Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the AIM Automated Improvement Mechanism Upon the Migration of the Exchange's Trading Platform to the Same System Used by the Cboe Affiliated Exchanges, 51673-51681 [2019-21098]
Download as PDF
<![CDATA[
Federal Register / Vol. 84, No. 189 / Monday, September 30, 2019 / Notices
SECURITIES AND EXCHANGE
COMMISSION
at the Commission’s Public Reference
Room.
[Release No. 34–87072; File No. SR–CBOE–
2019–045]
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the AIM
Automated Improvement Mechanism
Upon the Migration of the Exchange’s
Trading Platform to the Same System
Used by the Cboe Affiliated Exchanges
September 24, 2019.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 11, 2019, Cboe Exchange,
Inc. (the ‘‘Exchange’’ or ‘‘Cboe
Options’’) filed with the Securities and
Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Exchange filed the proposal as a ‘‘noncontroversial’’ proposed rule change
pursuant to Section 19(b)(3)(A)(iii) of
the Act 3 and Rule 19b–4(f)(6)
thereunder.4 The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
khammond on DSKJM1Z7X2PROD with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to amend
the Automated Improvement
Mechanism (‘‘AIM’’) and move it from
the currently effective Rulebook
(‘‘current Rulebook’’) to the shell
structure for the Exchange’s Rulebook
that will become effective upon the
migration of the Exchange’s trading
platform to the same system used by the
Cboe Affiliated Exchanges (as defined
below) (‘‘shell Rulebook’’). The text of
the proposed rule change is provided in
Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/CBOELegal
RegulatoryHome.aspx), at the
Exchange’s Office of the Secretary, and
4 17
CFR 240.19b–4(f)(6).
Rule 5.37 is substantially the same as
EDGX Options Rule 21.19, except as otherwise
described below.
6 The proposed rule change also adds to the
proposed introductory paragraph that for purposes
5 Proposed
VerDate Sep<11>2014
19:16 Sep 27, 2019
Jkt 247001
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
In 2016, the Exchange’s parent
company, Cboe Global Markets, Inc.
(formerly named CBOE Holdings, Inc.)
(‘‘Cboe Global’’), which is also the
parent company of Cboe C2 Exchange,
Inc. (‘‘C2’’), acquired Cboe EDGA
Exchange, Inc. (‘‘EDGA’’), Cboe EDGX
Exchange, Inc. (‘‘EDGX’’ or ‘‘EDGX
Options’’), Cboe BZX Exchange, Inc.
(‘‘BZX’’ or ‘‘BZX Options’’), and Cboe
BYX Exchange, Inc. (‘‘BYX’’ and,
together with Cboe Options, C2, EDGX,
EDGA, and BZX, the ‘‘Cboe Affiliated
Exchanges’’). The Cboe Affiliated
Exchanges are working to align certain
system functionality, retaining only
intended differences between the Cboe
Affiliated Exchanges, in the context of a
technology migration. Cboe Options
intends to migrate its trading platform to
the same system used by the Cboe
Affiliated Exchanges, which the
Exchange expects to complete on
October 7, 2019. Cboe Options believes
offering similar functionality to the
extent practicable will reduce potential
confusion for market participants.
In connection with this technology
migration, the Exchange has a shell
Rulebook that resides alongside its
current Rulebook, which shell Rulebook
will contain the Rules that will be in
place upon completion of the Cboe
Options technology migration. The
Exchange proposes to delete Rule 6.74A
in the current Rulebook and add the
provisions regarding AIM Auctions for
simple orders, as proposed to be
modified in this rule filing, to Rule 5.37
in the shell Rulebook.5
3 15
PO 00000
U.S.C. 78s(b)(3)(A)(iii).
Frm 00166
Fmt 4703
Sfmt 4703
51673
The proposed rule change clarifies in
the proposed introductory paragraph 6
that the Initiating Order may consist of
one or more solicited orders. This
accommodates multiple contra-parties
and increases the opportunities for
customer orders to be submitted into an
AIM Auction with the potential for
price improvement, since the Initiating
Order must stop the full size of the
Agency Order. This has no impact on
the execution of the Agency Order,
which may already trade against
multiple contra-parties depending on
the final auction price, as set forth in
proposed paragraph (e). This proposed
change is consistent with the
Exchange’s current interpretation of
current Rule 6.74A, and the proposed
rule change clarifies this in the Rule.7
The proposed rule change moves the
restriction that a solicited order cannot
be for the account of any Market-Maker
appointed in the class from current
Interpretation and Policy .04 to the
proposed introductory paragraph.
Proposed Rule 5.37(a)(5) states the
Trading Permit Holder that
electronically submits an order into an
AIM Auction (the ‘‘Initiating TPH’’) may
not designate an Agency Order or
Initiating Order as Post Only. A Post
Only order is an order the System ranks
and executes pursuant to proposed Rule
5.32, subjects to the Price Adjust
process pursuant to Rule 5.32, or
cancels or rejects (including if it is not
subject to the Price Adjust process and
locks or crosses a Protected Quotation of
another exchange), as applicable (in
accordance with User instructions),
except the order or quote may not
remove liquidity from the Book or route
away to another Exchange. The
Exchange does not currently offer Post
Only order functionality, but will as of
the technology migration.8 The
Exchange believes it is appropriate to
not permit the Agency or Initiating
Order to be designated as Post Only, as
the purpose of a Post Only order is to
not execute upon entry and instead rest
4 17
CFR 240.19b–4(f)(6).
Rule 5.37 is substantially the same as
EDGX Options Rule 21.19, except as otherwise
described below.
6 The proposed rule change also adds to the
proposed introductory paragraph that for purposes
of proposed Rule 5.37, the term ‘‘NBBO’’ means the
national best bid or offer at the particular point in
time applicable to the reference, and the term
‘‘Initial NBBO’’ means the national best bid or
national best offer at the time an AIM Auction is
initiated. This is merely an addition of terminology
used throughout the Rule, but has no impact on
functionality.
5 Proposed
E:\FR\FM\30SEN1.SGM
30SEN1
51674
Federal Register / Vol. 84, No. 189 / Monday, September 30, 2019 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
in the Book, while the purpose of an
AIM Auction is to receive an execution
following the Auction but prior to
entering the Book.
Proposed Rule 5.37(a)(6) states the
Initiating TPH may only submit an
Agency Order to an AIM Auction after
the market open. This is consistent with
current functionality, as executions
cannot occur prior to the opening of
trading. The proposed rule change
clarifies this in the Rule.
Proposed Rule 5.37(a)(7) states the
Initiating TPH may not submit an
Agency Order if the NBBO is crossed
(unless the Agency Order is an AIM
Intermarket Sweep Order (‘‘AIM ISO’’)
or Sweep and AIM order (see discussion
below). This is consistent with current
functionality, and the proposed rule
change clarifies this in the Rule. The
Exchange believes it is appropriate to
not permit an AIM Auction to be
initiated if the NBBO is crossed, as a
crossed NBBO may indicate price
uncertainty within the market. The
Exchange believes this may prevent
executions at potentially erroneous
prices.
The proposed rule change moves the
various other AIM Auction eligibility
requirements to proposed paragraph (a)
and makes nonsubstantive changes:
• The requirement that an Agency
Order be in a class of options the
Exchange designates as eligible for AIM
Auctions remains in subparagraph
(a)(1).9
• The requirement that the Initiating
TPH mark an Agency Order for AIM
processing moves from current
subparagraph (b)(1)(A) to proposed
subparagraph (a)(2).
• The provision that there is no
minimum size for Agency Orders moves
from current Interpretation and Policy
.03 to proposed subparagraph (a)(3).
Additionally, the requirement that the
Initiating Order be for the same size as
the Agency Order moves from current
subparagraphs (a)(2) and (a)(3) to
proposed subparagraph (a)(3).
• The provision regarding the
minimum increment for the Agency
Order and Initiating Order price moves
from current subparagraph (a)(3) to
proposed subparagraph (a)(4). As further
9 The proposed rule change deletes the provision
that the Agency Order be within the designated
Auction order eligibility size parameters
determined by the Exchange, as the current and
proposed rule explicitly state any applicable size
parameters, as discussed below. Additionally, the
Exchange will announce all determinations it may
make with respect to an AIM Auction pursuant to
Rule 1.2 in the current Rulebook (Rule 1.5 in the
shell Rulebook), and therefore deletes current
Interpretation and Policy .05 (and other provisions
regarding how the Exchange will announce these
determinations).
VerDate Sep<11>2014
19:16 Sep 27, 2019
Jkt 247001
discussed below, the proposed rule
change deletes he requirement that
during Regular Trading Hours, at least
three Market-Makers with an
appointment in the class are quoting in
the relevant series to initiate an AIM
Auction moves from current
subparagraph (a)(4). The proposed rule
change also explicitly states that all of
the eligibility requirements in proposed
paragraph (a) must be met for an AIM
Auction to be initiated, and that the
System rejects or cancels both an
Agency Order and Initiating Order
submitted to an AIM Auction that do
not meet the conditions in proposed
paragraph (a).
Proposed subparagraph (b)(2) states if
the Agency Order is to buy (sell), the
stop price must be at least one
minimum increment better than the
Exchange best bid (offer), unless the
Agency Order is a Priority Customer
order and the resting order is not a
Priority Customer, in which case the
stop price must be at or better than the
Exchange best bid (offer). Current Rule
6.74A(b)(3)(I) states if the final auction
price locks a Priority Customer order in
the Book on the same side of the market
as the Agency Order, then, unless there
is sufficient size in the Auction
responses to execute both the Agency
Order and the booked Priority Customer
order (in which case they will both
execute at the final auction price), the
Agency Order will execute against the
auction responses at one minimum
increment worse than the final auction
price against the auction participants
that submitted the final auction price
and any balance will trade against the
priority customer order in the book at
the order’s limit price. The proposed
rule change protects Priority Customers
on the same side of the Book as the
current rule does, except it does so by
applying a check at the initiation of an
AIM Auction rather than at the
conclusion of an AIM Auction. By
permitting a Priority Customer Agency
Order to trade at the same price as a
resting non-Priority Customer order, the
proposed rule change also protects
Priority Customer orders submitted into
an AIM Auction. Additionally,
application of this check at the
initiation of an AIM Auction may result
in the Agency Order executing at a
better price, since the stop price must
improve any same-side orders (with the
exception of a Priority Customer Agency
Order and a resting non-Priority
Customer order described above), as
under the current Rule, the Agency
Order may execute at one minimum
increment worse. The proposed rule
PO 00000
Frm 00167
Fmt 4703
Sfmt 4703
change is consistent with general
customer priority principles.
The proposed rule change adds
subparagraph (b)(3), which states if
there is a buy (sell) all-or-none (‘‘AON’’)
order (either Priority Customer or nonPriority Customer) resting on the Book
at a price at or better than the Exchange
best bid (offer), the stop price must be
at least one minimum increment higher
(lower) than the price of the buy (sell)
AON order. The following examples
demonstrate this proposed
functionality:
Example #1
Suppose the BBO for a series is 1.00
to 1.05, and an AON order to sell is
resting on the Book at an offer price of
1.04. An Initiating TPH submits an
Agency Order to buy paired with an
Initiating Order at a stop price of 1.04.
The System will reject the Agency Order
and Initiating Order, because the stop
price equals the offer price of a resting
sell AON Order on the Book (which
offer price is lower than the Exchange
best offer).
Example #2
Suppose the BBO for a series is 1.00
to 1.05, and an AON order to sell is
resting on the Book at an offer price of
1.01. An Initiating TPH submits an
Agency Order to buy paired with an
Initiating Order at a stop price of 1.02.
The System will reject the Agency Order
and Initiating Order, because the stop
price is higher than the offer price of a
resting sell AON Order on the Book
(which offer price is better than the
Exchange best offer).
Example #3
Suppose the BBO for a series is 1.00
to 1.05, and an AON order to sell is
resting on the Book at an offer price of
1.01. An Initiating TPH submits an
Agency Order to sell paired with an
Initiating Order at a stop price of 1.02.
The System will reject the Agency Order
and Initiating Order, because the stop
price is higher than the offer price of a
resting sell AON Order on the Book
(which offer price is better than the
Exchange best offer).
As discussed below, due to technical
complexities, AON orders resting on the
Book at the conclusion of an AIM
Auction will not be eligible for
execution against the Agency Order. If
the Exchange were to initiate an AIM
Auction for a buy Agency Order at a
stop price equal to or through the price
of a resting AON order on the opposite
side of the Book, and that AON order
were not eligible for execution against
the Agency Order (if the stop price was
the final auction price), that marketable
E:\FR\FM\30SEN1.SGM
30SEN1
khammond on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 84, No. 189 / Monday, September 30, 2019 / Notices
AON order would miss a potential
execution opportunity that it could have
had if an auction had not occurred
(assuming its size contingency could be
met after execution of all other
interest).10 Therefore, the Exchange
believes the proposed rule change will
protect AON orders resting on the Book
at the time an AIM Auction begins.
