Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of Amendment Nos. 1, 2, and 3 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 2, and 3, To Amend the Exchange's Opening Process, Including on VIX Settlement Days, 47984-47989 [2019-19611]
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47984
Federal Register / Vol. 84, No. 176 / Wednesday, September 11, 2019 / Notices
should be submitted on or before
October 2, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.32
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–19610 Filed 9–10–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86879; File No. SR–CBOE–
2019–034]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of
Amendment Nos. 1, 2, and 3 and Order
Granting Accelerated Approval of a
Proposed Rule Change, as Modified by
Amendment Nos. 1, 2, and 3, To
Amend the Exchange’s Opening
Process, Including on VIX Settlement
Days
September 5, 2019.
I. Introduction
On July 2, 2019, Cboe Exchange, Inc.
(the ‘‘Exchange’’ or ‘‘Cboe Options’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to amend the Exchange’s
opening auction process for options as
well as the modified opening auction
process used to calculate the exercise or
final settlement value of expiring
volatility index derivatives. The
proposed rule change was published for
comment in the Federal Register on July
22, 2019.3 On August 15, 2019, the
Exchange filed Amendment No. 1 to the
proposed rule change.4 The Exchange
32 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 86387
(July 22, 2019), 84 FR 35147 (‘‘Notice’’).
4 In Amendment No. 1, the Exchange: Revised the
proposal to make clear that a series is ineligible to
open if the Composite Market of the series is
crossed; modified the application of the Maximum
Composite Width Check for constituent series on
exercise settlement value determination days to
provide additional price protection to the opening
prices of constituent option series; provided
additional detail regarding the proposed settlement
strip; clarified the timing and frequency for the
Exchange’s dissemination of opening auction
updates, including for constituent option series on
exercise settlement value determination days;
correct a typographical error in proposed Exchange
Rule 5.31(c); indicated that the Exchange maintains
and reviews records of any determinations made
pursuant to proposed Exchange Rule 5.31(j)(2) with
respect to the modified opening process in
accordance with proposed Exchange Rule 5.31;
clarified that All Sessions orders will rest on the
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filed Amendment Nos. 2 and 3 to the
proposal on August 20, 2019, and
August 28, 2019, respectively.5 The
Commission has received no comments
regarding the proposal. The Commission
is publishing this notice to solicit
comment on Amendment Nos. 1, 2, and
3 and is approving the proposed rule
change, as modified by Amendment
Nos. 1, 2, and 3, on an accelerated basis.
II. Description of the Proposed Rule
Change
As described more fully in the
Notice,6 the Exchange proposes to
amend (1) the opening auction process
used to open options on the Exchange;
and (2) the modified opening auction
process used to calculate the exercise or
final settlement value of expiring Cboe
Volatility Index (‘‘VIX’’) derivatives.7
The Exchange states that the proposed
opening auction process, other than the
modified opening auction process for
expiring VIX derivatives, is ‘‘virtually
identical’’ to the opening auction
process used on two of the Exchange’s
GTH Queuing Book starting at 2:00 a.m., rather than
7:30 a.m., to participate in the GTH opening auction
process; indicated that the term ‘‘primary market’’
means the primary exchange on which an
underlying security is listed, and that the term
‘‘equity option’’ includes options on exchangetraded products; and indicated that the VIX
methodology is available on the Exchange’s
website. Amendment No. 1 replaced and
superseded the original filing in its entirety. When
it filed Amendment No. 1 with the Commission, the
Exchange simultaneously submitted it as a
comment letter on the proposal and the
Commission publicly posted it here: https://
www.sec.gov/comments/sr-cboe-2019-034/
srcboe2019034-5977238-190214.pdf.
5 In Amendment No. 2, the Exchange revised the
definition of Maximum Composite Width in
proposed Exchange Rules 5.31(a) and 5.31(j)(1) to
replace references to ‘‘Market Composite Widths’’
with references to ‘‘Maximum Composite Widths.’’
When it filed Amendment No. 2 with the
Commission, the Exchange simultaneously
submitted it as a comment letter on the proposal
and the Commission publicly posted it here:
https://www.sec.gov/comments/sr-cboe-2019-034/
srcboe2019034-5994750-190368.pdf. In
Amendment No. 3, the Exchange deleted two
sentences that were erroneously retained in
proposed Exchange Rule 5.31(j)(5) following
modifications to that paragraph by Amendment No.
1. The deletion of the sentences makes clear that on
exercise settlement value determination days, the
System performs the Maximum Composite Width
check and determines the opening trade price
pursuant to proposed Exchange Rule 5.31(j)(5) in
lieu of propose Exchange Rules 5.31(e)(1) and (2).
When it filed Amendment No. 3 with the
Commission, the Exchange simultaneously
submitted it as a comment letter on the proposal
and the Commission publicly posted it here:
https://www.sec.gov/comments/sr-cboe-2019-034/
srcboe2019034-6034336-191248.pdf.
6 See note 3, supra.
7 See proposed Exchange Rule 5.31(j) (defining
‘‘VIX derivatives’’). The Exchange notes that
options expire on an expiration date and settle to
an exercise settlement value, and futures settle on
a final settlement date to a final settlement value.
See Notice, supra note 3, 84 FR at 35152, n. 51.
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affiliated exchanges.8 The Exchange
states that the proposed modified
opening auction process for expiring
VIX derivatives ‘‘will function in
substantially similar manner as the
current modified opening auction
process’’ for expiring VIX derivatives.9
A. Standard Opening Auction Process
Under the proposed opening auction
process, the Queuing Period 10 will
begin at 2:00 a.m. for All Sessions
Classes 11 and at 7:30 a.m. for Regular
Trading Hours (‘‘Regular Trading
Hours’’ or ‘‘RTH’’) classes.12 During the
Queuing Period, the System will accept
orders and quotes pursuant to Exchange
Rule 5.30, and they will be eligible for
execution during the opening rotation,
with certain limitations.13 Orders and
8 Id. at 35164 (citing C2 Rule 6.11 and EDGX
Options Rule 21.7).
9 Id. at 35163. See also Exchange Rule 6.2,
Interpretation and Policy .01.
10 The Queuing Period is the time period prior to
the initiation of an opening rotation during which
the System accepts orders and quotes in the
Queuing Book for participation in the opening
rotation for the applicable trading session. The
Queuing Book is the book into which Users may
submit orders and quotes (and onto which Goodtil-Cancelled and Good-til-Date orders remaining on
the Book from the previous trading session or
trading day, as applicable, are entered) during the
Queuing Period for participation in the applicable
opening rotation. Orders and quotes on the Queuing
Book may not execute until the applicable opening
rotation commences. The Queuing Book for the
Global Trading Hours (‘‘Global Trading Hours’’ or
‘‘GTH’’) opening auction process is distinguished
from the Queuing Book for the RTH opening
auction process. See proposed Exchange Rule
5.31(a).
11 An All Sessions Class is an options class that
the Exchange lists for trading during both Global
Trading Hours and Regular Trading Hours. See
Exchange Rule 1.1. At the time of this order, Cboe
only trades certain SPX and VIX options during
GTH. See https://www.cboe.com/micro/eth/pdf/
global-trading-hours.pdf. Regular Trading Hours
and Global Trading Hours are set forth in Exchange
Rule 5.1.
12 See proposed Exchange Rule 5.31(b)(1). At 2:00
a.m., All Sessions Orders will rest on the GTH
Queuing Book and will be eligible to participate in
the GTH opening auction process. In addition,
Users may enter orders into the RTH Queuing Book
beginning at 2:00 a.m., and these orders will rest
on the RTH Queuing Book and be eligible to
participate in the RTH opening auction process
once it begins. See Amendment No. 1.
13 See proposed Exchange Rule 5.31(b)(2). The
following limitations apply to orders and quotes
entered during the Queuing Period: (1) The System
rejects Immediate-or-Cancel and Fill-or-Kill orders
during the Queuing Period; (2) the System accepts
orders and quotes with Match Trade Prevention
(‘‘MTP’’) Modifiers during the Queuing Period, but
does not enforce them during the opening rotation;
(3) the System accepts all-or-none, stop, and stoplimit orders during the Queuing Period, but they do
not participate in the opening rotation. The System
enters any of these orders it receives during the
Queuing Period into the Book following completion
of the opening rotation (in time priority); (4) the
System converts all intermarket sweep orders
(‘‘ISOs’’) received prior to the completion of the
opening rotation into non-ISOs; and (5) complex
orders do not participate in the opening auction
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quotes on the Queuing Book will not be
eligible for execution until the opening
rotation, as provided in proposed
Exchange Rule 5.31(e).14 Beginning at
2:00 a.m. for the GTH trading session
and at 8:30 a.m. for the RTH trading
session, and until the conclusion of the
opening rotation for a series, the
Exchange will disseminate opening
auction updates for the series.15 The
Exchange will disseminate opening
auction updates every five seconds,
unless there are no updates to the
opening information since the
previously disseminated update, in
which case the Exchange will
disseminate updates every minute.16
The Exchange believes that these
messages will provide market
participants with information that may
contribute to enhanced liquidity and
price discovery during the opening
auction process.17
For Regular Trading Hours, the
System will initiate the opening rotation
for the series in a class after 9:30 a.m.
following the first disseminated (A)
transaction on the primary market in the
security underlying an equity option; or
(B) index value for the index underlying
an index option.18 For Global Trading
Hours, the System will initiate the
opening rotation at 3:00 a.m.19 The
Exchange will disseminate a message to
market participants indicating the
initiation of the opening rotation.20
As part of the opening rotation, the
System will conduct a Maximum
Composite Width check for a series.21 If
process described in proposed Exchange Rule 5.31
and instead may participate in the Complex Order
Book Opening Process pursuant to Exchange Rule
5.33(c). See id. The ‘‘System’’ refers to 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 Exchange Rule
1.1.
14 See proposed Exchange Rule 5.31(b)(2).
15 See proposed Exchange Rule 5.31(c) and
Amendment No. 1.
