Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Exchange's Rules Regarding the Trading of Flexible Exchange Options, and Move Those Rules From the Currently Effective 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, 54671-54692 [2019-22144]
Download as PDF
Federal Register / Vol. 84, No. 197 / Thursday, October 10, 2019 / Notices
migration as they do today. The
Exchange further notes that the general
framework of the Exchange’s FLEX AIM
and SAM Auction process will continue
to be substantively the same as the
framework for the non-FLEX AIM and
SAM Auctions, except for differences
that relate to the distinctions between
FLEX and non-FLEX Options.62
Additionally, the Exchange states that
the proposal relocates certain provisions
from the current Rulebook to the shell
Rulebook, such as provisions related to
auction eligibility requirements, auction
responses, and executions following the
conclusion of an auction, and makes
only non-substantive changes to such
provisions, which the Exchange believes
will have no impact on FLEX AIM and
SAM Auctions. The Exchange further
notes that it has provided market
participants with notice of this change
in advance of the system migration.63
For these reasons, the Commission
believes that waiving 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 upon filing.64
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:
62 See
supra note 41.
e.g, Exchange Notice C2019092500,
Trading of FLEX Options on Cboe Options
Exchange (September 25, 2019); Exchange Notice
2019092501, Cboe Town Hall on FLEX Trading on
the New Cboe Options Exchange Platform
(September 25, 2019); BOE and FIX Specifications,
available at https://markets.cboe.com/us/options/
support/technical/.
64 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).
63 See,
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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–2019–093 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–2019–093. 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–2019–093 and
should be submitted on or before
October 31, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.65
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–22157 Filed 10–9–19; 8:45 am]
BILLING CODE 8011–01–P
65 17
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54671
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87235; File No. SR–CBOE–
2019–084]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the
Exchange’s Rules Regarding the
Trading of Flexible Exchange Options,
and Move Those Rules From the
Currently Effective 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
October 4, 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 October
2, 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 and II 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.
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 Exchange’s Rules regarding the
trading of flexible exchange options
‘‘FLEX Options’’ 5 and moves those
Rules from the currently effective
Rulebook (‘‘current Rulebook’’) to the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(6).
5 See current Rule 24A.1(d), (f), and (g) (which
define a FLEX Option, FLEX Index Option, and
FLEX Equity Option) and proposed definition of
FLEX Option in Rule 1.1 of the shell Rulebook
(with nonsubstantive changes to simplify the
definition of FLEX Options). A FLEX Option on an
equity security may be referred to as a ‘‘FLEX
Equity Option,’’ and a FLEX Option on an index
may be referred to as a ‘‘FLEX Index Option.’’ The
proposed rule change also adds a period following
the rule number of Rule 1.1 to conform to the
formatting of other Rules in the shell Rulebook. The
proposed rule change also deletes the
corresponding definitions of Non-FLEX Option,
Non-FLEX Equity Option, and Non-FLEX Index
Option, as the Exchange believes the meanings of
those terms are self-evident, making the definitions
unnecessary. See current Rule 24A.1(o), (p), and (q).
2 17
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Federal Register / Vol. 84, No. 197 / Thursday, October 10, 2019 / Notices
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. 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
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will be in place upon completion of the
Cboe Options technology migration.
As part of this effort, the Exchange is
reorganizing its Rules within the shell
Rulebook to, among other things,
include all rules regarding the
Exchange’s trading hours in a single
rule, include all rules related to listing
of options products within one chapter,
and include all rules related to trading
of all products within one chapter. The
Exchange has provided market
participants with notice of this change
in advance of the system migration.6
Subject to regulatory review, these
proposed rule changes will be in effect
October 7, 2019, in conjunction with the
system migration. For example, rules
related to the classes and series of FLEX
Options the Exchange may list for
trading will be in the same chapter as
the rules related to the classes and series
of equity options and index options the
Exchange may list for trading.
Additionally, the rules related to the
manner in which FLEX Options may
trade will be in the same chapter as the
rules related to the manner in which all
other types of options may trade.7 The
shell Rulebook will clearly identify the
Rules that apply to the trading of FLEX
Options.
Chapter XXIVA of the current
Rulebook sets forth the Rules applicable
to the trading of FLEX Options on the
Exchange’s hybrid trading system (i.e.,
trading in both open outcry and
electronically). Trading of FLEX
Options is subject to all other Rules
applicable to the trading of options on
the Exchange, unless otherwise
specified in Chapter XXIVA of the
current Rulebook (proposed Chapter 5,
Section F in the shell Rulebook).8 A
Trading Permit Holder (a ‘‘TPH’’) may
trade FLEX Options if the Exchange has
approved the TPH to trade FLEX
Options on the Exchange; such a TPH is
6 See, e.g, Exchange Notice C2019092500, Trading
of FLEX Options on Cboe Options Exchange
(September 25, 2019); Exchange Notice
2019092501, Cboe Town Hall on FLEX Trading on
the New Cboe Options Exchange Platform
(September 25, 2019); BOE and FIX Specifications,
available at https://markets.cboe.com/us/options/
support/technical/.
7 In separate rule filings, the Exchange will move
to the shell Rulebook certain FLEX Rules not being
moved in this rule filing. These rules include Rule
24A.6 regarding discretionary transactions, Rule
24A.7 regarding position limits and reporting
requirements, Rule 24A.8 regarding exercise limits,
and Rule 24A.13 regarding Letters of guarantee or
authorizations. The Exchange notes it will not be
making any substantive changes to those Rules, but
will rather merely be moving them into the shell
Rulebook (and thus will update the rule number, as
well as the paragraph lettering and numbering), and
therefore these Rules will continue to apply to
FLEX trading in the same manner they apply today.
8 See current Introduction to Chapter XXIVA and
proposed Rule 5.72(a).
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referred to as a ‘‘FLEX Trader.’’ 9
Currently, FLEX Options trade on the
Exchange’s FLEX Hybrid Trading
System, which is the Exchange’s trading
platform that allows FLEX Traders to
submit electronic and open outcry
request for quotes (‘‘RFQs’’), FLEX
quotes in response to those RFQs, and
FLEX Orders into the electronic book.10
Upon the Exchange’s trading platform
migration, FLEX trading will occur on
the same Exchange System 11 as all other
options trading occurs on the Exchange.
Pursuant to current Rule 24A.3, there
are no trading rotations in FLEX
Options, either at the opening or at the
close of trading. The proposed rule
change moves the provision that states
there is no opening rotation in FLEX
Options to Rule 5.71(a) of the shell
Rulebook. The proposed rule change
deletes the provisions from current Rule
24A.3 regarding the absence of closing
rotations for FLEX Options, as closing
rotations do not occur in any class of
options on the Exchange.
Currently, FLEX Options open for
trading at a randomly selected time
within a number of seconds after 9:30
a.m. Eastern Time.12 Currently, the
Exchange has set that number of
seconds at one. Proposed Rule 5.71(b)
states the times when FLEX Traders
may begin submitting FLEX Orders into
an electronic FLEX Auction pursuant to
proposed Rule 5.72(c), a FLEX AIM
pursuant to proposed Rule 5.73, or a
FLEX SAM pursuant to proposed Rule
5.74,13 or initiate an open outcry FLEX
Auction the Exchange’s trading floor
9 See current Rule 24A.1(l) in the current
Rulebook and proposed Rule 3.57 in the shell
Rulebook. The proposed rule change makes
nonsubstantive changes to the definition of a FLEX
Trader, including to make the definition plain
English by eliminating passive voice and deleting
the unnecessary language ‘‘FLEX-participating,’’ as
that is redundant of the provision that provides the
TPH is approved to trade FLEX Options on the
Exchange.
10 See current Rule 24A.1(e).
11 The term ‘‘System’’ means the Exchange’s
hybrid trading platform that integrates electronic
and open outcry trading of option contracts on the
Exchange, and includes any connectivity to the
foregoing trading platform that is administered by
or on behalf of the Exchange, such as a
communications hub. See Rule 1.1 in the shell
Rulebook. Because there will no longer be a
separate FLEX system, the proposed rule change
deletes the definition of FLEX Hybrid Trading
System in current Rule 24A.1(e).
12 See current Rule 24A.3 (the current rule
includes times in Central Time, while the proposed
rule includes times in Eastern Time, consistent with
Rule 1.6 in the shell Rulebook).
13 The Exchange intends to amend and move
current Rules 24A.5A and 24A.5B regarding FLEX
AIM and SAM Auctions, respectively, from the
currently Rulebook to Rules 5.73 and 5.74,
respectively, of the shell Rulebook in a separate rule
filing.
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Federal Register / Vol. 84, No. 197 / Thursday, October 10, 2019 / Notices
pursuant to proposed Rule 5.72(c).14
Specifically, FLEX Traders may begin
submitting FLEX Orders (a) with respect
to the Regular Trading Hours (‘‘RTH’’)
trading session, after the System’s
observation after 9:30 a.m. Eastern Time
of the first disseminated (1) transaction
on the primary market in the security
underlying an equity option or (2) index
value for the index underlying an index
option, and (b) with respect to the
Global Trading Hours (‘‘GTH’’) trading
session, after 3:00 a.m. Eastern Time.15
As discussed further below, while the
Exchange currently has an electronic
book for orders for FLEX Options, it has
only been used in recent months by one
customer for limited purpose, and for a
minimal amount of FLEX volume.
Because of the limited usage of an
electronic book for FLEX Orders, the
Exchange has determined there will be
no electronic book of resting orders for
FLEX Options available following the
technology migration, which lack of
availability of a FLEX Book is consistent
with current Exchange authority.
Additionally, because there will also be
no opening rotation, at the time at
which FLEX Trading opens, there will
be no automatic executions. Therefore,
being ‘‘open’’ for FLEX trading merely
means that FLEX Traders may submit
14 This is consistent with current Rule 24A.3,
which states after the time at which a FLEX Option
series opens for trading, a FLEX auction may be
initiated. The proposed rule change deletes the
provision that states FLEX Orders may be entered
directly into the electronic book (if available),
because, as discussed below, the Exchange will not
have an electronic book available for FLEX Options.
15 See Securities Exchange Act Release No. 86879
(September 5, 2019), 84 FR 47984 (September 11,
2019) (SR–CBOE–2019–034) (approval of proposed
rule change to provide that the opening rotation for
non-FLEX Options will be triggered by the same
events, which are substantially the same as those
in current Rule 6.2(b)). Pursuant to Rule 5.1(b)(3)
in the shell Rulebook, Regular Trading Hours for
FLEX Options are the same as the corresponding
non-FLEX Options, except the Exchange may
determine to narrow or otherwise restrict the
trading hours for FLEX Options. The rule change
clarifies in Rule 5.1(b)(3)(A) that Regular Trading
Hours for FLEX Options are the same as the Regular
Trading Hours for the corresponding non-FLEX
Options, as the Exchange inadvertently omitted the
phrase ‘‘the Regular Trading Hours for’’ from that
Rule (therefore, the proposed rule change makes no
substantive changes to the trading hours for FLEX
Options). Additionally, pursuant to Rule 5.1(c)(1) in
the shell Rulebook, if the Exchange designates a
class of index options as eligible for trading during
Global Trading Hours, FLEX Options with the same
underlying index are also deemed eligible for
trading during Global Trading Hours.
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FLEX Orders into one of the various
FLEX Auctions, at the conclusion of
which executions in FLEX Auctions
may occur (which are all discussed
below). Because market participants
incorporate transaction prices of
underlying securities or the values of
underlying indexes when pricing
options (including FLEX Options), the
Exchange believes it will benefit
investors for FLEX Options trading to
not be available until that information
has begun to be disseminated in the
market. Additionally, the proposed
trigger events occur for many
underlying securities or indexes within
one second of 9:30 a.m. Eastern Time
(which is consistent with the current
time at which the Exchange has
determined to open FLEX Option
classes), and the majority occur within
ten seconds. Therefore, pursuant to the
proposed rule change, the opening of
FLEX Options for trading may occur
over a longer timeframe, which would
further reduce any potential market
impact of the change to the opening
time for FLEX Options. While the
Exchange believes it is important to
open series for trading as soon as
possible, the Exchange also believes the
proposed rule change will permit it to
manage the number of FLEX Option
series that may begin to trade during a
short time period to ensure a fair and
orderly opening in all options listed on
the Exchange. The Exchange also notes
that FLEX Options trading volume
currently represents approximately
1.5% of total trading volume on the
Exchange, and therefore the Exchange
believes any potential market impact of
this change would be de minimis.
The proposed rule change moves the
provision in current Rule 24A.3 that
states a new FLEX Option series may be
established on any business day prior to
the expiration date and opened for
trading pursuant to the procedures and
principles for trading as provided in
other rules within current Chapter
XXIV, to proposed Rule 4.21(a)(2). As
described below, other current rules
have the same provision, and the
Exchange does not believe they also
need to be in the rule regarding the
opening of trading, but rather in the
rules regarding permissible series.16 The
16 See, e.g., current Rule 24A.4(a)(1) (which the
proposed rule change moves to proposed Rule
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54673
Exchange moves these provisions to the
shell Rulebook as set forth below. The
Exchange also makes nonsubstantive
changes to provisions moved from
current Rule 24A.3 to proposed Rule
5.71, including changes to make the
language more plain English, update
cross-references, update times to Eastern
Time, and incorporate defined terms.
Current Rule 24A.4 (and other Rules
in current Chapter XXIVA) sets forth the
terms of FLEX Options. The Exchange
moves these provisions to Chapter 4,
Section C of the shell Rulebook.17 The
Exchange moves the provisions that
state the Exchange may authorize for
trading a FLEX Option class on any
equity security or index if it may
authorize for trading a non-FLEX Option
class on that equity security or index
pursuant to Rules 4.3 and 4.10,18
respectively, of the shell Rulebook, even
if the Exchange does not list that nonFLEX Option class for trading, from
current Rule 24.4A(b)(1) and (c)(1) to
proposed Rule 4.20.19 Because the
provisions related to FLEX Index
Options and FLEX Equity Options
provide the Exchange with the same
authority with respect to each type of
FLEX Options, the proposed rule change
combines them into a single one.
The proposed rule change moves the
following provisions regarding the terms
of FLEX Option series from the current
Rulebook to the shell Rulebook. In
addition to the substantive changes
described below, the proposed rule
change makes additional nonsubstantive
changes to these Rules, including to
make the rule text plain English,
simplify the rule provisions, use
consistent language throughout the
Rules, use active voice, incorporate
defined terms, update cross-references
and paragraph numbering and lettering,
and eliminate redundant provisions.
4.21(a)(2)). The table below describes the proposed
changes to the language of this provision.
17 Chapter 4 of the shell Rulebook will contain all
Rules related to the listing of options on the
Exchange.
18 The Exchange intends to move current Rules
5.3 and 24.2 to Rules 4.3 and 4.10, respectively, in
the shell Rulebook in a separate rule filing.
19 See also proposed Rule 4.21(a) (which states
the Exchange may approve a FLEX Option series for
trading on any FLEX Option class it may authorize
for trading pursuant to proposed Rule 4.20).
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Rule provision
Current rule
(current rulebook)
Proposed rule
(shell rulebook)
FLEX Option series are not pre-established ..............................
Rule 24A.4(a)(1) ......................
Rule 4.21(a) ............................
The Exchange may approve a FLEX Option series for trading
in any FLEX Option class it may authorize for trading pursuant to proposed Rule 4.20.
Rule 24A.4(b)(1) and (c)(1) .....
4.21(a) (introductory paragraph).
A FLEX Option series is eligible for trading on the Exchange
upon submission to the System of a FLEX Order for that series pursuant to proposed Rule 5.72 (as well as Rules 5.73
and 5.74) 20.
Rules 24A.4(a)(1) and
24A.5(a).
Rule 4.21(a) (introductory
paragraph).
The Exchange only permits trading in a put or call FLEX Option series that does not have the same exercise style,
same expiration date, and same exercise price as a nonFLEX Option series on the same underlying security or
index that is already available for trading. This includes permitting trading in a FLEX Option series before a series with
identical terms is listed for trading as a non-FLEX Option series. If the Exchange lists for trading a non-FLEX Option series with identical terms as a FLEX Option series, the FLEX
Option series will become fungible with the non-FLEX Options series pursuant to proposed Rule 4.22. The System
does not accept a FLEX Order for a put or call FLEX Option
series if a non-FLEX Option series on the same underlying
security or index with the same expiration date, exercise
price, and exercise style is already listed for trading.
A FLEX Order for a FLEX Option series may be established
on any trading day prior to the expiration date.
Rule 24A.4, Interpretation and
Policy .02(b).
Rule 4.21(a)(1) ........................
Rule 24A.3 and Rule
24A.4(a)(1).
Rule 4.21(a)(2) ........................
The Exchange may halt trading in a FLEX Option class pursuant to Rule 5.20, and always halts trading in a FLEX Option
class when trading in a non-FLEX Option class with the
same underlying equity security or index is halted on the Exchange. The System does not accept a FLEX Order for a
FLEX Option series while trading in a FLEX Option class is
halted.
N/A ..........................................
Rule 4.21(a)(3) ........................
When submitting a FLEX Order for a FLEX Option series to
the System, the submitting FLEX Trader must include one
of each of the following terms in the FLEX Order, which
terms constitute the FLEX Option series.
Rules 24A.1(w) and
24A.4(a)(2).
Rule 4.21(b) ............................
• underlying equity security or index, as applicable (the index
multiplier for FLEX Index Options is 100).
Rules 24A.1(m) and
24A.4(a)(2)(i).
Rule 4.21(b)(1) ........................
• type of option (i.e., put or call), except an Asian-settled or
Cliquet-settled FLEX Option series may only be a call.
Rule 24A.4(a)(2)(ii), (b)(5) and
(6).
Rule 4.21(b)(2) ........................
• exercise style, which may be American-style or Europeanstyle, except an Asian-settled or Cliquet-settled FLEX Option
series may only be European-style.
Rules 1.1(aa) and (cc) and
24A.4(a)(2)(iii).
Rule 4.21(b)(3) ........................
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Proposed changes
The proposed rule change incorporates the term FLEX Option series (rather than options series) into this rule provision.
The proposed rule change combines the provisions for trading FLEX Index Options and FLEX Equity Options into a
single provision, as they provide the Exchange with the
same authority. As further discussed below, a FLEX Option
series is not created (and thus not eligible to trade) until a
FLEX Order for the series is submitted into one of the
FLEX Auctions. Therefore, the proposed rule change deletes the reference to the Exchange being able to ‘‘open for
trading’’ any FLEX Option series.
The current rule states FLEX Option series are established
through the bidding and offering mechanics detailed in current Rule 24A.5. As discussed below, the proposed rule
change amends the provisions governing how FLEX Options may trade on the Exchange. A FLEX Option series
may only be eligible for trading after submission into one of
the various auctions available for FLEX trading. A FLEX
Option series may be established under current rules upon
submission of a FLEX Order to a FLEX auction, as is the
case pursuant to the proposed rule change, but will no
longer be able to be established upon submission of a
FLEX Order into the book (as there will be no book).21 See
additional discussion below regarding the elimination of an
electronic book for FLEX Options.
The proposed rule change deletes the introductory clause in
current Rule 24A.4, Interpretation and Policy .02(b) that references the requirement that options on an underlying security or index to be otherwise eligible for FLEX Trading, as
that language is redundant of the language in proposed
Rule 4.21(a). The proposed rule change also eliminates the
use of passive voice and makes other nonsubstantive
changes to this provision.
Updated to reflect the proposed changes to the FLEX trading
procedures, which provide that a FLEX Option series is
only available for trading upon submission of a FLEX Order
(as noted above).
This provision is not explicitly stated in current Chapter XXIV.
However, it is consistent with Exchange authority to halt
trading in options classes listed for trading on the Exchange (see current Rules 6.3 and 24.7, which were
moved to Rule 5.20 in the shell Rulebook), and current Exchange practice. The reasons why the Exchange would
halt trading in a non-FLEX Option class (e.g., trading in the
underlying security is halted) would generally be reasons
why the Exchange would halt a FLEX Option class, and
therefore the Exchange will always halt trading in a FLEX
Option class when trading in a non-FLEX Option class with
the same underlying equity security or index is halted on
the Exchange.22
The current definition of a series of FLEX Options (the proposed rule change uses the term FLEX Option series) is all
option contracts of the same class having the same exercise price, exercise style, and expiration date (and with respect to FLEX Index Options, the same settlement value
and index multiplier). The current Rules also require a
FLEX Request for Quotes (‘‘RFQ’’), FLEX Order, or FLEX
Option contract contain one element from the categories of
underlying security, type, exercise style, expiration date,
and exercise price. As noted above, a FLEX Option series
may only be established through the submission of a FLEX
Order, and therefore, the proposed rule change combines
the provisions to provide that a FLEX Order must contain
one element of each of the listed terms, which terms constitute the actual FLEX Option series being established by
that order.
The proposed rule change simplifies the language of this provision and includes the fact that the index multiplier for all
FLEX Index Options is 100 in this provision, rather than in
a definition, as the term index multiplier is not otherwise
used in the proposed rule.
The proposed rule change refers to type of option, which is
defined in Rule 1.1 in the shell Rulebook as put or call.
The proposed rule change also combines the provisions regarding the permissible type of option available for Asiansettled and Cliquet-settled FLEX Options, so that provisions regarding types of options available for FLEX Option
series are included in the same place.
Only nonsubstantive changes.
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Current rule
(current rulebook)
Rule provision
• expiration date, which may be any business day (specified
to the day, month, and year) no more than 15 years from
the date on which a FLEX Trader submits a FLEX Order to
the System, except an Asian-settled or Cliquet-settled FLEX
Option series, which must have an expiration date that is a
business day but may only expire 350 to 371 days (which is
approximately 50 to 53 calendar weeks) from the date on
which a FLEX Trader submits a FLEX Order to the System.
• settlement type 23:
Æ FLEX Equity Options are (i) settled with physical delivery of the underlying security; and (ii) subject to the exercise by exception provisions of OCC Rule 805.