The proposed rule change moves and
makes nonsubstantive changes to the
other provisions regarding the
requirements for the price at which the
Initiating Order must stop the entire
Agency Order in proposed paragraph
(b):
• The requirement that the stop price
must be (1) at least one minimum
increment better than the then-current
NBBO or the Agency Order’s limit price
(if the order is a limit order), whichever
is better, if the Agency Order is for less
than 50 standard option contracts (or
500 mini-option contracts); or (2) at or
better than the then-current NBBO) or
the Agency Order’s limit price,
whichever is better, if the Agency Order
is for 50 standard option contracts (or
500 mini-option contracts) or more,
moves from current subparagraphs (a)(2)
and (3) to proposed subparagraph (b)(1).
• The provisions that require the
Initiating TPH to specify (1) a single
price at which it seeks to execute the
Agency Order against the Initiating
Order (a ‘‘single-price submission’’),
including whether it elects to have last
priority in allocation; or (2) an initial
stop price and instruction to
automatically match the price and size
of all AIM responses and other contraside trading interest (‘‘auto-match’’) at
each price up to a designated limit
price, or at all prices, better than the
price at which the balance of the
Agency Order can be fully executed (the
‘‘final auction price’’) move from
current subparagraph (b)(1)(A) to
proposed subparagraph (b)(5).
• The descriptions of AIM Sweep
orders and Sweep and AIM orders move
from current Rule 6.53 to proposed Rule
5.37(b)(4). The proposed rule change
explicitly states that AIM responses, the
stop price, and executions are permitted
at a price inferior to the Initial NBBO if
the Initiating TPH submits an AIM
Sweep or Sweep and AIM Order to an
AIM Auction, but the stop price is still
subject to the price improvement
requirement described above if the
Agency Order is for less than 50
standard option contracts (or 500 mini10 See Rule 6.45(a)(v) in the current Rulebook
(Rule 5.32(a)(3)(C) in the shell Rulebook) (which
provides that an AON order is always last in
priority).
VerDate Sep<11>2014
19:16 Sep 27, 2019
Jkt 247001
option contracts).11 The proposed rule
change adds that the two orders
submitted as a Sweep and AIM order
may not both be for the accounts of
Priority Customers. Unlike an AIM ISO
(for which the Initiating TPH sends an
ISO),12 the Exchange sends the ISO for
a Sweep and AIM order and then
receives the fill report for the ISO
during the AIM Auction period, so it
knows by the end of the AIM Auction
how much of the Agency Order is left
for execution against contra-interest on
the Exchange. If both orders were for
Priority Customers, they would
immediately cross pursuant to
paragraph (f) (as described below), prior
to the Exchange receiving information
regarding the size of any executions on
away exchanges (and thus prior to
knowing the NBBO that price of the
immediate cross should have traded
through). Not permitting pairs of
Priority Customer orders to be
submitted as Sweep and AIM orders
ensures that the Agency Order is not
oversubscribed, which can be prevented
if there is an AIM Auction period, and
that the immediate cross occurs at a
price at or better than the NBBO. TPHs
can submit these pairs of orders through
the AIM Auction process. The Exchange
believes there is minimal demand to
submit pairs of Priority Customer orders
as Sweep and AIM orders.
The proposed rule change also
explicitly states that all of the
conditions in proposed paragraph (b)
must be met for an AIM Auction to be
initiated, and that the System rejects or
cancels both an Agency Order and
Initiating Order submitted to an AIM
Auction that do not meet the conditions
in proposed paragraph (b).
Proposed paragraph (c) describes the
AIM Auction process. Currently, only
one AIM auction may be ongoing at any
given time in a series, and AIM
Auctions in the same series may not
queue or overlap in any manner.
Proposed subparagraph (c)(1) states with
respect to Agency Orders for less than
50 standard option contracts (or 500
mini-option contracts), only one AIM
11 Rule filing SR–CBOE–2019–027 deleted the
definitions of AIM Sweep and Sweep and AIM
orders from the current Rulebook, which deletion
will not take effect until the completion of the
technology migration, at which time the proposed
rule change will take effect.
12 TPHs are responsible for sending the ISO order
for an AIM ISO, and thus the Exchange does not
need to wait for a fill report for the ISO. Because
it is a TPH’s responsibility to send the ISO, and
thus account for any executions resulting from that
ISO at away exchanges (and the resulting NBBO),
the proposed rule change does not prohibit pairs of
Priority Customer orders to be submitted as an AIM
ISO. However, the Exchange believes there is
minimal demand for use of this order type for pairs
of Priority Customer orders.
PO 00000
Frm 00168
Fmt 4703
Sfmt 4703
51675
Auction may be ongoing at any given
time in a series, and AIM Auctions in
the same series may not queue or
overlap in any manner. Therefore, the
proposed rule change has no impact on
these smaller Agency Orders. However,
for Agency Orders of 50 standard option
contracts (or 500 mini-option contracts)
or more, the proposed rule change states
one or more AIM Auctions in the same
series may occur at the same time. To
the extent there is more than one AIM
Auction in a series underway at a time,
the AIM Auctions conclude sequentially
based on the exact time each AIM
Auction commenced, unless terminated
early pursuant to paragraph (d). At the
time each AIM Auction concludes, the
System allocates the Agency Order
pursuant to paragraph (e) and takes into
account all AIM Auction responses and
unrelated orders and quotes in place at
the exact time of conclusion. In the
event there are multiple AIM Auctions
underway that are each terminated early
pursuant to paragraph (d), the System
processes the AIM Auctions
sequentially based on the exact time
each AIM Auction commenced. The
Exchange believes the proposed new
functionality may lead to an increase in
AIM Auctions, which may provide
additional opportunities for price
improvement for Agency Orders.
The proposed rule change moves and
makes nonsubstantive changes to other
provisions regarding the AIM Auction
process to proposed paragraph (c):
• The proposed rule change moves
the provision regarding the AIM
Auction notification message (currently
called a request for responses (‘‘RFR’’))
from current subparagraph (b)(1)(B) to
proposed subparagraph (c)(2). The
proposed provision specifies that the
message will detail the side, size,
Auction ID, and options series of the
Agency Order to all Users that elect to
receive AIM Auction notification
messages. This is consistent with the
current RFR that is disseminated; the
proposed rule change adds these details
to the rule. The proposed rule change
also adds that AIM Auction notification
messages are not included in the
disseminated BBO or OPRA, which is
also consistent with current
functionality.
• The proposed rule change moves
the provision regarding the length of the
AIM Auction period from current
subparagraph (b)(1)(C) to proposed
subparagraph (c)(3). The proposed rule
change makes no changes to the current
range of permitted lengths of AIM
Auction periods.
• The proposed rule change moves
the provision that prohibits an Initiating
TPH from modifying or cancelling an
E:\FR\FM\30SEN1.SGM
30SEN1
51676
Federal Register / Vol. 84, No. 189 / Monday, September 30, 2019 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
Agency Order or Initiating Order after
submission to an AIM Auction from
current subparagraph (b)(1)(A) to
proposed subparagraph (c)(4).
The proposed rule change also moves
all provisions regarding AIM Auction
responses into proposed subparagraph
(c)(5), as well as makes certain changes
described below, as well as
nonsubstantive changes:
• The proposed rule change moves
the provision regarding which market
participants may respond to AIM
Auctions, as well as what must be
specified in the responses (including
price, size, side, and Auction ID) from
current subparagraphs (b)(1)(D) and (E)
to proposed subparagraph (c)(5). The
current rule specifies that responses
must specify prices and sizes; the
proposed rule change adds responses
must also specify side and an Auction
ID. The proposed rule change adds that
an AIM response may only participate
in the AIM Auction with the Auction ID
specified in the response. This is
consistent with current functionality.13
The Exchange proposes to include this
language given the above proposal that
permits concurrent AIM Auctions in the
same series for larger Agency Orders.
Currently, only Market-Makers with
an appointment in the applicable class
and TPHs representing orders as agent
at the top of the Book may respond to
AIM Auctions.14 The Exchange
proposes to permit all Users to respond
to AIM Auctions. By permitting
additional participants to submit
responses to AIM Auctions, the
Exchange believes this may provide the
opportunity for additional liquidity in
these auctions, which could lead to
additional price improvement
opportunities. EDGX Options similarly
permits all Users to respond to AIM
Auctions.15 In connection with this
change, the proposed rule change
deletes the requirement in current Rule
6.74A(a)(4) that during Regular Trading
Hours, at least three Market-Makers
with an appointment in the class be
quoting in the relevant series to initiate
a simple AIM Auction. The purpose of
13 Current subparagraph (b)(3)(K) permits an
unexecuted balance of an AIM Auction response
after the Agency Order has been executed and the
balance to trade against any unrelated order(s) that
cause the AIM Auction to conclude. The proposed
rule change deletes that provision given the
proposed rule change to permit concurrent
auctions, as described above, and thus the
requirement that responses may only trade with an
Agency Order in the AIM Auction into which the
AIM response was submitted. If a responder wishes
to execute interest against any orders that caused
an AIM Auction to conclude and that are resting in
the Book, that responder may separately submit an
order to the Exchange.
14 See current Rule 6.74A(b)(1)(D) and (E).
15 See EDGX Options Rule 21.19(c)(5).
VerDate Sep<11>2014
19:16 Sep 27, 2019
Jkt 247001
this requirement was to ensure there
were a minimum number of MarketMakers active in a series and thus
available to potentially submit
responses to an AIM Auction and
provide liquidity to simple AIM
Auctions, given the restriction on
market participants that may respond to
those Auctions. Given the proposed rule
change to open AIM Auctions up to all
Users, the Exchange believes the threequoter requirement is no longer
necessary.
• The proposed rule change moves
the provision regarding the permissible
minimum increment for AIM responses
from current subparagraph (b)(1)(G) to
proposed subparagraph (c)(5)(A).
• Proposed subparagraph (c)(5)(B)
states AIM buy (sell) responses are
capped at the Exchange best offer (bid),
or one minimum increment better than
the Exchange best offer (bid) if it is
represented by a Priority Customer on
the Book (unless the Agency Order is an
AIM ISO or Sweep and AIM) that exists
at the conclusion of the AIM Auction.
The System will execute AIM responses,
if possible, at the most aggressive
permissible price not outside the BBO at
the conclusion of the AIM Auction or
the Initial NBBO. This is consistent with
current subparagraph (b)(1)(E). The
proposed rule change ensures the
execution price of a response will not
cross the Initial NBBO in accordance
with linkage rules.16 Additionally,
proposed subparagraph (e) requires the
execution price to be at or between the
BBO at the conclusion of the AIM
Auction. Therefore, as proposed, the
price at which any response may
execute will ultimately not be through
the Initial NBBO or the BBO at the
conclusion of the AIM Auction.
• Proposed subparagraph (c)(5)(C)
states a User may submit multiple AIM
responses at the same or multiple prices
to an AIM Auction. This is consistent
with current functionality. Current Rule
6.74A contains no restriction on how
many responses a User may submit; the
proposed rule change merely makes this
explicit in the Rules. The proposed rule
change also states for purposes of an
AIM Auction, the System aggregates all
of a User’s orders and quotes on the
Book and AIM responses for the same
EFID at the same price. This (combined
with the proposed size cap) will prevent
a User from submitting multiple orders,
quotes, or responses at the same price to
obtain a larger pro-rata share of the
Agency Order.
16 See current Rule 6.81(b)(8) (proposed Rule
5.66(b)(8)) (requires an order to be stopped at a
price no worse than the price at the time of receipt
of the order).
PO 00000
Frm 00169
Fmt 4703
Sfmt 4703
• Proposed subparagraph (c)(5)(D)
states the System caps the size of an
AIM response, or the aggregate size of a
User’s orders and quotes on the Book
and AIM responses for the same EFID at
the same price, at the size of the Agency
Order (i.e., the System ignores size in
excess of the size of the Agency Order
when processing the AIM Auction).
This is consistent with current
subparagraph (b)(1)(H), except the
proposed rule change caps the aggregate
size of a User’s interest at the same
price, rather than the size of an
individual response. The Exchange
believes this is reasonable to prevent a
User from submitting an order, quote, or
response with an extremely large size in
order to obtain a larger pro-rata share of
the Agency Order.
• Proposed subparagraph (c)(5)(E)
states AIM responses must be on the
opposite side of the market as the
Agency Order, and the System rejects an
AIM response on the same side of the
market as the Agency Order. This is
consistent with current functionality,
and the proposed rule change merely
adds this detail to the rules.
Additionally, the Exchange believes this
is reasonable given that the purpose of
an AIM response is to trade against the
Agency Order in the AIM Auction into
which the AIM response was submitted.
• Proposed subparagraph (c)(5)(F)
states AIM responses may be designated
with the match trade prevention
(‘‘MTP’’) modifier of MTP Cancel
Newest, but no other MTP modifiers,
and the System rejects an AIM response
with any other MTP modifier.17 An
incoming order marked with MTP
Cancel Newest will not execute against
opposite side interest marked with any
MTP modifier originating from the same
Unique Identifier, and the incoming
order (the AIM response in this case)
will be cancelled back to the originating
User. If an Agency Order and response
have the same Unique Identifier and an
MTP modifier, the System will cancel
the response and permit the Agency
Order to execute against other interest.
This is consistent with the prohibition
on the Agency Order being cancelled
after it is submitted.
• Proposed subparagraph (c)(5)(G)
states AIM responses may not be
designated as immediate-or-cancel
(‘‘IOC’’) or fill-or-kill (‘‘FOK’’) and the
System rejects an AIM response
17 See Rule 5.6(c) in the shell Rulebook for
definitions of the various types of MTP Modifiers
that will be available on the Exchange as of the
System migration. The Exchange does not currently
have any equivalent to an MTP modifier that may
be applied to orders or auction responses.
