboeEDGX-2019-039 to be effective on August
22, 2019, or as close in time as possible to the Feature Pack 9
implementation date of August 16, 2019, so that the proposed changes
may seamlessly coincide with the implementation of the rule changes
under the two rule filings.
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 85831 (May 10,
2019), 84 FR 22178 (May 16, 2019) (Notice of Filing of a Proposed
Rule Change To Adopt Rule 21.22 (Complex Automated Improvement
Mechanism)) (SR-CboeEDGX-2019-028); Securities Exchange Act Release
No. 86493 (July 26, 2019) (Notice of Filing of Amendment No. 1 and
Order Granting Accelerated Approval of a Proposed Rule Change, as
Modified by Amendment No. 1, to Adopt Rule 21.22 (Complex Automated
Improvement Mechanism)).
\6\ See Securities Exchange Act Release No. 86353 (July 11,
2019), 84 FR 34230 (July 17, 2019) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Add Stock-Option Order
Functionality and Complex Qualified Contingent Cross (``QCC'') Order
With Stock Functionality, and To Make Other Changes to its Rules)
(SR-CboeEDGX-2019-039).
\7\ The Exchange notes that implementation of these changes as a
part of Feature Pack 9 was recently postponed via Exchange notice
from a roll-out of August 5, 2019 to August 16, 2019. See Exchange
Notice No. C2019080200 (Updated August 02, 2019). The changes under
SR-CboeEDGX-2019-028 have been postponed and are planned to be
implemented soon after August 16, 2019.
---------------------------------------------------------------------------
Currently, under Rule 21.22(d)(1) C-AIM Auction concludes at the
earliest to occur of the following times:
(a) The end of the C-AIM Auction period;
(b) upon receipt by the System of an unrelated non-Priority
Customer complex order on the same side as the Agency Order that would
post to the COB at a price better than the stop price;
(c) upon receipt by the System of an unrelated Priority Customer
complex order on the same side as the Agency Order that would post to
the COB at a price equal to or better than the stop price;
(d) upon receipt by the System of an unrelated non-Priority
Customer order or quote that would post to the Simple Book and cause
the SBBO on the same side as the Agency Order to be better than the
stop price;
(e) upon receipt by the System of an unrelated Priority Customer
order in any component of the complex strategy that would post to the
Simple Book and cause the SBBO on the same side as the Agency Order to
be equal to or better than the stop price;
(f) upon receipt by the System of a simple non-Priority Customer
order that would cause the SBBO on the opposite side of the Agency
Order to be better than the stop price, or a Priority Customer order
that would cause the SBBO on the opposite side of the Agency Order to
be equal to or better than the stop price;
(g) the market close; and
(h) any time the Exchange halts trading in the complex strategy or
any component of the complex strategy, provided, however, that in such
instance, the C-AIM Auction concludes without execution.
The Exchange now proposes to add an event under Rule 21.22(g) \8\
that would conclude a C-AIM Auction in response to an incoming order
that would cause the SBBO to be at a price not permissible under the
Limit Up-Limit Down Plan or Regulation SHO,\9\ and would conclude the
C-AIM Auction without execution. This will ensure that the stock leg of
a stock-option order submitted into a C-AIM Auction does not execute at
a price not permissible under that plan or regulation. This is
consistent with current C-AIM functionality to ensure that stock legs
do not trade at prices not permissible under the Limit Up-Limit Down
Plan or Regulation SHO.\10\
---------------------------------------------------------------------------
\8\ And subsequently re-letter the subparagraphs, changing
current subparagraph (g) to (h), and current (h) to (i).
\9\ See Rule 21.20(j)(3).
\10\ Id.