Æ FLEX Index Options are settled in U.S. dollars and may
be:
(i) a.m.-settled; 24
(ii) p.m.-settled,25, or
(iii) for a FLEX Index Option on a broad-based index,
Asian-settled or Cliquet-settled (which have unique
settlement procedures); 26
• exercise price (which the System rounds to the nearest minimum increment), which may be (1) for a FLEX Equity Option or FLEX Index Option that is not Cliquet-settled, (a) a
fixed price expressed in terms of dollars and cents or a specific index value, as applicable, or (b) a percentage of the
closing value of the underlying equity security or index, as
applicable, on the trade date; or (2) for a FLEX Index Option
that is Cliquet-settled, the capped monthly return (which
must be expressed in dollars and cents).
• All other terms of a FLEX Option series are the same as
those that apply to non-FLEX Options.
Bids and offers for FLEX Options must be expressed in (a)
U.S. dollars and decimals, if the exercise price for the FLEX
Option series is a fixed price, or (b) a percentage, if the exercise price for the FLEX Option series is a percentage of
the closing value of the underlying equity security or index
on the trade date, per unit of the underlying security or
index, as applicable.28 The System rounds bids and offers
to the nearest minimum increment.
The Exchange determines the minimum increment for bids
and offers on FLEX Options on a class-by-class basis,
which may not be smaller than (a) $0.01, if the exercise
price for the FLEX Option series is a fixed price, or (b)
0.01%, if the exercise price for the FLEX Option series is a
percentage of the closing value of the underlying equity security or index on the trade date. The System rounds bids
and offers to the nearest minimum increment.
FLEX Traders may apply trade conditions to FLEX Orders ......
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Proposed rule
(shell rulebook)
54675
Proposed changes
Rule 24A.4(a)(2)(iv), (a)(5),
and (a)(6).
Rule 4.21(b)(4) ........................
The proposed rule change incorporates the concept that a
FLEX Option series is available for trading only when a
FLEX Trader submits a FLEX Order to the System, and
therefore the date on which the FLEX Order is submitted is
the date from which the expiration date is measured (this is
consistent with FLEX trading today, pursuant to which a
FLEX series may only be opened for trading through the
RFQ process). The proposed rule change also includes all
provisions regarding permissible expiration dates in the
same place.
Rules 24A.1(aa) through (cc)
and 24A.4(a)(2)(iv) and
(b)(3) through (6), (c)(3)
through (4), and Interpretation and Policy .01.
Rule 4.21(b)(5) ........................
The proposed rule change uses the term ‘‘settlement type’’ to
describe all potential ways in which the settlement value
will be determined (current rules also use the term settlement style), and includes all provisions regarding the permissible settlement types in a single place.
Rule 24A.4(a)(2)(v), (b)(2)(i)
and (iii), (b)(6), and (c)(2)(i)
and (iii).
Rule 4.21(b)(6) ........................
Rule 24A.4(a)(1) ......................
Rule 4.21(b) ............................
The proposed rule change includes all provisions regarding
permissible exercise prices in a single place within the
Rules. In addition to the exercise price options in proposed
Rule 4.21(b)(6), current Rule 24A.4(b)(2) and (c)(2) permits
exercise prices for FLEX Index Options to be specified as
a method for fixing an index value or dollar amount at the
time of a FLEX RFQ or a FLEX Order is traded, or as a
percentage of the index value calculated at the time of the
trade, and for FLEX Equity Options, to be specified as a
method for fixing a dollar amount at the time of a FLEX
RFQ or a FLEX Order is traded, or as a percentage of the
price of the underlying security at the time of the trade. In
the past year, no FLEX Trader has designated the exercise
price for a FLEX series in any of these manners—FLEX
Traders have only designated the exercise price for a series as a fixed price or as a percentage of the closing value
of the underlying on the trade date. Therefore, the Exchange proposes to only offer the two options for exercise
prices for FLEX Options that are used by FLEX Traders.27
Because FLEX Traders do not use the other types of exercise prices for FLEX Options, the Exchange believes elimination of that functionality will have a de minimis, if any,
impact on FLEX trading.
Only nonsubstantive changes of types described above.
Rules 24A.4(b)(2) and (c)(2)
and 24A.5(e).
Rule 5.3(e)(3) 29 ......................
Rules 24A.4(b)(2) and (c)(2)
and 24A.5(e) 32.
Rule 5.4(c)(4) 33 ......................
Rules 24A.1(y), 24A.4(a)(3)(ii)
and (4)(ii), and
24A.5(d)(3) 35.
N/A ..........................................
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The proposed rule change adds the term ‘‘dollars and decimals’’ regarding how bids and offers (currently referred to
as premiums in Rule 24A.4(b) and (c)) 30 to be consistent
with terminology in Rule 5.3 in the shell Rulebook (this is
merely a change in terminology). The proposed rule
change moves the provisions regarding the form of bids
and offers of FLEX Options to Rule 5.3 in the shell
Rulebook, so that all provisions regarding the form of bids
and offers for all options eligible for trading on the Exchange are included in a single Rule. The proposed rule
change adds detail that the bid and offer amount is per unit
of the underlying security or index, as applicable. This is
true today and is merely adding detail to the rules.31 The
proposed rule change makes no substantive changes to
the form and manner in which FLEX Traders may make
bids and offers on FLEX Options.
The proposed rule change moves the provisions regarding
the minimum increment for FLEX Options to Rule 5.4 in the
shell Rulebook, so that all provisions regarding permissible
minimum increments for all options eligible to trade on the
Exchange are included in a single Rule.34
Currently, FLEX Traders may designate FLEX Orders as immediate-or-cancel (‘‘IOC’’), which executes (in whole or in
part) as soon as it is represented or is cancels (or the
unexecuted portion cancels). As further discussed below,
the will not make a FLEX Book available following the technology migration. Because there will be no book, all FLEX
Orders will be functionally equivalent to an IOC, which can
only trade (or partially trade) following an auction, and thus
no designation will be necessary.36 Additionally, FLEX
Traders may currently designate a FLEX Order as a
‘‘hedge,’’ which is an electronic condition that makes execution of a FLEX Option contingent on the trade of an execution in a non-FLEX Option or other non-FLEX components. In the past year, no FLEX Trader has applied this
trade condition to a FLEX Order. Therefore, the Exchange
no longer intends to offer this trade condition for FLEX Options. Because FLEX Traders do not use this trade condition for FLEX Options, the Exchange believes elimination
of this functionality will have a de minimis, if any, impact on
FLEX trading.
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Current rule
(current rulebook)
Proposed rule
(shell rulebook)
Rule 24A.4, Interpretation and
Policy .02.
Rule 4.22 .................................
Rule provision
Fungibility of FLEX Options ........................................................
20 As noted above, the Exchange intends to move
current Rules 24A.5A and 24A.5B regarding FLEX
AIM and SAM Auctions, respectively, to Rules 5.73
and 5.74, respectively, in the shell Rulebook in a
separate filing.
21 The Exchange notes there is an electronic book
available for FLEX Options today, but only being
used by one FLEX Trader for a limited purpose, as
further discussed below, and only for
approximately 1.2% of FLEX trading. Therefore, the
vast majority of FLEX Option series are established
for trading today in the same manner as they will
be able to be established pursuant to the proposed
rule change. See current Rule 24A.5(a) (which states
the Request for Quotes (‘‘RFQ’’) process is required
to open trading in a new series (unless the auction
process under Rule 24A.5A or 24A.5B is used to
open trading in a new series); and (b).
22 Rule 5.20 in the shell Rulebook also provides
the Exchange with authority to halt trading in a
FLEX Option, even if trading in a non-FLEX Option
with the same underlying is not halted. While such
situation would be rare, there may be unusual
circumstances that would cause the Exchange to
halt trading in the FLEX Option (see Rule 5.20(a)(5)
in the shell Rulebook).
23 FLEX Index Options are cash-settled in U.S.
dollars, and FLEX Equity Options are physical
settled, subject to the exercise by exception
provisions of Options Clearing Corporation (‘‘OCC’’)
Rule 805. See current Rule 24A.4(b)(4) and (c)(3)
and (4) (proposed Rule 4.21(a)(5)).
24 The exercise settlement value for an a.m.settled FLEX Index Option series is determined by
reference to the reported level of the index derived
from the reported opening prices of the component
securities. See current Rule 24A.4(b)(3) (proposed
Rule 4.21(b)(5)(A)). The proposed rule change
eliminates the defined term Expiration Friday, as it
is not used elsewhere in the Rules. The proposed
rule change deletes the provision regarding the
exercise settlement value of FLEX Index Options on
the NYSE Composite Index, as the Exchange no
longer lists options on that index for trading. The
proposed rule change includes the provisions
regarding how the exercise settlement value is
determined for each settlement type, as how the
exercise settlement value is determined is
dependent on the settlement type.
25 The exercise settlement value for a p.m.-settled
FLEX Index Option series is determined by
reference to the reported level of the index derived
from the reported closing prices of the component
securities. See current Rule 24A.4(b)(3) (proposed
Rule 4.21(b)(5)(B)). A FLEX Index Option that
expires on any business day that falls on or within
two business days of a third Friday-of-the-month for
a non-FLEX Option (other than a QIX option) may
only be a.m.-settled; however, FLEX Index Options
with an expiration date on the third-Friday of the
month may be p.m.-settled pursuant to a pilot
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program ending the earlier of November 4, 2019 or
the date on which the pilot program is approved on
a permanent basis. See current Rule 24A.4,
Interpretation and Policy .01 (proposed Rule
4.21(a)(5)(B)).
26 Asian-settled FLEX Index Options have an
exercise settlement value based on an arithmetic
average of the specified closing prices of an
underlying broad-based index taken on 12
predetermined monthly observation dates
(including on the expiration date), which dates the
FLEX Trader specifies. Cliquet-settled FLEX Index
Options have an exercise settlement value equal to
the greater of $0 or the sum of capped monthly
returns (i.e., percent changes in the closing value of
the underlying broad-based index from one month
to the next) applied over 12 predetermined monthly
observation dates (including an expiration date),
which dates and monthly cap value (which must be
no smaller than $0.05 and no larger than $25.95,
and in an increment of $0.05) the FLEX Trader
specifies. For Asian- and Cliquet-settled FLEX
Index Options, if a monthly observation date falls
on a non-business day, the monthly observation
occurs on the immediately preceding business days.
See current Rule 24A.1(aa) through (cc) and
24A.4(b)(5) and (6) (proposed Rule 4.21(b)(5)(C) and
(D)). The proposed rule change deletes the
definition of ‘‘preceding business day convention’’
and incorporates its meaning into the descriptions
of each of Asian-settled and Cliquet-settled, as that
defined term is not otherwise used in the Rules, and
also incorporates the defined term ‘‘business day.’’
See Rule 1.1 in the shell Rulebook.
27 The proposed rule change also deletes current
Rule 24A.5, Interpretation and Policy .02, which
relates only to FLEX Options with exercise prices
specified using the terms that the proposed rule
change deletes (i.e., exercise prices for FLEX Index
Options specified as a method for fixing an index
value or dollar amount at the time of a FLEX RFQ
or a FLEX Order is traded, or as a percentage of the
index value calculated at the time of the trade, and
for FLEX Equity Options, specified as a method for
fixing a dollar amount at the time of a FLEX RFQ
or a FLEX Order is traded, or as a percentage of the
price of the underlying security at the time of the
trade), and any other provisions in Rules 24A.1,
24A.4, and 24A.5 related to these exercise types.
28 While the current rule permits bids and offers
to be in a different format than the exercise price,
the current functionality does not permit this.
Therefore, the proposed rule change makes it clear
that bids and offers must be in the same format as
the exercise price, as it would be difficult to apply
a dollar price for a FLEX Option series with a
percentage-based exercise price.
29 The proposed rule change also updates the
subparagraph numbering in Rule 5.3(e) in the shell
Rulebook.
30 The term ‘‘premium’’ refers to the prices at
which a market participant is willing to trade an
option, which is also referred to as a bid or offer.
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Proposed changes
The proposed rule change makes no substantive changes to
the fungibility of FLEX Options with non-FLEX options, and
makes various nonsubstantive changes of the type described above. The proposed rule change updates terminology in the proposed provision to reflect changes to the
FLEX trading procedures, which are described below, and
updates cross-references to applicable Rules in the shell
Rulebook. The proposed rule change adds a cross-reference to the rule (Rule 5.1(d) in the shell Rulebook) that
lists Exchange holidays rather than use the term ‘‘Exchange holiday’’ so that market participants will know
where in the Rules to look to know what constitutes an Exchange holiday. The proposed rule change deletes the
phrase that states Interpretation and Policy .02 (proposed
Rule 4.22) applies to all FLEX Options. The proposed rule
lists no exceptions for when this provision applies to FLEX
Options, and therefore this phrase is unnecessary.
Pursuant to Rule 5.6(a) in the shell
Rulebook, the Exchange may make order
types, Order Instructions, and Times-inForce available on a class basis.
Pursuant to that authority, which
authority the Exchange currently has
pursuant Rule 6.53 in the current
Rulebook, the proposed rule change
adopts Rule 5.70(a) in the shell
Rulebook to state that it may make the
following order types, Order
Instructions, and Times-in-Force
available for orders submitted in FLEX
Options (‘‘FLEX Orders’’): 37
The proposed rule change just uses the terms bids
and offers in proposed Rule 5.3(e)(3), which is
consistent with the bid and offer provisions for
other types of options in Rule 5.3 in the shell
Rulebook.
31 It is also consistent with language applicable to
bids and offers in non-FLEX Options. See Rule
5.3(a) in the shell Rulebook.
32 The proposed rule change deletes the provision
regarding the Exchange’s pronouncement of
minimum increments for FLEX by regulatory
circular, as the Exchange will announce all
determinations pursuant to Rule 1.5 in the shell
Rulebook (see also Rule 1.2 in the current
Rulebook).
33 The proposed rule change also updates the
subparagraph numbering in Rule 5.4(c) in the shell
Rulebook.
34 The Exchange notes the current rules reference
the term ‘‘minimum tick’’ as well as ‘‘other decimal
increment.’’ The term ‘‘minimum tick’’ generally
refers to the minimum increment applicable to an
option, which in non-FLEX trading is a dollar
amount. Because FLEX Options may also have a
minimum increment in a percentage, that is
included in the reference in the current rules to
‘‘other decimal increment.’’ However, the Exchange
believes the term ‘‘minimum increment’’ applies to
both formats (dollars and percentage), and therefore
eliminates the reference to tick.
35 The proposed rule change deletes all additional
provisions in current Chapter XXIVA of the current
Rulebook related to these trade conditions.
36 As set forth in proposed Rule 5.72(c)(3)(B), and
as discussed below, a FLEX Order may trade in
whole or in part following an electronic FLEX
Auction, as any unexecuted FLEX Order (or
unexecuted portion) cancels at the conclusion of
the auction.
37 See Rule 5.6 in the shell Rulebook for
definitions of these order types, Order Instructions,
and Times-in-Force. The proposed rule change
deletes the corresponding current definition of
FLEX Order in current Rule 24A.1(j). The only
proposed substantive change to the definition of
FLEX Order is the deletion of the reference to the
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• Order Types—limit orders
• Order Instructions—All Sessions,
Attributable, Direct to PAR, Electronic
Only, Non-Attributable, Not Held, and
RTH Only
• Times-in-Force—Day
Given that FLEX Orders will only be
eligible to trade following an electronic
or open outcry FLEX Auction and not
rest in an electronic book or route away
(for which most Order Instructions and
Times-in-Force set forth in Rule 5.6 in
the shell Rulebook are relevant), the
Exchange believes these are appropriate
designations for FLEX Orders. Because
there is no existing market for FLEX
Options, and thus no price protections
available to ensure execution of FLEX
Orders at reasonable prices, the
Exchange believes it is appropriate to
only permit FLEX Options be submitted
as limit orders. The Direct to PAR and
Electronic Only Order Instructions
permit a FLEX Trader to determine
whether it wants a FLEX Order to be
eligible for electronic execution or
subject to manual handling for
execution in open outcry on the
Exchange’s trading floor. Additionally,
as set forth in Rule 5.1(c) of the shell
Rulebook, following the migration the
Exchange may designate certain FLEX
Option classes as eligible for trading
during the Global Trading Hours
sessions, and the All Sessions and RTH
Only designations will permit a FLEX
Trader to determine in which trading
session(s) it wants a FLEX Order to be
eligible for execution. While not
specified in the Rules, FLEX Traders
may designate a FLEX Order as
Attributable (pursuant to the Exchange’s
authority pursuant to current Rule 6.53,
which permits the Exchange to make
certain order types available on a class
basis). FLEX Orders not designated as
Attributable will be Non-Attributable.38
Current Rules 24A.4(a)(2) and 24A.5,
Interpretation and Policy .01
contemplate the availability of complex
orders for FLEX trading. Proposed Rule
5.70(b) explicitly states the Exchange
may make complex orders, including
security future-option orders and stocksubmission of FLEX Orders to the electronic book,
as there will no longer be a FLEX Book available
(consistent with the Exchange’s current authority to
not make a FLEX Book available), as discussed
below. Because all FLEX Traders, including FLEX
Market-Makers, will submit FLEX Orders, and
responses to FLEX Auctions, in the same manner,
the proposed rule change does not distinguish
between bids and offers submitted by different
types of FLEX Traders, and also deletes the defined
term ‘‘FLEX Quote’’ from current Rule 24A.1(k).
38 See definitions of ‘‘Attributable Order’’ and
‘‘Non-Attributable Order’’ in current Rule 6.53
(Rule 5.6(c) in the shell Rulebook). Attribution has
no impact on trading, and merely relates to
information that a FLEX Trader may want
disseminated with respect to its orders.
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option orders,39 available for FLEX
trading. Complex FLEX Orders may
have up to the maximum number of legs
determines by the Exchange. Each leg of
a complex FLEX Order:
• Must be for a FLEX Option series
authorized for trading 40 with the same
underlying equity security or index; 41
• must have the same exercise style
(American or European); and
• for a FLEX Index Option, may have
different settlement types (a.m.-settled
or p.m.-settled),42 except each leg must
have the same settlement type if
designated as Asian-settled or Cliquetsettled.
The Exchange believes requiring the
legs of a FLEX Option complex order to
have the same exercise style is
appropriate given the conflict that
would arise with legs with different
exercise styles. Similarly, the Exchange
believes requiring the legs of a FLEX
Option complex order to have the same
settlement type for Asian-settled and
Cliquet-settled FLEX Index Options is
appropriate given the complex nature of
those settlement types. The Exchange
believes this may alleviate any potential
difficulties that may arise if the market
needed to price such complex strategies.
The Exchange notes it has not receive
any complex orders at least within the
last year that have legs with difference
exercise styles, or that have legs that are
Asian-settled and Cliquet-settled with
other legs that have a different
settlement types.
Proposed Rule 5.70(c) states a FLEX
Trader may enter a FLEX Order into the
System during the times set forth in
39 See definition of complex order in Rule 1.1 of
the current Rulebook and Rule 1.1 of the shell
Rulebook, which provide that unless the context
otherwise requires, the term ‘‘complex order’’
includes a stock-option order and a security futureoption order. Additionally, proposed Rule 5.70(b) is
consistent with current Exchange authority to
determine in which classes complex orders
(including FLEX classes) may be made available for
trading, and to determine the maximum number of
legs for a complex order. See definition of complex
order in Rule 1.1 of the current Rulebook (which
states the Exchange determines in which classes
complex orders are eligible for processing). The
proposed rule change merely states this authority
explicitly for FLEX complex orders.
40 Current Rule 24A.4(a)(2) provides that each
component of a multi-legged RFQ or FLEX Order
must contain the information required for a FLEX
series, as specified in that Rule and in proposed
Rule 4.21(b).
41 This is consistent with current Rules (see Rule
1.1 of the current Rulebook and Rule 1.1 of the shell
Rulebook), as a complex order may consist of legs
in multiple series in the same class (i.e., the same
underlying security or index). Therefore, the
proposed rule change merely explicitly states this
in the rules for FLEX Option complex orders.
42 The current Rules does not restrict legs of a
complex order to all be either a.m.-settled or p.m.settled.
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54677
Rule 5.7 of the shell Rulebook.43 This
proposed rule change merely applies the
rule that sets forth the times at which
the System is available to receive orders
to FLEX Orders. The System only
available for receipt of a FLEX Order at
the times at which the System is
available for all other orders.
A FLEX Trader must designate a
FLEX Order entered prior to the opening
of the applicable trading session or
during a trading halt as Direct to PAR;
the System rejects a FLEX Order
designated as Electronic Only prior to
the opening of the applicable trading
session or during a trading halt. As
discussed below, there will be no
electronic book in which FLEX Orders
may rest, and FLEX Orders may only be
submitted for electronic execution into
a FLEX auction. Therefore, a FLEX
Order designated for electronic
execution would have nowhere to rest if
submitted when trading on the
Exchange is not open. Because a FLEX
Order designated as Direct to PAR (like
any order designated as Direct to PAR)
would rest on a PAR workstation and be
available for manual handling by a Floor
Broker after the opening of trading,
there is not risk of execution of such an
order submitted to the Exchange while
trading is not available on the Exchange.
Proposed Rule 5.72 describes the
procedures for FLEX trading on the
Exchange following the migration. As
noted above, trading of FLEX Options is
subject to all other Rules applicable to
the trading of options on the Exchange,
unless otherwise provided in proposed
Chapter 5, Section F of the shell
Rulebook.44 Because there will be no
electronic book available in which FLEX
Orders may rest,45 a FLEX Option series
is only eligible for trading if a FLEX
Trader (the ‘‘Submitting FLEX Trader’’)
(a) submits a FLEX Order for that series
into an electronic FLEX Auction
pursuant to proposed Rule 5.72(c) (as
described below); (b) represents the
FLEX Order in an open outcry FLEX
Auction pursuant to proposed Rule
5.72(d) (as described below); or submits
the FLEX Order to a FLEX AIM or SAM
Auction pursuant to Rule 5.73 or 5.74,
respectively, of the shell Rulebook.46
43 Rule 5.7 in the shell Rulebook provides that
Users can enter orders and quotes into the System,
or cancel previously entered orders and quotes,
from 2:00 a.m. Eastern Time until Regular Trading
Hours market close, subject to certain terms and
conditions.
44 See proposed Rule 5.72(a) (current Chapter
XXIV, Introduction).
45 This is consistent with current Exchange
authority pursuant to current Rule 24A.5(b) to not
make an electronic book available for FLEX
Auctions.