E:\FR\FM\30SEN1.SGM
30SEN1
Federal Register / Vol. 84, No. 189 / Monday, September 30, 2019 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
designated as IOC or FOK.18 This is
consistent with the purpose of an AIM
response, which is to potentially
execute against an Agency Order at the
conclusion of an AIM Auction (and thus
not immediately upon entry, as required
by the times-in-force of IOC and FOK).19
• The provision that states AIM
responses are not visible to AIM
Auction participants or disseminated to
OPRA moves from current subparagraph
(b)(1)(F) to proposed subparagraph
(c)(5)(H).
• The provision that states AIM
responses may be cancelled moves from
current subparagraph (b)(1)(I) to
proposed subparagraph (c)(5)(I). The
proposed rule change also clarifies that
AIM responses may be modified (which
is consistent with current functionality
and merely clarified in the rules).20
Proposed paragraph (d) states that an
AIM Auction concludes at the earliest to
occur of the following times:
• The end of the AIM Auction period
(consistent with current subparagraph
(b)(2)(A);
• upon receipt by the System of a
Priority Customer order on the same
side of the market with a price the same
as or better than the stop price that
would post to the Book;
• upon receipt by the System of an
unrelated order or quote, including a
Post Only order or quote, that is not a
Priority Customer order on the same
side of the market as the Agency Order
that would cause the stop price to be
outside of the BBO;
• the market close (consistent with
current functionality and merely added
to the rules); and
• any time the Exchange halts trading
in the affected series, provided,
however, that in such instance the AIM
Auction concludes without execution
(consistent with current subparagraph
(b)(2)(F), and the proposed rule change
adds detail that an AIM Auction in such
a case will conclude without execution,
which is consistent with current
functionality, as no executions may
18 See Rule 5.6(d) in the shell Rulebook. Current
AIM response functionality does not permit a User
to apply these order instructions to AIM responses.
19 If a user designates an AIM response as Post
Only, the System accepts the response but
disregards the Post Only instruction, as the
response (like all AIM responses) will execute
against the Agency Order or cancel at the
conclusion of the AIM Auction. In an AIM Auction,
the Agency Order is treated as a taker of liquidity,
while a response is treated like a maker of liquidity,
and therefore responses are consistent with the
purpose of a Post Only order instructions (which is
to not remove liquidity from the Book upon entry).
20 Proposed subparagraph (e)(6) states the System
will cancel or reject any unexecuted AIM responses
(or unexecuted portions) at the conclusion of the
AIM Auction.
VerDate Sep<11>2014
19:16 Sep 27, 2019
Jkt 247001
occur while a series is halted for
trading).
The proposed rule change deletes the
following events that currently cause an
AIM Auction to conclude early:
• Upon receipt by the System of an
unrelated order (in the same series as
the Agency Order) that is marketable
against either the BBO (when such
quote is the NBBO) or the RFR
responses;
• upon receipt by the System of an
unrelated limit order (in the same series
as the Agency Order and on the
opposite side of the market as the
Agency Order) that improves any RFR
responses; and
• any time there is a quote lock on the
Exchange pursuant to current Rule
6.45(c).
As discussed below, unrelated orders
on the opposite side of the Agency
Order received during the AIM Auction
may execute against interest outside of
the AIM Auction, and therefore, the
Exchange will no longer terminate an
AIM Auction due to the receipt of an
order on the opposite side of the Agency
Order.21 The proposed rule change to
conclude an AIM Auction early upon
receipt of certain orders on the same
side as the Agency Order ensure that the
execution price does not occur at the
same price as a Priority Customer order
on the Book or at a price worse on than
a non-Priority Customer order on the
Book. This is consistent with the
requirements for the stop price
described above. Additionally, the
Exchange will not have quote lock
functionality following the technology
migration, and therefore proposes to
delete that as an event that may cause
an AIM Auction to terminate early.22
An unrelated market or marketable
limit order (against the BBO), including
a Post Only Order, on the opposite side
of the Agency Order received during the
AIM Auction does not cause the AIM
Auction to end early and executes
against interest outside of the AIM
Auction. If contracts remain from such
unrelated order at the time the AIM
Auction ends, they may be allocated for
execution against the Agency Order
pursuant to proposed paragraph (e).
Because these orders may have the
opportunity to trade against the Agency
Order following the conclusion of the
AIM Auction, which execution must
still be at or better than the Initial NBBO
21 The proposed rule change also deletes current
subparagraphs (b)(3)(D) and (E), as they relate to the
handling of orders that currently terminate an AIM
Auction but will no longer terminate an AIM
Auction as proposed.
22 See SR–CBOE–2019–033 (proposed rule change
in which the Exchange deletes quote lock
functionality).
PO 00000
Frm 00170
Fmt 4703
Sfmt 4703
51677
and BBO at the conclusion of the AIM
Auction, the Exchange does not believe
it is necessary to cause an AIM Auction
to conclude early in the event the
Exchange receives such orders. This
will provide more time for potential
price improvement, and the unrelated
order will have the opportunity to trade
against the Agency Order in the same
manner as all other contra-side interest.
Proposed paragraph (e) describes how
the System will allocate contra-side
interest against the Agency Order at the
best price(s), which provisions are in
current subparagraph (b)(3) and moved
to proposed paragraph (e).23 Proposed
paragraph (e) also clarifies that any
execution price(s) must be at or better
than both sides of the BBO existing at
the conclusion of the AIM Auction
(consistent with current Rules that
require executions to occur at or better
than the best prices available on the
Exchange’s Book) and at or better than
both sides of the Initial NBBO
(consistent with linkage rules). The
proposed allocations following each
potential outcome of an AIM Auction
are substantially the same as the current
allocations.24 Priority Customer orders
in the Book will continue to have first
priority at each price level. With respect
to the entitlement for the Initiating
Order, the applicable percentage will be
based on the number of other Users at
the same price rather than the number
of appointed Market-Makers and
Trading Permit Holders acting as agent
for an order resting at the top of the
Book opposite the Agency order. The
proposed rule change also codifies that
the allocation percentages are based on
the number of contracts remaining after
execution against Priority Customer
orders, which is consistent with current
functionality but not currently specified
in Rule 6.74A.25 This proposed change
will provide additional opportunities
for other Users to have their interest
execute against the Agency Order.26
23 The proposed rule change adds to the provision
regarding last priority (which the proposed rule
change moves from current subparagraph (b)(3)(J) to
proposed subparagraph (e)(5)) that last priority
information is not available to other market
participants and may not be modified after it is
submitted.
24 See current subparagraph (b)(3).
25 This proposed change will ensure the size used
to determine the allocation percentage for the
Initiating Order will be based on the same number
of contracts that would otherwise be available to
other contra-side interest. It is also the same as
other options exchanges. See, e.g., ISE Rule
723(d)(2); and MIAX Rule 515A, Interpretation and
Policy .11.
26 The proposed rule change also adds that under
no circumstances does the Initiating TPH receive an
allocation percentage, at the price at which the
balance of the Agency Order can be fully executed
E:\FR\FM\30SEN1.SGM
Continued
30SEN1
51678
Federal Register / Vol. 84, No. 189 / Monday, September 30, 2019 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
Current subparagraph (b)(3)(H)
provides that if the AIM Auction does
not result in price improvement over the
Exchange’s disseminated price at the
time the AIM Auction began, resting
unchanged quotes or orders that were
disseminated at the best price before the
AIM Auction began will have priority
after any Priority Customer orders and
the Initiating TPH’s priority have been
satisfied. The proposed rule change
defines these resting displayed quotes
and orders as Priority Orders, and
provides that these orders will have
priority at each price level, not just the
Initial NBBO.27 The Exchange believes
giving these orders and quotes priority
encourages market participants to
display their best bids and offers.
The proposed rule change clarifies
that AON orders will have last priority
at price levels better than the stop price
following the conclusion of an AIM
Auction if there is sufficient size to
satisfy the size of the AON order (with
Priority Customer AON order trading
ahead of non-Priority Customer AON
orders). AON orders (both Priority
Customer and non-Priority Customer)
resting at the final auction price (which
may be the stop price if there is no price
improvement) at the conclusion of the
AIM Auction do not trade against the
Agency Order, even if the Initiating
Member of an AIM auction selects last
priority.28 The Exchange notes there
would be significant technical
complexities associated with
reprogramming priority within the
System to provide AON orders with
second to last priority in a specific (and
likely uncommon situation), as would
be required to permit AON orders to
execute at the final auction price (which
may be the stop price), even if the
Initiating TPH selects last priority. As
noted above, the Exchange will not
initiate an AIM Auction at a stop price
equal to or more aggressive than the
price of an AON order resting on either
(the ‘‘final auction price’’), of more than 50% of the
initial Agency Order in the event there is interest
from one other User or 40% of the initial Agency
Order in the event there is interest from two or
more other Users. This is consistent with current
functionality, and merely clarified in the Rules.
Additionally, this is consistent with current
subparagraph (b)(3)(C) which states no participation
entitlement applies to orders executed in an AIM
Auction.
27 Priority Orders at the same price will be
allocated pursuant to Rule 5.32(a) (the base
allocation algorithm applicable to the class).
28 This is consistent with current functionality, as
well as current allocation and priority principles,
pursuant to which executions following an AIM
Auction with respect to contra-side interest other
than Priority Customer orders and the Initiating
Order entitlement. See current Rule 6.45(a)(v)
(which provides that AON orders (including
Priority Customer AON orders) always have last
priority).
VerDate Sep<11>2014
19:16 Sep 27, 2019
Jkt 247001
side of the Book at or between the BBO
at the time an Agency Order and
Initiating Order is submitted to the
Exchange. Thus, the only AON orders
that could be resting on the Book at the
final auction price (and thus excluded
from potential execution against the
Agency Order) are those that were
submitted during the AIM Auction and
do not execute upon entry.29 The
Exchange believes the possibility of this
occurring is very small, and therefore it
would be rare for there to be a resting
AON order at the stop price or final
auction price of an AIM Auction that
could be satisfied by the remaining
contracts of an Agency Order at that
price. Therefore, the Exchange believes
the proposed rule change will have a de
minimis impact, if any, on the execution
opportunities for AON orders on the
Book.
The proposed rule change also
provides that the System will exclude
the size of any AON orders when
determining the number of contracts the
Initiating Order will execute against at
each price level better than the stop
price when the Initiating Member
selects auto-match.30 Due to the size
contingency of an AON order, the
System cannot determine whether there
will be sufficient contracts remaining in
the Agency Order to execute against any
AON order at a price level until after
execution of the applicable number of
contracts against the Initiating Order
and other contra-side interest. However,
after those auto-match executions at that
price level, the System will execute the
Agency Order against any AON orders
at that price level for which the size can
be satisfied by the remaining contracts
in the Agency Order.31
The proposed rule change moves the
provision regarding customer-tocustomer immediate crosses from
current Interpretation and Policy .08 to
proposed paragraph (f). Proposed
paragraph (f) does not specify that the
execution price must be in the
applicable standard increment, as the
minimum increment applicable to these
crosses is covered by the provisions
29 As noted above, AON orders resting in the
Book at the conclusion of an AIM Auction at prices
better than the final auction price may execute
against the Agency Order if their size contingencies
can be met. See proposed Rule 5.37(e)(2) (pursuant
to which AON orders may execute at those prices
after all other interest has traded).
30 This is consistent with current functionality.
31 After executions at price levels better than the
final auction price, including against AON orders
for which the size can be satisfied at those price
levels, if there are remaining contracts from the
Agency Order at the final auction price, those
contracts will execute against contra-side interest as
set forth in subparagraph (e)(1). This is consistent
with current functionality.
PO 00000
Frm 00171
Fmt 4703
Sfmt 4703
described above.32 The proposed rule
change also deletes the provision that
states customer-to-customer immediate
crosses are available in classes the
Exchange designates as eligible for these
crosses, as they are and will be available
classes in which the Exchange has
designated as eligible for AIM Auctions.
The proposed rule change deletes
current Interpretation and Policy .09
regarding AIM retained order
functionality. TPHs currently do not use
this functionality, so the Exchange has
determined to no longer offer it.
The proposed rule change moves from
current Rule 6.74A, Interpretation and
Policy .08 to proposed Rule 5.37,
Interpretation and Policy .03 that states
a TPH may not execute agency orders to
increase its economic gain from trading
against the order without first giving
other trading interests on the Exchange
an opportunity to either trade with the
agency order or to trade at the execution
price when the TPH was already
bidding or offering on the book. The
proposed rule change also moves
current Rule 6.74A, Interpretations and
Policies .01 and .02 to proposed Rule
5.37, Interpretations and Policies .01
and .02, respectively, with no
substantive changes.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.33 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 34 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Additionally, the Exchange believes the
proposed rule change is consistent with
32 Users may not submit customer orders for
immediate execution as Post Only, as that
instruction is inconsistent with functionality to
provide for immediate execution. As discussed
above, the purpose of the Post Only order
instruction is to prevent an order from executing
upon entry. The purpose of a customer-to-customer
immediate cross, as described above, is to execute
immediately upon entry and not rest in the Book.
33 15 U.S.C. 78f(b).