16 See id.
17 See Notice, supra note 3, 84 FR at 35149.
18 The primary market is the primary exchange on
which an underlying security is listed. The
Exchange notes that equity options include options
on exchange-traded products. See Exchange Rule
1.1, proposed Exchange Rule 5.31(d)(1), and
Amendment No. 1.
19 See proposed Exchange Rule 5.31(d)(2).
20 See proposed Exchange Rule 5.31(d)(1).
21 See proposed Exchange Rule 5.31(e)(1). The
Maximum Composite Width, as set forth in
proposed Exchange Rule 5.31(a)(1), is the amount
that the Composite Width of a series may generally
not be greater than before the Exchange will open
the series (subject to certain exceptions set forth in
proposed Exchange Rule 5.31(e)(1)). The Composite
Width is the width of the Composite Market (i.e.,
the width between the Composite Bid and the
Composite Offer) of a series. The Composite Market
is the market for a series comprised of (1) the higher
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the Composite Market of a series is not
crossed, and the Composite Width of the
series is less than or equal to the
Maximum Composite Width, the series
is eligible to open and the System will
determine the Opening Trade Price
pursuant to proposed Exchange Rule
5.31(e)(2).22 If the Composite Market of
a series is not crossed, and the
Composite Width of the series is greater
than the Maximum Composite Width,
but there are (i) no non-M Capacity 23 (a)
market orders or (b) buy (sell) limit
orders with prices higher (lower) than
the Composite Bid (Offer) and (ii) no
orders or quotes marketable against each
other, the series is eligible to open, and
the System will determine the Opening
Trade Price pursuant to proposed
Exchange Rule 5.31(e)(2).24 If the
conditions in neither proposed
Exchange Rule 5.31(e)(1)(A) or (B) are
satisfied for a series, or if the Composite
Market of a series is crossed, the series
will be ineligible to open and the
Queuing Period for the series will
continue (including the dissemination
of opening auction updates) until one of
the conditions in proposed Exchange
Rule 5.31(e)(1)(A) or (B) for the series is
satisfied, or the Exchange opens the
series pursuant to proposed Exchange
Rule 5.31(h).25
After a series satisfies the Maximum
Composite Width Check, if there are
orders and quotes marketable against
each other at a price not outside the
Opening Collar, the System will
determine the Opening Trade Price for
the series.26 If there are no such orders
or quotes, there is no Opening Trade
Price.27 The Opening Trade Price is the
volume-maximizing, imbalance
minimizing price (‘‘VMIM price’’) that is
of the then-current best appointed Market-Maker
bid on the Exchange and the Away Best Bid
(‘‘ABB’’) (if there is an ABB) and (2) the lower of
the then-current best appointed Market-Maker offer
on the Exchange and the Away Best Offer (‘‘ABO’’)
(if there is an ABO). See proposed Cboe Rule
5.31(a).
22 See proposed Exchange Rule 5.31(e)(1)(A).
23 An M Capacity order is an order for the account
of a Market Maker. See Cboe Rule 1.1.
24 See proposed Exchange Rule 5.31(e)(1)(B).
25 See proposed Exchange Rule 5.31(e)(1)(C) and
Amendment No. 1. See Notice, supra note 3, 84 FR
at 53510, for examples of the application of the
Maximum Composite Width Check.
26 See proposed Exchange Rule 5.31(e)(2). The
Opening Collar is the price range that establishes
limits at or inside of which the System will
determine the Opening Trade Price for a series. The
Exchange sets the Opening Collar by determining
the midpoint of the Composite Market and adding
and subtracting half of the applicable width amount
above and below, respectively, that midpoint. The
Opening Collar widths for all classes are set forth
in proposed Exchange Rule 5.31(a)(1) and are based
on the Composite Bid for a series. See proposed
Exchange Rule 5.31(a)(1).
27 See proposed Exchange Rule 5.31(e)(2).
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47985
not outside the Opening Collar.28 The
Exchange states that the Maximum
Composite Width Check and Opening
Collar are intended to facilitate the
opening of a series in a fair and orderly
manner and at prices consistent with
the current market conditions at the
Exchange and other exchanges.29
If the System establishes an Opening
Trade Price, the System will execute
orders and quotes in the Queuing Book
at the Opening Trade Price, prioritizing
orders and quotes in the following
order: Market orders, limit orders, and
quotes with prices better than the
Opening Trade Price, and orders and
quotes at the Opening Trade Price.30
The System will allocate orders and
quotes at the same price on a pro-rata
basis pursuant to Exchange Rule 5.32.,
and will apply a Priority Customer
overlay to all classes, except for SPX
(including SPXW) and VIX (excluding
VIXW).31 If there is no Opening Trade
Price, the System will open a series
without a trade.32 Following the
conclusion of the opening rotation, the
System will enter any unexecuted
orders and quotes, or remaining
portions, from the Queuing Book into
the Book in time sequence, subject to a
User’s instructions, where they will be
processed in accordance with Exchange
Rule 5.32.33 The System will cancel any
unexecuted OPG orders, or remaining
portions thereof, following the
conclusion of the opening rotation.34
Following a trading halt in a class, the
Exchange will open series using the
same auction process described in
proposed Exchange Rule 5.31, except
that: (1) The Queuing Period will begin
immediately when the Exchange halts
trading in the class; (2) the system will
queue orders or quotes resting on the
Book at the time of a trading halt for
participation in the opening rotation
following the trading halt, unless the
User has entered instructions to cancel
28 The VMIM price is: (1) The price at which the
largest number of contracts can execute (i.e., the
volume-maximizing price); (2) if there are multiple
volume-maximizing prices, the price at which the
fewest number of contracts remain unexecuted (i.e.,
the imbalance-minimizing price); or (3) if there are
multiple volume-maximizing, imbalanceminimizing prices, (i) the highest (lowest) price, if
there is a buy (sell) imbalance, or (ii) the price at
or nearest to the midpoint of the Opening Collar,
if there is no imbalance. See id.
29 See Notice, supra note 3, 84 FR at 35150.
30 See proposed Exchange Rule 5.31(e)(3)(A).
31 See proposed Exchange Rule 5.31(e)(3)(A)(ii).
32 See proposed Exchange Rule 5.31(e)(3)(B).
33 See proposed Exchange Rule 5.31(f). The Book
is the electronic book of simple orders and quotes
maintained by the System, which single book is
used during both the RTH and GTH trading
sessions. See Exchange Rule 1.1.
34 See proposed Exchange Rule 5.31(f). An OPG
order is an order that may only participate in the
Opening Process on the Exchange.
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its resting orders and quotes; and (3) the
System will initiate the opening rotation
for a class upon the Exchange’s
determination to resume trading.35
The proposal deletes current
Exchange Rule 6.2(g) regarding the use
of the opening auction process to
conduct a closing rotation upon
determination by the Exchange. The
Exchange states that it does not
currently conduct closing rotations, and
does not intend to do so in the future.36
B. Modified Opening Process for
Expiring VIX Derivatives
1. Background
Currently, the exercise settlement
value for expiring VIX derivatives is
determined on the morning of their
expiration date using the opening prices
of a portfolio of SPX options—the
settlement strip—that expire
approximately 30 days later.37 These
opening prices are determined through
a modified version of the Exchange’s
standard opening auction process.38 The
Exchange proposes several changes to
its modified opening auction process,
including changes to its methodology
for determining the settlement strip and
the elimination of the concepts of
‘‘strategy orders’’ 39 and ‘‘non-strategy
orders.’’ 40
35 See
proposed Exchange Rule 5.31(g).
Notice, supra note 3, 84 FR at 35152.
37 See id. at 35152. The proposal defines the
‘‘settlement strip’’ as the constituent option series
used to calculate the exercise or final settlement
value, as applicable, of expiring VIX derivatives.
The ‘‘constituent option series’’ are all SPX
(including SPXW) option series listed on the
Exchange with the expirations the Exchange uses to
calculate the exercise or final settlement value of
the expiring VIX derivative on exercise settlement
value determination days. See proposed Exchange
Rule 5.31(j)(1).
38 See Notice, supra note 3, 84 FR at 35152.
39 See Exchange Rule 6.2, Interpretation and
Policy .01(c). Currently, the Exchange deems
individual orders (considered collectively) that a
market participant submits for participation in the
modified opening auction process to be a ‘‘strategy
order,’’ based on related facts and circumstances
considered by the Exchange, if the orders: (1) Relate
to the market participant’s positions in expiring VIX
derivatives; (2) are for option series with the
expiration that the Exchange will use to calculate
the exercise or final settlement value, as applicable,
of the applicable VIX derivative; (3) are for option
series with strike prices approximating the range of
series that are later determined to constitute the
constituent option series for the applicable
expiration; (4) are for put (call) options with strike
prices equal to or less (greater) than the ‘‘at-themoney’’ strike price; and (5) have quantities
approximating the weighting formula used to
determine the exercise or final settlement value, as
applicable, in accordance with the VIX
methodology. See Notice, supra note 3, 84 FR at
35153, n. 54, and current Exchange Rule 6.2,
Interpretation and Policy .01(a) (definition of
‘‘strategy order’’).
40 A ‘‘non-strategy order’’ is any order (including
an order in a constituent option series) a market
participant submits for participation in the
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36 See
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2. Determination of the Settlement Strip
Currently, the Exchange uses the
opening trade prices of SPX series that
comprise the settlement strip (or the
average of a series’ opening bid and ask
if there is no opening trade in that
series) established by the modified
opening auction process to calculate the
exercise or final settlement value of
expiring VIX derivatives.41 In doing so,
the Exchange excludes from
consideration out-of-the-money SPX put
and call options in any SPX series that
have a zero bid price.42 The
methodology then truncates the SPX
series used to calculate the VIX
settlement value after encountering two
consecutive series having ‘‘zero-bid’’
prices, even if further out-of-the-money
series have an opening trade price and
are ‘‘non-zero’’ bid.43
As proposed, the Exchange will no
longer use the non-zero bid provision
and the two consecutive zero-bid
provisions.44 Instead, the Exchange
proposes to determine the settlement
strip as follows:
(A) The Exchange determines the
highest call strike and lowest put strike
that establish the ‘‘strike range’’ for the
settlement strip pursuant to an
algorithm.