46 See proposed Rule 5.72(b).
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This is consistent with current Rule
24A.5(a), which states the current RFQ
process is required to open trading in a
new series (unless the auction process
in current Rules 24A.5A or 24A.5B
(current Rules describing FLEX AIM
and SAM Auctions, respectively) is
used to open trading in a new series),
which RFQ process may be conducted
through the System or in open outcry.
The proposed rule change only makes
nonsubstantive changes, including to
update rule cross-references and
conform terminology to the proposed
trading procedures.
The proposed rule change makes
explicit the requirements for both
simple and complex FLEX Orders:
• A FLEX Order for a FLEX Option
series submitted to the System must
include all terms for a FLEX Option
series set forth in Rule 4.21 (including
that a non-FLEX Option series with
identical terms is not listed for trading),
size, side of the market, and a bid or
offer price, subject to the order entry
requirements set forth in Rule 5.7 of the
shell Rulebook.47
• A FLEX Order for a FLEX Option
complex strategy submitted to the
System must satisfy the criteria for a
complex FLEX Order set forth in
proposed Rule 5.70(b) (see discussion
above) and include size, side of the
market, a net debit or credit price, and
a bid or offer price for each leg of the
FLEX Order, which leg prices must add
together to equal the net price.48
Additionally, each leg of the FLEX
Option complex strategy must include
all terms for a FLEX Option series set
forth in Rule 4.21 (including that a nonFLEX Option series with identical terms
is not listed for trading), subject to the
order entry requirements set forth in
Rule 5.7 of the shell Rulebook.49
These proposed order requirements
are consistent with current Rule
24A.4(a)(2), 24A.4(a)(3)(iv), and
24A.4(a)(4). Those current provisions
state every RFQ Order must contain one
element from each contract term
category and the same transaction
specifications as the related RFQ (and
any additional trade conditions, which
as discussed below, will no longer be
available following migration), and that
every RFQ Order must contain the quote
type and form sought (i.e., the RFQ
order must specify whether it seeks bids
or offers, the size of the order, whether
47 See
proposed Rule 5.72(b)(1).
discussed below, current Rules requires a
FLEX Trader to input leg prices for a complex FLEX
Order following a transaction. The proposed rule
change merely moves the requirement to input this
information upon submission of the FLEX Order,
rather than following a transaction.
49 See proposed Rule 5.72(b)(2).
48 As
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it seeks responses as a dollar amount or
percentage, and contingencies and trade
conditions (which will no longer be
available following migration)).
Additionally, with respect to complex
orders, the current rules add that each
component series in a multilegged FLEX
RFQ or FLEX Order must include all
terms of a FLEX Option series. As
discussed above, pursuant to the
proposed rule change, bids and offers
for a FLEX Option series must be
expressed in dollars and decimals, if the
exercise price of the series is a fixed
price, or as a percentage, if the exercise
price of the series is a percentage of the
closing value of the underlying equity
security or index. Therefore, the
proposed rule change does not require
the submission of a FLEX Order to
identify whether it seeks bid and offer
responses in the form of a dollar amount
or percentage, as that is dictated by the
format of the exercise price of the FLEX
Option series in the FLEX Order. Rule
5.7 of the shell Rulebook includes
provisions that apply to all order
submitted to the Exchange, including
FLEX Orders. Therefore, the proposed
rule change makes no substantive
changes to the required information for
a simple FLEX Order, and makes only
nonsubstantive changes to the language
in the proposed provision.
Current Rule 24A.5 describes how
electronic and open outcry trading in
FLEX Options may occur on the
Exchange today.50 To initiate an
electronic RFQ,51 a TPH (the
‘‘Submitting TPH’’) 52 submits an RFQ
with the terms of a FLEX Option series,
as well as whether the Submitting TPH
is requesting a bid, offer, or both.53 The
System then communicates the terms of
the RFQ to FLEX Traders.54 Only one
electronic RFQ may be ongoing at a
given time in a series, and electronic
RFQs may not overlap or queue.55
During the RFQ Response Period (which
is the period of time during which FLEX
Traders may provide bids and offers in
50 Current Rule 24A.5, Interpretation and Policy
.01 describes how the electronic RFQ process
applies to complex FLEX Orders, which the
proposed rule change also deletes, as complex
FLEX orders will trade electronically in the same
manner as simple FLEX orders.
51 See current Rule 24A.5(a)(1) for a description
of the electronic RFQ process.
52 This proposed definitions replaces the current
definition of a Submitting TPH in current Rule
24A.1(x), which the proposed rule change deletes.
The proposed rule change also deletes the provision
in current Rule 24A.1(x) regarding the ability of a
Submitting TPH to submit a FLEX Order into an
electronic book, as there will be no electronic book
available following the migration.
53 See current Rules 24A.4(a)(3)(i) and
24A.5(a)(1)(i)(A).
54 See current Rule 24A.5(a)(1)(i)(B).
55 Id.
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response to RFQs),56 FLEX Traders
(including the Submitting TPH) 57 may
then submit bids and offers in response
to the RFQ, which they may withdraw
during that period.58 Current Rule
24A.5(a)(1)(ii)(A) does not permit
options market-makers from another
options exchange to enter bids and
offers (currently referred to in the Rules
as FLEX Quotes (see current Rule
24A.1(k)) in response to an RFQ. The
Exchange does not believe this
restriction is necessary and proposes to
delete it, and therefore permit all FLEX
Traders to provide liquidity in
electronic FLEX auctions. The Exchange
believes permitting additional
participants to submit responses to
FLEX Auctions will provide the
opportunity for additional liquidity in
these auctions, which could lead to
additional price improvement
opportunities.
Currently, the Submitting TPH may
designate the length of the RFQ
Response Period when initiating the
RFQ, which time must be within a time
range established by the Exchange and
not less than three seconds.59 During the
RFQ Response Period, the System
calculates and disseminates the thencurrent market given current FLEX
orders and quotes.60 At the conclusion
of the RFQ Response Period, the
Submitting TPH may accept or reject the
56 See
current Rule 24A.1(u).
to Rule 1.1 in the shell Rulebook, a
User must specify the Capacity (which is defined
in Rule 1.1 of the shell Rulebook as the capacity in
which a User submits an order, which the User
specifies by applying the corresponding code to the
order; the Exchange notes the various Capacity
codes listed in Rule 1.1 will be available for FLEX
Orders) of each order upon submission to the
Exchange (Rule 5.7(f) in the shell Rulebook requires
at least the information specified in that rule to be
input upon submission of an order prior to
representation on the Exchange, and requires any
additional information with respect to that order to
be input contemporaneously). While responses to
FLEX Auctions will no longer be restricted by
Capacity, the Exchange uses Capacity information
for a variety of reasons, including prioritization in
certain transactions as well as several surveillances
for compliance with various regulatory obligations.
58 See current Rule 24A.5(a)(1)(ii)(B). The
proposed rule change permits responses to be
modified or cancelled, as opposed to just cancelled/
withdrawn. Modification of a response is equivalent
to cancelling and reentering a response, which is
permitted under the current rule, and is merely a
different type of message to accomplish the same
thing. The proposed rule change deletes the
reference to the obligations of a FLEX Appointed
Market-Maker from that provision in the current
Rules, as the Exchange does not currently have any
FLEX Appointed Market-Makers and does not
intend to in the future, and thus is deleting
provisions related to FLEX Appointed MarketMakers from the Rules.
59 See current Rule 24A.4(a)(3)(iii); see also Cboe
Options Regulatory Circular RG12–056 (April 20,
2012) (which sets the current range for RFQ
Response Periods as three seconds to ten minutes).
60 See current Rule 24A.5(a)(1)(ii)(C).
57 Pursuant
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bids and offers submitted during the
RFQ Response Period within an RFQ
Reaction Period, the length of which the
Exchange determines on a class-by-class
basis and may not be more than five
minutes.61 During the RFQ Reaction
Period, FLEX Traders may continue to
submit or cancel responses, and the
Submitting TPH may accept bids and
offers or cancel the RFQ (or let it
expire).62 During the RFQ Reaction
Period, the System calculates and
disseminates the then-current market
given current FLEX orders and quotes.63
If the Submitting TPH chooses to
trade, it may enter the RFQ Order to
trade with one side of the market
provided by the RFQ.64 The FLEX Order
will trade with contra-side interest first
at the best prices. If there are multiple
bids or offers available at the same
price, then the FLEX Order is allocated
as follows:
• Bids and offers for the account of
public customers and non-TPH brokerdealers in time priority;
• bids and offers of a FLEX
Appointed Market-Maker if the
Exchange has applied a participation
entitlement; 65 and
• all other bids and offers in time
priority.
Any remaining balance of the FLEX
Order would enter the FLEX Book (if the
Exchange made a FLEX Book available)
or be cancelled (if there was no FLEX
Book). The Submitting TPH has no
61 See current Rule 24A.5(a)(1)(iii)(A). Currently,
the Exchange has set the maximum time of the
Reaction Period at three minutes. See Cboe Options
Regulatory Circular RG12–056 (April 20, 2012).
62 See current Rule 24A.5(a)(1)(iii)(B)(I) and (III).
The proposed rule change deletes the reference to
the obligations of a FLEX Appointed Market-Maker
from that provision in the current Rules, as the
Exchange does not currently have any FLEX
Appointed Market-Makers and does not intend to
in the future, and thus is deleting provisions related
to FLEX Appointed Market-Makers from the Rules.
The proposed rule change also deletes the provision
regarding the inability to submit FLEX Orders to the
electronic book during the RFQ Reaction Period, as
there will be no electronic book for FLEX Orders,
as further discussed below.
63 See current Rule 24A.5(a)(1)(iii)(B)(II).
64 See current Rule 24A.5(a)(1)(iii)(B)(IV). If the
Submitting TPH enters a response during the RFQ
Reaction Period, it must bid or offer for at least the
crossing exposure period prior to entering the FLEX
Order (which period the Exchange establishes on a
class-by-class basis and may not be less than three
seconds, which the Exchange has currently
established as three seconds).
65 See current Rule 24A.5(d)(2)(ii). Current Rule
24A.1(h) defines a ‘‘FLEX Market-Maker’’ as a FLEX
Trader (see proposed Rule 3.57 in the shell
Rulebook) that is appointed as a FLEX Appointed
Market-Maker or a FLEX Qualified Market-Maker,
each as described in current Rule 24A.9. The
proposed rule change intends to move the
definition of a FLEX Market-Maker, as well as the
rule provisions regarding the roles of a FLEX
Market-Maker, to the shell Rulebook in a separate
rule filing.
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obligation to accept any FLEX bid or
offer.66
The Exchange proposes to replace the
current electronic RFQ process 67 with a
new electronic FLEX Auction process.
Pursuant to proposed Rule 5.72(c), a
Submitting FLEX Trader may
electronically submit a FLEX Order
(simple or complex) into an electronic
FLEX Auction for execution. Pursuant
to proposed Rule 5.72(c)(1), the
Submitting FLEX Trader may initiate a
FLEX Auction if all of the following
conditions are met:
• The FLEX Order is in a class of
options the Exchange is authorized to
list for trading on the Exchange.68 As
discussed above regarding proposed
Rule 5.72(b), a FLEX Order must be in
a FLEX Option series (or FLEX Option
complex strategy, each of which
consists of a FLEX Option series), which
series must be in a FLEX eligible class.69
The proposed rule change is therefore
consistent with current requirements for
submission of a FLEX Order into a FLEX
Auction.
• There is no minimum size for FLEX
Orders. Current Rule 24A.5 includes no
restrictions on the size of FLEX Orders
that may be submitted for electronic
execution. Therefore, the proposed rule
change is consistent with current
functionality and merely specifies this
in the Rules.
• A simple or complex FLEX Order
must comply with proposed paragraph
(b) above. As discussed above, current
Rules require FLEX Orders (and RFQ
Orders, which are orders submitted into
an electronic FLEX RFQ, which is being
replaced by the proposed electronic
FLEX Auction) to include the
information in proposed paragraph (b),
so this proposed rule change imposes no
66 See current Rule 24A.5(a)(iii)(C). The current
Rules include additional provisions regarding what
happens if the RFQ Market is locked or crossed, and
what happens to any unexecuted responses at the
conclusion of the RFQ Reaction Period. As
discussed below, there will be no market, as FLEX
electronic auctions will be one-sided, so there
cannot be a locked or crossed market, and responses
may only execute against the FLEX Order submitted
into the auction.
67 Therefore, the proposed rule change deletes all
provisions that describe the current electronic RFQ
process and related definitions, including Rules
24A.1(a), (b), (k), (r), (s), (t), (u), (v), and (z) (note
certain of these definitions also apply to open
outcry RFQs, which the Exchange proposes to
eliminate and replace with a different manner of
open outcry trading for FLEX options, as discussed
below), 24A.4(a)(3), and 24A.5(a)(1).
68 See current Rule 24A.4(a)(2), (b)(1) and (c)(1)
(which provide that a FLEX Order must contain the
underlying security or index, as applicable, which
underlying must be eligible for non-FLEX trading
pursuant to current Rules 5.3 or 24.2, respectively).
69 See proposed Rule 4.21 and accompanying
discussion above, demonstrating the proposed rule
change makes no substantive changes to the classes
that are eligible for FLEX trading on the Exchange.
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54679
new requirements on the submission of
FLEX Orders into an auction. As
discussed below, the only difference is
that the Submitting TPH must submit
the FLEX Order to initiate the electronic
FLEX Auction, rather than initiate an
RFQ and only submit an order if it
chooses to trade following the
conclusion of the RFQ Response Period.
• A simple FLEX Order must include
a bid or offer price (the ‘‘auction price’’).
A complex FLEX Order must include a
net bid or offer price and a bid or offer
price for each leg of the FLEX Order,
which leg prices must add together to
equal the net price (the ‘‘auction price’’).
Because the current process is an RFQ
rather than an auction, the Submitting
TPH does not include a price on RFQ
when initiating an RFQ. Requiring the
inclusion of a price on a FLEX Order
when initiating an electronic FLEX
Auction is consistent with an auction
process. As discussed below, the
auction price will not be included on
the auction notification message
disseminated to FLEX Traders,70 and
therefore FLEX Traders will be
encouraged to submit their best priced
responses in response to the auction as
they are today when submitting their
markets in response to the RFQ.
• The Submitting FLEX Trader may
only submit a FLEX Order for electronic
execution in a FLEX Auction after FLEX
trading has opened pursuant to
proposed Rule 5.71 (as discussed
above). This is consistent with current
Rule 24A.3, which states only after the
open of FLEX trading may FLEX Orders
be submitted into a FLEX Auctions
pursuant to current Rules 24A.5,
24A.5A, or 24A.5B.
• The Submitting FLEX Trader must
designate the length of the ‘‘exposure
interval,’’ which must be between three
seconds and five minutes. The
designated time may not go beyond the
market close. Current Rule
24A.4(a)(3)(iii) also requires the
Submitting FLEX Trader to designate
the length of the RFQ Response Period,
the permissible range of which is
established by the Exchange but may
not be less than three seconds.
Currently, the Exchange has set the
range at three seconds to ten minutes.71
The proposed rule change to set the
exposure interval between three seconds
and five minutes is consistent with the
70 Other Exchange auction mechanisms do not
include the price on the auction notification
message disseminated to market participants. See,
e.g., Rules 5.33(d)(1) (regarding the auction message
for a complex order auction (‘‘COA’’) and 5.37(d)(2)
(regarding the notification message for an AIM
Auction for non-FLEX Options).
71 See Cboe Options Regulatory Circular RG12–
056 (April 20, 2012).
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Exchange’s current authority in the
Rules, as it only requires a minimum of
three seconds. The Exchange believes
this interval is reasonable, because it is
consistent with the lengths designated
by FLEX Traders in the current
electronic RFQ process. Specifically, the
Exchange notes that from January
through August of 2019, the average
RFQ Response period is less than nine
seconds, and the average RFQ Reaction
period is approximately three minutes.
Therefore, the average length of the
electronic RFQ process is within the
proposed exposure interval.
Additionally, in 2019, only 25 of 3457
(or 0.7%) of electronic FLEX RFQs
lasted for a total of more than five
minutes in 2019, so the Exchange does
not believe capping the length of the
proposed electronic FLEX Auction at
five minutes will have a significant
impact on FLEX trading. In addition, the
Exchange believes a shorter maximum
time is appropriate based on feedback
received from market participants, and
because FLEX Traders will only need to
submit responses on the opposite side of
the auctioned FLEX Order, rather than
responses on potentially both sides to
create a market. As further discussed
below, the Exchange believes a
shortened auction process may increase
liquidity in the electronic FLEX market
on the Exchange.
The System rejects or cancels a FLEX
Order that does not meet the conditions
in proposed Rule 5.72(c)(1). This is
consistent with the concept of eligibility
requirements, as well as current Rule
24A.5(a)(1)(i)(A), which states a
Submitting TPH may submit a FLEX
RFQ using the form, format, and
procedures prescribed by the Exchange.
As described in the bulleted
paragraphs above, the proposed
requirements to initiate an electronic
FLEX Auction are substantially similar
to the current requirements to initiate an
electronic RFQ. The proposed electronic
FLEX Auction will be voluntary, just as
the current electronic RFQ is voluntary,
and all FLEX Traders will be able to
initiate an electronic FLEX Auction, just
as they are all able to currently initiate
an electronic RFQ, if they so choose.
However, rather than submit an order in
response/following to an RFQ if and
when the Submitting TPH determines to
trade against RFQ responses, the
proposed rule change requires the
Submitting TPH to submit a FLEX Order
to initiate the electronic FLEX Auction.
This is consistent with the Exchange’s
other electronic auction processes,72 as
72 See, e.g., current Rules 6.14A (describing the
Exchange’s step-up mechanism), 6.53C (describing
the Exchange’s single-sided complex order auction),
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the auction will result in automatic
execution against any responses (if they
satisfy the auction price) at the
conclusion of the auction. The unique
feature of FLEX Options is the flexibility
with respect to their terms, which is
why current FLEX Rules, and the
proposed FLEX Rules, provide a longer
time frame for FLEX Traders to submit
bids and offers. As noted above, the
proposed exposure interval is consistent
with the Exchange’s authority under the
current Rules, and appropriately
shortened given the one-sided nature of
the proposed auction.73 Additionally, as
further discussed below, the Exchange
believes a generally shorter electronic
auction process, combined with the
certainty of execution at the conclusion
if responses satisfy the price of the
auctioned order, may encourage
additional market participants to submit
FLEX Orders to the Exchange for
electronic execution.
Proposed Rule 5.72(c)(2) describes the
FLEX Auction process. Upon receipt of
a FLEX Order that meets the conditions
in proposed subparagraph (c)(1), the
FLEX Auction Process commences. As it
does today,74 the System will initiate a
FLEX Auction by sending a FLEX
Auction notification message to FLEX
Traders detailing the FLEX Option
series or complex strategy (as
applicable).75 The current RFQ
identifies the terms of the FLEX Option
(see current Rule 24A.4(a)(2)), which
correspond to the series or complex
strategy. Additionally, the current RFQ
identifies whether a bid, offer, or both
are sought (see current Rule
24A.4(a)(3)), and whether a price in
dollars or percentage is sought (as
discussed above, bids and offers must be
in the same format as the exercise price
of the FLEX Option series under
proposed Rule 5.3(e)(3), and thus there
is no need to separately identify
whether a price in dollars or percentage
is sought, as that will be dictated by the
series’ exercise price). Because the
proposed process is a one-sided auction
process, the proposed auction
notification message will include the
side and size of the auctioned order,
which will permit FLEX Traders to
focus their responses on the side on
which a potential execution may occur.
and 6.74A (describing the Exchange’s price
improvement automated improvement mechanism),
all of which require an order with a price to initiate.
73 As noted above, the length of auction intervals
for non-FLEX Options is generally under one
second.
74 See current Rule 24A.5(a)(1)(i)(B) (pursuant to
which the System causes the terms and
specifications of the RFQ to be communicated to
FLEX Traders upon receipt of an RFQ in proper
form).
75 See proposed Rule 5.72(c)(2)(A).
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Auction ID,76 Capacity,77 the time at
which the exposure interval will
conclude,78 and Attribution (if the FLEX
Order is designated as Attributable).79
FLEX Auction notification messages are
not disseminated to OPRA.80
The FLEX Auction message will not
include the price of the auctioned FLEX
Order. The Exchange believes not
including the auction price in the
notification message will encourage
FLEX Traders to respond with the best
prices at which they are willing to trade
against the auctioned FLEX Order. If the
message included the price, FLEX
Traders may only respond to trade at
that price; without the price, FLEX
Traders may respond at better prices,
which may result in price improvement
opportunities for the auctioned FLEX
Order. This is consistent with other
electronic auctions on the Exchange.81
This is similar to the current RFQ
process today, in which there is no
disseminated price, and instead market
participants submit bids and offers
based on prices at which they are
willing to transact in the series subject
to the RFQ.
Pursuant to current Rule
24A.5(a)(1)(i)(B), only one electronic
RFQ may be ongoing at any given time
in a series, and electronic RFQs in the
same series may not queue or overlap in
any manner. Similarly, pursuant to Rule
24A.5, Interpretation and Policy .01,
only one electronic RFQ may be ongoing
at any given time for a given complex
order strategy, and electronic RFQs may
not queue or overlap in any manner.82
76 This is new information on the auction message
based on the proposed rule change discussed
below, which permits responses to only execute at
the conclusion of the auction into which the
responses were submitted.
77 This is new information on the auction
message. Because an order was not previously
required to initiate an RFQ, there was no Capacity
to include. Capacity will be provided on the auction
message for informational purposes, and FLEX
Traders may consider the Capacity in any manner
they see fit when determining how to respond to
an electronic FLEX Auction.
78 While not specified in the Rules, this is true
today, so that FLEX Traders know how long they
have to submit responses.
79 While not specified in the Rules, this is true
today, as it is consistent with the concept of an
attributable order. See definition of ‘‘Attributable
Order’’ in current Rule 6.53 (Rule 5.6(c) in the shell
Rulebook).
80 This is true today, as RFQs are only sent to
FLEX Traders. See id.
81 See also current Rules 6.53C and 6.74A (Rules
5.33 and 5.37 in the shell Rulebook) pursuant to
which COA auction messages and AIM auction
messages do not include the auction price.