34 15 U.S.C. 78f(b)(5).
E:\FR\FM\30SEN1.SGM
30SEN1
khammond on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 84, No. 189 / Monday, September 30, 2019 / Notices
the Section 6(b)(5) 35 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
The proposed rule change is generally
intended to align certain system
functionality currently offered by Cboe
Options to the Exchange’s System in
order to provide a consistent technology
offering for the Cboe Affiliated
Exchanges. A consistent technology
offering, in turn, will simplify the
technology implementation, changes
and maintenance by Users of the
Exchange that are also participants on
Cboe Affiliated Exchanges. This will
provide Users with greater
harmonization of price improvement
auction mechanisms available among
the Cboe Affiliated Exchanges.
The Exchange’s AIM Auction as
proposed will function in a
substantially similar manner following
the technology migration as it does
today. The proposed rule change
clarifies in the Rules that the Initiating
Order may be comprised of multiple
contra-party orders will benefit
investors. As noted above, this is
consistent with current functionality,
and the proposed rule change merely
adds this detail to the rule, which
additional transparency will benefit
investors. Permitting the Initiating
Order to be comprised of multiple
contra-party orders may increase the
opportunity for customers to have
orders participate in an AIM auction. As
a result, this may increase opportunities
for price improvement, because this will
increase the liquidity available for the
Initiating Order, which is consistent
with the purpose of AIM Auctions. The
Exchange believes that this is beneficial
to participants because allowing
multiple contra-parties should foster
competition for filling the Initiating
Order and thereby result in potentially
better prices, as opposed to only
allowing one contra-party and, thereby
requiring that contra-party to do a larger
size order which could result in a worse
price for the trade.
The proposed rule change to prohibit
Initiating TPHs from designating an
Agency Order or Initiating Order as Post
Only is appropriate, as the purpose of a
Post Only order is to not execute upon
entry and instead rest in the Book, while
the purpose of an AIM Auction is to
receive an execution following the
Auction but prior to entering the Book.
The proposed rule change to require
the stop price to be at least one
minimum increment better than the
BBO, unless the Agency Order is a
Priority Customer order and the resting
35 Id.
VerDate Sep<11>2014
19:16 Sep 27, 2019
Jkt 247001
order is not a Priority Customer, in
which case the stop price must be at or
better than the BBO, will protect
investors. It will protect Priority
Customer orders on the same side of the
Book, as the current rule does, except it
does so by applying a check at the
initiation of an AIM rather than at the
conclusion of an AIM. By permitting a
Priority Customer Agency Order to trade
at the same price as a resting nonPriority Customer order, the proposed
rule change also protects Priority
Customer orders submitted into an AIM
Auction. Additionally, application of
this check at the initiation of an AIM
Auction may result in the Agency Order
executing at a better price, since the
stop price must improve any same-side
orders (with the exception of a Priority
Customer Agency Order and a resting
non-priority customer order described
above), as under the current Rule, the
Agency Order may execute at one
minimum increment worse. The
proposed rule change is consistent with
general customer priority principles.
The Exchange believes the proposed
rule change will protect investors by
rejecting Sweep and AIM orders with
pairs of orders for customer accounts, as
this will ensure customers will receive
better prices at least as good as the
Initial NBBO and not oversubscribe the
Agency Order. The Exchange believes
there is minimal demand for use of
Sweep and AIM orders for pairs of
Priority Customer orders.
As noted above, the proposed rule
change will allow AIM Auctions for 50
standard option contracts (or 500 minioption contracts) or more to occur
concurrently with other AIM Auctions.
Although AIM Auctions for larger
Agency Orders will be allowed to
overlap, the Exchange does not believe
that this raises any issues that are not
addressed by the proposed rule change.
For example, although overlapping,
each AIM Auction will be started in a
sequence and with a time that will
determine its processing. Thus, even if
there are two AIM Auctions that
commence and conclude, at nearly the
same time, each AIM Auction will have
a distinct conclusion at which time the
Auction will be allocated. In turn, when
the first AIM Auction concludes,
unrelated orders that then exist will be
considered for participation in the
Auction. If unrelated orders are fully
executed in such AIM Auction, then
there will be no unrelated orders for
consideration when the subsequent
Auction is processed (unless new
unrelated order interest has arrived). If
instead there is remaining unrelated
order interest after the first AIM Auction
has been allocated, then such unrelated
PO 00000
Frm 00172
Fmt 4703
Sfmt 4703
51679
order interest will be considered for
allocation when the subsequent Auction
is processed. As another example, each
AIM response is required to specifically
identify the Auction for which it is
targeted and if not fully executed will be
cancelled back at the conclusion of the
Auction. Thus, AIM responses will be
specifically considered only in the
specified Auction.
The proposed rule change to allow
multiple auctions to overlap for Agency
Orders of 50 standard option contracts
(or 500 mini-option contracts) or more
is consistent with functionality already
in place on other exchanges.36 Different
series are essentially different
products—orders in different series
cannot interact, just as orders in
different classes cannot interact.
Therefore, the Exchange believes
concurrent AIM Auctions in different
series is appropriate. As proposed, AIM
Auctions will ensure that Agency
Orders execute at prices that protect
Priority Customer orders in the Book
and that are not inferior to the BBO,
even when there are concurrent AIM
Auctions occurring. The proposed rule
change sets forth how any Auctions in
overlapping series will conclude if
terminated due to the same event. The
Rules do not currently prevent a COA in
a complex strategy from occurring at the
same time as an AIM in one of the
components of the complex strategy.
Therefore, the Exchange believes it is
similarly reasonable to permit multiple
AIM Auctions in the same series. The
Exchange believes this new
functionality may lead to an increase in
Exchange volume and should allow the
Exchange to better compete against
other markets that permit overlapping
price improvement auctions, while
providing an opportunity for price
improvement for Agency Orders and
assuring that Priority Customers on the
Book are protected.
The proposed rule changes regarding
permissible designations on responses
are reasonable and promote a fair and
orderly market, because they are
consistent with the general auction
functionality. The proposed rule change
that prohibits Users from designating an
AIM Auction response with an MTP
Modifier other than MTP Cancel Newest
is consistent with the prohibition on the
Agency Order being cancelled after it is
submitted. Additionally, the proposed
rule change that prohibits Users from
designating a response as IOC or FOK,
because it consistent with the purpose
36 See, e.g., EDGX Rule 21.19(c)(1); see also, e.g.,
Nasdaq ISE LLC (‘‘ISE’’) Rules 716(d) and 723,
Interpretation and Policy .04; and Boston Options
Exchange LLC (‘‘BOX’’) Rule 7270 and BOX IM–
7150–3.
E:\FR\FM\30SEN1.SGM
30SEN1
khammond on DSKJM1Z7X2PROD with NOTICES
51680
Federal Register / Vol. 84, No. 189 / Monday, September 30, 2019 / Notices
of an AIM response, which is to
potentially execute against an Agency
Order at the conclusion of an AIM
Auction (and thus not immediately
upon entry, as required by the times-inforce of IOC and FOK).
The proposed rule change to permit
all Users to respond to AIM Auctions
will benefit investors. Permitting all
Users to submit responses to AIM
Auctions, rather than only appointed
Market-Makers and TPHs representing
orders as agent at the top of the Book,
may result in more Users having the
opportunity to participate in executions
at the conclusion of AIM Auctions.
Additionally, it may increase liquidity
in AIM Auctions, which may lead to
more opportunities to price
improvement. The Exchange believes
the proposed rule change will remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, because
other exchanges permit all market
participants other than appointed
market-makers to respond to similar
price improvement auctions.37
The proposed events that will
conclude an AIM Auction are
reasonable and promote a fair and
orderly market and national market
system, because they will ensure that
executions at the conclusion of an
Auction occur at permissible prices
(such as not outside the BBO and not at
the same price as a Priority Customer
order). The proposed rule change will
also benefit investors by providing
clarity regarding what will cause an
AIM Auction to conclude. These events
would create circumstances under
which an AIM Auction would not have
been permitted to start, or that would
cause the auction price no longer be
consistent with the permissible prices at
which executions at the conclusion of
an AIM Auction may occur. Thus the
Exchange believes it is appropriate to
conclude an AIM Auction if those
circumstances occur. The Exchange will
no longer conclude an AIM Auction
early due to the receipt of an opposite
side order. The Exchange believes this
promotes just and equitable principles
of trade, because these orders may have
the opportunity to trade against the
Agency Order following the conclusion
of the Auction, which execution must
still be at or better than the BBO. The
Exchange believes this will protect
investors, because it will provide more
time for price improvement, and the
unrelated order will have the
opportunity to trade against the Agency
Order in the same manner as all other
contra-side interest.
37 See,
e.g., EDGX Options Rule 21.19.
VerDate Sep<11>2014
19:16 Sep 27, 2019
Jkt 247001
The proposed rule change to provide
Priority Orders with priority (after
Priority Customers and any entitlement
for the Initiating Order) at every price
level will remove impediments to and
perfect the mechanism of a free and
open market and a national market
system and will protect investors,
because it encourages market
participants to display their best bids
and offers. Displayed interest may lead
to enhanced liquidity and tighter
markets, which benefits all investors.
The allocation of AON orders
following an AIM auction will protect
investors, because it is consistent with
current functionality and adds
transparency to the Rules. This
allocation provides Priority Customers
and other displayed interest with
priority over non-displayed orders and
is consistent with the proposed general
priority of AON orders in the
Exchange’s Rules.38 As noted above, the
Exchange believes this encourages
market participants to display their best
bids and offers, which may lead to
enhanced liquidity and tighter markets.
While AON orders will not be eligible
for execution at the final auction price
(which may be the stop price), the
Exchange believes it would be rare for
there to be a resting AON order at the
that price at the conclusion of an AIM
Auction that could be satisfied by the
remaining contracts of an Agency Order
at that price. This is because the
Exchange will not initiate an AIM
Auction at a stop price that is at or
through the price of an AON order
resting on the Book at or between the
BBO. Thus, the only potential AON
orders resting on the Book at the final
auction price at the conclusion of the
AIM Auction are those that submitted
during the AIM Auction. Given this
likely uncommon situation, and because
the proposed rule change will protect
AON orders resting on the Book at the
time the Exchange initiates an AIM
Auction, the Exchange believes the
proposed rule change will have a de
minimis impact, if any, on the execution
opportunities for AON orders. The
Exchange notes there would be
significant technical complexities
associated with reprogramming priority
within the System to provide AON
orders with second to last priority in a
specific (and likely uncommon
situation), as would be required to
permit AON orders to execute at the
stop price, even if the Initiating TPH
selects last priority. Similarly, due to
the size contingency of an AON order,
the System cannot determine whether
38 See current Rule 6.45(a)(v) (Rule 5.32 in the
shell Rulebook).
PO 00000
Frm 00173
Fmt 4703
Sfmt 4703
there will be sufficient contracts
remaining in the Agency Order to
execute against any AON order at a
price level until after execution of the
applicable number of contracts against
the Initiating Order and other contraside interest. However, AON orders at
each price level better than the final
auction price for which the size can be
satisfied by the remaining contracts in
the Agency Order will execute.
The Exchange believes the proposed
rule changes that add detail to the
Rules, which are consistent with current
functionality, will remove impediments
to and perfect the mechanism of a free
and open market and protect investors,
as these changes provide transparency
in the Rules regarding AIM Auctions.
Additionally, the proposed rule change
aligns rule language with corresponding
provisions in the EDGX Options rule.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange does not believe the proposed
rule change will impose any burden on
intramarket competition, as the
proposed changes to the Exchange’s
AIM Auction will apply to all orders
submitted to an Auction in the same
manner. AIM Auctions will continue to
be voluntary for TPHs to use, and are
available to all TPHs. Additionally, the
ability to respond to AIM Auctions will
now be available to all Users. The
Exchange does not believe the proposed
rule change will impose any burden on
intermarket competition, because the
proposed changes are substantially the
same as another options exchange’s
rules.39 The general framework and
primary features of the Exchange’s
current AIM Auctions are not changing,
and will continue to protect orders,
including Priority Customer orders,
resting in the Book.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed
rule change pursuant to Section
39 See
E:\FR\FM\30SEN1.SGM
EDGX Options Rule 21.19.
30SEN1
Federal Register / Vol. 84, No. 189 / Monday, September 30, 2019 / Notices
19(b)(3)(A) of the Act 40 and Rule 19b–
4(f)(6) 41 thereunder. Because the
foregoing proposed rule change does
not: (i) Significantly affect the
protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 42 and Rule 19b–
4(f)(6) 43 thereunder.
A proposed rule change filed under
Rule 19b–4(f)(6) 44 normally does not
become operative prior to 30 days after
the date of the filing. However, pursuant
to Rule 19b–4(f)(6)(iii),45 the
Commission may designate a shorter
time if such action is consistent with
protection of investors and the public
interest. The Exchange has asked the
Commission to waive the 30-day
operative delay so that the proposed
rule change may become operative prior
to the proposed Exchange’s system
migration on October 7, 2019, in order
to permit the Exchange to provide the
AIM functionality to market participants
on an uninterrupted basis. In support of
its waiver request, the Exchange cites to
similarities between its proposed rule
and EDGX Options Rule 21.19. The
Exchange further notes that the general
framework of the Exchange’s AIM
Auction is not changing. The
Commission believes that, as described
above, the Exchange’s proposal does not
raise any new or novel issues.