(B) The at-the-money strike price is
determined in accordance with the VIX
methodology, using opening bid and
offer information of each constituent
option series.
(C) The Exchange disseminates the
highest call strike and lowest put strike
of the strike range to all subscribers
through the Exchange’s data feeds that
deliver opening auction update
messages, no later than 8:45 a.m. on
exercise settlement value determination
days.
(D) Each call (put) constituent option
series with a strike price not outside the
strike range (i.e., a strike price equal to
or greater (less) than the at-the-money
strike price up (down) to the highest call
modified opening procedure that is not a strategy
order (or a change to or cancellation of a strategy
order). Examples of non-strategy orders include, but
are not limited to: (1) A buy (sell) order in a
constituent options series if an expected opening
information message (‘‘EOI’’) disseminated no more
than two minutes prior to the time a market
participant submitted the order included a sell
(buy) imbalance and the size of the order is no
larger than the size of the imbalance in the EOI,
regardless of whether the market participant
previously submitted a strategy order or has
positions in expiring volatility index derivatives; or
(2) a Market-Maker bid or offer in a constituent
option series, as set forth in Exchange Rule 6.2,
Interpretation and Policy .01(e).
41 See Notice, supra note 3, 84 FR at 35157.
42 See id.
43 See id.
44 See id. at 35159.
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(lowest put) strike of the strike range) is
included in the settlement strip.
(E) The Exchange may update the
strike range until 9:15 a.m. pursuant to
an algorithm due to changes to the value
of VIX, prices of related futures, or other
algorithmic inputs. The Exchange will
disseminate any such updates.45
The Exchange believes that the
proposed settlement methodology may
provide additional protection against
manipulation because the Exchange will
be solely responsible for determining
the strike range of the settlement strip,
making it impossible for anyone to
attempt to manipulate the VIX
settlement process by attempting to
artificially affect which SPX series will
have zero bids at the opening and thus
potentially be included in the
settlement strip.46 The Exchange notes
that the algorithm that will determine
the strike range of the settlement strip
will employ numerous market inputs,
including prices (both on the exercise
settlement value determination day
(including during the GTH trading day)
and the previous trading day) of SPX
options, SPY options, and e-mini S&P
500 options.47 The Exchange believes
that it is therefore unlikely that one of
these inputs of the Exchange’s algorithm
will have a material impact on the
determination of the strike range.48 The
Exchange designed the proposed
methodology for determining the
settlement strip to approximate the
same settlement strip that would be
used pursuant to the Exchange’s current
methodology.49
3. Entry of Orders and Quotes During
the Queuing Period
The Exchange’s current rules
generally require strategy orders to be
entered prior to the strategy order cutoff time.50 The proposal eliminates the
concept of both strategy orders and nonstrategy orders. Instead, during the
Queuing Period prior to 9:20 a.m., the
System will continue to accept all
orders and quotes (except Settlement
Liquidity Opening Orders, or SLOOs,
which the System rejects), and any
changes to or cancellations of those
orders and quotes. After the 9:20 a.m.
cut-off time (until the opening of trading
in a series), the System will only accept
SLOOs (including changes to and
cancellations of SLOOs) and bulk
message bids and offers (including
45 See proposed Exchange Rule 5.31(j)(1) and
Amendment No. 1.
46 See Notice, supra note 3, 84 FR at 35164.
47 See id. at 35159.
48 See id.
49 See id. at 35157.
50 See Exchange Rule 6.2, Interpretation and
Policy .01(c) and (d).
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changes to and cancellations of bulk
message bids and offers submitted
before and after the cut-off time) from
Market-Makers with an SPX
appointment. After that cut-off, the
System will reject all other orders and
quotes (and all other changes to and
cancellations of orders and quotes
submitted prior to the cut-off time).51
The Exchange states that SLOOs will
provide market participants with a
definitive order type that they may use
to participate in a competitive auction
without creating an imbalance condition
that would prevent a series from
opening.52
Under the proposal, Market-Makers
with an SPX appointment will continue
to be able to submit bulk message bids
and offers (including changes to and
cancellations of bulk message bids and
offers submitted before and after the cutoff time) following the cut-off time, as
they do today.53 The Exchange notes
that a Market-Maker has obligations to,
among other things, engage in dealings
for the Market-Maker’s own account
when there exists a lack of price
continuity or a temporary disparity
between the supply of and demand for
an option (i.e., an imbalance), to
compete with other Market-Makers to
improve markets in its appointed
classes, and to update market quotations
in response to changed market
conditions in its appointed classes.54
The Exchange believes that MarketMaker participation throughout the
entire modified opening auction process
may add liquidity to the process and
promote a fair and orderly opening and
51 See proposed Exchange Rule 5.31(j)(3). A
SLOO is a limit order in a constituent option series
designated with an OPG Time-in-Force that Users
may only submit to the Exchange on exercise
settlement value determination days following the
cut-off time described in proposed Exchange Rule
5.31(j)(3). The System cancels a SLOO (or
remaining portion thereof) that does not execute
during the modified opening auction process, and
Users may not designate bulk messages as SLOOs.
If the limit price of a buy (sell) SLOO crosses the
midpoint of the then-current Opening Collar upon
entry, the System adjusts its price to equal the
midpoint of the Opening Collar (rounded up (down)
to the nearest minimum increment), except for a
sell SLOO when the midpoint is less than or equal
to 0.175. If the midpoint of the Opening Collar
changes during the Queuing Period, the System readjusts the SLOO’s price to equal to the new
Opening Collar midpoint (rounded as provided
above), up to its limit price. The Exchange does not
disseminate the prices of SLOOs in the Queuing
Book. See proposed Exchange Rule 5.31(j)(1).
52 The Exchange notes that the proposed SLOO
repricing functionality, as described in note 51,
supra, will prevent the entry of a SLOO from
creating or adding to an imbalance that would
prevent a constituent option series from opening.
See id. at 35156.
53 See id.
54 See id.
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Jkt 247001
settlement process.55 In addition, the
Exchange states that it will continue to
review all Trading Permit Holder
activity in constituent series on exercise
settlement value determination days for
compliance with all applicable Rules.56
4. Auction Updates, Opening Rotation,
and Opening Trade Price Determination
On exercise settlement value
determination days, the Exchange will
disseminate opening auction updates for
constituent series every five seconds,
regardless of whether there are updates
to the opening information since the
previously disseminated update.57 The
opening rotation process will occur as
set forth in proposed Exchange Rule
5.31(e), except that the System will
perform the Maximum Composite
Width Check and determine the
Opening Trade Price pursuant to
proposed Exchange Rule 5.31(j)(5).58
The Maximum Composite Width Check
for constituent series on exercise
settlement value determination days
55 See id. The Exchange notes that Market-Maker
quoting activity on exercise settlement value
determination days will continue to be subject to
all applicable Exchange rules. These rules include,
among others: current Exchange Rule 4.1, which
prohibits a Trading Permit Holder from engaging in
acts or practices inconsistent with just and
equitable principles of trade; current Exchange Rule
4.7, which prohibits (among other things) a Trading
Permit Holder from effecting or inducing the
purchase, sale, or exercise of any security for the
purpose of creating or inducing a false, misleading,
or artificial appearance of activity in such security
or in the underlying security, or for the purpose of
unduly or improperly influencing the market price
of such security or of the underlying security or for
the purpose of making a price that does not reflect
the true state of the market in such security or in
the underlying security; current Exchange Rule
4.18, which requires a Trading Permit Holder to
establish, maintain, and enforce written policies
and procedures reasonably designed, taking into
consideration the nature of such Trading Permit
Holder’s business, to prevent the misuse, in
violation of the Exchange Act and the Rules, of
material, nonpublic information by the Trading
Permit Holder or persons associated with the
Trading Permit Holder; and current Exchange Rule
8.7, which requires Market-Makers to, among other
things, enter into transactions in their market
making capacity that constitute a course of dealings
reasonably calculated to contribute to the
maintenance of a fair and orderly market, and not
to make bids or offers or enter into transactions that
are inconsistent with such course of dealings. See
id. at 335156–7.
56 See id. at 335157.
57 See proposed Exchange Rule 5.31(j)(4) and
Amendment No. 1. The Exchange believes
providing frequent, regular updates in constituent
series will further enhance transparency in the
modified opening auction process. In addition,
because the opening trading prices that will be used
to determine the settlement values of expiring VIX
derivatives will be determined by prices of the
constituent option series, the Exchange believes
that regular auction updates, and thus additional
transparency, will contribute to a fair and orderly
auction and settlement process. See Amendment
No. 1.
58 See proposed Exchange Rule 5.31(j)(5) and
Amendment No. 3.
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47987
differs from the Maximum Composite
Width Check used on other days in that
a constituent series will not open,
without exception, if the Composite
Width is greater than the Maximum
Composite Width.59 In that case, the
Queuing Period for the series will
continue, including the dissemination
of opening auction updates, until the
Composite Width is less than or equal
to the Maximum Composite Width or
until the Composite Market is not
crossed (as applicable), or the Exchange
opens the series pursuant to proposed
Exchange Rule 5.31(h).60 The Exchange
states that this proposed process is
similar to the current opening auction
process in classes in which the Hybrid
Agency Liaison (‘‘HAL’’) is not activated
at the open.61
After a series satisfies the Maximum
Composite Width Check, the System
determines the Opening Trade Price for
the series if there are orders and quotes
marketable against each other at a price
not outside the Opening Collar.62 If
there are no such orders or quotes, there
is no Opening Trade Price.63 The
Exchange notes that during the opening
rotation on non-exercise settlement
value determination days, the Opening
Trade Price is the VMIM price that is
not outside the Opening Collar.64 Thus,
if the System determines that the VMIM
price is outside of the Opening Collar,
rather than not open, the System will
use the collar limit as the opening
price.65 On exercise settlement value
determination days for constituent
series, however, if (1) the VMIM price
is outside the Opening Collar, or (2)
there would be unexecuted market
orders (or remaining portions), the
series will not open.66 In either case, the
Queuing Period for the series will
continue (including the dissemination
of opening auction updates) until the
VMIM price is not outside the Opening
Collar, or the Exchange opens the series
pursuant to proposed paragraph (h).67
The Exchange notes that this is
consistent with the current opening
59 See proposed Exchange Rule 5.31(j)(5)(B) and
Amendment No. 1.