82 In the event there are bids (offers) in any of the
individual component series legs represented in the
electronic book when an electronic RFQ for a
complex strategy is submitted to the System, the
electronic RFQ will not commence, and an
unrelated FLEX Order in any of the individual
series legs may not be submitted to the electronic
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Due to current limitations, the
Exchange’s System is not currently able
to process multiple electronic RFQs at
the same time, nor is it able to process
an electronic RFQ for a complex strategy
if an order in any of the leg series that
comprise that complex order is present
in the System. However, different types
of auctions for the same series or
complex strategy may occur at the same
time. For example, the Rules do not
currently prevent a complex order
auction (‘‘COA’’) of a complex order
from occurring at the same time as an
AIM in one of the leg series of the
complex order subject to a COA. The
System to which the Exchange’s trading
platform will move upon completion of
the technology migration is able to
process concurrent auctions for orders
in the same series (including auctions
for complex strategies and for legs series
that comprise those strategies).83
Therefore, the Exchange believes it is
similarly reasonable to permit multiple
FLEX Auctions in the same series to
occur at the same time. As proposed,
one or more FLEX Auctions in the same
FLEX Option series or complex strategy
(as applicable) may occur at the same
time.84 To the extent there is more than
one FLEX Auction in a FLEX Option
series or complex strategy (as
applicable) underway at the same time,
the FLEX Auctions conclude
sequentially based on the times at
which each FLEX Auction’s exposure
interval concludes. At the time each
FLEX Auction concludes, the System
allocates the FLEX Order pursuant to
proposed subparagraph (b)(3) (as
described below), and takes into
account all FLEX responses submitted
during the exposure interval.
Concurrent auctions will be permitted
in various other electronic auctions on
the Exchange following migration.85 If a
FLEX Trader attempts to initiate an
electronic FLEX Auction in a FLEX
Option series while another auction in
that series is ongoing, the Exchange
believes it will provide that second
FLEX Order with an opportunity for
execution in a timely manner by
initiating another FLEX Auction, rather
than requiring the FLEX Trader to wait
for the first auction to conclude. The
book or for electronic RFQ processing during the
duration of an electronic RFQ. See current Rule
24A.5, Interpretation and Policy .01.
83 See Rules 5.33(d), 5.37(c)(1), 5.38(c)(1),
5.39(c)(1), and 5.40(c)(1) in the shell Rulebook; see
also EDGX Options Rules 21.19(c)(1), 21.20(d),
21.21(c)(1), and 21.22(c)(1).
84 See current Rule 24A.5(a)(1)(i)(B) and
Interpretation and Policy .01; and proposed Rule
5.72(c)(2)(B).
85 See, e.g., Rules 5.33, 5.37, and 5.38 in the shell
Rulebook; see also EDGX Options Rules 21.19,
21.20, and 21.22.
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second FLEX Trader may not be able to
submit a response to trade in the
ongoing FLEX Auction, because the
terms may not be consistent with that
FLEX Trader’s order (for example, there
may not be sufficient size, and the FLEX
Trader may only receive a share of the
auctioned order depending on other
responses). Therefore, the Exchange
believes providing this functionality for
electronic FLEX Auctions may similarly
lead to an increase in electronic FLEX
Auctions, which may provide additional
opportunities for execution of FLEX
Orders. Pursuant to proposed Rule
5.72(c)(2)(C), the Submitting FLEX
Trader may cancel a FLEX Auction prior
to its conclusion. This is consistent with
a Submitting TPH’s current ability to
not accept any FLEX bid or offer, and
thus not execute an order for which it
requests a market pursuant to an RFQ.86
Proposed Rule 5.72(c)(2)(D) describes
the requirements for responses that
FLEX Traders may submit to an
electronic FLEX Auction.87 Any FLEX
Trader (including the Submitting FLEX
Trader if it is seeking to effect a cross) 88
may submit responses to a FLEX
Auction that are properly marked
specifying the FLEX Option series or
complex strategy (as applicable), bid or
offer price or net price (respectively),
size, side of the market, and the Auction
ID for the FLEX Auction to which the
User is submitting the response. This
information is currently required to be
included on response to RFQs (other
than an Auction ID), and the proposed
rule change merely adds this detail to
the Rules. A FLEX response may only
participate in the FLEX Auction with
the Auction ID specified in the
response, which is why the auction
notification will include an Auction ID
86 See
current Rule 24A.5(1)(iii).
proposed provisions regarding FLEX
responses are consistent with rules regarding
responses to other electronic auctions. See, e.g.,
Rules 5.33, 5.37, and 5.38 in the shell Rulebook; see
also EDGX Options Rules 21.19, 21.20, and 21.22.
88 Current Rule 24A.5(a)(1)(iii)(B)(IV) states if a
Submitting TPH enters a response (referred to in the
current Rule as a FLEX Quote) during the RFQ
Reaction Period (and thus a quote to trade against
the RFQ Order, should the Submitting TPH decide
to execute during the RFQ Reaction Period), it must
be bidding (offering) for at least the crossing
exposure period prior to entering the RFQ Order to
trade. The Exchange may determine the duration of
this period, which must be at least three seconds
(and which the Exchange has currently set at three
seconds). The purpose of this time period is to
ensure all FLEX Traders have an opportunity to
submit responses if the Submitting TPH decides to
execute a cross. Because the exposure interval
(which occurs after the submission of a FLEX
Order) in the new process must be at least three
seconds, which will be the earliest time at which
execution of the FLEX Order may occur, all FLEX
Traders will have the same opportunity and time
to participate in an execution against the FLEX
Order.
87 The
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54681
and response must identify the
applicable Auction ID.89 The Exchange
proposes to include this given the above
proposal that permits concurrent
electronic FLEX Auctions in the same
series or complex strategy.
A FLEX Trader may submit multiple
FLEX responses at the same or multiple
prices to a FLEX Auction. This is
consistent with current functionality.
Current Rule 24A.5(a)(1) contains no
restriction on how many responses a
FLEX Trader may submit; the proposed
rule change merely makes this explicit
in the Rules. For purposes of a FLEX
Auction, the System aggregates all of a
FLEX Trader’s FLEX responses for the
same Executing Firm ID (‘‘EFID’’) at the
same price. The System will cap the size
of a FLEX response, or the aggregate size
of a FLEX Trader’s FLEX responses for
the same EFID at the same price, at the
size of the FLEX Order (i.e., the System
ignores the size in excess of the size of
the FLEX Order when processing the
FLEX Auction). These provisions are
new given the potential for an automatic
execution at the conclusion of the FLEX
Auction (unlike the current process
which provides the Submitting TPH
with the opportunity to trade or not
trade). Additionally, the Exchange
proposes to add these provisions given
the proposed rule change to apply a prorata allocation to responses at the
conclusion of an electronic FLEX
Auction, as further discussed below.
These provisions are consistent with
other auction functionality that apply a
pro-rata allocation to executions
following those auctions.90 The
Exchange believes these proposed
changes are reasonable to prevent a User
from submitting a response with an
extremely large size in order to obtain
a larger pro-rata share of the FLEX
Order.
FLEX responses must be on the
opposite side of the market as the FLEX
Order. The System rejects a FLEX
response on the same side of the market
as the FLEX Order. Unlike the current
RFQ process, FLEX Traders will know
the side of the market on which the
Submitting FLEX Trader is looking to
trade, and therefore the Exchange
believes this is reasonable given that the
purpose of a response is to trade against
the FLEX Order in the auction into
which the response was submitted.
Pursuant to the current RFQ process, the
89 If there are concurrent FLEX Auctions
occurring, a FLEX Trader may submit responses to
all ongoing auctions, and thus concurrent auctions
will not hinder a FLEX Trader’s ability to
participate in any FLEX Auction.
90 See, e.g., Rules 5.33, 5.37, and 5.38 in the shell
Rulebook; see also EDGX Options Rules 21.19,
21.20, and 21.22.
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Submitting TPH may request bids and
offers on both sides of the market. By
only requesting responses on the
opposite side of the market, the
proposed rule change will allow FLEX
Traders to focus on pricing responses
that would be eligible to execute (i.e., on
the opposite side of the market on
which the Submitting FLEX Trader is
looking to trade).
FLEX responses are not visible to
FLEX Traders or disseminated to OPRA.
RFQ responses are also not currently
disseminated to OPRA.91 However,
while the Exchange does not
disseminate all individual responses to
an electronic RFQ, the best market
created by responses is intermittently
calculated and disseminated during the
RFQ Response Period and Reaction
Period, during which time FLEX
Traders may withdraw those
responses.92 The proposed rule change
is consistent with many electronic
auctions, in which responses are not
visible to the market.93 Responses to
electronic auctions are not firm prior to
the conclusion of the auction, and thus
are not disseminated to OPRA, because
they are not executable until the
conclusion of the auction, at which time
their price and size are firm.94 For the
same reason as the Exchange does not
disseminate the auction price on the
auction notification message as
discussed above, the Exchange believes
it will encourage FLEX Traders to
submit their best possible pricedresponses if they do not know the prices
at which other FLEX Traders are willing
to trade. For example, if during a FLEX
Auction of a buy FLEX Order, a FLEX
Trader submitted a response to sell at
$1.05, if another FLEX Trader saw that
response, it may merely respond to sell
at $1.05, or maybe $1.04, even though
it may ultimately be willing to sell at
$1.03. Without seeing the other
responses, the second FLEX Trader may
instead submit a response to sell at
$1.03, which could result in price
improvement for the auctioned order.
The Exchange appreciates that there is
no disseminated market in FLEX
Options. However, the length of the
exposure interval (which, as discussed
above, is longer than the interval in
typical electronic auctions and
91 Responses to an RFQ are considered
indications of interest, which are exempt from
disseminated bids and offers. See, e.g., current Rule
6.80(2).
92 See current Rule 24A.5(a)(ii)(C) and (iii)(B)(II).
93 See, e.g., current Rules 6.53C and 6.74A (Rules
5.37 and 5.38 in the shell Rulebook); see also EDGX
Options Rules 21.19, 21.20, and 21.22.
94 See, e.g., Rules 5.33(d)(4)(C) and (D),
5.37(c)(5)(H), 5.38(c)(5)(H), 5.39(c)(5)(F),
5.40(c)(5)(F).
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consistent with the minimum RFQ
response period in the current RFQ
process) will provide all FLEX Traders
with the same opportunity to submit
responses. A FLEX Trader may modify
or cancel its FLEX responses during the
exposure interval. As noted above, the
current Rule permits FLEX Traders to
withdraw (which is the equivalent of
cancel) a response to a FLEX RFQ, but
does not explicitly state that those
responses may be modified. A
modification of a response is equivalent
to a cancellation of an existing response
and submission of a new response, but
may instead be done through a different
message type. Therefore, the proposed
rule change permits the same activity
that can be done pursuant to the current
rule, but merely in a different manner
(i.e., modification rather than
cancellation and separate entry).
Pursuant to proposed Rule 5.72(c)(3),
the FLEX Auction concludes at the end
of the exposure interval, unless the
Exchange halts trading in the affected
series or the Submitting FLEX Trader
cancels the FLEX Auction, in which
case the FLEX Auction concludes
without execution. There are no events
that will cause the current RFQ
Response Period to conclude early
pursuant to current Rule 24A.5(a)(1).
While the current Rule does not discuss
how a trading halt may impact an
ongoing electronic RFQ, the proposed
rule change is consistent with current
functionality, as the Exchange would
not permit any executions to occur
during a trading halt.95
At the conclusion of the FLEX
Auction:
• The System executes the FLEX
Order against the FLEX responses at the
best price(s), to the price at which the
balance of the FLEX Order or the FLEX
responses can be fully executed (the
‘‘final auction price’’). If there are
multiple FLEX responses at the same
price level, then the contracts in those
FLEX responses are allocated
proportionally, according to size (in a
pro-rata fashion).96
• The System cancels an unexecuted
FLEX Order (or unexecuted portion).
95 Concluding an electronic auction without an
execution due to a trading halt is consistent with
other electronic auctions on the Exchange. See, e.g.,
current Rules 6.53C and 6.74A (Rules 5.33, 5.37,
and 5.38 in the shell Rulebook); see also EDGX
Options Rules 21.19, 21.20, and 21.22.
96 The executable quantity is allocated to the
nearest whole number, with fractions 1⁄2 or greater
rounded up and fractions less than 1⁄2 rounded
down. If the executable quantity cannot be evenly
allocated, contracts will be distributed using this
pro-rata priority methodology until there are no
contracts remaining. This is consistent with the
Exchange’s standard pro-rata electronic allocation
algorithm. See Rule 5.32(a)(1)(B) in the shell
Rulebook.
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• The System cancels any unexecuted
FLEX responses (or unexecuted
portions).
The proposed allocation process is
consistent with the electronic pro-rata
allocation with no overlays that they
Exchange may apply to trading in nonFLEX Options.97 Unlike the proposed
allocation process, the current
allocation at the conclusion of an
electronic FLEX RFQ provides priority
to Priority Customers and non-TPH
broker-dealers orders and quotes, the
purpose of which was to accommodate
TPHs that rely on the ‘‘G’’ exemption
from Section 11(a)(1) of the Exchange
Act when submitting orders for
electronic execution. While certain
other electronic auctions available on
the Exchange prioritize Priority
Customer orders, none prioritize nonTPH broker-dealers, and thus electronic
submission of an order into those
auctions would not be eligible for the
‘‘G’’ exemption either. Currently, a
minimal number of TPHs rely on the
‘‘G’’ exemption. As discussed below, the
Exchange believes the proposed
electronic FLEX Auction satisfies the
‘‘Effect vs. Execute’’ exemption, and
will permit TPHs to rely on that
exemption (subject to satisfaction of the
requirements of that exemption) when
submitting FLEX Orders for electronic
execution. A TPH (not acting in a
market-maker capacity) could submit an
order for a covered account from off of
the Exchange’s trading floor to an
unaffiliated Floor Broker for submission
for execution in the FLEX Auction from
the trading floor and satisfy the ‘‘Effect
vs. Execute’’ exemption (assuming the
other conditions are satisfied).98
However, a TPH could not submit an
order for a covered account to its
‘‘house’’ Floor Broker on the trading
floor for execution and rely on this
exemption. If a FLEX Trader cannot
satisfy the ‘‘Effect vs. Execute’’
exemption (for example, because the
FLEX Trader submits a proprietary
order from on the Exchange’s trading
floor), it may submit a FLEX Order into
the proposed electronic FLEX Auction
only if it satisfies another exemption
from Section 11(a)(1) of the Exchange
Act. Alternatively, a FLEX Trader may
execute a FLEX Order in open outcry on
the Exchange’s trading floor (subject to
satisfaction of an exemption—for
example, a FLEX Trader may yield
priority as necessary to satisfy the ‘‘G’’
exemption, as it may do today). Because
97 See
id.
98 Orders
for covered accounts that rely on the
‘‘Effect vs. Execute’’ exemption in this scenario
must be transmitted from a remote location directly
to the Floor Broker on the trading floor by
electronic means.
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there will not be an electronic FLEX
Book (as discussed below),99 there will
be no resting Priority Customer orders
resting that would receive priority at the
conclusion of the Auction (or any
resting orders to trade against the
auctioned FLEX Order). And because
there will be no FLEX Appointed
Market-Makers, there will be no
participation entitlement at the
conclusion of the Auction. Therefore,
there will only be responses available at
the conclusion of the Auction to execute
against the auctioned FLEX Order. The
Exchange has determined to apply prorata allocation to those responses, rather
than time priority (as it does today),
because that is the allocation the
Exchange applies to the majority of
classes on the Exchange, and therefore
this will provide additional consistency
for market participants. Additionally,
the Exchange believes application of
pro-rata may encourage FLEX Traders to
submit larger-sized responses, because if
the responses are at the marketable
prices, those responses will receive
execution based on size rather than time
(as is the case today).
Current Rule 24A.5(b) states the
Exchange may make an electronic book
available into which FLEX Orders may
be entered or remaining balances of
FLEX Orders submitted into an RFQ
may rest. Currently, while the Exchange
makes an electronic book available for
FLEX Orders, prior to April 2019, no
FLEX Traders were submitting FLEX
Orders into the Book in any class.
Beginning in April 2019, one FLEX
Trader began submitting FLEX orders
for a customer into the FLEX Book, and
then after the required exposure period
passed, that FLEX Trader would submit
an order on the opposite side to trade
with that resting customer order (in
other words, to execute a cross with that
resting order). The Exchange
understands from this FLEX Trader that
it does not submit these orders into an
electronic RFQ, because it is difficult for
that FLEX Trader to code to that
process, given how different it is from
other electronic auctions.100 For the
five-month period from April through
August 2019, this activity represented
99 As discussed above, while one customer has
recently begin to submit interest to the FLEX Book,
that interest is generally executed within a few
seconds (after the required exposure period) and,
thus, there are generally no orders resting on the
FLEX Book available for allocation following an
open outcry RFQ.
100 Additionally, this FLEX Trader is unable to
cross these orders through a FLEX AIM or SAM,
because the solicited contra-side order is for the
account of a Market-Maker, which is not
permissible in those auctions. See current Rules
24A.5A, Interpretation and Policy .04 and 24A.5B,
Interpretation and Policy .04.
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approximately 1.2% of total FLEX
volume during that time. As noted
above, only one FLEX Trader was using
the FLEX Book, and only for a limited
purpose. While all FLEX Traders have
access to the current FLEX Book, they
are choosing not to use it. There are no
FLEX Traders submitting FLEX Orders
into the FLEX Book to rest and wait for
another FLEX Trader to submit interest
to trade against that resting order, which
is the general purpose of an electronic
book. Therefore, the Exchange does not
intend to make one available following
migration, consistent with its current
authority under current Rule 24A.5(b).
Therefore, the Exchange proposes to
delete current Rule 24A.5(b) and all
other provisions in its Rules regarding
an electronic FLEX Book. As a result, all
FLEX executions currently occur
following an electronic RFQ or FLEX
Automated Improvement Mechanism 101
for electronic execution, and deletion of
the Rules regarding an electronic FLEX
Book will have no significant impact on
FLEX trading given the current limited
use of a FLEX Book by one FLEX
Trader. The Exchange also notes the
Rules currently provide that there is no
electronic book for complex FLEX
Orders, and therefore the proposed rule
change will have no impact on the
trading of complex FLEX Orders.102
Because the proposed auction will
result in automatic execution following
the exposure interval, there is no period
equivalent to the RFQ reaction period in
the proposed auction process. The
Exchange believes automatic execution
will provide FLEX Traders with more
certainty regarding executions of their
FLEX Orders and responses, as well as
more timely executions. The Exchange
notes the current maximum time for the
Submitting TPH to decide whether to
trade against the RFQ Market is five
minutes, which is the proposed
maximum time for the exposure
interval. Additionally, as noted above,
in January through August of 2019, the
average length of the entire electronic
RFQ process (as designated by the
Submitting TPH) is just over three
minutes (combining the RFQ Response
and Reaction periods), during which
time FLEX Traders may submit
responses, and less than 1% of
electronic RFQs lasted more than five
101 See Rule 24A.5A in the current Rulebook,
which the Exchange intends to move to the shell
Rulebook in a separate rule filing. The Exchange
notes current Rule 24A.5B provides for a FLEX
Solicitation Auction Mechanism, which the
Exchange has not currently made available in any
FLEX Option classes, but does intend to make
available following migration.
102 See Rule 24A.5, Interpretation and Policy .01
in the current Rulebook.
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54683
minutes. Therefore, pursuant to the
proposed electronic FLEX Auction
process, the Submitting FLEX Trader
may designate an exposure interval
duration during which FLEX Traders
may submit responses consistent with
the average duration, and over 99%, of
current electronic RFQs.
The Exchange believes the proposed
electronic FLEX Auction simplifies the
process pursuant to which FLEX
Traders may execute FLEX Orders on
the Exchange, as it is similar to other
electronic auctions (as noted above) and
eliminates the multiple periods in
which FLEX Traders may submit
responses. Pursuant to the proposed
Auction process, an electronic FLEX
Auction in which an order is entered
and exposed to FLEX Traders, and then
automatically executes against bestpriced bids and offers at the conclusion
of the auction. As discussed above, the
proposed range for the auction exposure
interval is consistent with the average
length of the entire electronic RFQ
process. Additionally, while the
proposed range of the exposure interval
is shorter than the current range
designated by the Exchange, the
proposed range is consistent with the
Exchange’s authority under the current
Rules, as the Rules only require that the
length of the RFQ Response Period be at
least three seconds. Because the auction
message will identify the side of the
auctioned order, and thus responses
will only be on the opposite side of that
order, the Exchange believes a shorter
maximum time is appropriate, as FLEX
Traders will not need to determine
responses on the side of the market on
which there is no potential execution.
Therefore, the Exchange believes the
proposed rule change will continue to
provide FLEX Traders with sufficient
time to price FLEX Option series that
are auctioned and submit bids or offers
at which they would be willing to effect
transactions in the series subject to the
auction.
As is the case today, market
participants will not know the price at
which the Submitting TPH is seeking to
trade an order (which the Submitting
TPH must include a price on the FLEX
Order submitted to the auction, it will
not be included in the notification
message). The Exchange believes not
notifying FLEX Traders of the auction
price, as well as not permitting FLEX
Traders to see prices of other responses,
will encourage FLEX Traders to submit
responses at the best prices at which
they would be willing to trade, as noted
above.