---------------------------------------------------------------------------
The Exchange proposes to amend Rule 21.20(f)(2) to provide for how
the Exchange will handle a stock-option order with one or multiple
options legs when different minimum trading increments are allowed for
the stock and options legs of such trades. Pursuant to SR-CboeEDGX-
2019-039, Rule 21.20(f)(1)(B) provides that the option leg(s) of a
stock-option order may be executed in $0.01 increments, regardless of
the minimum increments otherwise applicable to the option leg(s), and
the stock leg of a stock-option order may be executed in any decimal
price permitted in the equity market. In a small subset of cases,
generally as a result of unusual leg ratios, in calculating the total
notional value a stock leg may result in a price outside of the NBBO,
thus cannot execute pursuant to Rule 21.20(f)(2)(B).\11\ In order to
allow for the strategy to execute, the proposed rule change would offer
functionality that allows the legs of the stock option order to trade
outside of their expected notional value by a specified amount
determined by the Exchange.\12\ Therefore, the System could ensure that
options legs and stock leg were priced in in line with Rule 21.20,
which includes ensuring that: (1) The option leg of a stock-option
order with one option leg does not trade at a price worse than the
individual component price on the Simple Book or at the same price as a
Priority Customer Order on the Simple Book; (2) that the option leg(s)
of a stock-option order with more than one option leg trades does not
execute at a net price (i) that would cause a leg to execute at a price
of zero, (ii) worse than the SBBO or equal to the SBBO when there is a
Priority Customer Order at the SBBO, except AON complex orders may only
execute at prices better than the SBBO, (ii) that would cause a leg to
be executed at a price worse than the individual component prices on
the Simple Book, (iv) worse than the price that would be available if
the complex order Legged into the Simple Book, or (v) that would cause
any component of the complex strategy to be executed at a price ahead
of a Priority Customer Order on the Simple Book without improving the
BBO of at least one component of the complex strategy; and (3) that a
stock leg does not execute above (below) the buffer amount that is
above (below) the NBBO.\13\ Although this would result in a negligible
difference (i.e. residual amount) between the expected notional value
of the trade and the actual trade value, Users generally prefer not to
forgo an execution for their stock-option strategies when the residual
amount is miniscule compared to the total value of the trade. The value
allowance would work, for example, as follows:
---------------------------------------------------------------------------
\11\ Pursuant to Rule 21.20(f)(2)(B), the System will only
execute the stock leg of a stock-option order up to a buffer amount
outside of the stock leg NBBO and that the execution price of the
buy (sell) stock leg of a QCC with Stock Order may be any price
(including outside the NBBO for the stock leg). While the QCT
exemption permits a stock leg to execute outside of the NBBO, the
Exchange still offers price protections to prevent execution too far
away from the NBBO, which it understands is consistent with market
participants' desire. Currently on EDGX, the buffer referenced in
Rule 21.20(f)(2)(B) is set to zero, so the Exchange does not permit
execution of the stock leg of a stock-option order outside of the
NBBO (other than a QCC with stock order, which will execute
immediately without exposure and thus is unlikely to trade too far
outside of the NBBO). Current rules of other exchanges (such as Cboe
Options) prevent execution of the stock component from being too far
away from the NBBO, as do the rules of stock exchanges.
\12\ Pursuant to Rule 16.3, the Exchange announces to Options
Members all determinations it makes pursuant to the Rules via
specifications, Notices, or Regulatory Circulars with appropriate
advanced notice, which will be posted on the Exchange's website, or
electronic message.
\13\ See supra note 11.
---------------------------------------------------------------------------
Assume the Exchange has determined a trade value allowance
of $0.50 from the expected trade value.
Assume also that:
(Equity) NBBO: 10.00 x 11.00
(Option) NBBO: 1.00 x 1.05, BBO: 1.00 x 1.05
SNBBO: 7.70 x 8.32 (i.e., bid = (47 x 10.00 / 100) + (3 x 1.00) = 7.70,
and
[[Page 46059]]
offer = (47 x 11.00 / 100) + (3 x 1.05) = 8.32)
A User enters a stock-option order to Buy 47 shares of XYZ
stock and Buy 3 June 10 XYZ calls with a net price of 8.30 and a
quantity of 3.
The order matches with corresponding contra order on the
complex order book.