60 See id.
61 See Amendment No. 1.
62 See proposed Exchange Rule 5.31(j)(5).
63 See Amendment No. 1.
64 See Notice, supra note 3, 84 FR at 35160. The
System will determine the VMIM price pursuant to
proposed Rules 5.31(e)(2)(A) through (C) in the
same manner it determines the VMIM price on all
other days. See proposed Exchange Rule
5.31(j)(5)(B)(i) and Notice, supra note 3, 84 FR at
35159–60.
65 See id.
66 See proposed Exchange Rule 5.31(j)(5)(B)(iii)
and Amendment No. 1.
67 See id.
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47988
Federal Register / Vol. 84, No. 176 / Wednesday, September 11, 2019 / Notices
auction process in classes in which HAL
is not activated at the open.68
required to abide by current Exchange
Rules 4.1, 4.7, and 4.18.75
5. Opening Rotation Self-Trades
Under the proposed modified opening
process, a market participant could
submit orders that replicate the vega, or
volatility, exposure of its expiring VIX
derivatives prior to the cut-off time, and
then submit a SLOO after the cut-off
time to contribute liquidity to the
opening process, including to offset any
imbalances.69 Assuming there were no
other factors demonstrating a different
purpose, the SLOO might not have been
intended to execute against the vega
replicating order (and thus effect a
transaction that involves no change in
beneficial ownership to create a false or
misleading appearance of active trading
in SPX options). Rather, the SLOO
could have been intended to contribute
liquidity to the modified opening
auction process to offset an existing
imbalance and to contribute to a fair and
orderly opening process for that series.70
To accommodate fair and orderly
trading in the modified opening auction
process, the Exchange proposes to state
in the Rules that, subject to other facts
and circumstances (such as that may
demonstrate a different purpose for the
submission of the orders), the Exchange
will not consider self-trades resulting
from the execution of a User’s orders
against each other during the opening
rotation of the modified opening auction
process to be violations of Section
9(a)(1) of the Exchange Act.71 The
Exchange will review all activity,
including these executions, during the
modified opening auction process for
compliance with the Exchange Act and
with the Exchange’s rules, including
rules prohibiting manipulation.72
The Exchange represents that it has an
adequate surveillance program in place
to review options activity during the
modified opening auction process that
occurs on each exercise settlement value
determination day.73 In addition, the
Exchange states that it is updating its
surveillance program to reflect the
proposed amendments to the process,
and that it will continue to review its
surveillance program to determine
whether additional enhancements are
necessary or appropriate.74 The
Exchange notes that all market
participants will be continue to be
III. Discussion and Commission
Findings
Notice, supra note 3, 84 FR at 35160.
id.
70 See id.
71 15 U.S.C. 78(i)(a)(1). See proposed Exchange
Act Rule 5.31(j)(6).
72 See proposed Exchange Act Rule 5.31(j)(6). See
also Notice, supra note 3, 84 FR at 35161–2.
73 See id. at 35162.
74 See id.
After careful review, the Commission
finds that the proposed rule change, as
modified by Amendment Nos. 1, 2, and
3, is consistent with the requirements of
the Act and the rules and regulations
thereunder applicable to a national
securities exchange and, in particular,
with Section 6(b) of the Act.76 In
particular, the Commission finds that
the proposed rule change is consistent
with Section 6(b)(5) of the Act,77 which
requires, among other things, that the
rules of a national securities 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.
The Commission believes that the
proposed opening auction process is
consistent with the protection of
investors and the public interest
because it is designed to provide a fair
and orderly opening for options traded
on the Exchange. The Commission notes
that the proposed standard opening
process is substantially identical to the
opening processes used on two other
exchanges.78
The proposed modified opening
auction process for expiring VIX
derivatives will operate in a manner that
is substantially similar to the
Exchange’s current modified opening
auction process, but with certain
changes, as described above.79 While
the Exchange has designed its new
methodology of determining the
settlement strip to largely replicate how
settlement strips are determined today,
the new methodology reduces the
potential that a market participant
would be able to manipulate the VIX
settlement process by attempting to
affect which SPX series will (and will
not) have zero bids at the opening,
which impacts which strikes are
68 See
69 See
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17:44 Sep 10, 2019
Jkt 247001
75 See
id. at 35164.
U.S.C. 78f(b). In approving this proposed
rule change, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
77 15 U.S.C. 78f(b)(5).
78 See C2 Rule 6.11 and EDGX Options Rule 21.7.
79 See Notice, supra note 3, 84 FR at 35163.
76 15
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Frm 00058
Fmt 4703
Sfmt 4703
included in the strip.80 The Commission
believes that the proposed changes to
the methodology for determining the
settlement strip are designed to protect
investors and the public interest by
reducing the potential for manipulative
or disruptive trading in connection with
the modified opening auction process
used on exercise settlement value
determination days.
The Commission believes that the
proposal to eliminate the concept of
strategy orders, and instead permit two
types of market activity following the
cut-off time—the submission of SLOOs
and quotes from Market-Makers with an
SPX appointment—could help to attract
liquidity to trade against imbalances
and reduce the likelihood that a
constituent option series will fail to
open, thereby helping to facilitate an
orderly opening for VIX derivatives. The
proposed SLOOs are designed to
provide market participants with an
order type they may submit following
the cut-off time, which could encourage
them to provide liquidity to offset order
imbalances. In addition, the SLOO
repricing functionality will prevent the
entry of a SLOO from creating or adding
to an imbalance that would prevent a
constituent option series from
opening.81
The Commission notes that all market
participants will continue to be required
to comply with current Exchange Rules
4.1 (Just and Equitable Principles of
Trade), 4.7 (Manipulation), and 4.18
(Prevention of the Misuse of Material,
Nonpublic Information).82 In addition,
the Exchange will continue to conduct
surveillance to monitor all trading
activity in constituent option series on
exercise settlement value determination
days, including but not limited to
monitoring the entry of orders and
quotes following the cut-off time, as
well as compliance with other Exchange
rules,83 which the Commission believes
is essential to protect investors and the
public interest.
For the foregoing reasons, the
Commission finds that the proposed
rule change, as modified by Amendment
Nos. 1, 2, and 3, is consistent with
Sections 6(b)(5) of the Act.84
IV. Solicitation of Comments on
Amendment Nos. 1, 2, and 3 to the
Proposed Rule Change
Interested persons are invited to
submit written data, views, and
arguments concerning whether
80 See
id. at 35164.
id. at 35156.
82 See id.
83 See id.
84 15 U.S.C. 78f(b)(5).
81 See
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Federal Register / Vol. 84, No. 176 / Wednesday, September 11, 2019 / Notices
Amendment Nos. 1, 2, and 3 are
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–2019–034 on the subject line.
Paper Comments
jspears on DSK3GMQ082PROD with NOTICES
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CBOE–2019–034. 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–2019–034, and
should be submitted on or before
October 2, 2019.
Jkt 247001
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,86 that the
proposed rule change (SR–CBOE–2019–
034), as modified by Amendment Nos.
1, 2, and 3, is approved on an
accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.87
Jill M. Peterson,
Assistant Secretary.
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meetings
Notice is hereby given,
pursuant to the provisions of the
Government in Sunshine Act, Public
Law 94–409, that the Securities and
Exchange Commission Investor
Advisory Committee will hold a
meeting on Thursday, September 19,
2019 at 9:30 a.m. (ET).
TIME AND DATE:
The meeting will be held in
Multi-Purpose Room LL–006 at the
Commission’s headquarters, 100 F
Street NE, Washington, DC 20549.
PLACE:
This meeting will begin at 9:30
a.m. (ET) and will be open to the public.
Seating will be on a first-come, firstserved basis. Doors will open at 9:00
a.m. Visitors will be subject to security
checks. The meeting will be webcast on
the Commission’s website at
www.sec.gov.
STATUS:
On August
28, 2019, the Commission issued notice
of the Committee meeting (Release No.
33–10676), indicating that the meeting
is open to the public (except during that
portion of the meeting reserved for an
administrative work session during
lunch), and inviting the public to
submit written comments to the
Committee. This Sunshine Act notice is
being issued because a quorum of the
Commission may attend the meeting.
MATTERS TO BE CONSIDERED:
The agenda for the meeting includes:
Welcome remarks; a discussion
regarding methods to develop better
disclosures for investors; a discussion
regarding increased leverage and related
SEC regulatory implications;
subcommittee reports; and a nonpublic
administrative work session during
lunch.
CONTACT PERSON FOR MORE INFORMATION:
For further information and to ascertain
what, if any, matters have been added,
deleted or postponed; please contact
Vanessa A. Countryman from the Office
of the Secretary at (202) 551–5400.
Dated: September 9, 2019.
Vanessa A. Countryman,
Secretary.
BILLING CODE 8011–01–P
[FR Doc. 2019–19809 Filed 9–9–19; 4:15 pm]
85 15
The Commission finds good cause to
approve the proposed rule change, as
18:37 Sep 10, 2019
VI. Conclusion
[FR Doc. 2019–19611 Filed 9–10–19; 8:45 am]
V. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment Nos. 1, 2, and 3
VerDate Sep<11>2014
modified by Amendment Nos. 1, 2, and
3 prior to the thirtieth day after the date
of publication of notice of the filing of
Amendment No. 1 in the Federal
Register. Amendment No. 1 clarifies
several aspects of the proposal,
including by providing additional
details regarding the settlement strip
and the timing and frequency of
opening auction updates, without
introducing new material concepts. In
addition, Amendment No. 1 modifies
the application of the Maximum
Composite Width Check to provide that
a constituent option series will not open
if the Composite Width is greater than
the Maximum Composite Width,
without exception. The Exchange notes
that this is similar to the current
opening auction process in classes in
which HAL is not activated at the open.