Therefore, the Commission believes that
waving the 30-day operative delay is
consistent with the protection of
investors and the public interest.
Accordingly, the Commission
designates the proposed rule change to
be operative on upon filing.46
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
40 15
U.S.C. 78(b)(3)(A).
CFR 240.19b–4(f)(6).
42 15 U.S.C. 78s(b)(3)(A).
43 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires the Exchange to give the
Commission written notice of the Exchange’s intent
to file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
44 17 CFR 240.19b–4(f)(6).
45 17 CFR 240.19b–4(f)(6).
46 For purposes only of waiving the 30-day
operative delay, the Commission also has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
khammond on DSKJM1Z7X2PROD with NOTICES
41 17
VerDate Sep<11>2014
19:16 Sep 27, 2019
Jkt 247001
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
51681
Number SR–CBOE–2019–045 and
should be submitted on or before
October 21, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.47
Jill M. Peterson,
Assistant Secretary.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
[FR Doc. 2019–21098 Filed 9–27–19; 8:45 am]
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–2019–045 on the subject line.
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend the
Exchange’s Pricing Schedule, at
Equity 7, Section 3
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–2019–045. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
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
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 12, 2019, Nasdaq PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
PO 00000
Frm 00174
Fmt 4703
Sfmt 4703
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87094; File No. SR–Phlx–
2019–35]
September 24, 2019.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend the
Exchange’s transaction fees at Equity 7,
Section 3, as described further below.
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaqphlx.cchwallstreet.com/,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
47 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
E:\FR\FM\30SEN1.SGM
30SEN1
]]>Agencies
[Federal Register Volume 84, Number 189 (Monday, September 30, 2019)]
[Notices]
[Pages 51673-51681]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21098]
[[Page 51673]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87072; File No. SR-CBOE-2019-045]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
the AIM Automated Improvement Mechanism Upon the Migration of the
Exchange's Trading Platform to the Same System Used by the Cboe
Affiliated Exchanges
September 24, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on September 11, 2019, Cboe Exchange, Inc. (the ``Exchange'' or
``Cboe Options'') filed with the Securities and Exchange Commission
(the ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by the Exchange. The
Exchange filed the proposal as a ``non-controversial'' proposed rule
change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule
19b-4(f)(6) thereunder.\4\ The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to amend the Automated Improvement Mechanism (``AIM'') and move it from
the currently effective Rulebook (``current Rulebook'') to the shell
structure for the Exchange's Rulebook that will become effective upon
the migration of the Exchange's trading platform to the same system
used by the Cboe Affiliated Exchanges (as defined below) (``shell
Rulebook''). The text of the proposed rule change is provided in
Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
In 2016, the Exchange's parent company, Cboe Global Markets, Inc.
(formerly named CBOE Holdings, Inc.) (``Cboe Global''), which is also
the parent company of Cboe C2 Exchange, Inc. (``C2''), acquired Cboe
EDGA Exchange, Inc. (``EDGA''), Cboe EDGX Exchange, Inc. (``EDGX'' or
``EDGX Options''), Cboe BZX Exchange, Inc. (``BZX'' or ``BZX
Options''), and Cboe BYX Exchange, Inc. (``BYX'' and, together with
Cboe Options, C2, EDGX, EDGA, and BZX, the ``Cboe Affiliated
Exchanges''). The Cboe Affiliated Exchanges are working to align
certain system functionality, retaining only intended differences
between the Cboe Affiliated Exchanges, in the context of a technology
migration. Cboe Options intends to migrate its trading platform to the
same system used by the Cboe Affiliated Exchanges, which the Exchange
expects to complete on October 7, 2019. Cboe Options believes offering
similar functionality to the extent practicable will reduce potential
confusion for market participants.
In connection with this technology migration, the Exchange has a
shell Rulebook that resides alongside its current Rulebook, which shell
Rulebook will contain the Rules that will be in place upon completion
of the Cboe Options technology migration. The Exchange proposes to
delete Rule 6.74A in the current Rulebook and add the provisions
regarding AIM Auctions for simple orders, as proposed to be modified in
this rule filing, to Rule 5.37 in the shell Rulebook.\5\
---------------------------------------------------------------------------
\5\ Proposed Rule 5.37 is substantially the same as EDGX Options
Rule 21.19, except as otherwise described below.
---------------------------------------------------------------------------
The proposed rule change clarifies in the proposed introductory
paragraph \6\ that the Initiating Order may consist of one or more
solicited orders. This accommodates multiple contra-parties and
increases the opportunities for customer orders to be submitted into an
AIM Auction with the potential for price improvement, since the
Initiating Order must stop the full size of the Agency Order. This has
no impact on the execution of the Agency Order, which may already trade
against multiple contra-parties depending on the final auction price,
as set forth in proposed paragraph (e). This proposed change is
consistent with the Exchange's current interpretation of current Rule
6.74A, and the proposed rule change clarifies this in the Rule.\7\ The
proposed rule change moves the restriction that a solicited order
cannot be for the account of any Market-Maker appointed in the class
from current Interpretation and Policy .04 to the proposed introductory
paragraph.
---------------------------------------------------------------------------
\6\ The proposed rule change also adds to the proposed
introductory paragraph that for purposes of proposed Rule 5.37, the
term ``NBBO'' means the national best bid or offer at the particular
point in time applicable to the reference, and the term ``Initial
NBBO'' means the national best bid or national best offer at the
time an AIM Auction is initiated. This is merely an addition of
terminology used throughout the Rule, but has no impact on
functionality.
\7\ See Cboe Options Regulatory Circular RG17-074 (May 19,
2017); see also EDGX Rule 21.19; and NASDAQ ISE, LLC (``ISE'') Rule
723(b).
---------------------------------------------------------------------------
Proposed Rule 5.37(a)(5) states the Trading Permit Holder that
electronically submits an order into an AIM Auction (the ``Initiating
TPH'') may not designate an Agency Order or Initiating Order as Post
Only. A Post Only order is an order the System ranks and executes
pursuant to proposed Rule 5.32, subjects to the Price Adjust process
pursuant to Rule 5.32, or cancels or rejects (including if it is not
subject to the Price Adjust process and locks or crosses a Protected
Quotation of another exchange), as applicable (in accordance with User
instructions), except the order or quote may not remove liquidity from
the Book or route away to another Exchange. The Exchange does not
currently offer Post Only order functionality, but will as of the
technology migration.\8\ The Exchange believes it is appropriate to not
permit the Agency or Initiating Order to be designated as Post Only, as
the purpose of a Post Only order is to not execute upon entry and
instead rest
[[Page 51674]]
in the Book, while the purpose of an AIM Auction is to receive an
execution following the Auction but prior to entering the Book.
---------------------------------------------------------------------------
\8\ See Cboe Options Rule 5.6(c) in the shell Rulebook; see also
Securities Exchange Act Release No. 86173 (June 20, 2019), 84 FR
30267 (June 26, 2019) (SR-CBOE-2019-027) (which filing added the
Post Only order instruction to the shell Rulebook).
---------------------------------------------------------------------------
Proposed Rule 5.37(a)(6) states the Initiating TPH may only submit
an Agency Order to an AIM Auction after the market open. This is
consistent with current functionality, as executions cannot occur prior
to the opening of trading. The proposed rule change clarifies this in
the Rule.
Proposed Rule 5.37(a)(7) states the Initiating TPH may not submit
an Agency Order if the NBBO is crossed (unless the Agency Order is an
AIM Intermarket Sweep Order (``AIM ISO'') or Sweep and AIM order (see
discussion below). This is consistent with current functionality, and
the proposed rule change clarifies this in the Rule. The Exchange
believes it is appropriate to not permit an AIM Auction to be initiated
if the NBBO is crossed, as a crossed NBBO may indicate price
uncertainty within the market. The Exchange believes this may prevent
executions at potentially erroneous prices.
The proposed rule change moves the various other AIM Auction
eligibility requirements to proposed paragraph (a) and makes
nonsubstantive changes:
The requirement that an Agency Order be in a class of
options the Exchange designates as eligible for AIM Auctions remains in
subparagraph (a)(1).\9\
---------------------------------------------------------------------------
\9\ The proposed rule change deletes the provision that the
Agency Order be within the designated Auction order eligibility size
parameters determined by the Exchange, as the current and proposed
rule explicitly state any applicable size parameters, as discussed
below. Additionally, the Exchange will announce all determinations
it may make with respect to an AIM Auction pursuant to Rule 1.2 in
the current Rulebook (Rule 1.5 in the shell Rulebook), and therefore
deletes current Interpretation and Policy .05 (and other provisions
regarding how the Exchange will announce these determinations).
---------------------------------------------------------------------------
The requirement that the Initiating TPH mark an Agency
Order for AIM processing moves from current subparagraph (b)(1)(A) to
proposed subparagraph (a)(2).
The provision that there is no minimum size for Agency
Orders moves from current Interpretation and Policy .03 to proposed
subparagraph (a)(3). Additionally, the requirement that the Initiating
Order be for the same size as the Agency Order moves from current
subparagraphs (a)(2) and (a)(3) to proposed subparagraph (a)(3).
The provision regarding the minimum increment for the
Agency Order and Initiating Order price moves from current subparagraph
(a)(3) to proposed subparagraph (a)(4). As further discussed below, the
proposed rule change deletes he requirement that during Regular Trading
Hours, at least three Market-Makers with an appointment in the class
are quoting in the relevant series to initiate an AIM Auction moves
from current subparagraph (a)(4). The proposed rule change also
explicitly states that all of the eligibility requirements in proposed
paragraph (a) must be met for an AIM Auction to be initiated, and that
the System rejects or cancels both an Agency Order and Initiating Order
submitted to an AIM Auction that do not meet the conditions in proposed
paragraph (a).
Proposed subparagraph (b)(2) states if the Agency Order is to buy
(sell), the stop price must be at least one minimum increment better
than the Exchange best bid (offer), unless the Agency Order is a
Priority Customer order and the resting order is not a Priority
Customer, in which case the stop price must be at or better than the
Exchange best bid (offer). Current Rule 6.74A(b)(3)(I) states if the
final auction price locks a Priority Customer order in the Book on the
same side of the market as the Agency Order, then, unless there is
sufficient size in the Auction responses to execute both the Agency
Order and the booked Priority Customer order (in which case they will
both execute at the final auction price), the Agency Order will execute
against the auction responses at one minimum increment worse than the
final auction price against the auction participants that submitted the
final auction price and any balance will trade against the priority
customer order in the book at the order's limit price. The proposed
rule change protects Priority Customers on the same side of the Book as
the current rule does, except it does so by applying a check at the
initiation of an AIM Auction rather than at the conclusion of an AIM
Auction. By permitting a Priority Customer Agency Order to trade at the
same price as a resting non-Priority Customer order, the proposed rule
change also protects Priority Customer orders submitted into an AIM
Auction. Additionally, application of this check at the initiation of
an AIM Auction may result in the Agency Order executing at a better
price, since the stop price must improve any same-side orders (with the
exception of a Priority Customer Agency Order and a resting non-
Priority Customer order described above), as under the current Rule,
the Agency Order may execute at one minimum increment worse. The
proposed rule change is consistent with general customer priority
principles.
The proposed rule change adds subparagraph (b)(3), which states if
there is a buy (sell) all-or-none (``AON'') order (either Priority
Customer or non-Priority Customer) resting on the Book at a price at or
better than the Exchange best bid (offer), the stop price must be at
least one minimum increment higher (lower) than the price of the buy
(sell) AON order. The following examples demonstrate this proposed
functionality:
Example #1
Suppose the BBO for a series is 1.00 to 1.05, and an AON order to
sell is resting on the Book at an offer price of 1.04. An Initiating
TPH submits an Agency Order to buy paired with an Initiating Order at a
stop price of 1.04. The System will reject the Agency Order and
Initiating Order, because the stop price equals the offer price of a
resting sell AON Order on the Book (which offer price is lower than the
Exchange best offer).
Example #2
Suppose the BBO for a series is 1.00 to 1.05, and an AON order to
sell is resting on the Book at an offer price of 1.01. An Initiating
TPH submits an Agency Order to buy paired with an Initiating Order at a
stop price of 1.02. The System will reject the Agency Order and
Initiating Order, because the stop price is higher than the offer price
of a resting sell AON Order on the Book (which offer price is better
than the Exchange best offer).
Example #3
Suppose the BBO for a series is 1.00 to 1.05, and an AON order to
sell is resting on the Book at an offer price of 1.01. An Initiating
TPH submits an Agency Order to sell paired with an Initiating Order at
a stop price of 1.02. The System will reject the Agency Order and
Initiating Order, because the stop price is higher than the offer price
of a resting sell AON Order on the Book (which offer price is better
than the Exchange best offer).
As discussed below, due to technical complexities, AON orders
resting on the Book at the conclusion of an AIM Auction will not be
eligible for execution against the Agency Order. If the Exchange were
to initiate an AIM Auction for a buy Agency Order at a stop price equal
to or through the price of a resting AON order on the opposite side of
the Book, and that AON order were not eligible for execution against
the Agency Order (if the stop price was the final auction price), that
marketable
[[Page 51675]]
AON order would miss a potential execution opportunity that it could
have had if an auction had not occurred (assuming its size contingency
could be met after execution of all other interest).\10\ Therefore, the
Exchange believes the proposed rule change will protect AON orders
resting on the Book at the time an AIM Auction begins.