The expected trade value based on the order's limit price,
quantity and a contract multiplier of 100 is $2,490.00 (i.e., 8.30 x 3
x 100).
The calculated options match price is 1.00 based on market
prices and the stock match price is 11.2766 (rounded four decimals),
therefore, outside of the NBBO.
The trade value allowance then calculates the stock match
price that results in a total notional trade value of $2489.9934:
Options leg notional = $1.05 x 100 x 3 x 3 = $945
Stock Leg notional = $10.9574 x 47 x 3 = $1,544.9934
Notional trade value = $2,489.9934, which is within the $0.50 trade
value allowance.
The Exchange notes that a valid trade price within the NBBO for the
stock leg with the smallest residual between the difference in actual
trade value and expected notional trade value is $10.9574. Therefore,
in this example, the corresponding options leg match price would be
$1.05 because it is the options match price that could be paired with a
valid stock trade price that would also allow for the smallest residual
between the difference in actual trade value and expected notional
trade value. If, for example, the next allowable options increment \14\
within the BBO ($1.04) was used, the stock leg notional trade value
matched to meet the notional value closest to the expected trade value
would be $11.0213, and therefore still outside of the NBBO.\15\ The
Exchange also notes that $1.05 is consistent with the BBO in this
example.
---------------------------------------------------------------------------
\14\ See Rule 21.20(f)(1)(B), which states that the option
leg(s) of a stock-option order may be executed in $0.01 increments.
\15\ The notional trade value would be: ($1.04 x 100 x 3 x 3) +
($11.0213 x 47 x 3) = $2,490.0033.
---------------------------------------------------------------------------
Under the proposed rule, the System will not apply the trade value
allowance to orders with a ``C'' capacity code (for the account of a
Priority Customer).\16\ This limitation is intended to function as an
additional protection for customers who may not have the same levels of
trading sophistication or technological and informational advantages as
that of Professionals or broker-dealers. Therefore, customers may not
have measures in place to assume any level of risk that may be
associated with trading outside of the expected trade value (which risk
the Exchange believes is de minimis given that the Exchange will impose
a reasonable cap, as described below, on the amount by which the actual
trade value may differ from the expected trade level). As a result, the
Exchange believes that not applying the trade value allowance to
customer orders will further protect customers from assuming this
potential risk for which they may not have calculated.
---------------------------------------------------------------------------
\16\ See Rule 16.1, which states that a Priority Customer means
any person or entity that is not a broker or dealer in securities or
a Professional. See also Securities Exchange Act Release No. 86415
(July 19, 2019), 84 FR 35905 (July 25, 2019) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change Relating To Update
Rule 16.1 To Include the Definition of Capacity, as well as Amend
Its Fee Schedule To Reflect This Update) (SR-CboeEDGX-2019-046).
---------------------------------------------------------------------------
Overall, this proposed functionality is a helpful feature which
will allow Users to receive an expeditious execution, and trade the
stock and options components of a stock-option strategy in a moving
market without introducing legging risk. Without this functionality
members would be forced to resubmit their orders and potentially
receive a much worse price or miss an execution. The Exchange will
announce to all market participants the determined trade value
allowance amount pursuant to Rule 1.5. The Exchange would determine an
allowance amount that would reasonably account for the average
differences in notional trade values as well as the cost benefit to
market participants between the differences in actual trade value
versus expected notional trade value and the imposition of resubmitting
their orders and potentially receiving a much worse price or missing an
execution.\17\ The Exchange notes that, if, however, a User determines
that the trade value allowance is more attractive or favorable on
another venue, Users are free to execute on other such venues. The
proposed Exchange determination of a value allowance outside of the
expected notional value is currently in place on other exchanges.\18\
---------------------------------------------------------------------------
\17\ The Exchange expects this value to be initially set at
$0.50 as represented in the example above.
\18\ See Nasdaq ISE Rules, Supplementary Material .03 to Options
3, Section 14; and Nasdaq MRX Rules, Supplementary Material .03 to
Options 3, Section 14.