The Commission believes that the
proposed change to the Maximum
Composite Width Check should protect
investors by helping to assure that the
constituent option series, which are
used to determine the settlement value
of expiring VIX derivatives, open at
prices that are consistent with current
market conditions. Accordingly, the
Commission believes that Amendment
No. 1 does not raise novel regulatory
issues. Amendment Nos. 2 and 3 correct
a few errors in the rule text, thereby
helping to assure the accuracy and
clarity of the proposed rules in a
manner that is consistent with the
original proposal and that do not
introduce new concepts or raise novel
regulatory issues. Accordingly, the
Commission finds good cause, pursuant
to Section 19(b)(2) of the Act,85 to
approve the proposed rule change, as
modified by Amendment Nos. 1, 2, and
3, on an accelerated basis.
47989
U.S.C. 78s(b)(2).
86 15 U.S.C. 78s(b)(2).
87 17 CFR 200.30–3(a)(12).
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]]>Agencies
[Federal Register Volume 84, Number 176 (Wednesday, September 11, 2019)]
[Notices]
[Pages 47984-47989]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-19611]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86879; File No. SR-CBOE-2019-034]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of Amendment Nos. 1, 2, and 3 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 2,
and 3, To Amend the Exchange's Opening Process, Including on VIX
Settlement Days
September 5, 2019.
I. Introduction
On July 2, 2019, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend the Exchange's opening auction process
for options as well as the modified opening auction process used to
calculate the exercise or final settlement value of expiring volatility
index derivatives. The proposed rule change was published for comment
in the Federal Register on July 22, 2019.\3\ On August 15, 2019, the
Exchange filed Amendment No. 1 to the proposed rule change.\4\ The
Exchange filed Amendment Nos. 2 and 3 to the proposal on August 20,
2019, and August 28, 2019, respectively.\5\ The Commission has received
no comments regarding the proposal. The Commission is publishing this
notice to solicit comment on Amendment Nos. 1, 2, and 3 and is
approving the proposed rule change, as modified by Amendment Nos. 1, 2,
and 3, on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 86387 (July 22,
2019), 84 FR 35147 (``Notice'').
\4\ In Amendment No. 1, the Exchange: Revised the proposal to
make clear that a series is ineligible to open if the Composite
Market of the series is crossed; modified the application of the
Maximum Composite Width Check for constituent series on exercise
settlement value determination days to provide additional price
protection to the opening prices of constituent option series;
provided additional detail regarding the proposed settlement strip;
clarified the timing and frequency for the Exchange's dissemination
of opening auction updates, including for constituent option series
on exercise settlement value determination days; correct a
typographical error in proposed Exchange Rule 5.31(c); indicated
that the Exchange maintains and reviews records of any
determinations made pursuant to proposed Exchange Rule 5.31(j)(2)
with respect to the modified opening process in accordance with
proposed Exchange Rule 5.31; clarified that All Sessions orders will
rest on the GTH Queuing Book starting at 2:00 a.m., rather than 7:30
a.m., to participate in the GTH opening auction process; indicated
that the term ``primary market'' means the primary exchange on which
an underlying security is listed, and that the term ``equity
option'' includes options on exchange-traded products; and indicated
that the VIX methodology is available on the Exchange's website.
Amendment No. 1 replaced and superseded the original filing in its
entirety. When it filed Amendment No. 1 with the Commission, the
Exchange simultaneously submitted it as a comment letter on the
proposal and the Commission publicly posted it here: https://www.sec.gov/comments/sr-cboe-2019-034/srcboe2019034-5977238-190214.pdf.
\5\ In Amendment No. 2, the Exchange revised the definition of
Maximum Composite Width in proposed Exchange Rules 5.31(a) and
5.31(j)(1) to replace references to ``Market Composite Widths'' with
references to ``Maximum Composite Widths.'' When it filed Amendment
No. 2 with the Commission, the Exchange simultaneously submitted it
as a comment letter on the proposal and the Commission publicly
posted it here: https://www.sec.gov/comments/sr-cboe-2019-034/srcboe2019034-5994750-190368.pdf. In Amendment No. 3, the Exchange
deleted two sentences that were erroneously retained in proposed
Exchange Rule 5.31(j)(5) following modifications to that paragraph
by Amendment No. 1. The deletion of the sentences makes clear that
on exercise settlement value determination days, the System performs
the Maximum Composite Width check and determines the opening trade
price pursuant to proposed Exchange Rule 5.31(j)(5) in lieu of
propose Exchange Rules 5.31(e)(1) and (2). When it filed Amendment
No. 3 with the Commission, the Exchange simultaneously submitted it
as a comment letter on the proposal and the Commission publicly
posted it here: https://www.sec.gov/comments/sr-cboe-2019-034/srcboe2019034-6034336-191248.pdf.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
As described more fully in the Notice,\6\ the Exchange proposes to
amend (1) the opening auction process used to open options on the
Exchange; and (2) the modified opening auction process used to
calculate the exercise or final settlement value of expiring Cboe
Volatility Index (``VIX'') derivatives.\7\ The Exchange states that the
proposed opening auction process, other than the modified opening
auction process for expiring VIX derivatives, is ``virtually
identical'' to the opening auction process used on two of the
Exchange's affiliated exchanges.\8\ The Exchange states that the
proposed modified opening auction process for expiring VIX derivatives
``will function in substantially similar manner as the current modified
opening auction process'' for expiring VIX derivatives.\9\
---------------------------------------------------------------------------
\6\ See note 3, supra.
\7\ See proposed Exchange Rule 5.31(j) (defining ``VIX
derivatives''). The Exchange notes that options expire on an
expiration date and settle to an exercise settlement value, and
futures settle on a final settlement date to a final settlement
value. See Notice, supra note 3, 84 FR at 35152, n. 51.
\8\ Id. at 35164 (citing C2 Rule 6.11 and EDGX Options Rule
21.7).
\9\ Id. at 35163. See also Exchange Rule 6.2, Interpretation and
Policy .01.
---------------------------------------------------------------------------
A. Standard Opening Auction Process
Under the proposed opening auction process, the Queuing Period \10\
will begin at 2:00 a.m. for All Sessions Classes \11\ and at 7:30 a.m.
for Regular Trading Hours (``Regular Trading Hours'' or ``RTH'')
classes.\12\ During the Queuing Period, the System will accept orders
and quotes pursuant to Exchange Rule 5.30, and they will be eligible
for execution during the opening rotation, with certain
limitations.\13\ Orders and
[[Page 47985]]
quotes on the Queuing Book will not be eligible for execution until the
opening rotation, as provided in proposed Exchange Rule 5.31(e).\14\
Beginning at 2:00 a.m. for the GTH trading session and at 8:30 a.m. for
the RTH trading session, and until the conclusion of the opening
rotation for a series, the Exchange will disseminate opening auction
updates for the series.\15\ The Exchange will disseminate opening
auction updates every five seconds, unless there are no updates to the
opening information since the previously disseminated update, in which
case the Exchange will disseminate updates every minute.\16\ The
Exchange believes that these messages will provide market participants
with information that may contribute to enhanced liquidity and price
discovery during the opening auction process.\17\
---------------------------------------------------------------------------
\10\ The Queuing Period is the time period prior to the
initiation of an opening rotation during which the System accepts
orders and quotes in the Queuing Book for participation in the
opening rotation for the applicable trading session. The Queuing
Book is the book into which Users may submit orders and quotes (and
onto which Good-til-Cancelled and Good-til-Date orders remaining on
the Book from the previous trading session or trading day, as
applicable, are entered) during the Queuing Period for participation
in the applicable opening rotation. Orders and quotes on the Queuing
Book may not execute until the applicable opening rotation
commences. The Queuing Book for the Global Trading Hours (``Global
Trading Hours'' or ``GTH'') opening auction process is distinguished
from the Queuing Book for the RTH opening auction process. See
proposed Exchange Rule 5.31(a).
\11\ An All Sessions Class is an options class that the Exchange
lists for trading during both Global Trading Hours and Regular
Trading Hours. See Exchange Rule 1.1. At the time of this order,
Cboe only trades certain SPX and VIX options during GTH. See https://www.cboe.com/micro/eth/pdf/global-trading-hours.pdf. Regular Trading
Hours and Global Trading Hours are set forth in Exchange Rule 5.1.
\12\ See proposed Exchange Rule 5.31(b)(1). At 2:00 a.m., All
Sessions Orders will rest on the GTH Queuing Book and will be
eligible to participate in the GTH opening auction process. In
addition, Users may enter orders into the RTH Queuing Book beginning
at 2:00 a.m., and these orders will rest on the RTH Queuing Book and
be eligible to participate in the RTH opening auction process once
it begins. See Amendment No. 1.
\13\ See proposed Exchange Rule 5.31(b)(2). The following
limitations apply to orders and quotes entered during the Queuing
Period: (1) The System rejects Immediate-or-Cancel and Fill-or-Kill
orders during the Queuing Period; (2) the System accepts orders and
quotes with Match Trade Prevention (``MTP'') Modifiers during the
Queuing Period, but does not enforce them during the opening
rotation; (3) the System accepts all-or-none, stop, and stop-limit
orders during the Queuing Period, but they do not participate in the
opening rotation. The System enters any of these orders it receives
during the Queuing Period into the Book following completion of the
opening rotation (in time priority); (4) the System converts all
intermarket sweep orders (``ISOs'') received prior to the completion
of the opening rotation into non-ISOs; and (5) complex orders do not
participate in the opening auction process described in proposed
Exchange Rule 5.31 and instead may participate in the Complex Order
Book Opening Process pursuant to Exchange Rule 5.33(c). See id. The
``System'' refers to 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 Exchange Rule 1.1.