---------------------------------------------------------------------------
\10\ See Rule 6.45(a)(v) in the current Rulebook (Rule
5.32(a)(3)(C) in the shell Rulebook) (which provides that an AON
order is always last in priority).
---------------------------------------------------------------------------
The proposed rule change moves and makes nonsubstantive changes to
the other provisions regarding the requirements for the price at which
the Initiating Order must stop the entire Agency Order in proposed
paragraph (b):
The requirement that the stop price must be (1) at least
one minimum increment better than the then-current NBBO or the Agency
Order's limit price (if the order is a limit order), whichever is
better, if the Agency Order is for less than 50 standard option
contracts (or 500 mini-option contracts); or (2) at or better than the
then-current NBBO) or the Agency Order's limit price, whichever is
better, if the Agency Order is for 50 standard option contracts (or 500
mini-option contracts) or more, moves from current subparagraphs (a)(2)
and (3) to proposed subparagraph (b)(1).
The provisions that require the Initiating TPH to specify
(1) a single price at which it seeks to execute the Agency Order
against the Initiating Order (a ``single-price submission''), including
whether it elects to have last priority in allocation; or (2) an
initial stop price and instruction to automatically match the price and
size of all AIM responses and other contra-side trading interest
(``auto-match'') at each price up to a designated limit price, or at
all prices, better than the price at which the balance of the Agency
Order can be fully executed (the ``final auction price'') move from
current subparagraph (b)(1)(A) to proposed subparagraph (b)(5).
The descriptions of AIM Sweep orders and Sweep and AIM
orders move from current Rule 6.53 to proposed Rule 5.37(b)(4). The
proposed rule change explicitly states that AIM responses, the stop
price, and executions are permitted at a price inferior to the Initial
NBBO if the Initiating TPH submits an AIM Sweep or Sweep and AIM Order
to an AIM Auction, but the stop price is still subject to the price
improvement requirement described above if the Agency Order is for less
than 50 standard option contracts (or 500 mini-option contracts).\11\
The proposed rule change adds that the two orders submitted as a Sweep
and AIM order may not both be for the accounts of Priority Customers.
Unlike an AIM ISO (for which the Initiating TPH sends an ISO),\12\ the
Exchange sends the ISO for a Sweep and AIM order and then receives the
fill report for the ISO during the AIM Auction period, so it knows by
the end of the AIM Auction how much of the Agency Order is left for
execution against contra-interest on the Exchange. If both orders were
for Priority Customers, they would immediately cross pursuant to
paragraph (f) (as described below), prior to the Exchange receiving
information regarding the size of any executions on away exchanges (and
thus prior to knowing the NBBO that price of the immediate cross should
have traded through). Not permitting pairs of Priority Customer orders
to be submitted as Sweep and AIM orders ensures that the Agency Order
is not oversubscribed, which can be prevented if there is an AIM
Auction period, and that the immediate cross occurs at a price at or
better than the NBBO. TPHs can submit these pairs of orders through the
AIM Auction process. The Exchange believes there is minimal demand to
submit pairs of Priority Customer orders as Sweep and AIM orders.
---------------------------------------------------------------------------
\11\ Rule filing SR-CBOE-2019-027 deleted the definitions of AIM
Sweep and Sweep and AIM orders from the current Rulebook, which
deletion will not take effect until the completion of the technology
migration, at which time the proposed rule change will take effect.
\12\ TPHs are responsible for sending the ISO order for an AIM
ISO, and thus the Exchange does not need to wait for a fill report
for the ISO. Because it is a TPH's responsibility to send the ISO,
and thus account for any executions resulting from that ISO at away
exchanges (and the resulting NBBO), the proposed rule change does
not prohibit pairs of Priority Customer orders to be submitted as an
AIM ISO. However, the Exchange believes there is minimal demand for
use of this order type for pairs of Priority Customer orders.
---------------------------------------------------------------------------
The proposed rule change also explicitly states that all of the
conditions in proposed paragraph (b) must be met for an AIM Auction to
be initiated, and that the System rejects or cancels both an Agency
Order and Initiating Order submitted to an AIM Auction that do not meet
the conditions in proposed paragraph (b).
Proposed paragraph (c) describes the AIM Auction process.
Currently, only one AIM auction may be ongoing at any given time in a
series, and AIM Auctions in the same series may not queue or overlap in
any manner. Proposed subparagraph (c)(1) states with respect to Agency
Orders for less than 50 standard option contracts (or 500 mini-option
contracts), only one AIM Auction may be ongoing at any given time in a
series, and AIM Auctions in the same series may not queue or overlap in
any manner. Therefore, the proposed rule change has no impact on these
smaller Agency Orders. However, for Agency Orders of 50 standard option
contracts (or 500 mini-option contracts) or more, the proposed rule
change states one or more AIM Auctions in the same series may occur at
the same time. To the extent there is more than one AIM Auction in a
series underway at a time, the AIM Auctions conclude sequentially based
on the exact time each AIM Auction commenced, unless terminated early
pursuant to paragraph (d). At the time each AIM Auction concludes, the
System allocates the Agency Order pursuant to paragraph (e) and takes
into account all AIM Auction responses and unrelated orders and quotes
in place at the exact time of conclusion. In the event there are
multiple AIM Auctions underway that are each terminated early pursuant
to paragraph (d), the System processes the AIM Auctions sequentially
based on the exact time each AIM Auction commenced. The Exchange
believes the proposed new functionality may lead to an increase in AIM
Auctions, which may provide additional opportunities for price
improvement for Agency Orders.
The proposed rule change moves and makes nonsubstantive changes to
other provisions regarding the AIM Auction process to proposed
paragraph (c):
The proposed rule change moves the provision regarding the
AIM Auction notification message (currently called a request for
responses (``RFR'')) from current subparagraph (b)(1)(B) to proposed
subparagraph (c)(2). The proposed provision specifies that the message
will detail the side, size, Auction ID, and options series of the
Agency Order to all Users that elect to receive AIM Auction
notification messages. This is consistent with the current RFR that is
disseminated; the proposed rule change adds these details to the rule.
The proposed rule change also adds that AIM Auction notification
messages are not included in the disseminated BBO or OPRA, which is
also consistent with current functionality.
The proposed rule change moves the provision regarding the
length of the AIM Auction period from current subparagraph (b)(1)(C) to
proposed subparagraph (c)(3). The proposed rule change makes no changes
to the current range of permitted lengths of AIM Auction periods.
The proposed rule change moves the provision that
prohibits an Initiating TPH from modifying or cancelling an
[[Page 51676]]
Agency Order or Initiating Order after submission to an AIM Auction
from current subparagraph (b)(1)(A) to proposed subparagraph (c)(4).
The proposed rule change also moves all provisions regarding AIM
Auction responses into proposed subparagraph (c)(5), as well as makes
certain changes described below, as well as nonsubstantive changes:
The proposed rule change moves the provision regarding
which market participants may respond to AIM Auctions, as well as what
must be specified in the responses (including price, size, side, and
Auction ID) from current subparagraphs (b)(1)(D) and (E) to proposed
subparagraph (c)(5). The current rule specifies that responses must
specify prices and sizes; the proposed rule change adds responses must
also specify side and an Auction ID. The proposed rule change adds that
an AIM response may only participate in the AIM Auction with the
Auction ID specified in the response. This is consistent with current
functionality.\13\ The Exchange proposes to include this language given
the above proposal that permits concurrent AIM Auctions in the same
series for larger Agency Orders.
---------------------------------------------------------------------------
\13\ Current subparagraph (b)(3)(K) permits an unexecuted
balance of an AIM Auction response after the Agency Order has been
executed and the balance to trade against any unrelated order(s)
that cause the AIM Auction to conclude. The proposed rule change
deletes that provision given the proposed rule change to permit
concurrent auctions, as described above, and thus the requirement
that responses may only trade with an Agency Order in the AIM
Auction into which the AIM response was submitted. If a responder
wishes to execute interest against any orders that caused an AIM
Auction to conclude and that are resting in the Book, that responder
may separately submit an order to the Exchange.
---------------------------------------------------------------------------
Currently, only Market-Makers with an appointment in the applicable
class and TPHs representing orders as agent at the top of the Book may
respond to AIM Auctions.\14\ The Exchange proposes to permit all Users
to respond to AIM Auctions. By permitting additional participants to
submit responses to AIM Auctions, the Exchange believes this may
provide the opportunity for additional liquidity in these auctions,
which could lead to additional price improvement opportunities. EDGX
Options similarly permits all Users to respond to AIM Auctions.\15\ In
connection with this change, the proposed rule change deletes the
requirement in current Rule 6.74A(a)(4) that during Regular Trading
Hours, at least three Market-Makers with an appointment in the class be
quoting in the relevant series to initiate a simple AIM Auction. The
purpose of this requirement was to ensure there were a minimum number
of Market-Makers active in a series and thus available to potentially
submit responses to an AIM Auction and provide liquidity to simple AIM
Auctions, given the restriction on market participants that may respond
to those Auctions. Given the proposed rule change to open AIM Auctions
up to all Users, the Exchange believes the three-quoter requirement is
no longer necessary.
---------------------------------------------------------------------------
\14\ See current Rule 6.74A(b)(1)(D) and (E).
\15\ See EDGX Options Rule 21.19(c)(5).
---------------------------------------------------------------------------
The proposed rule change moves the provision regarding the
permissible minimum increment for AIM responses from current
subparagraph (b)(1)(G) to proposed subparagraph (c)(5)(A).
Proposed subparagraph (c)(5)(B) states AIM buy (sell)
responses are capped at the Exchange best offer (bid), or one minimum
increment better than the Exchange best offer (bid) if it is
represented by a Priority Customer on the Book (unless the Agency Order
is an AIM ISO or Sweep and AIM) that exists at the conclusion of the
AIM Auction. The System will execute AIM responses, if possible, at the
most aggressive permissible price not outside the BBO at the conclusion
of the AIM Auction or the Initial NBBO. This is consistent with current
subparagraph (b)(1)(E). The proposed rule change ensures the execution
price of a response will not cross the Initial NBBO in accordance with
linkage rules.\16\ Additionally, proposed subparagraph (e) requires the
execution price to be at or between the BBO at the conclusion of the
AIM Auction. Therefore, as proposed, the price at which any response
may execute will ultimately not be through the Initial NBBO or the BBO
at the conclusion of the AIM Auction.
---------------------------------------------------------------------------
\16\ See current Rule 6.81(b)(8) (proposed Rule 5.66(b)(8))
(requires an order to be stopped at a price no worse than the price
at the time of receipt of the order).
---------------------------------------------------------------------------
Proposed subparagraph (c)(5)(C) states a User may submit
multiple AIM responses at the same or multiple prices to an AIM
Auction. This is consistent with current functionality. Current Rule
6.74A contains no restriction on how many responses a User may submit;
the proposed rule change merely makes this explicit in the Rules. The
proposed rule change also states for purposes of an AIM Auction, the
System aggregates all of a User's orders and quotes on the Book and AIM
responses for the same EFID at the same price. This (combined with the
proposed size cap) will prevent a User from submitting multiple orders,
quotes, or responses at the same price to obtain a larger pro-rata
share of the Agency Order.
Proposed subparagraph (c)(5)(D) states the System caps the
size of an AIM response, or the aggregate size of a User's orders and
quotes on the Book and AIM responses for the same EFID at the same
price, at the size of the Agency Order (i.e., the System ignores size
in excess of the size of the Agency Order when processing the AIM
Auction). This is consistent with current subparagraph (b)(1)(H),
except the proposed rule change caps the aggregate size of a User's
interest at the same price, rather than the size of an individual
response. The Exchange believes this is reasonable to prevent a User
from submitting an order, quote, or response with an extremely large
size in order to obtain a larger pro-rata share of the Agency Order.
Proposed subparagraph (c)(5)(E) states AIM responses must
be on the opposite side of the market as the Agency Order, and the
System rejects an AIM response on the same side of the market as the
Agency Order. This is consistent with current functionality, and the
proposed rule change merely adds this detail to the rules.
Additionally, the Exchange believes this is reasonable given that the
purpose of an AIM response is to trade against the Agency Order in the
AIM Auction into which the AIM response was submitted.
Proposed subparagraph (c)(5)(F) states AIM responses may
be designated with the match trade prevention (``MTP'') modifier of MTP
Cancel Newest, but no other MTP modifiers, and the System rejects an
AIM response with any other MTP modifier.\17\ An incoming order marked
with MTP Cancel Newest will not execute against opposite side interest
marked with any MTP modifier originating from the same Unique
Identifier, and the incoming order (the AIM response in this case) will
be cancelled back to the originating User. If an Agency Order and
response have the same Unique Identifier and an MTP modifier, the
System will cancel the response and permit the Agency Order to execute
against other interest. This is consistent with the prohibition on the
Agency Order being cancelled after it is submitted.
---------------------------------------------------------------------------
\17\ See Rule 5.6(c) in the shell Rulebook for definitions of
the various types of MTP Modifiers that will be available on the
Exchange as of the System migration. The Exchange does not currently
have any equivalent to an MTP modifier that may be applied to orders
or auction responses.