The proposed electronic FLEX
Auction is similar to other electronic
auctions offered by the Exchange, such
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as the Automated Improvement
Mechanism (‘‘AIM’’) in Rule 6.74A in
the current Rulebook (Rule 5.37 in the
shell Rulebook) and the Complex Order
Auction (‘‘COA’’) in Rule 6.53C in the
current Rulebook (which the Exchange
intends to move to Rule 5.33 in the shell
Rulebook). These electronic auctions do
not provide for a request for market,
which concept does not currently exist
in electronic trading. The Exchange
believes implementing a simpler
electronic FLEX Auction that is similar
to other electronic auctions may
encourage TPHs to submit FLEX Orders
for electronic execution. Market
participants are more familiar with this
type of functionality and have their
systems coded to conform to these types
of auctions. The Exchange has received
feedback from market participants
indicating the difficulty and additional
resources necessary to code to the
nonstandard FLEX RFQ process given
the multiple intervals. Additionally, the
Exchange believes elimination of a
reaction period at the conclusion of an
electronic FLEX Auction will permit
executions of FLEX Orders to be
completed in a more timely fashion. As
a result, the Exchange believes the
proposed auction will permit FLEX
Traders to continue to compete
vigorously and potentially provide price
improvement for FLEX Orders in a
competitive auction process, as they do
for non-FLEX Orders, and thus will fit
more seamlessly into the Exchange’s
market.103
Current Rule 24A.5(a)(2) describes the
current open outcry RFQ process for
FLEX Orders. Currently, a Submitting
TPH may submit to a FLEX Official an
RFQ, and then announce the terms of
the RFQ to the trading crowd.104 At that
point, FLEX Traders in the trading
crowd may respond to the RFQ with
bids and offers during an RFQ Response
Period, during which time those
responses (referred to in the current
Rule as FLEX Quotes) may be modified
or withdrawn.105 At the conclusion of
the RFQ Response Period, the
Submitting TPH announces the best
103 The Exchange notes it intends to continue to
offer a FLEX AIM process to provide FLEX Orders
with price improvement and electronic crossing
opportunities, and will move that from Rule 6.74A
in the current Rulebook to Rule 5.73 in the shell
Rulebook in a different rule filing.
104 See current Rule 24A.5(a)(2)(i).
105 See current Rule 24A.5(a)(2)(ii). The proposed
rule change deletes from that provision the
reference to obligations of FLEX Appointed MarketMakers. As noted above, the Exchange currently has
none and does not intend to have them following
migration, so the Exchange is deleting all references
to FLEX Appointed Market-Makers in the rules. As
is the case for electronic RFQs, the open outcry RFQ
Response Period may not be less than three
seconds.
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market to the trading crowd.106 It may
then promptly accept or reject the best
priced bids and offers, or announce an
intention to cross the FLEX order (in
which it may receive an entitlement
pursuant to Rule 24A.5(b)(3) and
(d)(2)).107 If the Submitting TPH
determines to execute the FLEX Order
against the responses from the trading
crowd (and not cross), the bids and
offers are allocated as described
below.108 If the Submitting TPH rejects
the BBO or accepts it for less than the
entire size requested, all FLEX Traders
(other than the Submitting TPH) may
match or improve the BBO during the
BBO Improvement Interval,109 after
which the Submitting TPH must
promptly accept or reject the BBO.110 If
the Submitting TPH indicates an
intention to cross, then the Submitting
TPH must announce the price to the
crowd and permit the rest of the crowd
to attempt to improve or match the BBO
during the BBO Improvement Interval.
At the expiration of the BBO
Improvement Interval, the Submitting
TPH must promptly accept or reject the
BBO, and may execute the order against
responses as described below.111 The
Submitting TPH has no obligation to
accept any FLEX bid or offer.112
Current Rule 24A.5(d)(2)(i) provides
that the Exchange may establish a
crossing participation entitlement,
subject to certain conditions. The
Exchange proposes to delete that
provision, as the Exchange does not
intend to establish any priority overlays,
including a crossing participation
entitlement, to the proposed FLEX
106 See current Rule 24A.5(a)(2)(ii)(B). The
proposed rule change deletes the reference that the
BBO will consider orders in the electronic book, as
there will be no book following migration, as noted
above.
107 See current Rule 24A.5(a)(2)(iii)(A).
108 See id.
109 The ‘‘BBO Improvement Interval’’ is the
period of time in respect of the open outcry RFQ
process during which FLEX Traders in the trading
crowd may submit responses (referred to in the
current rules as FLEX Quotes) to meet or improve
the BBO established during the RFQ Response
Period. See current Rule 24A.1(b). The rules do not
specify a duration of the BBO Improvement
Interval, so the Exchange permits responses to be
made in a reasonably prompt manner (consistent
with a similar provision that applies to current
open outcry trading if there are remaining contracts,
see current Rule 6.45(b)(i)(B)(5)).
110 See current Rule 24A.5(a)(2)(iii)(A).
111 See current Rule 24A.5(a)(2)(iii)(B).
112 See current Rule 24A.5(a)(2)(iii)(C). Rejection
of the BBO or failure to promptly accept the BBO
results in expiration of the BBO and the RFQ. See
current Rule 24A.5(a)(2)(iv). If the Submitting TPH
rejects the BBO or the BBO size exceeds the FLEX
transaction size in the RFQ, FLEX Traders in the
crowd may accept the unfilled balance by public
outcry promptly following the rejection of the BBO
(or expiration of the BBO Improvement Interval).
See current Rule 24A.5(a)(2)(iii)(D).
PO 00000
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Fmt 4703
Sfmt 4703
Auctions.113 The Exchange does not
currently establish a crossing
participation entitlement for electronic
FLEX trading, so this will have no
impact on electronic trading. The
Exchange has currently established a
crossing participation entitlement for
open outcry FLEX trading. However, as
further discussed below, the Exchange
proposes to permit FLEX Trades to be
crossed in accordance with general
crossing rules for open outcry trading,
which provide for a similar crossing
procedure and participation entitlement
as the current FLEX crossing procedure
and entitlement.
Current Rule 24A.5(d)(2)(ii) provides
that the Exchange may establish a
participation entitlement for a FLEX
Appointed Market-Maker. The Exchange
currently does not have any FLEX
Appointed Market-Makers, and thus
does not have a participation
entitlement established, and deletes that
provision from the Rules.114
The highest bid (lowest offer) will
have priority at the conclusion of a
FLEX open outcry RFQ. If there are
multiple bids or offers at the same price,
any crossing participation entitlements
have second priority, any FLEX
Appointed Market-Maker participation
entitlements have third priority, all
other response have fourth priority (in
time sequence), and finally orders
resting in the book have last priority.115
Proposed Rule 5.72(d) provides that a
Submitting FLEX Trader may represent
and execute a FLEX Order that complies
with paragraph (b) above on the
Exchange’s trading floor in the same
manner as a TPH may represent and
execute an order for a non-FLEX Option
(which includes systemization of the
FLEX Order pursuant to Rule 5.7(f) and
routing the FLEX Order to PAR
pursuant to Rule 5.82 of the shell
Rulebook) on the Exchange’s trading
floor pursuant to Chapter 5, Section G
113 This is consistent with the Exchange’s
authority under current Rule 24A.5(d)(2) to not
establish any priority overlays.
114 The Exchange intends to delete all provisions
regarding FLEX Appointed Market-Makers from the
Rules in a separate rule filing. To the extent the
Exchange determines in the future to appoint FLEX
Appointed Market-Makers (or similar market
participant) or apply a participation entitlement to
FLEX Auctions (electronic or open outcry), the
Exchange will submit a separate rule filing. Because
there will no longer be any priority overlays, the
proposed rule change deletes current Rule
24A.5(d)(2)(iii) regarding announcements of
participation entitlements.
115 See current Rule 24A.5(a)(2)(v)(A); see also
current Rule 24A.5(d) (which describes current
crossing participation entitlements). As is the case
in all open outcry trading, any FLEX Traders
relying on the ‘‘G’’ exemption must yield priority
to any bid (offer) at the same price. See current Rule
24A.5(a)(2)(v)(B) (Rule 5.85(a)(2)(E) in the shell
Rulebook).
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of the shell Rulebook,116 except (1) InCrowd Market Participants (‘‘ICMPs’’)
will have a reasonable amount of time
(which amount of time must be between
three seconds (the current minimum for
an RFQ Response Period) and five
minutes) from the time a FLEX Trader
requests a quote in a FLEX Option
Series or represents a FLEX Order
(including announcing a crossing
transaction pursuant to Rule 5.87 in the
shell Rulebook) to respond with bids
and offers; and (2) FLEX Orders are
allocated only to responses from the
trading crowd pursuant to Rule
5.85(a)(2)(C) of the shell Rulebook.117
The proposed time period is consistent
with the proposed time period for
electronic FLEX Auctions described
above, as well as current Rules (which
require at last three seconds to pass),118
and the Exchange believes this will
ensure there is sufficient time for the
crowd to price a FLEX Option series
given its unique terms as well as ensure
executions of FLEX Orders take place in
a timely manner. Whether a reasonable
amount of time has passed before a
Submitting TPH determines to represent
an order after a request for quotes, or to
execute an order after it was represented
will be based on facts and
circumstances, and will be determined
by the Submitting FLEX Trader. This is
consistent with general open outcry
trading, in which the representing Floor
116 Therefore, a FLEX Order may be represented
and executed, in addition to Rule 5.85 as described
above, pursuant to Rule 5.86 in the shell Rulebook
regarding facilitated and solicited transactions and
Rule 5.87 in the shell Rulebook regarding crossing
orders.
117 The proposed rule change notes that Rule
5.85(b) through (e) (complex order priority (this
relates to the prices at which complex orders may
trade depending on resting simple orders, which
will not apply given there will be no book for FLEX
Options), split-price priority, multi-class spread
orders, and SPX Combo Orders) does not apply to
FLEX Options, which is consistent with FLEX
trading today. See current Rules 24.19 (which sets
forth specific trading rules for multi-class spreads,
which are not consistent with FLEX trading), 24.20
(which sets forth specific trading rules for SPX
Combo Orders, which are not consistent with FLEX
trading), and 24A.15 (which provides that splitprice priority does not apply to FLEX trading, and
the Exchange moves the provision that states the
inapplicability of split-price priority to the portion
of the Rule regarding open outcry trading, so that
all provisions regarding open outcry priority are
included in the same place). To the extent the
Exchange intends to make any of these provisions
applicable to FLEX Options in the future, it will
submit a rule filing. As discussed above, there will
be no electronic FLEX Book (and thus no Priority
Customer orders resting that would otherwise have
priority). Additionally, as discussed below, there
will be no participation entitlements. The Exchange
notes FLEX Orders may be crossed on the Exchange
trading floor in the same manner as non-FLEX
Orders pursuant to Rule 5.87 in the shell Rulebook,
rather than pursuant to separate crossing rules as is
the case today.
118 See current Rule 24A.4(a)(3)(iii).
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Broker (which will be the Submitting
FLEX Trader) determines at what time
a market is established and which
ICMPs responded at that time and in
what order.119 As set forth in Rule
5.85(a)(2), orders represented in open
outcry may also be allocated to Priority
Customers resting in the book (which
will not apply to FLEX Options since
there will be no book), or to certain
market-makers if there is a participation
entitlement (which there will not be for
FLEX Options), or to other orders
resting in the book (which, again, will
not apply to FLEX Options since there
will be no book). Therefore, the only
interest against which a FLEX Order
may execute in open outcry are bids and
offers from the trading crowd.
The Exchange believes the current
open outcry RFQ process for FLEX
Orders is substantially similar to the
current open outcry process for nonFLEX Orders, and therefore believes
completely aligning the two processes is
appropriate. Currently, in open outcry
trading, a Floor Broker can request a
market from the crowd.120 ICMPs may
then respond with their markets. There
is no formal time frame in which ICMPs
may respond with a market, but ICMPs
generally respond promptly with their
market. This is substantially similar to
the current RFQ process described
above, in which a FLEX Trader requests
a market and provides FLEX Traders in
the crowd with at least three seconds to
respond with a market. The Exchange
believes it is appropriate to ensure there
is at least a minimum amount of time
FLEX Traders to respond give the
unique terms of FLEX Options. The
proposed timeframe in which ICMPs
that are FLEX Traders must respond is
consistent with the current Rule, which
as noted above, requires the RFQ
Response Period to be at least three
seconds long. The proposed rule change
also permits a FLEX Trader to initially
represent a FLEX Order to the trading
crowd, and then receive bids or offers
(as appropriate) and trade.121 Therefore,
other than eliminating the formal name
of the RFQ Response Period which is
not contemplated in non-FLEX Option
open outcry trading, the Exchange
believes the proposed rule change will
119 If another FLEX Trader does not believe there
was a reasonable amount of time to respond
permitted, that FLEX Trader may request a review
from a FLEX Official for compliance with the
applicable rules (see proposed Rule 5.75).
120 A Floor Broker may also initially represent an
order to the trading crowd, and then receives bids
or offers, as appropriate, and trade. However, this
is an uncommon scenario but permissible under the
Rules.
121 The Exchange notes this is an uncommon
scenario in open outcry trading, but is permissible
under the Rules.
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have minimal (if any) impact on how a
FLEX Trader may request a market on
the Exchange’s trading floor.
Unlike the current process, which
requires a FLEX Trader to submit an
RFQ to a FLEX Official, the proposed
rule change will require a FLEX Trader
to systematize a FLEX Order in the same
manner as Floor Brokers systematize
non-FLEX Orders, which is to
systematize them pursuant to current
Rule 6.24 (Rule 5.7(f) in the shell
Rulebook). TPHs have familiarity with
the systemization process, and the
Exchange believes the proposed rule
change will result in a more efficient
open outcry trading process for FLEX
Options, as a FLEX Trader can request
a market as soon as it gets that request
from a customer rather than first go to
a FLEX Official.122 This may ultimately
result in a more timely execution for
customers.
Once a Floor Broker has received a
market from the crowd, the Floor Broker
may then represent its order on the floor
(after systematizing it and routing it to
PAR, which it must do prior to
representing an order on the trading
floor) and elect to trade against the best
prices or not, or announce an intention
to cross at a specific price.123 As
discussed above, this is substantially
similar to the current RFQ process, in
which a FLEX Trader can elect to trade
or not trade with the best prices from
the crowd, or announce an intention to
cross. Currently, the Exchange has set a
crossing entitlement for facilitations and
solicitations of FLEX Orders in all
122 Because the proposed rule change will require
FLEX Orders to be systematized in the same manner
as all other orders, the proposed rule change deletes
Rule 5.7, Interpretation and Policy .04, which
exempts FLEX Options from systematization
requirements. The Exchange notes systemization
will capture FLEX Options in the Exchange’s audit
trail, and thus the Exchange will no longer need to
maintain separate records similar to COATS data.
The current rule requires the Exchange to make the
data it retained with respect to FLEX Options
available to the SEC upon request. While the
proposed ruled does not explicitly state this (the
Rules generally impose obligations on TPHs rather
than the Exchange), the Exchange is required to
maintain these records and provide them to the
Commission upon request pursuant to its SRO
obligations. See 17 CFR 240.17a–1 (which requires
an exchange to keep and preserve at least one copy
of all documents made or received in the course of
its business and in the conduct of its self-regulatory
activity, to retain such documents for at least five
years (in an easily accessible place for the first two
years) subject to destruction and disposition
provisions of Rule 17a–6 under the Act, and to
promptly furnish copies of these documents to the
Commission upon request).
123 See current Rule 6.74 (Rule 5.87(f) in the shell
Rulebook), which describes procedures for crossing
orders on the Exchange’s trading floor.
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classes to be 40%.124 As set forth in
current Rule 6.74(d) (Rule 5.87(f) of the
shell Rulebook), the Exchange may
similarly set a crossing entitlement on a
class-by-class basis up to 40%. The
Exchange intends to set this entitlement
for FLEX Orders at 40% in all classes,
as it does today.125 Rule 5.87(f) of the
shell Rulebook requires a Floor Broker
representing an eligible-sized order to
request bids and offers for a series. Once
the trading crowd has provided a quote,
once a reasonable amount of time has
passed, there is a significant change in
the price of the underlying, or the price
of the responses has been improved, the
Floor Broker may cross the applicable
percentage of the order, after all Public
Customer orders in the book or crowd
have been satisfied. This is similar to
how a FLEX Trader may cross a FLEX
Order in open outcry, as noted above.
Specifically, a FLEX Trader would
request a market, and after a reasonable
amount of time has passed, announce an
intention to cross, and receive a crossing
entitlement after Public Customer
interest has been satisfied. Therefore,
the Exchange believes the proposed rule
change will have a minimal (if any)
impact on the crossing of FLEX Orders
in open outcry.
The proposed rule change eliminates
the formal BBO Improvement Interval.
However, pursuant to general open
outcry rules regarding crossing, as noted
in the previous paragraph, if a FLEX
Trader announces an intention to cross
a FLEX Order, the FLEX Trader must
provide time for the trading crowd to
submit bids and offers (which is
equivalent to what occurs during the
BBO Improvement Interval). Similarly,
if there is no intention to cross, but the
FLEX Trader elects to not trade or there
is insufficient size, the crowd may make
subsequent bids and offers in a
reasonably prompt manner.126
The proposed allocation is
substantially similar to the allocation for
non-FLEX trading in open outcry,
excluding the provisions that are
inapplicable to FLEX trading, and to the
current allocation for FLEX trading in
open outcry (if there were no FLEX
Appointed Market-Makers, and if the
Exchange determined to not offer an
electronic book for FLEX Options
pursuant to its authority under the
current Rules). With respect to
allocation, best-priced responses will
124 Current Rule 24A.5(d)(2)(i) permits the
Exchange to establish a crossing participation
entitlement on a class-by-class basis up to 40%.
125 The Exchange would announce any changes to
this percentage pursuant to Rule 1.5 in the shell
Rulebook.
126 See Rule 5.85(a)(2)(C)(v) in the shell Rulebook.
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continue to have first priority.127 With
respect to responses at the same price,
because there will be no electronic Book
for FLEX Options, there can be no
Priority Customer FLEX Orders resting
in the book that would receive first
priority at the same price.128
Additionally, there will be no FLEX
Appointed Market-Makers, so there will
be no participation entitlement
applicable to FLEX trading.129 The
crossing participation will continue to
next priority.130 All other interest in the
crowd will continue to then have
priority in the sequence in which they
were made; to the extent multiple bids
or offers were submitted at the same
time, or if the Submitting FLEX Trader
cannot reasonable determine the
sequence in which they were made,
priority will be apportioned equally
among those bids and offers.131 As there
will be no electronic book of orders for
FLEX Options, there will be no noncustomer orders in the book that would
be eligible for execution after all other
interest trades.132 Therefore, the
proposed rule change will have minimal
(if any) impact on the allocation of
responses in open outcry trades of FLEX
Orders.133
As is the case regarding the proposed
electronic FLEX Auction described
above, the proposed rule change
simplifies the process pursuant to
which FLEX Traders may execute FLEX
Orders on the Exchange in open outcry.
As demonstrated above, the general
open outcry trading rules are
substantially similar to the current open
outcry RFQ procedure for FLEX
Options. However, the proposed rule
change eliminates the terminology that
applies only to FLEX trading. FLEX
127 See current Rule 24A.5(a)(2)(v)(A) and Rule
5.85(a)(1) in the shell Rulebook.
128 Therefore, Rule 5.85(a)(2)(A) in the shell
Rulebook will be inapplicable to FLEX trading.
129 Therefore, Rule 5.85(a)(2)(B) in the shell
Rulebook will be inapplicable to FLEX trading.
130 See current Rule 24A.5(a)(2)(v)(A)(I) and Rule
5.87(a) and (f) in the shell Rulebook.
131 See current Rule 24A.5(a)(2)(v)(A)(III) and
Rule 5.85(a)(2)(C) in the shell Rulebook.
132 As discussed above, while one customer has
recently begin to submit interest to the FLEX Book,
that interest is generally executed within a few
seconds (after the required exposure period) and,
thus, there are generally no orders resting on the
FLEX Book available for allocation following an
open outcry RFQ. Therefore, Rule 5.85(a)(2)(D) in
the shell Rulebook will be inapplicable to FLEX
Trading.
133 As is the case today, and with open outcry
non-FLEX trading, a TPH relying on the exemption
in Section 11(a)(1)(G) of the Exchange Act and Rule
11a–1(T) thereunder may submit a proprietary order
to the Exchange for execution in open outcry if it
yields priority to any bid (offer) at the same price
that is represented by all other bids (offers) that
have priority over the TPH’s order. See proposed
Rule 5.72(e)(1); see also Rule 5.85(a)(2)(E) in the
shell Rulebook and current Rule 24A.5(a)(5)(v)(B).
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Traders are more familiar with the
general open outcry trading procedures,
and therefore, by aligning the open
outcry trading process for FLEX Options
with that of non-FLEX Options, and
permitting FLEX trading in the same
manner as non-FLEX trading on the
Exchange’s trading floor, the Exchange
believes the proposed rule change may
encourage TPHs to submit FLEX Orders
for execution. The Exchange believes
the proposed rule change may reduce
confusion regarding how FLEX Orders
may trade in open outcry, given that any
minor differences between the two
processes that exist today are being
eliminated. However, as noted above,
one difference that will remain is the
minimum amount of time that the
trading crowd will have to respond to a
request for a market or to a represented
FLEX Order, which will ensure the
crowd has sufficient time to price the
unique terms of FLEX Options. The
proposed range of a reasonable time that
must be three seconds (but no more than
five minutes), is consistent with the
current Rule, which requires the
response period to be at least three
seconds. The Exchange believes the
maximum time accommodate this
pricing while permitting executions of
FLEX Orders to be completed in a more
timely fashion. As a result, the
Exchange believes the proposed auction
will fit more seamlessly into the
Exchange’s market. The Exchange also
believes this will encourage FLEX
Traders to compete vigorously and
potentially provide price improvement
for FLEX Orders in a competitive
auction process, as they do for nonFLEX Orders.
The proposed rule change deletes
current Rule 24A.5(c), which states that
acceptance of any bid or offer creates a
binding contract under Rule 6.48 in the
current Rulebook (which the Exchange
intends to move to Rule 5.11 in the shell
Rulebook). Current Rule 6.48 applies to
all acceptances of bids and offers on the
Exchange, including FLEX bids and
offers, and thus the Exchange does not
believe it is necessary to include a
separate provision in the FLEX Rules.
This has no impact on the binding
nature of the acceptance of bids and
offers on FLEX Options pursuant to
proposed Rule 5.72.
The proposed rule change moves the
provision that states all transactions
must be in compliance with Section
11(a)(1) of the Exchange Act and the
rules promulgated thereunder,
including the description of the activity
prohibited by Section 11(a)(1), from
current Rule 24A.5(d)(4) (as well as
current Rules 24A.5(a)(2)(v)(B) and
(b)(2)(ii), which are cross-referenced in
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Rule 24A.5(d)(4)) to proposed Rule
5.72(e). The proposed rule change
amends this provision to state that it
applies to all executions of FLEX
Orders, as this provision is only
applicable to FLEX trading. The
proposed rule change deletes current
Rule 24A.5(d)(4)(i) and (iii) regarding
the market-maker exemption and the
effect versus execute exemption,
respectively. Those exemptions will
continue to be available to FLEX
Traders with respect to FLEX trading.