\14\ See proposed Exchange Rule 5.31(b)(2).
\15\ See proposed Exchange Rule 5.31(c) and Amendment No. 1.
\16\ See id.
\17\ See Notice, supra note 3, 84 FR at 35149.
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For Regular Trading Hours, the System will initiate the opening
rotation for the series in a class after 9:30 a.m. following the first
disseminated (A) transaction on the primary market in the security
underlying an equity option; or (B) index value for the index
underlying an index option.\18\ For Global Trading Hours, the System
will initiate the opening rotation at 3:00 a.m.\19\ The Exchange will
disseminate a message to market participants indicating the initiation
of the opening rotation.\20\
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\18\ The primary market is the primary exchange on which an
underlying security is listed. The Exchange notes that equity
options include options on exchange-traded products. See Exchange
Rule 1.1, proposed Exchange Rule 5.31(d)(1), and Amendment No. 1.
\19\ See proposed Exchange Rule 5.31(d)(2).
\20\ See proposed Exchange Rule 5.31(d)(1).
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As part of the opening rotation, the System will conduct a Maximum
Composite Width check for a series.\21\ If the Composite Market of a
series is not crossed, and the Composite Width of the series is less
than or equal to the Maximum Composite Width, the series is eligible to
open and the System will determine the Opening Trade Price pursuant to
proposed Exchange Rule 5.31(e)(2).\22\ If the Composite Market of a
series is not crossed, and the Composite Width of the series is greater
than the Maximum Composite Width, but there are (i) no non-M Capacity
\23\ (a) market orders or (b) buy (sell) limit orders with prices
higher (lower) than the Composite Bid (Offer) and (ii) no orders or
quotes marketable against each other, the series is eligible to open,
and the System will determine the Opening Trade Price pursuant to
proposed Exchange Rule 5.31(e)(2).\24\ If the conditions in neither
proposed Exchange Rule 5.31(e)(1)(A) or (B) are satisfied for a series,
or if the Composite Market of a series is crossed, the series will be
ineligible to open and the Queuing Period for the series will continue
(including the dissemination of opening auction updates) until one of
the conditions in proposed Exchange Rule 5.31(e)(1)(A) or (B) for the
series is satisfied, or the Exchange opens the series pursuant to
proposed Exchange Rule 5.31(h).\25\
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\21\ See proposed Exchange Rule 5.31(e)(1). The Maximum
Composite Width, as set forth in proposed Exchange Rule 5.31(a)(1),
is the amount that the Composite Width of a series may generally not
be greater than before the Exchange will open the series (subject to
certain exceptions set forth in proposed Exchange Rule 5.31(e)(1)).
The Composite Width is the width of the Composite Market (i.e., the
width between the Composite Bid and the Composite Offer) of a
series. The Composite Market is the market for a series comprised of
(1) the higher of the then-current best appointed Market-Maker bid
on the Exchange and the Away Best Bid (``ABB'') (if there is an ABB)
and (2) the lower of the then-current best appointed Market-Maker
offer on the Exchange and the Away Best Offer (``ABO'') (if there is
an ABO). See proposed Cboe Rule 5.31(a).
\22\ See proposed Exchange Rule 5.31(e)(1)(A).
\23\ An M Capacity order is an order for the account of a Market
Maker. See Cboe Rule 1.1.
\24\ See proposed Exchange Rule 5.31(e)(1)(B).
\25\ See proposed Exchange Rule 5.31(e)(1)(C) and Amendment No.
1. See Notice, supra note 3, 84 FR at 53510, for examples of the
application of the Maximum Composite Width Check.
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After a series satisfies the Maximum Composite Width Check, if
there are orders and quotes marketable against each other at a price
not outside the Opening Collar, the System will determine the Opening
Trade Price for the series.\26\ If there are no such orders or quotes,
there is no Opening Trade Price.\27\ The Opening Trade Price is the
volume-maximizing, imbalance minimizing price (``VMIM price'') that is
not outside the Opening Collar.\28\ The Exchange states that the
Maximum Composite Width Check and Opening Collar are intended to
facilitate the opening of a series in a fair and orderly manner and at
prices consistent with the current market conditions at the Exchange
and other exchanges.\29\
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\26\ See proposed Exchange Rule 5.31(e)(2). The Opening Collar
is the price range that establishes limits at or inside of which the
System will determine the Opening Trade Price for a series. The
Exchange sets the Opening Collar by determining the midpoint of the
Composite Market and adding and subtracting half of the applicable
width amount above and below, respectively, that midpoint. The
Opening Collar widths for all classes are set forth in proposed
Exchange Rule 5.31(a)(1) and are based on the Composite Bid for a
series. See proposed Exchange Rule 5.31(a)(1).
\27\ See proposed Exchange Rule 5.31(e)(2).
\28\ The VMIM price is: (1) The price at which the largest
number of contracts can execute (i.e., the volume-maximizing price);
(2) if there are multiple volume-maximizing prices, the price at
which the fewest number of contracts remain unexecuted (i.e., the
imbalance-minimizing price); or (3) if there are multiple volume-
maximizing, imbalance-minimizing prices, (i) the highest (lowest)
price, if there is a buy (sell) imbalance, or (ii) the price at or
nearest to the midpoint of the Opening Collar, if there is no
imbalance. See id.
\29\ See Notice, supra note 3, 84 FR at 35150.
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If the System establishes an Opening Trade Price, the System will
execute orders and quotes in the Queuing Book at the Opening Trade
Price, prioritizing orders and quotes in the following order: Market
orders, limit orders, and quotes with prices better than the Opening
Trade Price, and orders and quotes at the Opening Trade Price.\30\ The
System will allocate orders and quotes at the same price on a pro-rata
basis pursuant to Exchange Rule 5.32., and will apply a Priority
Customer overlay to all classes, except for SPX (including SPXW) and
VIX (excluding VIXW).\31\ If there is no Opening Trade Price, the
System will open a series without a trade.\32\ Following the conclusion
of the opening rotation, the System will enter any unexecuted orders
and quotes, or remaining portions, from the Queuing Book into the Book
in time sequence, subject to a User's instructions, where they will be
processed in accordance with Exchange Rule 5.32.\33\ The System will
cancel any unexecuted OPG orders, or remaining portions thereof,
following the conclusion of the opening rotation.\34\
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\30\ See proposed Exchange Rule 5.31(e)(3)(A).
\31\ See proposed Exchange Rule 5.31(e)(3)(A)(ii).
\32\ See proposed Exchange Rule 5.31(e)(3)(B).
\33\ See proposed Exchange Rule 5.31(f). The Book is the
electronic book of simple orders and quotes maintained by the
System, which single book is used during both the RTH and GTH
trading sessions. See Exchange Rule 1.1.
\34\ See proposed Exchange Rule 5.31(f). An OPG order is an
order that may only participate in the Opening Process on the
Exchange.
---------------------------------------------------------------------------
Following a trading halt in a class, the Exchange will open series
using the same auction process described in proposed Exchange Rule
5.31, except that: (1) The Queuing Period will begin immediately when
the Exchange halts trading in the class; (2) the system will queue
orders or quotes resting on the Book at the time of a trading halt for
participation in the opening rotation following the trading halt,
unless the User has entered instructions to cancel
[[Page 47986]]
its resting orders and quotes; and (3) the System will initiate the
opening rotation for a class upon the Exchange's determination to
resume trading.\35\
---------------------------------------------------------------------------
\35\ See proposed Exchange Rule 5.31(g).
---------------------------------------------------------------------------
The proposal deletes current Exchange Rule 6.2(g) regarding the use
of the opening auction process to conduct a closing rotation upon
determination by the Exchange. The Exchange states that it does not
currently conduct closing rotations, and does not intend to do so in
the future.\36\
---------------------------------------------------------------------------
\36\ See Notice, supra note 3, 84 FR at 35152.
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B. Modified Opening Process for Expiring VIX Derivatives
1. Background
Currently, the exercise settlement value for expiring VIX
derivatives is determined on the morning of their expiration date using
the opening prices of a portfolio of SPX options--the settlement
strip--that expire approximately 30 days later.\37\ These opening
prices are determined through a modified version of the Exchange's
standard opening auction process.\38\ The Exchange proposes several
changes to its modified opening auction process, including changes to
its methodology for determining the settlement strip and the
elimination of the concepts of ``strategy orders'' \39\ and ``non-
strategy orders.'' \40\
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\37\ See id. at 35152. The proposal defines the ``settlement
strip'' as the constituent option series used to calculate the
exercise or final settlement value, as applicable, of expiring VIX
derivatives. The ``constituent option series'' are all SPX
(including SPXW) option series listed on the Exchange with the
expirations the Exchange uses to calculate the exercise or final
settlement value of the expiring VIX derivative on exercise
settlement value determination days. See proposed Exchange Rule
5.31(j)(1).
\38\ See Notice, supra note 3, 84 FR at 35152.
\39\ See Exchange Rule 6.2, Interpretation and Policy .01(c).
Currently, the Exchange deems individual orders (considered
collectively) that a market participant submits for participation in
the modified opening auction process to be a ``strategy order,''
based on related facts and circumstances considered by the Exchange,
if the orders: (1) Relate to the market participant's positions in
expiring VIX derivatives; (2) are for option series with the
expiration that the Exchange will use to calculate the exercise or
final settlement value, as applicable, of the applicable VIX
derivative; (3) are for option series with strike prices
approximating the range of series that are later determined to
constitute the constituent option series for the applicable
expiration; (4) are for put (call) options with strike prices equal
to or less (greater) than the ``at-the-money'' strike price; and (5)
have quantities approximating the weighting formula used to
determine the exercise or final settlement value, as applicable, in
accordance with the VIX methodology. See Notice, supra note 3, 84 FR
at 35153, n. 54, and current Exchange Rule 6.2, Interpretation and
Policy .01(a) (definition of ``strategy order'').
\40\ A ``non-strategy order'' is any order (including an order
in a constituent option series) a market participant submits for
participation in the modified opening procedure that is not a
strategy order (or a change to or cancellation of a strategy order).