---------------------------------------------------------------------------
Proposed subparagraph (c)(5)(G) states AIM responses may
not be designated as immediate-or-cancel (``IOC'') or fill-or-kill
(``FOK'') and the System rejects an AIM response
[[Page 51677]]
designated as IOC or FOK.\18\ This is consistent with the purpose of an
AIM response, which is to potentially execute against an Agency Order
at the conclusion of an AIM Auction (and thus not immediately upon
entry, as required by the times-in-force of IOC and FOK).\19\
---------------------------------------------------------------------------
\18\ See Rule 5.6(d) in the shell Rulebook. Current AIM response
functionality does not permit a User to apply these order
instructions to AIM responses.
\19\ If a user designates an AIM response as Post Only, the
System accepts the response but disregards the Post Only
instruction, as the response (like all AIM responses) will execute
against the Agency Order or cancel at the conclusion of the AIM
Auction. In an AIM Auction, the Agency Order is treated as a taker
of liquidity, while a response is treated like a maker of liquidity,
and therefore responses are consistent with the purpose of a Post
Only order instructions (which is to not remove liquidity from the
Book upon entry).
---------------------------------------------------------------------------
The provision that states AIM responses are not visible to
AIM Auction participants or disseminated to OPRA moves from current
subparagraph (b)(1)(F) to proposed subparagraph (c)(5)(H).
The provision that states AIM responses may be cancelled
moves from current subparagraph (b)(1)(I) to proposed subparagraph
(c)(5)(I). The proposed rule change also clarifies that AIM responses
may be modified (which is consistent with current functionality and
merely clarified in the rules).\20\
---------------------------------------------------------------------------
\20\ Proposed subparagraph (e)(6) states the System will cancel
or reject any unexecuted AIM responses (or unexecuted portions) at
the conclusion of the AIM Auction.
---------------------------------------------------------------------------
Proposed paragraph (d) states that an AIM Auction concludes at the
earliest to occur of the following times:
The end of the AIM Auction period (consistent with current
subparagraph (b)(2)(A);
upon receipt by the System of a Priority Customer order on
the same side of the market with a price the same as or better than the
stop price that would post to the Book;
upon receipt by the System of an unrelated order or quote,
including a Post Only order or quote, that is not a Priority Customer
order on the same side of the market as the Agency Order that would
cause the stop price to be outside of the BBO;
the market close (consistent with current functionality
and merely added to the rules); and
any time the Exchange halts trading in the affected
series, provided, however, that in such instance the AIM Auction
concludes without execution (consistent with current subparagraph
(b)(2)(F), and the proposed rule change adds detail that an AIM Auction
in such a case will conclude without execution, which is consistent
with current functionality, as no executions may occur while a series
is halted for trading).
The proposed rule change deletes the following events that
currently cause an AIM Auction to conclude early:
Upon receipt by the System of an unrelated order (in the
same series as the Agency Order) that is marketable against either the
BBO (when such quote is the NBBO) or the RFR responses;
upon receipt by the System of an unrelated limit order (in
the same series as the Agency Order and on the opposite side of the
market as the Agency Order) that improves any RFR responses; and
any time there is a quote lock on the Exchange pursuant to
current Rule 6.45(c).
As discussed below, unrelated orders on the opposite side of the
Agency Order received during the AIM Auction may execute against
interest outside of the AIM Auction, and therefore, the Exchange will
no longer terminate an AIM Auction due to the receipt of an order on
the opposite side of the Agency Order.\21\ The proposed rule change to
conclude an AIM Auction early upon receipt of certain orders on the
same side as the Agency Order ensure that the execution price does not
occur at the same price as a Priority Customer order on the Book or at
a price worse on than a non-Priority Customer order on the Book. This
is consistent with the requirements for the stop price described above.
Additionally, the Exchange will not have quote lock functionality
following the technology migration, and therefore proposes to delete
that as an event that may cause an AIM Auction to terminate early.\22\
---------------------------------------------------------------------------
\21\ The proposed rule change also deletes current subparagraphs
(b)(3)(D) and (E), as they relate to the handling of orders that
currently terminate an AIM Auction but will no longer terminate an
AIM Auction as proposed.
\22\ See SR-CBOE-2019-033 (proposed rule change in which the
Exchange deletes quote lock functionality).
---------------------------------------------------------------------------
An unrelated market or marketable limit order (against the BBO),
including a Post Only Order, on the opposite side of the Agency Order
received during the AIM Auction does not cause the AIM Auction to end
early and executes against interest outside of the AIM Auction. If
contracts remain from such unrelated order at the time the AIM Auction
ends, they may be allocated for execution against the Agency Order
pursuant to proposed paragraph (e). Because these orders may have the
opportunity to trade against the Agency Order following the conclusion
of the AIM Auction, which execution must still be at or better than the
Initial NBBO and BBO at the conclusion of the AIM Auction, the Exchange
does not believe it is necessary to cause an AIM Auction to conclude
early in the event the Exchange receives such orders. This will provide
more time for potential price improvement, and the unrelated order will
have the opportunity to trade against the Agency Order in the same
manner as all other contra-side interest.
Proposed paragraph (e) describes how the System will allocate
contra-side interest against the Agency Order at the best price(s),
which provisions are in current subparagraph (b)(3) and moved to
proposed paragraph (e).\23\ Proposed paragraph (e) also clarifies that
any execution price(s) must be at or better than both sides of the BBO
existing at the conclusion of the AIM Auction (consistent with current
Rules that require executions to occur at or better than the best
prices available on the Exchange's Book) and at or better than both
sides of the Initial NBBO (consistent with linkage rules). The proposed
allocations following each potential outcome of an AIM Auction are
substantially the same as the current allocations.\24\ Priority
Customer orders in the Book will continue to have first priority at
each price level. With respect to the entitlement for the Initiating
Order, the applicable percentage will be based on the number of other
Users at the same price rather than the number of appointed Market-
Makers and Trading Permit Holders acting as agent for an order resting
at the top of the Book opposite the Agency order. The proposed rule
change also codifies that the allocation percentages are based on the
number of contracts remaining after execution against Priority Customer
orders, which is consistent with current functionality but not
currently specified in Rule 6.74A.\25\ This proposed change will
provide additional opportunities for other Users to have their interest
execute against the Agency Order.\26\
---------------------------------------------------------------------------
\23\ The proposed rule change adds to the provision regarding
last priority (which the proposed rule change moves from current
subparagraph (b)(3)(J) to proposed subparagraph (e)(5)) that last
priority information is not available to other market participants
and may not be modified after it is submitted.
\24\ See current subparagraph (b)(3).
\25\ This proposed change will ensure the size used to determine
the allocation percentage for the Initiating Order will be based on
the same number of contracts that would otherwise be available to
other contra-side interest. It is also the same as other options
exchanges. See, e.g., ISE Rule 723(d)(2); and MIAX Rule 515A,
Interpretation and Policy .11.
\26\ The proposed rule change also adds that under no
circumstances does the Initiating TPH receive an allocation
percentage, at the price at which the balance of the Agency Order
can be fully executed (the ``final auction price''), of more than
50% of the initial Agency Order in the event there is interest from
one other User or 40% of the initial Agency Order in the event there
is interest from two or more other Users. This is consistent with
current functionality, and merely clarified in the Rules.
Additionally, this is consistent with current subparagraph (b)(3)(C)
which states no participation entitlement applies to orders executed
in an AIM Auction.
---------------------------------------------------------------------------
[[Page 51678]]
Current subparagraph (b)(3)(H) provides that if the AIM Auction
does not result in price improvement over the Exchange's disseminated
price at the time the AIM Auction began, resting unchanged quotes or
orders that were disseminated at the best price before the AIM Auction
began will have priority after any Priority Customer orders and the
Initiating TPH's priority have been satisfied. The proposed rule change
defines these resting displayed quotes and orders as Priority Orders,
and provides that these orders will have priority at each price level,
not just the Initial NBBO.\27\ The Exchange believes giving these
orders and quotes priority encourages market participants to display
their best bids and offers.
---------------------------------------------------------------------------
\27\ Priority Orders at the same price will be allocated
pursuant to Rule 5.32(a) (the base allocation algorithm applicable
to the class).
---------------------------------------------------------------------------
The proposed rule change clarifies that AON orders will have last
priority at price levels better than the stop price following the
conclusion of an AIM Auction if there is sufficient size to satisfy the
size of the AON order (with Priority Customer AON order trading ahead
of non-Priority Customer AON orders). AON orders (both Priority
Customer and non-Priority Customer) resting at the final auction price
(which may be the stop price if there is no price improvement) at the
conclusion of the AIM Auction do not trade against the Agency Order,
even if the Initiating Member of an AIM auction selects last
priority.\28\ The Exchange notes there would be significant technical
complexities associated with reprogramming priority within the System
to provide AON orders with second to last priority in a specific (and
likely uncommon situation), as would be required to permit AON orders
to execute at the final auction price (which may be the stop price),
even if the Initiating TPH selects last priority. As noted above, the
Exchange will not initiate an AIM Auction at a stop price equal to or
more aggressive than the price of an AON order resting on either side
of the Book at or between the BBO at the time an Agency Order and
Initiating Order is submitted to the Exchange. Thus, the only AON
orders that could be resting on the Book at the final auction price
(and thus excluded from potential execution against the Agency Order)
are those that were submitted during the AIM Auction and do not execute
upon entry.\29\ The Exchange believes the possibility of this occurring
is very small, and therefore it would be rare for there to be a resting
AON order at the stop price or final auction price of an AIM Auction
that could be satisfied by the remaining contracts of an Agency Order
at that price. Therefore, the Exchange believes the proposed rule
change will have a de minimis impact, if any, on the execution
opportunities for AON orders on the Book.
---------------------------------------------------------------------------
\28\ This is consistent with current functionality, as well as
current allocation and priority principles, pursuant to which
executions following an AIM Auction with respect to contra-side
interest other than Priority Customer orders and the Initiating
Order entitlement. See current Rule 6.45(a)(v) (which provides that
AON orders (including Priority Customer AON orders) always have last
priority).
\29\ As noted above, AON orders resting in the Book at the
conclusion of an AIM Auction at prices better than the final auction
price may execute against the Agency Order if their size
contingencies can be met. See proposed Rule 5.37(e)(2) (pursuant to
which AON orders may execute at those prices after all other
interest has traded).
---------------------------------------------------------------------------
The proposed rule change also provides that the System will exclude
the size of any AON orders when determining the number of contracts the
Initiating Order will execute against at each price level better than
the stop price when the Initiating Member selects auto-match.\30\ Due
to the size contingency of an AON order, the System cannot determine
whether there will be sufficient contracts remaining in the Agency
Order to execute against any AON order at a price level until after
execution of the applicable number of contracts against the Initiating
Order and other contra-side interest. However, after those auto-match
executions at that price level, the System will execute the Agency
Order against any AON orders at that price level for which the size can
be satisfied by the remaining contracts in the Agency Order.\31\
---------------------------------------------------------------------------
\30\ This is consistent with current functionality.
\31\ After executions at price levels better than the final
auction price, including against AON orders for which the size can
be satisfied at those price levels, if there are remaining contracts
from the Agency Order at the final auction price, those contracts
will execute against contra-side interest as set forth in
subparagraph (e)(1). This is consistent with current functionality.
---------------------------------------------------------------------------
The proposed rule change moves the provision regarding customer-to-
customer immediate crosses from current Interpretation and Policy .08
to proposed paragraph (f). Proposed paragraph (f) does not specify that
the execution price must be in the applicable standard increment, as
the minimum increment applicable to these crosses is covered by the
provisions described above.\32\ The proposed rule change also deletes
the provision that states customer-to-customer immediate crosses are
available in classes the Exchange designates as eligible for these
crosses, as they are and will be available classes in which the
Exchange has designated as eligible for AIM Auctions.
---------------------------------------------------------------------------
\32\ Users may not submit customer orders for immediate
execution as Post Only, as that instruction is inconsistent with
functionality to provide for immediate execution. As discussed
above, the purpose of the Post Only order instruction is to prevent
an order from executing upon entry. The purpose of a customer-to-
customer immediate cross, as described above, is to execute
immediately upon entry and not rest in the Book.
---------------------------------------------------------------------------
The proposed rule change deletes current Interpretation and Policy
.09 regarding AIM retained order functionality. TPHs currently do not
use this functionality, so the Exchange has determined to no longer
offer it.
The proposed rule change moves from current Rule 6.74A,
Interpretation and Policy .08 to proposed Rule 5.37, Interpretation and
Policy .03 that states a TPH may not execute agency orders to increase
its economic gain from trading against the order without first giving
other trading interests on the Exchange an opportunity to either trade
with the agency order or to trade at the execution price when the TPH
was already bidding or offering on the book. The proposed rule change
also moves current Rule 6.74A, Interpretations and Policies .01 and .02
to proposed Rule 5.37, Interpretations and Policies .01 and .02,
respectively, with no substantive changes.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\33\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \34\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with
[[Page 51679]]
the Section 6(b)(5) \35\ requirement that the rules of an exchange not
be designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------
\33\ 15 U.S.C. 78f(b).
\34\ 15 U.S.C. 78f(b)(5).
\35\ Id.