However, there is nothing unique about
the applicability of those exemptions to
FLEX trading, as they are available to all
market participants with respect to all
trading in the same manner.
Additionally, the proposed rule change
deletes current Rule 24A.5(d)(4)(iv),
which states that a TPH may rely on any
other exception to comply with the
requirements of Section 11(a)(1) and the
rules promulgated thereunder. That will
continue to be true, and is captured by
the introductory language in proposed
Rule 5.72(e), which references that an
exception to Section 11(a)(1) may apply.
Because, FLEX traders may currently
rely on the ‘‘G’’ exemption for electronic
FLEX trading given the current priority
structure but will no longer be able to
rely on that exemption with respect to
electronic FLEX trading given the
proposed priority changes (see
discussion above regarding this
change),134 the proposed rule change
makes clear that the ‘‘G’’ exemption will
only be available for FLEX Orders
represented in open outcry, as long as
the TPH relying on that exemption
yields priority to any bid (offer) at the
same price that is represented by all
other bids (offers) that have priority over
the TPH’s order pursuant to proposed
Rule 5.72. The proposed rule change
also states that a TPH may not submit
an electronic FLEX Order pursuant to
proposed Rule 5.72(b), Rule 5.73, or
Rule 5.74 to effect any proprietary order
transactions by relying on the ‘‘G’’
exemption. As discussed below, the
Exchange believes the proposed rule
change is consistent with Section 11(a)
of the Exchange Act.
The proposed rule change deletes
current Rule 24A.5, Interpretation and
Policy .03 regarding post-trade
verification procedures for electronic
RFQs for complex orders. Due to the
System updates in connection with the
System migration, parties to FLEX
transactions will no longer need to take
additional steps with respect to
134 As discussed below, electronic FLEX trading,
like all other electronic trading on the Exchange,
will not allow FLEX Traders to take advantage of
the ‘‘G’’ exemption.
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executions of complex orders following
an electronic FLEX Auction.135 These
procedures require FLEX Traders to
input the leg price, exercise price, and/
or premium information into the System
following execution of a complex FLEX
Order. As discussed above, FLEX
Traders must submit all of this
information upon entry of a FLEX
Order.136 Therefore, pursuant to the
proposed rule change, a FLEX Trader
will be required to input the same
information for each leg of a complex
FLEX Order prior to submission rather
than following execution. A FLEX
Trader may request nullification of a
FLEX Option transaction if it did not
conform to the terms in proposed Rule
4.21, or update any inaccurate
information in a complex FLEX Order in
the same manner as any TPH may
update any inaccurate information in
any order pursuant to current Rule
6.67.137 Because all FLEX Orders will
now be systematized, as discussed
above, there is no longer a need for
separate procedures regarding the
correction of inaccurate information
entered for FLEX transactions.
The proposed rule change moves the
provisions in Rules 24A.1(i) and 24A.14
in the current Rulebook regarding FLEX
Officials to Rule 5.75 in the shell
Rulebook. The proposed rule change
makes only nonsubstantive changes to
this Rule, including to make the Rule
plain English, delete redundant
language (such as saying any TPH
approved to act as a Market-Maker, as
pursuant to Rule 8.1 in the current
Rulebook, a Market-Maker must be a
TPH), incorporate defined terms
(including the term ‘‘ICMP,’’ which is
an in-crowd Market-Maker, on-floor
designated primary market-maker or
lead market-maker with an allocation in
a class, or a floor broker or PAR official
representing an order in the trading
crowd on a trading floor 138), and update
cross-references and paragraph lettering
and numbering. FLEX Officials will
have the same responsibilities as they
do today.
135 Note current Rule 24A.5, Interpretation and
Policy .03 also applies to electronic transactions in
FLEX Options with exercise prices and premiums
based on a methodology for fixing that number or
based on a percentage. As noted above, the
Exchange will no longer offer exercise prices and
premiums based on such a methodology.
136 See proposed Rule 5.72(b)(2).
137 Rule 6.67 in the current Rulebook describes
the Exchange’s Cboe Trade Match System, which
permits TPHs to correct bona fide errors, subject to
certain restrictions. The Exchange intends to move
Rule 6.67 from the current Rulebook to Rule 6.6 in
the shell Rulebook in a separate rule filing.
138 See Rule 1.1 in the shell Rulebook.
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54687
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.139 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5)140 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5)141 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the Exchange believes
the proposed rule change will remove
impediments to and perfect the
mechanism of a free and open market,
and protect investors and the public
interest. As described above, the
proposed electronic FLEX Auction is
closely aligned to the Exchange’s other
electronic auctions for non-FLEX
Options, and the proposed open outcry
FLEX Auction is closely aligned with
the current open outcry trading process
for non-FLEX Options, but are still
similar to the FLEX trading processes in
place today. The proposed rule change
merely eliminates many of the
differences between FLEX and nonFLEX trading to eliminate potential
confusion for market participants given
the current differences, while
implementing trading processes with
which market participants are more
familiar. As a result, the Exchange
believes the proposed rule change will
have minimal impact on the trading of
FLEX Auctions, and possibly increase
participation in FLEX Auctions, which
could add liquidity to the Exchange’s
FLEX Market, which ultimately benefits
investors. Additionally, with respect to
electronic trading, market participants
are more familiar with this type of
functionality and have their systems
coded to conform to these types of
139 15
140 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
141 Id.
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auctions. The Exchange has received
feedback from market participants
indicating the difficulty and additional
resources necessary to code to the
nonstandard FLEX RFQ process given
the multiple intervals.
Additionally, the Exchange believes
the proposed rule change will permit
executions of FLEX Orders to be
completed in a more timely fashion,
while providing the crowd with
sufficient time to price the unique terms
of FLEX Options (as the proposed
ranges for the duration of the electronic
and open outcry FLEX Auctions are
consistent with current Rules).142 The
Exchange believes the proposed auction
processes will ultimately benefit
investors, as they will provide TPHs
with greater harmonization of auction
mechanisms on the Exchange. The
Exchange believes the proposed
auctions will provide mechanisms for
more efficient and timely executions of
FLEX Options, given participants’
familiarity with the trading processes
and reasonable durations of the
auctions. Additionally, by providing for
automatic executions following
electronic auctions of FLEX Orders, the
Exchange believes there will be more
certainty of execution at the end of an
auction, unlike today, when a FLEX
Trader may reject the market after a
period of potentially minutes. The
Exchange believes the proposed
auctions will encourage FLEX Traders
to continue to compete vigorously and
potentially provide price improvement
for FLEX Orders in a competitive
auction process, as they do for nonFLEX Orders, as they will be
encouraged to submit their best-priced
bids and offers during the auctions to
have the opportunity to execute against
the FLEX Order.
By permitting FLEX Options to trade
in a manner similar to non-FLEX
Options, the Exchange believes this
further improves a comparable
alternative to the over-the-counter
(‘‘OTC’’) market in customized options.
By enhancing our FLEX trading
platform and making it similar to
trading procedures in non-FLEX
options, with which market participants
are generally more familiar, the
Exchange believes it may be a more
attractive alternative to the OTC market.
The Exchange believes market
participants benefit from being able to
trade customized options in an
exchange environment in several ways,
including but not limited to the
following: (1) Enhanced efficiency in
142 See current Rule 24A.4(a)(3)(iii) and proposed
Rule 5.72(c)(1)(E) and (d)(1) (which all provide for
a minimum of three seconds of response time).
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initiating and closing out position; (2)
increased market transparency; and (3)
heightened contra-party
creditworthiness due to the role of OCC
as issuer and guarantor of FLEX
Options.
The Exchange believes the proposed
rule change to eliminate the ability for
FLEX Traders to specify exercise prices
for FLEX Index Options as a method for
fixing an index value or dollar amount
at the time of a FLEX RFQ or a FLEX
Order is traded, or as a percentage of the
index value calculated at the time of the
trade, and for FLEX Equity Options, as
a method for fixing a dollar amount at
the time of a FLEX RFQ or a FLEX Order
is traded, or as a percentage of the price
of the underlying security at the time of
the trade will have no impact on FLEX
Trading.143 As noted above, FLEX
Traders only designate an exercise price
for a FLEX series as a fixed amount or
a percentage of the closing value of the
underlying security or index, as
applicable, on the trade date. Similarly,
the Exchange believes the proposed rule
change to eliminate the ability for FLEX
traders to apply the hedge trade
condition to orders will have no impact
on FLEX Trading.144 As noted above,
FLEX Traders do not apply this trade
condition to FLEX Orders. Because
FLEX Traders do not use this
functionality, the Exchange believes it
will benefit investors if the Exchange
does not expend resources to rebuild on
a new System functionality that is not
in demand, and to not include
references to unused functionality in the
Exchange’s rules. In addition, the
current Rules permit the Exchange to
make a FLEX Book available on a classby-class basis.145 The Exchange
currently makes a FLEX Book available;
however, FLEX Traders were not
submitting orders into that Book until
recently (April 2019). Additionally, at
that time (and since that time), only one
FLEX Trader has been submitting FLEX
Orders into the FLEX Book, and only for
a limited purpose, as discussed above.
The activity in the FLEX Book
represented only approximately 1.2% of
all FLEX trading from the period of
April to August 2019. As a result, the
proposed elimination of the Exchange’s
ability to make a FLEX Book available
is consistent with the Exchange’s
current authority to not make a FLEX
Book available, and will also have no
143 See
current Rule 24A.4(b)(2) and (c)(2).
current Rule 24A.1(y). As discussed
above, elimination of the IOC trade condition will
have no impact, as it is no longer necessary given
that all FLEX Orders submitted for electronic
execution may only execute following an auction or
be cancelled.
145 See current Rule 24A.5(b).
144 See
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significant impact on FLEX trading,
given that the vast majority of FLEX
trading occurs outside of the book, and
given that only one customer has
recently been using the book for a
limited purpose.
The Exchange believes the proposed
rule change to allow multiple electronic
FLEX auctions to overlap will benefit
investors, as it may lead to an increase
in Exchange volume and permit the
Exchange to further compete with the
OTC market, while providing for
additional opportunities for price
discovery and execution. Although
electronic FLEX Auctions will be
allowed to overlap, the Exchange does
not believe that this raises any issues
that are not addressed through the
proposal as described above. For
example, although overlapping, each
Auction will be started in a sequence
and with a time that will determine its
processing. Thus, even if there are two
Auctions that commence and conclude,
at nearly the same time, each Auction
will have a distinct conclusion at which
time the Auction will be allocated.
Additionally, FLEX Orders submitted
into an electronic FLEX Auction will be
able to execute only against FLEX
responses submitted to that Auction. If
market participants desire to have
interest execute against both FLEX
Orders subject to concurring FLEX
Auctions, market participants may
submit responses to both Auctions.
Additionally, the proposed rule
change to permit concurrent auctions is
not novel, and is consistent with
functionality already in place on other
exchanges with respect to other types of
auctions.146 The Exchange does not
believe the unique terms of FLEX
Options create any additional issues not
previously considered by the
Commission with respect to concurrent
auctions. As described above, the
Exchange believes concurrent auctions
may increase execution opportunities,
and permit more timely executions, of
FLEX Orders in a more timely fashion,
which would ultimately benefit
investors. Additionally, the Rules do not
currently prevent a COA of a complex
order from occurring at the same time as
an AIM in one of the components of a
complex order subject to a COA.
Therefore, the Exchange believes it is
similarly reasonable to permit multiple
146 See, e.g., EDGX Rules 21.19(c)(1) and
21.22(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. Other Exchange rules to
take effect following the migration also permit
concurrent auctions. See, e.g., Rules 5.33, 5.37, and
5.38 in the shell Rulebook.
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FLEX Auctions in the same series to
occur at the same time.
The proposed rule change to permit
all FLEX Traders to respond to
electronic FLEX Auctions will benefit
investors. Permitting all FLEX traders to
submit responses, as opposed to not
permitting options market-makers at
away exchanges to respond, may result
in more FLEX Traders having the
opportunity to participate in executions
at the conclusion of electronic FLEX
Auctions. Additionally, it may increase
liquidity in these auctions, which may
lead to more opportunities to price
improvement and ultimately benefit
investors.
The Exchange believes the proposed
rule change regarding the time at which
trading in FLEX Options will be
available will benefit investors. Because
market participants incorporate
transaction prices of underlying
securities or the values of underlying
indexes when pricing options
(including FLEX Options), the Exchange
believes it will benefit investors for
FLEX Options trading to not be
available until that information has
begun to be disseminated in the market.
Because the Exchange will have no
electronic book of resting orders for
FLEX Options, and no opening rotation,
at the time at which FLEX Trading
opens, there are (and will be) no
automatic executions. Therefore, being
‘‘open’’ for FLEX trading merely means
that FLEX Traders may submit FLEX
Orders into one of the various FLEX
Auctions, at the conclusion of which
executions in FLEX Auctions may occur
(which are all discussed below).
Additionally, the proposed trigger
events occur for many underlying
securities or indexes within one second
of 9:30 a.m. Eastern Time (which is
consistent with the current time at
which the Exchange has determined to
open FLEX Option classes), and the
majority occur within ten seconds.
Therefore, pursuant to the proposed rule
change, the opening of FLEX Options
for trading may occur over a longer
timeframe, which would further reduce
any potential market impact of the
change to the opening time for FLEX
Options. While the Exchange believes it
is important to open series for trading as
soon as possible, the Exchange also
believes the proposed rule change will
permit it to manage the number of FLEX
Option series that may begin to trade
during a short time period to ensure a
fair and orderly opening in all options
listed on the Exchange. The Exchange
further believes aligning the trigger
events for the opening of FLEX and nonFLEX Options may eliminate any
confusion among market participants
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regarding when options with the same
underlying are open for trading. The
Exchange also notes that FLEX Options
trading volume currently represents
approximately 1.5% of total trading
volume on the Exchange, and therefore
the Exchange believes any potential
market impact of this change would be
de minimis.
The Exchange believes the proposed
order types and instructions that will be
available for FLEX Orders will promote
just and equitable principles of trade,
and benefit investors, because they will
provide FLEX Traders with control over
the executions of their FLEX Orders
while being consistent with the
proposed FLEX trading processes.
Instructions that are available for nonFLEX Orders but will not be available
for FLEX Orders are consistent with the
fact that FLEX Orders will only be
eligible to trade following an electronic
or open outcry FLEX Auction and not
rest in an electronic book or route away,
and because there is no market for FLEX
Options (for which most Order
Instructions and Times-in-Force set
forth in Rule 5.6 in the shell Rulebook
are relevant). The Exchange believes
making these order types, instructions,
and times-in-force available for FLEX
Orders is consistent with the Exchange’s
authority to designate availability of
orders types on a class-by-class basis.147
The Exchange believes the proposed
rule change will benefit investors by
specifying the order types that are
available for FLEX trading, as it
provides investors with additional
transparency.
Similarly, the proposed rule change
regarding FLEX Order requirements will
benefit investors, because it provides
investors with additional transparency
regarding complex order entry
requirements for FLEX Options. As
noted above, certain of the proposed
requirements are consistent with current
rules, while the restrictions on
permissible combinations of exercise
styles and settlement types on the leg
components will have no impact on
trading, as FLEX Traders do not
currently trade complex orders with legs
in the combinations that the proposed
rule change proposes to restrict.
Additionally, as noted above, the
proposed rule change to require FLEX
Traders to input the leg prices of
complex FLEX Orders upon entry
merely moves this requirement to the
time of order submission rather than
post-trade (as is required today).
Additionally, much of the proposed rule
change is merely relocating rules from
147 See Rule 6.53 in the current Rulebook and
Rule 5.6 in the shell Rulebook.
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54689
the current Rulebook to the shell
Rulebook, including flexible terms (such
as settlement type, exercise price,
exercise style, and expiration date) and
fungibility provisions, and making only
nonsubstantive changes, which will
therefore have no impact on FLEX
trading. The Exchange believes
providing a reorganized, holistic
rulebook upon migration will also
benefit investors.
The proposed rule change to adopt
electronic and open outcry FLEX
Auctions is also consistent with Section
11(a)(1) of the Act 148 and the rules
promulgated thereunder. Generally,
Section 11(a)(1) of the Act restricts any
member of a national securities
exchange from effecting any transaction
on such exchange for (i) the member’s
own account, (ii) the account of a
person associated with the member, or
(iii) an account with respect to which
the member or a person associated with
the member exercises investment
discretion, unless a specific exemption
is available. Examples of common
exemptions include the exemption for
transactions by broker dealers acting in
the capacity of a market maker under
Section 11(a)(1)(A),149 the ‘‘G’’
exemption for yielding priority to nonmembers under Section 11(a)(1)(G) of
the Act and Rule 11a1–1(T)
thereunder,150 and ‘‘Effect vs. Execute’’
exemption under Rule 11a2–2(T) under
the Act.151
As noted above, FLEX Traders that
effect FLEX transactions in open outcry
may qualify for the ‘‘G’’ exemption by
yielding priority to any bid (offer) at the
same price of any other bid (offer) that
has priority over those broker-dealer
orders under this Rule. However, FLEX
Traders may not rely on the ‘‘G’’
exemption to execute proprietary orders
in the electronic FLEX Auctions as set
forth in proposed Rule 5.72(e).
Therefore, a FLEX Trader must ensure it
complies with another exemption, such
as the ‘‘Effect vs. Execute’’ exemption,
when submitting proprietary FLEX
Orders for electronic execution.
The ‘‘Effect vs. Execute’’ exemption
permits an exchange member, subject to
certain conditions, to effect transactions
for covered accounts by arranging for an
unaffiliated member to execute
transactions on the exchange. To
148 15 U.S.C. 78k(a). Section 11(a)(1) prohibits a
member of a national securities exchange from
effecting transactions on that exchange for its own
account, the account of an associated person, or an
account over which it or its associated person
exercises discretion unless an exception applies.
149 15 U.S.C. 78k(a)(1)(A).
150 15 U.S.C. 78k(a)(1)(G) and 17 CFR 240.11a1–
1(T).
151 17 CFR 240.11a2–2(T).
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comply with Rule 11a2–2(T)’s
conditions, a member: (a) Must transmit
the order from off the exchange floor; (b)
may not participate in the execution of
the transaction once it has been
transmitted to the member performing
the execution; 152 (c) may not be
affiliated with the executing member;
and (d) with respect to an account over
which the member has investment
discretion, neither the member nor its
associated person may retain any
compensation in connection with
effecting the transaction except as
provided in the Rule. For the reasons set
forth below, the Exchange believes that
TPHs entering orders into an electronic
FLEX Auction would satisfy the
requirements of Rule 11a2–2(T).
The Exchange believes the electronic
platform component of the electronic
FLEX Auction will place all users—both
TPHs and non-TPHs on the ‘‘same
footing’’ as intended by Rule11a2–2(T).
Given the automated matching and
execution at the conclusion of an
electronic FLEX Auction, no TPH would
enjoy any special control over the time
of execution or special order handling
advances for orders executed
electronically following an electronic
FLEX Auction, because such orders
would be centrally processed for
execution by computer, as compared to
being handled by a member through
bids and offers on the trading floor.
Because the electronic trading platform
components are designed to prevent any
TPHs from gaining any time and place
advantages, the Exchange believes the
proposed electronic FLEX Auction
satisfies the four components of the
‘‘Effect vs. Execute’’ rule as well as the
general policy objectives of Section
11(a) of the Act.
In the context of automated trading
systems, the Commission has found that
the off-floor transmission requirement is
met if a covered account order is
transmitted from off the floor directly to
the Exchange by electronic means.153
152 The member may, however, participate in
clearing and settling the transaction.
153 See, e.g., Securities Exchange Act Release Nos.
61419 (January 26, 2010), 75 FR 5157 (February 1,
2010) (SR–BATS–2009–031) (approving BATS
options trading); 59154 (December 23, 2008), 73 FR
80468 (December 31, 2008) (SR–BSE–2008–48)
(approving equity securities listing and trading on
BSE); 57478 (March 12, 2008), 73 FR 14521 (March
18, 2008) (SR–NASDAQ–2007–004 and SR–
NASDAQ–2007–080) (approving NOM options
trading); 53128 (January 13, 2006), 71 FR 3550
(January 23, 2006) (File No. 10–131) (approving The
Nasdaq Stock Market LLC); 44983 (October 25,
2001), 66 FR 55225 (November 1, 2001) (SR–PCX–
00–25) (approving Archipelago Exchange); 29237
(May 24, 1991), 56 FR 24853 (May 31, 1991) (SR–
NYSE–90–52 and SR–NYSE–90–53) (approving
NYSE’s Off-Hours Trading Facility); and 15533
(January 29, 1979), 44 FR 6084 (January 31, 1979)
(‘‘1979 Release’’).
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Because the Exchange’s electronic FLEX
Auction receives, and will continue to
receive, orders from FLEX Traders
electronically through remote terminals
or computer-to-computer interfaces, the
Exchange believes that orders submitted
to an electronic FLEX Auction from off
the Exchange’s trading floor will satisfy
the off-floor transmission requirement.
The second condition of Rule 11a2–
2(T) requires that neither a member nor
an associated person of such member
participate in the execution of its order.
The Exchange represents that, upon
submission to an electronic FLEX
Auction, an order or FLEX response will
be executed automatically pursuant to
the Rules set forth for electronic FLEX
Auctions. In particular, execution of a
FLEX Order or FLEX response sent to
the electronic FLEX Auction depends
not on the FLEX Trader entering the
FLEX Order or FLEX response, but
rather on what other orders and
responses are present and the priority of
those orders and responses. Thus, at no
time following the submission of a
FLEX Order or FLEX response is a FLEX
Trader or associated person of such
FLEX Trader able to acquire control or
influence over the result or timing of
order or response execution.154 Once
the FLEX Order or FLEX response, as
applicable, has been transmitted, the
FLEX Trader that submitted the order or
response, respectively, will not
participate in its execution. No FLEX
Trader, including the Submitting FLEX
Trader, will see a FLEX response
submitted into an electronic FLEX
Auction, and therefore and will not be
able to influence or guide the execution
of their FLEX Orders or FLEX responses,
as applicable.