Examples of non-strategy orders include, but are not limited to: (1)
A buy (sell) order in a constituent options series if an expected
opening information message (``EOI'') disseminated no more than two
minutes prior to the time a market participant submitted the order
included a sell (buy) imbalance and the size of the order is no
larger than the size of the imbalance in the EOI, regardless of
whether the market participant previously submitted a strategy order
or has positions in expiring volatility index derivatives; or (2) a
Market-Maker bid or offer in a constituent option series, as set
forth in Exchange Rule 6.2, Interpretation and Policy .01(e).
---------------------------------------------------------------------------
2. Determination of the Settlement Strip
Currently, the Exchange uses the opening trade prices of SPX series
that comprise the settlement strip (or the average of a series' opening
bid and ask if there is no opening trade in that series) established by
the modified opening auction process to calculate the exercise or final
settlement value of expiring VIX derivatives.\41\ In doing so, the
Exchange excludes from consideration out-of-the-money SPX put and call
options in any SPX series that have a zero bid price.\42\ The
methodology then truncates the SPX series used to calculate the VIX
settlement value after encountering two consecutive series having
``zero-bid'' prices, even if further out-of-the-money series have an
opening trade price and are ``non-zero'' bid.\43\
---------------------------------------------------------------------------
\41\ See Notice, supra note 3, 84 FR at 35157.
\42\ See id.
\43\ See id.
---------------------------------------------------------------------------
As proposed, the Exchange will no longer use the non-zero bid
provision and the two consecutive zero-bid provisions.\44\ Instead, the
Exchange proposes to determine the settlement strip as follows:
---------------------------------------------------------------------------
\44\ See id. at 35159.
---------------------------------------------------------------------------
(A) The Exchange determines the highest call strike and lowest put
strike that establish the ``strike range'' for the settlement strip
pursuant to an algorithm.
(B) The at-the-money strike price is determined in accordance with
the VIX methodology, using opening bid and offer information of each
constituent option series.
(C) The Exchange disseminates the highest call strike and lowest
put strike of the strike range to all subscribers through the
Exchange's data feeds that deliver opening auction update messages, no
later than 8:45 a.m. on exercise settlement value determination days.
(D) Each call (put) constituent option series with a strike price
not outside the strike range (i.e., a strike price equal to or greater
(less) than the at-the-money strike price up (down) to the highest call
(lowest put) strike of the strike range) is included in the settlement
strip.
(E) The Exchange may update the strike range until 9:15 a.m.
pursuant to an algorithm due to changes to the value of VIX, prices of
related futures, or other algorithmic inputs. The Exchange will
disseminate any such updates.\45\
---------------------------------------------------------------------------
\45\ See proposed Exchange Rule 5.31(j)(1) and Amendment No. 1.
---------------------------------------------------------------------------
The Exchange believes that the proposed settlement methodology may
provide additional protection against manipulation because the Exchange
will be solely responsible for determining the strike range of the
settlement strip, making it impossible for anyone to attempt to
manipulate the VIX settlement process by attempting to artificially
affect which SPX series will have zero bids at the opening and thus
potentially be included in the settlement strip.\46\ The Exchange notes
that the algorithm that will determine the strike range of the
settlement strip will employ numerous market inputs, including prices
(both on the exercise settlement value determination day (including
during the GTH trading day) and the previous trading day) of SPX
options, SPY options, and e-mini S&P 500 options.\47\ The Exchange
believes that it is therefore unlikely that one of these inputs of the
Exchange's algorithm will have a material impact on the determination
of the strike range.\48\ The Exchange designed the proposed methodology
for determining the settlement strip to approximate the same settlement
strip that would be used pursuant to the Exchange's current
methodology.\49\
---------------------------------------------------------------------------
\46\ See Notice, supra note 3, 84 FR at 35164.
\47\ See id. at 35159.
\48\ See id.
\49\ See id. at 35157.
---------------------------------------------------------------------------
3. Entry of Orders and Quotes During the Queuing Period
The Exchange's current rules generally require strategy orders to
be entered prior to the strategy order cut-off time.\50\ The proposal
eliminates the concept of both strategy orders and non-strategy orders.
Instead, during the Queuing Period prior to 9:20 a.m., the System will
continue to accept all orders and quotes (except Settlement Liquidity
Opening Orders, or SLOOs, which the System rejects), and any changes to
or cancellations of those orders and quotes. After the 9:20 a.m. cut-
off time (until the opening of trading in a series), the System will
only accept SLOOs (including changes to and cancellations of SLOOs) and
bulk message bids and offers (including
[[Page 47987]]
changes to and cancellations of bulk message bids and offers submitted
before and after the cut-off time) from Market-Makers with an SPX
appointment. After that cut-off, the System will reject all other
orders and quotes (and all other changes to and cancellations of orders
and quotes submitted prior to the cut-off time).\51\ The Exchange
states that SLOOs will provide market participants with a definitive
order type that they may use to participate in a competitive auction
without creating an imbalance condition that would prevent a series
from opening.\52\
---------------------------------------------------------------------------
\50\ See Exchange Rule 6.2, Interpretation and Policy .01(c) and
(d).
\51\ See proposed Exchange Rule 5.31(j)(3). A SLOO is a limit
order in a constituent option series designated with an OPG Time-in-
Force that Users may only submit to the Exchange on exercise
settlement value determination days following the cut-off time
described in proposed Exchange Rule 5.31(j)(3). The System cancels a
SLOO (or remaining portion thereof) that does not execute during the
modified opening auction process, and Users may not designate bulk
messages as SLOOs. If the limit price of a buy (sell) SLOO crosses
the midpoint of the then-current Opening Collar upon entry, the
System adjusts its price to equal the midpoint of the Opening Collar
(rounded up (down) to the nearest minimum increment), except for a
sell SLOO when the midpoint is less than or equal to 0.175. If the
midpoint of the Opening Collar changes during the Queuing Period,
the System re-adjusts the SLOO's price to equal to the new Opening
Collar midpoint (rounded as provided above), up to its limit price.
The Exchange does not disseminate the prices of SLOOs in the Queuing
Book. See proposed Exchange Rule 5.31(j)(1).
\52\ The Exchange notes that the proposed SLOO repricing
functionality, as described in note 51, supra, will prevent the
entry of a SLOO from creating or adding to an imbalance that would
prevent a constituent option series from opening. See id. at 35156.
---------------------------------------------------------------------------
Under the proposal, Market-Makers with an SPX appointment will
continue to be able to submit bulk message bids and offers (including
changes to and cancellations of bulk message bids and offers submitted
before and after the cut-off time) following the cut-off time, as they
do today.\53\ The Exchange notes that a Market-Maker has obligations
to, among other things, engage in dealings for the Market-Maker's own
account when there exists a lack of price continuity or a temporary
disparity between the supply of and demand for an option (i.e., an
imbalance), to compete with other Market-Makers to improve markets in
its appointed classes, and to update market quotations in response to
changed market conditions in its appointed classes.\54\ The Exchange
believes that Market-Maker participation throughout the entire modified
opening auction process may add liquidity to the process and promote a
fair and orderly opening and settlement process.\55\ In addition, the
Exchange states that it will continue to review all Trading Permit
Holder activity in constituent series on exercise settlement value
determination days for compliance with all applicable Rules.\56\
---------------------------------------------------------------------------
\53\ See id.
\54\ See id.
\55\ See id. The Exchange notes that Market-Maker quoting
activity on exercise settlement value determination days will
continue to be subject to all applicable Exchange rules. These rules
include, among others: current Exchange Rule 4.1, which prohibits a
Trading Permit Holder from engaging in acts or practices
inconsistent with just and equitable principles of trade; current
Exchange Rule 4.7, which prohibits (among other things) a Trading
Permit Holder from effecting or inducing the purchase, sale, or
exercise of any security for the purpose of creating or inducing a
false, misleading, or artificial appearance of activity in such
security or in the underlying security, or for the purpose of unduly
or improperly influencing the market price of such security or of
the underlying security or for the purpose of making a price that
does not reflect the true state of the market in such security or in
the underlying security; current Exchange Rule 4.18, which requires
a Trading Permit Holder to establish, maintain, and enforce written
policies and procedures reasonably designed, taking into
consideration the nature of such Trading Permit Holder's business,
to prevent the misuse, in violation of the Exchange Act and the
Rules, of material, nonpublic information by the Trading Permit
Holder or persons associated with the Trading Permit Holder; and
current Exchange Rule 8.7, which requires Market-Makers to, among
other things, enter into transactions in their market making
capacity that constitute a course of dealings reasonably calculated
to contribute to the maintenance of a fair and orderly market, and
not to make bids or offers or enter into transactions that are
inconsistent with such course of dealings. See id. at 335156-7.
\56\ See id. at 335157.
---------------------------------------------------------------------------
4. Auction Updates, Opening Rotation, and Opening Trade Price
Determination
On exercise settlement value determination days, the Exchange will
disseminate opening auction updates for constituent series every five
seconds, regardless of whether there are updates to the opening
information since the previously disseminated update.\57\ The opening
rotation process will occur as set forth in proposed Exchange Rule
5.31(e), except that the System will perform the Maximum Composite
Width Check and determine the Opening Trade Price pursuant to proposed
Exchange Rule 5.31(j)(5).\58\ The Maximum Composite Width Check for
constituent series on exercise settlement value determination days
differs from the Maximum Composite Width Check used on other days in
that a constituent series will not open, without exception, if the
Composite Width is greater than the Maximum Composite Width.\59\ In
that case, the Queuing Period for the series will continue, including
the dissemination of opening auction updates, until the Composite Width
is less than or equal to the Maximum Composite Width or until the
Composite Market is not crossed (as applicable), or the Exchange opens
the series pursuant to proposed Exchange Rule 5.31(h).\60\ The Exchange
states that this proposed process is similar to the current opening
auction process in classes in which the Hybrid Agency Liaison (``HAL'')
is not activated at the open.\61\
---------------------------------------------------------------------------
\57\ See proposed Exchange Rule 5.31(j)(4) and Amendment No. 1.