---------------------------------------------------------------------------
The proposed rule change is generally intended to align certain
system functionality currently offered by Cboe Options to the
Exchange's System in order to provide a consistent technology offering
for the Cboe Affiliated Exchanges. A consistent technology offering, in
turn, will simplify the technology implementation, changes and
maintenance by Users of the Exchange that are also participants on Cboe
Affiliated Exchanges. This will provide Users with greater
harmonization of price improvement auction mechanisms available among
the Cboe Affiliated Exchanges.
The Exchange's AIM Auction as proposed will function in a
substantially similar manner following the technology migration as it
does today. The proposed rule change clarifies in the Rules that the
Initiating Order may be comprised of multiple contra-party orders will
benefit investors. As noted above, this is consistent with current
functionality, and the proposed rule change merely adds this detail to
the rule, which additional transparency will benefit investors.
Permitting the Initiating Order to be comprised of multiple contra-
party orders may increase the opportunity for customers to have orders
participate in an AIM auction. As a result, this may increase
opportunities for price improvement, because this will increase the
liquidity available for the Initiating Order, which is consistent with
the purpose of AIM Auctions. The Exchange believes that this is
beneficial to participants because allowing multiple contra-parties
should foster competition for filling the Initiating Order and thereby
result in potentially better prices, as opposed to only allowing one
contra-party and, thereby requiring that contra-party to do a larger
size order which could result in a worse price for the trade.
The proposed rule change to prohibit Initiating TPHs from
designating an Agency Order or Initiating Order as Post Only is
appropriate, as the purpose of a Post Only order is to not execute upon
entry and instead rest in the Book, while the purpose of an AIM Auction
is to receive an execution following the Auction but prior to entering
the Book.
The proposed rule change to require the stop price to be at least
one minimum increment better than the BBO, unless the Agency Order is a
Priority Customer order and the resting order is not a Priority
Customer, in which case the stop price must be at or better than the
BBO, will protect investors. It will protect Priority Customer orders
on the same side of the Book, as the current rule does, except it does
so by applying a check at the initiation of an AIM rather than at the
conclusion of an AIM. By permitting a Priority Customer Agency Order to
trade at the same price as a resting non-Priority Customer order, the
proposed rule change also protects Priority Customer orders submitted
into an AIM Auction. Additionally, application of this check at the
initiation of an AIM Auction may result in the Agency Order executing
at a better price, since the stop price must improve any same-side
orders (with the exception of a Priority Customer Agency Order and a
resting non-priority customer order described above), as under the
current Rule, the Agency Order may execute at one minimum increment
worse. The proposed rule change is consistent with general customer
priority principles.
The Exchange believes the proposed rule change will protect
investors by rejecting Sweep and AIM orders with pairs of orders for
customer accounts, as this will ensure customers will receive better
prices at least as good as the Initial NBBO and not oversubscribe the
Agency Order. The Exchange believes there is minimal demand for use of
Sweep and AIM orders for pairs of Priority Customer orders.
As noted above, the proposed rule change will allow AIM Auctions
for 50 standard option contracts (or 500 mini-option contracts) or more
to occur concurrently with other AIM Auctions. Although AIM Auctions
for larger Agency Orders will be allowed to overlap, the Exchange does
not believe that this raises any issues that are not addressed by the
proposed rule change. For example, although overlapping, each AIM
Auction will be started in a sequence and with a time that will
determine its processing. Thus, even if there are two AIM Auctions that
commence and conclude, at nearly the same time, each AIM Auction will
have a distinct conclusion at which time the Auction will be allocated.
In turn, when the first AIM Auction concludes, unrelated orders that
then exist will be considered for participation in the Auction. If
unrelated orders are fully executed in such AIM Auction, then there
will be no unrelated orders for consideration when the subsequent
Auction is processed (unless new unrelated order interest has arrived).
If instead there is remaining unrelated order interest after the first
AIM Auction has been allocated, then such unrelated order interest will
be considered for allocation when the subsequent Auction is processed.
As another example, each AIM response is required to specifically
identify the Auction for which it is targeted and if not fully executed
will be cancelled back at the conclusion of the Auction. Thus, AIM
responses will be specifically considered only in the specified
Auction.
The proposed rule change to allow multiple auctions to overlap for
Agency Orders of 50 standard option contracts (or 500 mini-option
contracts) or more is consistent with functionality already in place on
other exchanges.\36\ Different series are essentially different
products--orders in different series cannot interact, just as orders in
different classes cannot interact. Therefore, the Exchange believes
concurrent AIM Auctions in different series is appropriate. As
proposed, AIM Auctions will ensure that Agency Orders execute at prices
that protect Priority Customer orders in the Book and that are not
inferior to the BBO, even when there are concurrent AIM Auctions
occurring. The proposed rule change sets forth how any Auctions in
overlapping series will conclude if terminated due to the same event.
The Rules do not currently prevent a COA in a complex strategy from
occurring at the same time as an AIM in one of the components of the
complex strategy. Therefore, the Exchange believes it is similarly
reasonable to permit multiple AIM Auctions in the same series. The
Exchange believes this new functionality may lead to an increase in
Exchange volume and should allow the Exchange to better compete against
other markets that permit overlapping price improvement auctions, while
providing an opportunity for price improvement for Agency Orders and
assuring that Priority Customers on the Book are protected.
---------------------------------------------------------------------------
\36\ See, e.g., EDGX Rule 21.19(c)(1); see also, e.g., Nasdaq
ISE LLC (``ISE'') Rules 716(d) and 723, Interpretation and Policy
.04; and Boston Options Exchange LLC (``BOX'') Rule 7270 and BOX IM-
7150-3.
---------------------------------------------------------------------------
The proposed rule changes regarding permissible designations on
responses are reasonable and promote a fair and orderly market, because
they are consistent with the general auction functionality. The
proposed rule change that prohibits Users from designating an AIM
Auction response with an MTP Modifier other than MTP Cancel Newest is
consistent with the prohibition on the Agency Order being cancelled
after it is submitted. Additionally, the proposed rule change that
prohibits Users from designating a response as IOC or FOK, because it
consistent with the purpose
[[Page 51680]]
of an AIM response, which is to potentially execute against an Agency
Order at the conclusion of an AIM Auction (and thus not immediately
upon entry, as required by the times-in-force of IOC and FOK).
The proposed rule change to permit all Users to respond to AIM
Auctions will benefit investors. Permitting all Users to submit
responses to AIM Auctions, rather than only appointed Market-Makers and
TPHs representing orders as agent at the top of the Book, may result in
more Users having the opportunity to participate in executions at the
conclusion of AIM Auctions. Additionally, it may increase liquidity in
AIM Auctions, which may lead to more opportunities to price
improvement. The Exchange believes the proposed rule change will remove
impediments to and perfect the mechanism of a free and open market and
a national market system, because other exchanges permit all market
participants other than appointed market-makers to respond to similar
price improvement auctions.\37\
---------------------------------------------------------------------------
\37\ See, e.g., EDGX Options Rule 21.19.
---------------------------------------------------------------------------
The proposed events that will conclude an AIM Auction are
reasonable and promote a fair and orderly market and national market
system, because they will ensure that executions at the conclusion of
an Auction occur at permissible prices (such as not outside the BBO and
not at the same price as a Priority Customer order). The proposed rule
change will also benefit investors by providing clarity regarding what
will cause an AIM Auction to conclude. These events would create
circumstances under which an AIM Auction would not have been permitted
to start, or that would cause the auction price no longer be consistent
with the permissible prices at which executions at the conclusion of an
AIM Auction may occur. Thus the Exchange believes it is appropriate to
conclude an AIM Auction if those circumstances occur. The Exchange will
no longer conclude an AIM Auction early due to the receipt of an
opposite side order. The Exchange believes this promotes just and
equitable principles of trade, because these orders may have the
opportunity to trade against the Agency Order following the conclusion
of the Auction, which execution must still be at or better than the
BBO. The Exchange believes this will protect investors, because it will
provide more time for price improvement, and the unrelated order will
have the opportunity to trade against the Agency Order in the same
manner as all other contra-side interest.
The proposed rule change to provide Priority Orders with priority
(after Priority Customers and any entitlement for the Initiating Order)
at every price level will remove impediments to and perfect the
mechanism of a free and open market and a national market system and
will protect investors, because it encourages market participants to
display their best bids and offers. Displayed interest may lead to
enhanced liquidity and tighter markets, which benefits all investors.
The allocation of AON orders following an AIM auction will protect
investors, because it is consistent with current functionality and adds
transparency to the Rules. This allocation provides Priority Customers
and other displayed interest with priority over non-displayed orders
and is consistent with the proposed general priority of AON orders in
the Exchange's Rules.\38\ As noted above, the Exchange believes this
encourages market participants to display their best bids and offers,
which may lead to enhanced liquidity and tighter markets. While AON
orders will not be eligible for execution at the final auction price
(which may be the stop price), the Exchange believes it would be rare
for there to be a resting AON order at the that price at the conclusion
of an AIM Auction that could be satisfied by the remaining contracts of
an Agency Order at that price. This is because the Exchange will not
initiate an AIM Auction at a stop price that is at or through the price
of an AON order resting on the Book at or between the BBO. Thus, the
only potential AON orders resting on the Book at the final auction
price at the conclusion of the AIM Auction are those that submitted
during the AIM Auction. Given this likely uncommon situation, and
because the proposed rule change will protect AON orders resting on the
Book at the time the Exchange initiates an AIM Auction, the Exchange
believes the proposed rule change will have a de minimis impact, if
any, on the execution opportunities for AON orders. The Exchange notes
there would be significant technical complexities associated with
reprogramming priority within the System to provide AON orders with
second to last priority in a specific (and likely uncommon situation),
as would be required to permit AON orders to execute at the stop price,
even if the Initiating TPH selects last priority. Similarly, due to the
size contingency of an AON order, the System cannot determine whether
there will be sufficient contracts remaining in the Agency Order to
execute against any AON order at a price level until after execution of
the applicable number of contracts against the Initiating Order and
other contra-side interest. However, AON orders at each price level
better than the final auction price for which the size can be satisfied
by the remaining contracts in the Agency Order will execute.
---------------------------------------------------------------------------
\38\ See current Rule 6.45(a)(v) (Rule 5.32 in the shell
Rulebook).
---------------------------------------------------------------------------
The Exchange believes the proposed rule changes that add detail to
the Rules, which are consistent with current functionality, will remove
impediments to and perfect the mechanism of a free and open market and
protect investors, as these changes provide transparency in the Rules
regarding AIM Auctions. Additionally, the proposed rule change aligns
rule language with corresponding provisions in the EDGX Options rule.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe the proposed rule change will impose any burden on intramarket
competition, as the proposed changes to the Exchange's AIM Auction will
apply to all orders submitted to an Auction in the same manner. AIM
Auctions will continue to be voluntary for TPHs to use, and are
available to all TPHs. Additionally, the ability to respond to AIM
Auctions will now be available to all Users. The Exchange does not
believe the proposed rule change will impose any burden on intermarket
competition, because the proposed changes are substantially the same as
another options exchange's rules.\39\ The general framework and primary
features of the Exchange's current AIM Auctions are not changing, and
will continue to protect orders, including Priority Customer orders,
resting in the Book.
---------------------------------------------------------------------------
\39\ See EDGX Options Rule 21.19.
---------------------------------------------------------------------------
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
[[Page 51681]]
19(b)(3)(A) of the Act \40\ and Rule 19b-4(f)(6) \41\ thereunder.
Because the foregoing proposed rule change does not: (i) Significantly
affect the protection of investors or the public interest; (ii) impose
any significant burden on competition; and (iii) become operative for
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, it has become effective pursuant to
Section 19(b)(3)(A) of the Act \42\ and Rule 19b-4(f)(6) \43\
thereunder.
---------------------------------------------------------------------------
\40\ 15 U.S.C. 78(b)(3)(A).
\41\ 17 CFR 240.19b-4(f)(6).
\42\ 15 U.S.C. 78s(b)(3)(A).
\43\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires the Exchange to give the Commission written notice of the
Exchange's intent to file the proposed rule change, along with a
brief description and text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission. The
Exchange has satisfied this requirement.
---------------------------------------------------------------------------
A proposed rule change filed under Rule 19b-4(f)(6) \44\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\45\ the Commission
may designate a shorter time if such action is consistent with
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposed
rule change may become operative prior to the proposed Exchange's
system migration on October 7, 2019, in order to permit the Exchange to
provide the AIM functionality to market participants on an
uninterrupted basis. In support of its waiver request, the Exchange
cites to similarities between its proposed rule and EDGX Options Rule
21.19. The Exchange further notes that the general framework of the
Exchange's AIM Auction is not changing. The Commission believes that,
as described above, the Exchange's proposal does not raise any new or
novel issues. Therefore, the Commission believes that waving the 30-day
operative delay is consistent with the protection of investors and the
public interest. Accordingly, the Commission designates the proposed
rule change to be operative on upon filing.\46\
---------------------------------------------------------------------------
\44\ 17 CFR 240.19b-4(f)(6).
\45\ 17 CFR 240.19b-4(f)(6).
\46\ For purposes only of waiving the 30-day operative delay,
the Commission also has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------
At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission will institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2019-045 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2019-045. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written 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-2019-045 and should be submitted on
or before October 21, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
---------------------------------------------------------------------------
\47\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-21098 Filed 9-27-19; 8:45 am]
BILLING CODE 8011-01-P