---------------------------------------------------------------------------
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.\19\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \20\ 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) \21\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78f(b).
\20\ 15 U.S.C. 78f(b)(5).
\21\ Id.
---------------------------------------------------------------------------
In particular, the proposed additional event that will conclude a
C-AIM Auction is reasonable and promotes a fair and orderly market and
national market system, because it will ensure that executions at the
conclusion of a C-AIM Auction occur at permissible prices,
specifically, that the stock leg of a stock-option order submitted into
a C-AIM Auction does not execute at a price not permissible under the
Limit Up-Limit Down Plan or Regulation SHO. Moreover, the Exchanges
notes that this is consistent with current C-AIM functionality to
ensure that stock legs do not trade at prices not permissible under the
Limit Up-Limit Down Plan or Regulation SHO, therefore, the Exchange
believes it is appropriate to conclude a C-AIM Auction if the proposed
circumstance occurs.\22\ The proposed rule change will also benefit
investors by providing additional clarity regarding what will cause C-
AIM Auction to conclude.
---------------------------------------------------------------------------
\22\ See supra note 6.
---------------------------------------------------------------------------
The proposed Exchange determination to set an allowable value
outside of the expected notional trade value for the legs of a stock-
option order removes impediments to and perfects the mechanism of a
free and open market and a national market system because it provides
Users with functionality that allows a User's stock-option strategies
to trade outside of their specified net prices when the executable
stock match price results in a small difference between the expected
notional value of the trade and the
[[Page 46060]]
actual trade value. Users generally prefer not to forgo an execution
for their stock-option strategies when this occurs, as the residual
amount is miniscule compared to the value of the trade. As a result of
the proposed rule, Users will be able to receive an expeditious
execution, and trade the stock and options components of a stock-option
strategy in a moving market without introducing legging risk, instead
of resubmitting their orders and potentially receiving a much worse
price or missing an execution. In addition to this, the Exchange also
believes that not permitting the trade value allowance to apply to
customer orders will remove impediments to and perfect the mechanism of
a free and open market and national market system, and, in general
protect investors, in that it prevents customers from assuming
potential risk (which the Exchange believes is de minimis given that
the Exchange will impose a reasonable variance, as reiterated below).
The Exchange believes the proposed rule will protect customers because
customers may not have the same levels of trading sophistication or
technological and informational advantages as that of Professionals or
broker-dealers and, thus, may not have the measures in place to assume
any level of risk that may be associated with trading outside of the
expected trade value.
As stated above, the proposed Exchange determination of a value
allowance outside of the expected notional value is currently in place
on other exchanges.\23\ The Exchange believes that the differences
between the proposed rule and the rules of other exchanges will remove
impediments to and perfect the mechanism of a free and open market and
national market system, and, in general, protect investors. The other
exchanges' rules allow for a notional variance based on a percentage,
while the proposed rule will allow for a specific dollar amount which
the exchange believes is more straightforward and less confusing for
investors than the calculation of a percentage. The other exchanges'
rules allow for Member determination or a default to Exchange
determination of the notional variance, while the proposed rule will
allow only for Exchange determination, which the Exchange believes will
also simplify the implementation of this functionality and mitigate any
potential investor confusion by setting just one Exchange-determined
notional variance. The other exchanges rules also do not differentiate
between the trade value application to customer and non-customer
orders, however, as described herein this filing, the Exchange believes
this implements an additional protection for customer orders. Finally,
unlike other exchanges' rules, the proposed rule does not provide for a
User opt-out function. Because the difference between the expected
notional value of the trade and the actual trade value is
inconsequential, especially as compared to the overall benefit to
investors of an expeditious execution, this proposed difference will
not have any significant impact on the Exchange's participants and,
instead, will benefit participants overall. As stated, the Exchange
would determine an allowance amount that would reasonably account for
the average differences in notional trade values as well as the cost
benefit to market participants between the differences in actual trade
value versus expected notional trade value and the imposition of
resubmitting their orders and potentially receiving a much worse price
or missing an execution. The Exchange notes that, if, however, a User
determines that the trade value allowance is more attractive or
favorable on another venue, Users are free to execute on other such
venues.