Rule 11a2–2(T)’s third condition
requires that the order be executed by
an exchange member who is unaffiliated
with the member initiating the order.
The Commission has stated that the
requirement is satisfied when
automated exchange facilities, such as
the electronic FLEX Auction, are used,
as long as the design of these systems
ensures that members do not possess
any special or unique trading
advantages in handling their orders after
154 Submitting FLEX Traders may modify or
cancel their FLEX Orders, and all FLEX Traders
may modify or cancel their responses, after being
submitted to an electronic FLEX Auction. The
Exchange notes that the Commission has stated that
the non-participation requirement does not
preclude members from cancelling or modifying
orders, or from modifying instructions for executing
orders, after they have been transmitted so long as
such modifications or cancellations are also
transmitted from off the floor. See Securities
Exchange Act Release No. 14563 (March 14, 1978),
43 FR 11542, 11547 (the ‘‘1978 Release’’).
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transmitting them to the exchange.155
The Exchange represents that the
electronic FLEX Auction is designed so
that no FLEX Trader has any special or
unique trading advantage in the
handling of its orders after transmitting
its orders to the mechanism.
A TPH (not acting in a market-maker
capacity) could submit an order for a
covered account from off of the
Exchange’s trading floor to an
unaffiliated Floor Broker for submission
for execution in the FLEX Auction from
the trading floor and satisfy the ‘‘Effect
vs. Execute’’ exemption (assuming the
other conditions are satisfied).156
However, a TPH could not submit an
order for a covered account to its
‘‘house’’ Floor Broker on the trading
floor for execution and rely on this
exemption. Because a TPH may not rely
on the ‘‘G’’ exemption when submitting
a FLEX Order to an electronic FLEX
Auction,157 it would need to ensure
another exception applies in this
situation.
Rule 11a2–2(T)’s fourth condition
requires that, in the case of a transaction
effected for an account with respect to
which the initiating member or an
associated person thereof exercises
investment discretion, neither the
initiating member nor any associated
person thereof may retain any
compensation in connection with
effecting the transaction, unless the
person authorized to transact business
for the account has expressly provided
otherwise by written contract referring
to Section 11(a) of the Act and Rule
11a2–2(T) thereunder.158 The Exchange
155 In considering the operation of automated
execution systems operated by an exchange, the
Commission noted that, while there is not an
independent executing exchange member, the
execution of an order is automatic once it has been
transmitted into the system. Because the design of
these systems ensures that members do not possess
any special or unique trading advantages in
handling their orders after transmitting them to the
exchange, the Commission has stated that
executions obtained through these systems satisfy
the independent execution requirement of Rule
11a2–2(T). See 1979 Release.
156 Orders for covered accounts that rely on the
‘‘Effect vs. Execute’’ exemption in this scenario
must be transmitted from a remote location directly
to the Floor Broker on the trading floor by
electronic means.
157 See proposed Rule 5.72(e).
158 See 17 CFR 240.11a2–2(T)(a)(2)(iv). In
addition, Rule 11a2–2(T)(d) requires a member or
associated person authorized by written contract to
retain compensation, in connection with effecting
transactions for covered accounts over which such
member or associated persons thereof exercises
investment discretion, to furnish at least annually
to the person authorized to transact business for the
account a statement setting forth the total amount
of compensation retained by the member in
connection with effecting transactions for the
account during the period covered by the statement
which amount must be exclusive of all amounts
paid to others during that period for services
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recognizes that FLEX Traders relying on
Rule 11a2–2(T) for transactions effected
through the electronic FLEX Auction
must comply with this condition of the
Rule, and the Exchange will enforce this
requirement pursuant to its obligations
under Section 6(b)(1) of the Act to
enforce compliance with federal
securities laws.
Therefore, Exchange believes that the
instant proposal is consistent with Rule
11a2–2(T), and that therefore the
exception should apply in this case.
Therefore, the Exchange believes the
proposed rule change is consistent with
Section 11(a) of the Act and the rules
thereunder.
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 rule change will apply in the
same manner to all FLEX Orders
submitted for electronic or open outcry
execution. The trading of FLEX
Auctions, and the use of either of the
proposed FLEX Auctions, are voluntary
for TPHs to use and will be available to
all TPHs that register with the Exchange
as FLEX Traders. As discussed above,
the Exchange believes the proposed rule
change should encourage FLEX Traders
to compete amongst each other by
responding with their best price and
size for a particular auction. Because
bids and offers in response to an
Auction (whether electronic or open
outcry) will have the same opportunity
to execute against the FLEX Order
(which is allocated in a pro-rata manner
against bids and offers at the same
price), a FLEX Trader will be
encouraged to respond to FLEX
Auctions with bids and offers at the best
and most aggressive prices. The
Exchange believes the proposed rule
change will encourage FLEX Traders to
compete vigorously to provide the
opportunity for price improvement for
FLEX Orders in a competitive auction
process.
The Exchange does not believe the
proposed rule change will impose any
burden on intermarket competition. The
proposed rule change simplifies the
FLEX trading principles, and
rendered to effect such transactions. See also 1978
Release (stating ‘‘[t]he contractual and disclosure
requirements are designed to assure that accounts
electing to permit transaction-related compensation
do so only after deciding that such arrangements are
suitable to their interests’’).
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harmonizes the FLEX auction trading
procedures with the non-FLEX trading.
The Exchange believes aligning FLEX
trading processes with non-FLEX
trading processes with which FLEX
Traders are familiar may further
encourage FLEX trading on the
Exchange. The Exchange believes this is
a further improved and comparable
alternative to the OTC market in
customized options. By enhancing our
FLEX trading platform and making it
similar to trading procedures in nonFLEX options, with which market
participants are generally more familiar,
the Exchange believes it may be a more
attractive alternative to the OTC market.
The Exchange believes market
participants benefit from being able to
trade customized options in an
exchange environment in several ways,
including but not limited to the
following: (1) Enhanced efficiency in
initiating and closing out position; (2)
increased market transparency; and (3)
heightened contra-party
creditworthiness due to the role of OCC
as issuer and guarantor of FLEX
Options.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 159 and Rule 19b–
4(f)(6) thereunder.160
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 161 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 162
permits the Commission to designate a
159 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and 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.
161 17 CFR 240.19b–4(f)(6).
162 17 CFR 240.19b–4(f)(6)(iii).
160 17
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54691
shorter time if such action is consistent
with the protection of investors and the
public interest. The Exchange has
requested that the Commission 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 FLEX trading functionality to
market participants on an uninterrupted
basis. In support of its waiver request,
the Exchange cites to similarities
between its proposed rule and the rules
for non-FLEX transactions pursuant to
the Exchange’s standard auction
process.163 In addition, the Exchange
notes similarities to certain
functionalities already in place on other
exchanges.164 Additionally, the
Exchange states that the proposal
relocates certain rules from the current
Rulebook to the shell Rulebook,
including flexible terms and fungibility
provisions, and makes only nonsubstantive changes to such provisions,
which the Exchange believes will have
no impact on FLEX trading. The
Exchange further notes that it has
provided market participants with
notice of this change in advance of the
system migration.165 For these reasons,
the Commission believes that waiving
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 upon
filing.166
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.
163 See, e.g., Rule 5.33(d) and Rule 5.85(a) of the
shell Rulebook.
164 See supra note 146.
165 See supra note 6.
166 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).
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Comments may be submitted by any of
the following methods:
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
[Release No. 34–87233; File No. SR–
PEARL–2019–27]
• 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–2019–084 on the subject line.
October 4, 2019.
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–2019–084. 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–2019–084 and
should be submitted on or before
October 31, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.167
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–22144 Filed 10–9–19; 8:45 am]
BILLING CODE 8011–01–P
167 17
CFR 200.30–3(a)(12).
VerDate Sep<11>2014
19:50 Oct 09, 2019
Self-Regulatory Organizations; MIAX
PEARL, LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the MIAX
PEARL Fee Schedule
Jkt 250001
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 20, 2019, MIAX PEARL, LLC
(‘‘MIAX PEARL’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) a
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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the MIAX PEARL Fee Schedule
(the ‘‘Fee Schedule’’) to establish onetime membership application fees for
MIAX PEARL Members.3
The Exchange previously filed to
establish one-time membership
application fees on June 28, 2019 (SR–
PEARL–2019–22).4 That filing was
withdrawn on August 27, 2019. It is
replaced with the current filing (SR–
PEARL–2019–27).
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings/pearl at MIAX PEARL’s principal
office, 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
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 ‘‘Member’’ means an individual or organization
that is registered with the Exchange pursuant to
Chapter II of the Exchange Rules for purposes of
trading on the Exchange as an ‘‘Electronic Exchange
Member’’ or ‘‘Market Maker.’’ Members are deemed
‘‘members’’ under the Exchange Act. See Exchange
Rule 100.
4 See Securities Exchange Act Release No. 86363
(July 12, 2019), 84 FR 34445 (July 18, 2019) (SR–
PEARL–2019–22) (the ‘‘Second Proposed Rule
Change’’).
2 17
PO 00000
Frm 00108
Fmt 4703
Sfmt 4703
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
The Exchange proposes to amend the
Fee Schedule to establish one-time
membership application fees based
upon the applicant’s status as either an
Electronic Exchange Member 5 (‘‘EEM’’)
or as a Market Maker.6 MIAX PEARL
commenced operations as a national
securities exchange registered under
Section 6 of the Act 7 on February 6,
2017.8 The Exchange adopted its
transaction fees and certain of its nontransaction fees in its filing SR–PEARL–
2017–10.9 In that filing, the Exchange
expressly waived the one-time
membership application fees to provide
an incentive to prospective EEMs and
Market Makers to become Members of
the Exchange. At that time, the
Exchange waived one-time membership
application fees for the Waiver Period 10
and stated that it would provide notice
to market participants when the
5 ‘‘Electronic Exchange Member’’ or ‘‘EEM’’
means the holder of a Trading Permit who is a
Member representing as agent Public Customer
Orders or Non-Customer Orders on the Exchange
and those non-Market Maker Members conducting
proprietary trading. Electronic Exchange Members
are deemed ‘‘members’’ under the Exchange Act.
See Exchange Rule 100. See the Definitions Section
of the Fee Schedule.
6 ‘‘Market Maker’’ means a Member registered
with the Exchange for the purpose of making
markets in options contracts traded on the
Exchange and that is vested with the rights and
responsibilities specified in Chapter VI of Exchange
Rules. See Exchange Rule 100. See the Definitions
Section of the Fee Schedule.
7 15 U.S.C. 78f.
8 See Securities Exchange Act Release No. 79543
(December 13, 2016), 81 FR 92901 (December 20,
2016) (File No. 10–227) (order approving
application of MIAX PEARL, LLC for registration as
a national securities exchange).
9 See Securities Exchange Act Release No. 80061
(February 17, 2017), 82 FR 11676 (February 24,
2017) (SR–PEARL–2017–10).
10 ‘‘Waiver Period’’ means, for each applicable
fee, the period of time from the initial effective date
of the MIAX PEARL Fee Schedule until such time
that the Exchange has an effective fee filing
establishing the applicable fee. The Exchange will
issue a Regulatory Circular announcing the
establishment of an applicable fee that was subject
to a Waiver Period at least fifteen (15) days prior
to the termination of the Waiver Period and
effective date of any such applicable fee. See the
Definitions Section of the Fee Schedule.
E:\FR\FM\10OCN1.SGM
10OCN1
Agencies
[Federal Register Volume 84, Number 197 (Thursday, October 10, 2019)]
[Notices]
[Pages 54671-54692]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22144]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87235; File No. SR-CBOE-2019-084]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
the Exchange's Rules Regarding the Trading of Flexible Exchange
Options, and Move Those Rules From the Currently Effective 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
October 4, 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 October 2, 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
and II 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 Exchange's Rules regarding the trading of flexible
exchange options ``FLEX Options'' \5\ and moves those Rules from the
currently effective Rulebook (``current Rulebook'') to the
[[Page 54672]]
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.
---------------------------------------------------------------------------
\5\ See current Rule 24A.1(d), (f), and (g) (which define a FLEX
Option, FLEX Index Option, and FLEX Equity Option) and proposed
definition of FLEX Option in Rule 1.1 of the shell Rulebook (with
nonsubstantive changes to simplify the definition of FLEX Options).
A FLEX Option on an equity security may be referred to as a ``FLEX
Equity Option,'' and a FLEX Option on an index may be referred to as
a ``FLEX Index Option.'' The proposed rule change also adds a period
following the rule number of Rule 1.1 to conform to the formatting
of other Rules in the shell Rulebook. The proposed rule change also
deletes the corresponding definitions of Non-FLEX Option, Non-FLEX
Equity Option, and Non-FLEX Index Option, as the Exchange believes
the meanings of those terms are self-evident, making the definitions
unnecessary. See current Rule 24A.1(o), (p), and (q).
---------------------------------------------------------------------------
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. 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.
As part of this effort, the Exchange is reorganizing its Rules
within the shell Rulebook to, among other things, include all rules
regarding the Exchange's trading hours in a single rule, include all
rules related to listing of options products within one chapter, and
include all rules related to trading of all products within one
chapter. The Exchange has provided market participants with notice of
this change in advance of the system migration.\6\ Subject to
regulatory review, these proposed rule changes will be in effect
October 7, 2019, in conjunction with the system migration. For example,
rules related to the classes and series of FLEX Options the Exchange
may list for trading will be in the same chapter as the rules related
to the classes and series of equity options and index options the
Exchange may list for trading. Additionally, the rules related to the
manner in which FLEX Options may trade will be in the same chapter as
the rules related to the manner in which all other types of options may
trade.\7\ The shell Rulebook will clearly identify the Rules that apply
to the trading of FLEX Options.
---------------------------------------------------------------------------
\6\ See, e.g, Exchange Notice C2019092500, Trading of FLEX
Options on Cboe Options Exchange (September 25, 2019); Exchange
Notice 2019092501, Cboe Town Hall on FLEX Trading on the New Cboe
Options Exchange Platform (September 25, 2019); BOE and FIX
Specifications, available at https://markets.cboe.com/us/options/support/technical/.
\7\ In separate rule filings, the Exchange will move to the
shell Rulebook certain FLEX Rules not being moved in this rule
filing. These rules include Rule 24A.6 regarding discretionary
transactions, Rule 24A.7 regarding position limits and reporting
requirements, Rule 24A.8 regarding exercise limits, and Rule 24A.13
regarding Letters of guarantee or authorizations. The Exchange notes
it will not be making any substantive changes to those Rules, but
will rather merely be moving them into the shell Rulebook (and thus
will update the rule number, as well as the paragraph lettering and
numbering), and therefore these Rules will continue to apply to FLEX
trading in the same manner they apply today.
---------------------------------------------------------------------------
Chapter XXIVA of the current Rulebook sets forth the Rules
applicable to the trading of FLEX Options on the Exchange's hybrid
trading system (i.e., trading in both open outcry and electronically).
Trading of FLEX Options is subject to all other Rules applicable to the
trading of options on the Exchange, unless otherwise specified in
Chapter XXIVA of the current Rulebook (proposed Chapter 5, Section F in
the shell Rulebook).\8\ A Trading Permit Holder (a ``TPH'') may trade
FLEX Options if the Exchange has approved the TPH to trade FLEX Options
on the Exchange; such a TPH is referred to as a ``FLEX Trader.'' \9\
Currently, FLEX Options trade on the Exchange's FLEX Hybrid Trading
System, which is the Exchange's trading platform that allows FLEX
Traders to submit electronic and open outcry request for quotes
(``RFQs''), FLEX quotes in response to those RFQs, and FLEX Orders into
the electronic book.\10\ Upon the Exchange's trading platform
migration, FLEX trading will occur on the same Exchange System \11\ as
all other options trading occurs on the Exchange.
---------------------------------------------------------------------------
\8\ See current Introduction to Chapter XXIVA and proposed Rule
5.72(a).
\9\ See current Rule 24A.1(l) in the current Rulebook and
proposed Rule 3.57 in the shell Rulebook. The proposed rule change
makes nonsubstantive changes to the definition of a FLEX Trader,
including to make the definition plain English by eliminating
passive voice and deleting the unnecessary language ``FLEX-
participating,'' as that is redundant of the provision that provides
the TPH is approved to trade FLEX Options on the Exchange.
\10\ See current Rule 24A.1(e).
\11\ The term ``System'' means the Exchange's hybrid trading
platform that integrates electronic and open outcry trading of
option contracts on the Exchange, and includes any connectivity to
the foregoing trading platform that is administered by or on behalf
of the Exchange, such as a communications hub. See Rule 1.1 in the
shell Rulebook. Because there will no longer be a separate FLEX
system, the proposed rule change deletes the definition of FLEX
Hybrid Trading System in current Rule 24A.1(e).
---------------------------------------------------------------------------
Pursuant to current Rule 24A.3, there are no trading rotations in
FLEX Options, either at the opening or at the close of trading. The
proposed rule change moves the provision that states there is no
opening rotation in FLEX Options to Rule 5.71(a) of the shell Rulebook.
The proposed rule change deletes the provisions from current Rule 24A.3
regarding the absence of closing rotations for FLEX Options, as closing
rotations do not occur in any class of options on the Exchange.
Currently, FLEX Options open for trading at a randomly selected
time within a number of seconds after 9:30 a.m. Eastern Time.\12\
Currently, the Exchange has set that number of seconds at one. Proposed
Rule 5.71(b) states the times when FLEX Traders may begin submitting
FLEX Orders into an electronic FLEX Auction pursuant to proposed Rule
5.72(c), a FLEX AIM pursuant to proposed Rule 5.73, or a FLEX SAM
pursuant to proposed Rule 5.74,\13\ or initiate an open outcry FLEX
Auction the Exchange's trading floor
[[Page 54673]]
pursuant to proposed Rule 5.72(c).\14\ Specifically, FLEX Traders may
begin submitting FLEX Orders (a) with respect to the Regular Trading
Hours (``RTH'') trading session, after the System's observation after
9:30 a.m. Eastern Time of the first disseminated (1) transaction on the
primary market in the security underlying an equity option or (2) index
value for the index underlying an index option, and (b) with respect to
the Global Trading Hours (``GTH'') trading session, after 3:00 a.m.
Eastern Time.\15\
---------------------------------------------------------------------------
\12\ See current Rule 24A.3 (the current rule includes times in
Central Time, while the proposed rule includes times in Eastern
Time, consistent with Rule 1.6 in the shell Rulebook).
\13\ The Exchange intends to amend and move current Rules 24A.5A
and 24A.5B regarding FLEX AIM and SAM Auctions, respectively, from
the currently Rulebook to Rules 5.73 and 5.74, respectively, of the
shell Rulebook in a separate rule filing.
\14\ This is consistent with current Rule 24A.3, which states
after the time at which a FLEX Option series opens for trading, a
FLEX auction may be initiated. The proposed rule change deletes the
provision that states FLEX Orders may be entered directly into the
electronic book (if available), because, as discussed below, the
Exchange will not have an electronic book available for FLEX
Options.
\15\ See Securities Exchange Act Release No. 86879 (September 5,
2019), 84 FR 47984 (September 11, 2019) (SR-CBOE-2019-034) (approval
of proposed rule change to provide that the opening rotation for
non-FLEX Options will be triggered by the same events, which are
substantially the same as those in current Rule 6.2(b)). Pursuant to
Rule 5.1(b)(3) in the shell Rulebook, Regular Trading Hours for FLEX
Options are the same as the corresponding non-FLEX Options, except
the Exchange may determine to narrow or otherwise restrict the
trading hours for FLEX Options. The rule change clarifies in Rule
5.1(b)(3)(A) that Regular Trading Hours for FLEX Options are the
same as the Regular Trading Hours for the corresponding non-FLEX
Options, as the Exchange inadvertently omitted the phrase ``the
Regular Trading Hours for'' from that Rule (therefore, the proposed
rule change makes no substantive changes to the trading hours for
FLEX Options). Additionally, pursuant to Rule 5.1(c)(1) in the shell
Rulebook, if the Exchange designates a class of index options as
eligible for trading during Global Trading Hours, FLEX Options with
the same underlying index are also deemed eligible for trading
during Global Trading Hours.
---------------------------------------------------------------------------
As discussed further below, while the Exchange currently has an
electronic book for orders for FLEX Options, it has only been used in
recent months by one customer for limited purpose, and for a minimal
amount of FLEX volume. Because of the limited usage of an electronic
book for FLEX Orders, the Exchange has determined there will be no
electronic book of resting orders for FLEX Options available following
the technology migration, which lack of availability of a FLEX Book is
consistent with current Exchange authority. Additionally, because there
will also be no opening rotation, at the time at which FLEX Trading
opens, there will be no automatic executions. Therefore, being ``open''
for FLEX trading merely means that FLEX Traders may submit FLEX Orders
into one of the various FLEX Auctions, at the conclusion of which
executions in FLEX Auctions may occur (which are all discussed below).
Because market participants incorporate transaction prices of
underlying securities or the values of underlying indexes when pricing
options (including FLEX Options), the Exchange believes it will benefit
investors for FLEX Options trading to not be available until that
information has begun to be disseminated in the market. Additionally,
the proposed trigger events occur for many underlying securities or
indexes within one second of 9:30 a.m. Eastern Time (which is
consistent with the current time at which the Exchange has determined
to open FLEX Option classes), and the majority occur within ten
seconds. Therefore, pursuant to the proposed rule change, the opening
of FLEX Options for trading may occur over a longer timeframe, which
would further reduce any potential market impact of the change to the
opening time for FLEX Options. While the Exchange believes it is
important to open series for trading as soon as possible, the Exchange
also believes the proposed rule change will permit it to manage the
number of FLEX Option series that may begin to trade during a short
time period to ensure a fair and orderly opening in all options listed
on the Exchange. The Exchange also notes that FLEX Options trading
volume currently represents approximately 1.5% of total trading volume
on the Exchange, and therefore the Exchange believes any potential
market impact of this change would be de minimis.