The Exchange believes providing frequent, regular updates in
constituent series will further enhance transparency in the modified
opening auction process. In addition, because the opening trading
prices that will be used to determine the settlement values of
expiring VIX derivatives will be determined by prices of the
constituent option series, the Exchange believes that regular
auction updates, and thus additional transparency, will contribute
to a fair and orderly auction and settlement process. See Amendment
No. 1.
\58\ See proposed Exchange Rule 5.31(j)(5) and Amendment No. 3.
\59\ See proposed Exchange Rule 5.31(j)(5)(B) and Amendment No.
1.
\60\ See id.
\61\ See Amendment No. 1.
---------------------------------------------------------------------------
After a series satisfies the Maximum Composite Width Check, the
System determines the Opening Trade Price for the series if there are
orders and quotes marketable against each other at a price not outside
the Opening Collar.\62\ If there are no such orders or quotes, there is
no Opening Trade Price.\63\ The Exchange notes that during the opening
rotation on non-exercise settlement value determination days, the
Opening Trade Price is the VMIM price that is not outside the Opening
Collar.\64\ Thus, if the System determines that the VMIM price is
outside of the Opening Collar, rather than not open, the System will
use the collar limit as the opening price.\65\ On exercise settlement
value determination days for constituent series, however, if (1) the
VMIM price is outside the Opening Collar, or (2) there would be
unexecuted market orders (or remaining portions), the series will not
open.\66\ In either case, the Queuing Period for the series will
continue (including the dissemination of opening auction updates) until
the VMIM price is not outside the Opening Collar, or the Exchange opens
the series pursuant to proposed paragraph (h).\67\ The Exchange notes
that this is consistent with the current opening
[[Page 47988]]
auction process in classes in which HAL is not activated at the
open.\68\
---------------------------------------------------------------------------
\62\ See proposed Exchange Rule 5.31(j)(5).
\63\ See Amendment No. 1.
\64\ See Notice, supra note 3, 84 FR at 35160. The System will
determine the VMIM price pursuant to proposed Rules 5.31(e)(2)(A)
through (C) in the same manner it determines the VMIM price on all
other days. See proposed Exchange Rule 5.31(j)(5)(B)(i) and Notice,
supra note 3, 84 FR at 35159-60.
\65\ See id.
\66\ See proposed Exchange Rule 5.31(j)(5)(B)(iii) and Amendment
No. 1.
\67\ See id.
\68\ See Notice, supra note 3, 84 FR at 35160.
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5. Opening Rotation Self-Trades
Under the proposed modified opening process, a market participant
could submit orders that replicate the vega, or volatility, exposure of
its expiring VIX derivatives prior to the cut-off time, and then submit
a SLOO after the cut-off time to contribute liquidity to the opening
process, including to offset any imbalances.\69\ Assuming there were no
other factors demonstrating a different purpose, the SLOO might not
have been intended to execute against the vega replicating order (and
thus effect a transaction that involves no change in beneficial
ownership to create a false or misleading appearance of active trading
in SPX options). Rather, the SLOO could have been intended to
contribute liquidity to the modified opening auction process to offset
an existing imbalance and to contribute to a fair and orderly opening
process for that series.\70\
---------------------------------------------------------------------------
\69\ See id.
\70\ See id.
---------------------------------------------------------------------------
To accommodate fair and orderly trading in the modified opening
auction process, the Exchange proposes to state in the Rules that,
subject to other facts and circumstances (such as that may demonstrate
a different purpose for the submission of the orders), the Exchange
will not consider self-trades resulting from the execution of a User's
orders against each other during the opening rotation of the modified
opening auction process to be violations of Section 9(a)(1) of the
Exchange Act.\71\ The Exchange will review all activity, including
these executions, during the modified opening auction process for
compliance with the Exchange Act and with the Exchange's rules,
including rules prohibiting manipulation.\72\
---------------------------------------------------------------------------
\71\ 15 U.S.C. 78(i)(a)(1). See proposed Exchange Act Rule
5.31(j)(6).
\72\ See proposed Exchange Act Rule 5.31(j)(6). See also Notice,
supra note 3, 84 FR at 35161-2.
---------------------------------------------------------------------------
The Exchange represents that it has an adequate surveillance
program in place to review options activity during the modified opening
auction process that occurs on each exercise settlement value
determination day.\73\ In addition, the Exchange states that it is
updating its surveillance program to reflect the proposed amendments to
the process, and that it will continue to review its surveillance
program to determine whether additional enhancements are necessary or
appropriate.\74\ The Exchange notes that all market participants will
be continue to be required to abide by current Exchange Rules 4.1, 4.7,
and 4.18.\75\
---------------------------------------------------------------------------
\73\ See id. at 35162.
\74\ See id.
\75\ See id. at 35164.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment Nos. 1, 2, and 3, is consistent with
the requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange and, in particular, with
Section 6(b) of the Act.\76\ In particular, the Commission finds that
the proposed rule change is consistent with Section 6(b)(5) of the
Act,\77\ which requires, among other things, that the rules of a
national securities 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.
---------------------------------------------------------------------------
\76\ 15 U.S.C. 78f(b). In approving this proposed rule change,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\77\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission believes that the proposed opening auction process
is consistent with the protection of investors and the public interest
because it is designed to provide a fair and orderly opening for
options traded on the Exchange. The Commission notes that the proposed
standard opening process is substantially identical to the opening
processes used on two other exchanges.\78\
---------------------------------------------------------------------------
\78\ See C2 Rule 6.11 and EDGX Options Rule 21.7.
---------------------------------------------------------------------------
The proposed modified opening auction process for expiring VIX
derivatives will operate in a manner that is substantially similar to
the Exchange's current modified opening auction process, but with
certain changes, as described above.\79\ While the Exchange has
designed its new methodology of determining the settlement strip to
largely replicate how settlement strips are determined today, the new
methodology reduces the potential that a market participant would be
able to manipulate the VIX settlement process by attempting to affect
which SPX series will (and will not) have zero bids at the opening,
which impacts which strikes are included in the strip.\80\ The
Commission believes that the proposed changes to the methodology for
determining the settlement strip are designed to protect investors and
the public interest by reducing the potential for manipulative or
disruptive trading in connection with the modified opening auction
process used on exercise settlement value determination days.
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\79\ See Notice, supra note 3, 84 FR at 35163.
\80\ See id. at 35164.
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The Commission believes that the proposal to eliminate the concept
of strategy orders, and instead permit two types of market activity
following the cut-off time--the submission of SLOOs and quotes from
Market-Makers with an SPX appointment--could help to attract liquidity
to trade against imbalances and reduce the likelihood that a
constituent option series will fail to open, thereby helping to
facilitate an orderly opening for VIX derivatives. The proposed SLOOs
are designed to provide market participants with an order type they may
submit following the cut-off time, which could encourage them to
provide liquidity to offset order imbalances. In addition, the SLOO
repricing functionality will prevent the entry of a SLOO from creating
or adding to an imbalance that would prevent a constituent option
series from opening.\81\
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\81\ See id. at 35156.
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The Commission notes that all market participants will continue to
be required to comply with current Exchange Rules 4.1 (Just and
Equitable Principles of Trade), 4.7 (Manipulation), and 4.18
(Prevention of the Misuse of Material, Nonpublic Information).\82\ In
addition, the Exchange will continue to conduct surveillance to monitor
all trading activity in constituent option series on exercise
settlement value determination days, including but not limited to
monitoring the entry of orders and quotes following the cut-off time,
as well as compliance with other Exchange rules,\83\ which the
Commission believes is essential to protect investors and the public
interest.
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\82\ See id.
\83\ See id.
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For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment Nos. 1, 2, and 3, is consistent
with Sections 6(b)(5) of the Act.\84\
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\84\ 15 U.S.C. 78f(b)(5).
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IV. Solicitation of Comments on Amendment Nos. 1, 2, and 3 to the
Proposed Rule Change
Interested persons are invited to submit written data, views, and
arguments concerning whether
[[Page 47989]]
Amendment Nos. 1, 2, and 3 are 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-2019-034 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-2019-034. 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-2019-034, and should be submitted
on or before October 2, 2019.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment Nos. 1, 2, and 3
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment Nos. 1, 2, and 3 prior to the
thirtieth day after the date of publication of notice of the filing of
Amendment No. 1 in the Federal Register. Amendment No. 1 clarifies
several aspects of the proposal, including by providing additional
details regarding the settlement strip and the timing and frequency of
opening auction updates, without introducing new material concepts. In
addition, Amendment No. 1 modifies the application of the Maximum
Composite Width Check to provide that a constituent option series will
not open if the Composite Width is greater than the Maximum Composite
Width, without exception. The Exchange notes that this is similar to
the current opening auction process in classes in which HAL is not
activated at the open. The Commission believes that the proposed change
to the Maximum Composite Width Check should protect investors by
helping to assure that the constituent option series, which are used to
determine the settlement value of expiring VIX derivatives, open at
prices that are consistent with current market conditions. Accordingly,
the Commission believes that Amendment No. 1 does not raise novel
regulatory issues. Amendment Nos. 2 and 3 correct a few errors in the
rule text, thereby helping to assure the accuracy and clarity of the
proposed rules in a manner that is consistent with the original
proposal and that do not introduce new concepts or raise novel
regulatory issues. Accordingly, the Commission finds good cause,
pursuant to Section 19(b)(2) of the Act,\85\ to approve the proposed
rule change, as modified by Amendment Nos. 1, 2, and 3, on an
accelerated basis.
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\85\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\86\ that the proposed rule change (SR-CBOE-2019-034), as modified
by Amendment Nos. 1, 2, and 3, is approved on an accelerated basis.
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\86\ 15 U.S.C. 78s(b)(2).
\87\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\87\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-19611 Filed 9-10-19; 8:45 am]
BILLING CODE 8011-01-P