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\23\ See supra note 17.
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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 to add an additional event that would
conclude a C-AIM Auction will impose any burden on intramarket
competition, as this event, if it is the earliest to occur of the list
of events that would conclude a C-AIM Auction, will conclude a C-AIM
Auction in the manner which already occurs for the other events
currently listed under the rule, and a manner which is consistent with
current C-AIM functionality that ensures stock legs do not trade at
prices not permissible under the Limit Up-Limit Down Plan or Regulation
SHO. The subsequent conclusion of a C-AIM Auction applies in the same
manner to all Users. The Exchange does not believe the proposed change
to allow option legs of a stock-option strategy to trade outside of
their expected notional value by a specified amount determined by the
Exchange and communicated to Members via specifications and/or
Regulatory Circular will impose any burden on intramarket competition
because the amount will apply to all User's non-customer stock-option
strategies equally. As described above, the Exchange does not believe
that excluding customer orders from the trade value allowance
functionality would impose any significant burden on completion as
customers generally do not have the same levels of trading
sophistication or technological and informational advantages as that of
Professionals or broker-dealers in order to take on any level of risk
associated with trading outside the expected trade value. Rather, the
proposed rule benefits customers by ensuring that customers will not
assume potential risk for which they have not calculated.
The Exchange does not believe the proposed rule change to add an
additional event that would conclude a C-AIM Auction will impose any
burden on intermarket competition because the proposed change is
designed as a protection intended to ensure that the stock leg of a
stock-option order submitted into a C-AIM Auction does not execute at a
price not permissible under the Limit Up-Limit Down Plan or Regulation
SHO. As stated, current C-AIM functionality already exists which
ensures stock legs do not trade at prices not permissible under this
plan or regulation. The Exchange does not believe the proposed rule
change to allow option legs of a stock-option strategy to trade outside
of their expected notional value by a specified amount determined by
the Exchange and communicated to Members via specifications and/or
Regulatory Circular will impose any burden on intermarket competition
because it is substantially similar to other options exchanges' rules,
previously filed with the Commission.\24\
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\24\ See supra note 17.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, the proposed rule
change has become effective pursuant to Section 19(b)(3)(A)
[[Page 46061]]
of the Act \25\ and Rule 19b-4(f)(6) thereunder.\26\
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\25\ 15 U.S.C. 78s(b)(3)(A).
\26\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and the text of the proposed rule change,
at least five business days prior to the date of filing of the
proposed rule change, or such shorter time as designated by the
Commission. The Exchange has satisfied this requirement.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \27\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \28\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has asked the Commission to waive the 30-day operative delay so that
the proposal may become operative immediately upon filing. The Exchange
notes that waiver of the operative delay would allow it to implement
the proposal immediately and as close in time as possible to the
implementation date of other rule changes regarding stock-option
orders.\29\ The Commission believes that waiving the 30-day operative
delay is consistent with the protection of investors and the public
interest because the proposed rule change is designed to benefit
investors by allowing stock-option strategies to trade outside of their
specified net price when the executable match price results in a small
difference between the expected notional value of the trade and the
actual trade value, instead of forgoing an execution for their stock-
option strategies when this occurs. The Commission also notes that the
proposed rule change is consistent with the practices of other options
exchanges, which provide for similar notional variance for legs in a
stock-option strategy.\30\ Accordingly, the Commission hereby waives
the operative delay and designates the proposal operative upon
filing.\31\
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\27\ 17 CFR 240.19b-4(f)(6).
\28\ 17 CFR 240.19b-4(f)(6)(iii).
\29\ See supra note 7.
\30\ See supra note 18.
\31\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule 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 [email protected]. Please include
File Number SR-CboeEDGX-2019-053 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-2019-053. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CboeEDGX-2019-053 and should be
submitted on or before September 24, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-18873 Filed 8-30-19; 8:45 am]
BILLING CODE 8011-01-P