The proposed rule change moves the provision in current Rule 24A.3
that states a new FLEX Option series may be established on any business
day prior to the expiration date and opened for trading pursuant to the
procedures and principles for trading as provided in other rules within
current Chapter XXIV, to proposed Rule 4.21(a)(2). As described below,
other current rules have the same provision, and the Exchange does not
believe they also need to be in the rule regarding the opening of
trading, but rather in the rules regarding permissible series.\16\ The
Exchange moves these provisions to the shell Rulebook as set forth
below. The Exchange also makes nonsubstantive changes to provisions
moved from current Rule 24A.3 to proposed Rule 5.71, including changes
to make the language more plain English, update cross-references,
update times to Eastern Time, and incorporate defined terms.
---------------------------------------------------------------------------
\16\ See, e.g., current Rule 24A.4(a)(1) (which the proposed
rule change moves to proposed Rule 4.21(a)(2)). The table below
describes the proposed changes to the language of this provision.
---------------------------------------------------------------------------
Current Rule 24A.4 (and other Rules in current Chapter XXIVA) sets
forth the terms of FLEX Options. The Exchange moves these provisions to
Chapter 4, Section C of the shell Rulebook.\17\ The Exchange moves the
provisions that state the Exchange may authorize for trading a FLEX
Option class on any equity security or index if it may authorize for
trading a non-FLEX Option class on that equity security or index
pursuant to Rules 4.3 and 4.10,\18\ respectively, of the shell
Rulebook, even if the Exchange does not list that non-FLEX Option class
for trading, from current Rule 24.4A(b)(1) and (c)(1) to proposed Rule
4.20.\19\ Because the provisions related to FLEX Index Options and FLEX
Equity Options provide the Exchange with the same authority with
respect to each type of FLEX Options, the proposed rule change combines
them into a single one.
---------------------------------------------------------------------------
\17\ Chapter 4 of the shell Rulebook will contain all Rules
related to the listing of options on the Exchange.
\18\ The Exchange intends to move current Rules 5.3 and 24.2 to
Rules 4.3 and 4.10, respectively, in the shell Rulebook in a
separate rule filing.
\19\ See also proposed Rule 4.21(a) (which states the Exchange
may approve a FLEX Option series for trading on any FLEX Option
class it may authorize for trading pursuant to proposed Rule 4.20).
---------------------------------------------------------------------------
The proposed rule change moves the following provisions regarding
the terms of FLEX Option series from the current Rulebook to the shell
Rulebook. In addition to the substantive changes described below, the
proposed rule change makes additional nonsubstantive changes to these
Rules, including to make the rule text plain English, simplify the rule
provisions, use consistent language throughout the Rules, use active
voice, incorporate defined terms, update cross-references and paragraph
numbering and lettering, and eliminate redundant provisions.
[[Page 54674]]
----------------------------------------------------------------------------------------------------------------
Current rule (current Proposed rule (shell
Rule provision rulebook) rulebook) Proposed changes
----------------------------------------------------------------------------------------------------------------
FLEX Option series are not pre- Rule 24A.4(a)(1)...... Rule 4.21(a).......... The proposed rule change
established. incorporates the term FLEX
Option series (rather than
options series) into this
rule provision.
The Exchange may approve a FLEX Rule 24A.4(b)(1) and 4.21(a) (introductory The proposed rule change
Option series for trading in any (c)(1). paragraph). combines the provisions
FLEX Option class it may authorize for trading FLEX Index
for trading pursuant to proposed Options and FLEX Equity
Rule 4.20. Options into a single
provision, as they provide
the Exchange with the same
authority. As further
discussed below, a FLEX
Option series is not
created (and thus not
eligible to trade) until a
FLEX Order for the series
is submitted into one of
the FLEX Auctions.
Therefore, the proposed
rule change deletes the
reference to the Exchange
being able to ``open for
trading'' any FLEX Option
series.
A FLEX Option series is eligible Rules 24A.4(a)(1) and Rule 4.21(a) The current rule states
for trading on the Exchange upon 24A.5(a). (introductory FLEX Option series are
submission to the System of a FLEX paragraph). established through the
Order for that series pursuant to bidding and offering
proposed Rule 5.72 (as well as mechanics detailed in
Rules 5.73 and 5.74) \20\. current Rule 24A.5. As
discussed below, the
proposed rule change
amends the provisions
governing how FLEX Options
may trade on the Exchange.
A FLEX Option series may
only be eligible for
trading after submission
into one of the various
auctions available for
FLEX trading. A FLEX
Option series may be
established under current
rules upon submission of a
FLEX Order to a FLEX
auction, as is the case
pursuant to the proposed
rule change, but will no
longer be able to be
established upon
submission of a FLEX Order
into the book (as there
will be no book).\21\ See
additional discussion
below regarding the
elimination of an
electronic book for FLEX
Options.
The Exchange only permits trading Rule 24A.4, Rule 4.21(a)(1)....... The proposed rule change
in a put or call FLEX Option Interpretation and deletes the introductory
series that does not have the same Policy .02(b). clause in current Rule
exercise style, same expiration 24A.4, Interpretation and
date, and same exercise price as a Policy .02(b) that
non-FLEX Option series on the same references the requirement
underlying security or index that that options on an
is already available for trading. underlying security or
This includes permitting trading index to be otherwise
in a FLEX Option series before a eligible for FLEX Trading,
series with identical terms is as that language is
listed for trading as a non-FLEX redundant of the language
Option series. If the Exchange in proposed Rule 4.21(a).
lists for trading a non-FLEX The proposed rule change
Option series with identical terms also eliminates the use of
as a FLEX Option series, the FLEX passive voice and makes
Option series will become fungible other nonsubstantive
with the non-FLEX Options series changes to this provision.
pursuant to proposed Rule 4.22.
The System does not accept a FLEX
Order for a put or call FLEX
Option series if a non-FLEX Option
series on the same underlying
security or index with the same
expiration date, exercise price,
and exercise style is already
listed for trading.
A FLEX Order for a FLEX Option Rule 24A.3 and Rule Rule 4.21(a)(2)....... Updated to reflect the
series may be established on any 24A.4(a)(1). proposed changes to the
trading day prior to the FLEX trading procedures,
expiration date. which provide that a FLEX
Option series is only
available for trading upon
submission of a FLEX Order
(as noted above).
The Exchange may halt trading in a N/A................... Rule 4.21(a)(3)....... This provision is not
FLEX Option class pursuant to Rule explicitly stated in
5.20, and always halts trading in current Chapter XXIV.
a FLEX Option class when trading However, it is consistent
in a non-FLEX Option class with with Exchange authority to
the same underlying equity halt trading in options
security or index is halted on the classes listed for trading
Exchange. The System does not on the Exchange (see
accept a FLEX Order for a FLEX current Rules 6.3 and
Option series while trading in a 24.7, which were moved to
FLEX Option class is halted. Rule 5.20 in the shell
Rulebook), and current
Exchange practice. The
reasons why the Exchange
would halt trading in a
non-FLEX Option class
(e.g., trading in the
underlying security is
halted) would generally be
reasons why the Exchange
would halt a FLEX Option
class, and therefore the
Exchange will always halt
trading in a FLEX Option
class when trading in a
non-FLEX Option class with
the same underlying equity
security or index is
halted on the
Exchange.\22\
When submitting a FLEX Order for a Rules 24A.1(w) and Rule 4.21(b).......... The current definition of a
FLEX Option series to the System, 24A.4(a)(2). series of FLEX Options
the submitting FLEX Trader must (the proposed rule change
include one of each of the uses the term FLEX Option
following terms in the FLEX Order, series) is all option
which terms constitute the FLEX contracts of the same
Option series. class having the same
exercise price, exercise
style, and expiration date
(and with respect to FLEX
Index Options, the same
settlement value and index
multiplier). The current
Rules also require a FLEX
Request for Quotes
(``RFQ''), FLEX Order, or
FLEX Option contract
contain one element from
the categories of
underlying security, type,
exercise style, expiration
date, and exercise price.
As noted above, a FLEX
Option series may only be
established through the
submission of a FLEX
Order, and therefore, the
proposed rule change
combines the provisions to
provide that a FLEX Order
must contain one element
of each of the listed
terms, which terms
constitute the actual FLEX
Option series being
established by that order.
underlying equity security Rules 24A.1(m) and Rule 4.21(b)(1)....... The proposed rule change
or index, as applicable (the index 24A.4(a)(2)(i). simplifies the language of
multiplier for FLEX Index Options this provision and
is 100). includes the fact that the
index multiplier for all
FLEX Index Options is 100
in this provision, rather
than in a definition, as
the term index multiplier
is not otherwise used in
the proposed rule.
type of option (i.e., put Rule 24A.4(a)(2)(ii), Rule 4.21(b)(2)....... The proposed rule change
or call), except an Asian-settled (b)(5) and (6). refers to type of option,
or Cliquet-settled FLEX Option which is defined in Rule
series may only be a call. 1.1 in the shell Rulebook
as put or call. The
proposed rule change also
combines the provisions
regarding the permissible
type of option available
for Asian-settled and
Cliquet-settled FLEX
Options, so that
provisions regarding types
of options available for
FLEX Option series are
included in the same
place.
exercise style, which may Rules 1.1(aa) and (cc) Rule 4.21(b)(3)....... Only nonsubstantive
be American-style or European- and 24A.4(a)(2)(iii). changes.
style, except an Asian-settled or
Cliquet-settled FLEX Option series
may only be European-style.
[[Page 54675]]
expiration date, which may Rule 24A.4(a)(2)(iv), Rule 4.21(b)(4)....... The proposed rule change
be any business day (specified to (a)(5), and (a)(6). incorporates the concept
the day, month, and year) no more that a FLEX Option series
than 15 years from the date on is available for trading
which a FLEX Trader submits a FLEX only when a FLEX Trader
Order to the System, except an submits a FLEX Order to
Asian-settled or Cliquet-settled the System, and therefore
FLEX Option series, which must the date on which the FLEX
have an expiration date that is a Order is submitted is the
business day but may only expire date from which the
350 to 371 days (which is expiration date is
approximately 50 to 53 calendar measured (this is
weeks) from the date on which a consistent with FLEX
FLEX Trader submits a FLEX Order trading today, pursuant to
to the System. which a FLEX series may
only be opened for trading
through the RFQ process).
The proposed rule change
also includes all
provisions regarding
permissible expiration
dates in the same place.
settlement type \23\:
[cir] FLEX Equity Options are Rules 24A.1(aa) Rule 4.21(b)(5)....... The proposed rule change
(i) settled with physical through (cc) and uses the term ``settlement
delivery of the underlying 24A.4(a)(2)(iv) and type'' to describe all
security; and (ii) subject to (b)(3) through (6), potential ways in which
the exercise by exception (c)(3) through (4), the settlement value will
provisions of OCC Rule 805. and Interpretation be determined (current
and Policy .01. rules also use the term
settlement style), and
includes all provisions
regarding the permissible
settlement types in a
single place.
[cir] FLEX Index Options are
settled in U.S. dollars and
may be:
(i) a.m.-settled; \24\
(ii) p.m.-settled,\25\, or
(iii) for a FLEX Index
Option on a broad-based
index, Asian-settled or
Cliquet-settled (which
have unique settlement
procedures); \26\
exercise price (which the Rule 24A.4(a)(2)(v), Rule 4.21(b)(6)....... The proposed rule change
System rounds to the nearest (b)(2)(i) and (iii), includes all provisions
minimum increment), which may be (b)(6), and (c)(2)(i) regarding permissible
(1) for a FLEX Equity Option or and (iii). exercise prices in a
FLEX Index Option that is not single place within the
Cliquet-settled, (a) a fixed price Rules. In addition to the
expressed in terms of dollars and exercise price options in
cents or a specific index value, proposed Rule 4.21(b)(6),
as applicable, or (b) a percentage current Rule 24A.4(b)(2)
of the closing value of the and (c)(2) permits
underlying equity security or exercise prices for FLEX
index, as applicable, on the trade Index Options to be
date; or (2) for a FLEX Index specified as a method for
Option that is Cliquet-settled, fixing an index value or
the capped monthly return (which dollar amount at the time
must be expressed in dollars and of a FLEX RFQ or a FLEX
cents). Order is traded, or as a
percentage of the index
value calculated at the
time of the trade, and for
FLEX Equity Options, to be
specified as a method for
fixing a dollar amount at
the time of a FLEX RFQ or
a FLEX Order is traded, or
as a percentage of the
price of the underlying
security at the time of
the trade. In the past
year, no FLEX Trader has
designated the exercise
price for a FLEX series in
any of these manners--FLEX
Traders have only
designated the exercise
price for a series as a
fixed price or as a
percentage of the closing
value of the underlying on
the trade date. Therefore,
the Exchange proposes to
only offer the two options
for exercise prices for
FLEX Options that are used
by FLEX Traders.\27\
Because FLEX Traders do
not use the other types of
exercise prices for FLEX
Options, the Exchange
believes elimination of
that functionality will
have a de minimis, if any,
impact on FLEX trading.
All other terms of a FLEX Rule 24A.4(a)(1)...... Rule 4.21(b).......... Only nonsubstantive changes
Option series are the same as of types described above.
those that apply to non-FLEX
Options.
Bids and offers for FLEX Options Rules 24A.4(b)(2) and Rule 5.3(e)(3) \29\... The proposed rule change
must be expressed in (a) U.S. (c)(2) and 24A.5(e). adds the term ``dollars
dollars and decimals, if the and decimals'' regarding
exercise price for the FLEX Option how bids and offers
series is a fixed price, or (b) a (currently referred to as
percentage, if the exercise price premiums in Rule 24A.4(b)
for the FLEX Option series is a and (c)) \30\ to be
percentage of the closing value of consistent with
the underlying equity security or terminology in Rule 5.3 in
index on the trade date, per unit the shell Rulebook (this
of the underlying security or is merely a change in
index, as applicable.\28\ The terminology). The proposed
System rounds bids and offers to rule change moves the
the nearest minimum increment. provisions regarding the
form of bids and offers of
FLEX Options to Rule 5.3
in the shell Rulebook, so
that all provisions
regarding the form of bids
and offers for all options
eligible for trading on
the Exchange are included
in a single Rule. The
proposed rule change adds
detail that the bid and
offer amount is per unit
of the underlying security
or index, as applicable.
This is true today and is
merely adding detail to
the rules.\31\ The
proposed rule change makes
no substantive changes to
the form and manner in
which FLEX Traders may
make bids and offers on
FLEX Options.
The Exchange determines the minimum Rules 24A.4(b)(2) and Rule 5.4(c)(4) \33\... The proposed rule change
increment for bids and offers on (c)(2) and 24A.5(e) moves the provisions
FLEX Options on a class-by-class \32\. regarding the minimum
basis, which may not be smaller increment for FLEX Options
than (a) $0.01, if the exercise to Rule 5.4 in the shell
price for the FLEX Option series Rulebook, so that all
is a fixed price, or (b) 0.01%, if provisions regarding
the exercise price for the FLEX permissible minimum
Option series is a percentage of increments for all options
the closing value of the eligible to trade on the
underlying equity security or Exchange are included in a
index on the trade date. The single Rule.\34\
System rounds bids and offers to
the nearest minimum increment.
FLEX Traders may apply trade Rules 24A.1(y), N/A................... Currently, FLEX Traders may
conditions to FLEX Orders. 24A.4(a)(3)(ii) and designate FLEX Orders as
(4)(ii), and immediate-or-cancel
24A.5(d)(3) \35\. (``IOC''), which executes
(in whole or in part) as
soon as it is represented
or is cancels (or the
unexecuted portion
cancels). As further
discussed below, the will
not make a FLEX Book
available following the
technology migration.
Because there will be no
book, all FLEX Orders will
be functionally equivalent
to an IOC, which can only
trade (or partially trade)
following an auction, and
thus no designation will
be necessary.\36\
Additionally, FLEX Traders
may currently designate a
FLEX Order as a ``hedge,''
which is an electronic
condition that makes
execution of a FLEX Option
contingent on the trade of
an execution in a non-FLEX
Option or other non-FLEX
components. In the past
year, no FLEX Trader has
applied this trade
condition to a FLEX Order.
Therefore, the Exchange no
longer intends to offer
this trade condition for
FLEX Options. Because FLEX
Traders do not use this
trade condition for FLEX
Options, the Exchange
believes elimination of
this functionality will
have a de minimis, if any,
impact on FLEX trading.
[[Page 54676]]
Fungibility of FLEX Options........ Rule 24A.4, Rule 4.22............. The proposed rule change
Interpretation and makes no substantive
Policy .02. changes to the fungibility
of FLEX Options with non-
FLEX options, and makes
various nonsubstantive
changes of the type
described above. The
proposed rule change
updates terminology in the
proposed provision to
reflect changes to the
FLEX trading procedures,
which are described below,
and updates cross-
references to applicable
Rules in the shell
Rulebook. The proposed
rule change adds a cross-
reference to the rule
(Rule 5.1(d) in the shell
Rulebook) that lists
Exchange holidays rather
than use the term
``Exchange holiday'' so
that market participants
will know where in the
Rules to look to know what
constitutes an Exchange
holiday. The proposed rule
change deletes the phrase
that states Interpretation
and Policy .02 (proposed
Rule 4.22) applies to all
FLEX Options. The proposed
rule lists no exceptions
for when this provision
applies to FLEX Options,
and therefore this phrase
is unnecessary.
----------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------
\20\ As noted above, the Exchange intends to move current Rules
24A.5A and 24A.5B regarding FLEX AIM and SAM Auctions, respectively,
to Rules 5.73 and 5.74, respectively, in the shell Rulebook in a
separate filing.
\21\ The Exchange notes there is an electronic book available
for FLEX Options today, but only being used by one FLEX Trader for a
limited purpose, as further discussed below, and only for
approximately 1.2% of FLEX trading. Therefore, the vast majority of
FLEX Option series are established for trading today in the same
manner as they will be able to be established pursuant to the
proposed rule change. See current Rule 24A.5(a) (which states the
Request for Quotes (``RFQ'') process is required to open trading in
a new series (unless the auction process under Rule 24A.5A or 24A.5B
is used to open trading in a new series); and (b).
\22\ Rule 5.20 in the shell Rulebook also provides the Exchange
with authority to halt trading in a FLEX Option, even if trading in
a non-FLEX Option with the same underlying is not halted. While such
situation would be rare, there may be unusual circumstances that
would cause the Exchange to halt trading in the FLEX Option (see
Rule 5.20(a)(5) in the shell Rulebook).
\23\ FLEX Index Options are cash-settled in U.S. dollars, and
FLEX Equity Options are physical settled, subject to the exercise by
exception provisions of Options Clearing Corporation (``OCC'') Rule
805. See current Rule 24A.4(b)(4) and (c)(3) and (4) (proposed Rule
4.21(a)(5)).
\24\ The exercise settlement value for an a.m.-settled FLEX
Index Option series is determined by reference to the reported level
of the index derived from the reported opening prices of the
component securities. See current Rule 24A.4(b)(3) (proposed Rule
4.21(b)(5)(A)). The proposed rule change eliminates the defined term
Expiration Friday, as it is not used elsewhere in the Rules. The
proposed rule change deletes the provision regarding the exercise
settlement value of FLEX Index Options on the NYSE Composite Index,
as the Exchange no longer lists options on that index for trading.
The proposed rule change includes the provisions regarding how the
exercise settlement value is determined for each settlement type, as
how the exercise settlement value is determined is dependent on the
settlement type.
\25\ The exercise settlement value for a p.m.-settled FLEX Index
Option series is determined by reference to the reported level of
the index derived from the reported closing prices of the component
securities. See current Rule 24A.4(b)(3) (proposed Rule
4.21(b)(5)(B)). A FLEX Index Option that expires on any business day
that falls on or within two business days of a third Friday-of-the-
month for a non-FLEX Option (other than a QIX option) may only be
a.m.-settled; however, FLEX Index Options with an expiration date on
the third-Friday of the month may be p.m.-settled pursuant to a
pilot program ending the earlier of November 4, 2019 or the date on
which the pilot program is approved on a permanent basis. See
current Rule 24A.4, Interpretation and Policy .01 (proposed Rule
4.21(a)(5)(B)).
\26\ Asian-settled FLEX Index Options have an exercise
settlement value based on an arithmetic average of the specified
closing prices of an underlying broad-based index taken on 12
predetermined monthly observation dates (including on the expiration
date), which dates the FLEX Trader specifies. Cliquet-settled FLEX
Index Options have an exercise settlement value equal to the greater
of $0 or the sum of capped monthly returns (i.e., percent changes in
the closing value of the underlying broad-based index from one month
to the next) applied over 12 predetermined monthly observation dates
(including an expiration date), which dates and monthly cap value
(which must be no smaller than $0.05 and no larger than $25.95, and
in an increment of $0.05) the FLEX Trader specifies. For Asian- and
Cliquet-settled FLEX Index Options, if a monthly observation date
falls on a non-business day, the monthly observation occurs on the
immediately preceding business days. See current Rule 24A.1(aa)
through (cc) and 24A.4(b)(5) and (6) (proposed Rule 4.21(b)(5)(C)
and (D)). The proposed rule change deletes the definition of
``preceding business day convention'' and incorporates its meaning
into the descriptions of each of Asian-settled and Cliquet-settled,
as that defined term is not otherwise used in the Rules, and also
incorporates the defined term ``business day.'' See Rule 1.1 in the
shell Rulebook.
\27\ The proposed rule change also deletes current Rule 24A.5,
Interpretation and Policy .02, which relates only to FLEX Options
with exercise prices specified using the terms that the proposed
rule change deletes (i.e., exercise prices for FLEX Index Options
specified as a method for fixing an index value or dollar amount at
the time of a FLEX RFQ or a FLEX Order is traded, or as a percentage
of the index value calculated at the time of the trade, and for FLEX
Equity Options, specified as a method for fixing a dollar amount at
the time of a FLEX RFQ or a FLEX Order is traded, or as a percentage
of the price of the underlying security at the time of the trade),
and any other provisions in Rules 24A.1, 24A.4, and 24A.5 related to
these exercise types.
\28\ While the current rule permits bids and offers to be in a
different format than the exercise price, the current functionality
does not permit this. Therefore, the proposed rule change makes it
clear that bids and offers must be in the same format as the
exercise price, as it would be difficult to apply a dollar price for
a FLEX Option series with a percentage-based exercise price.
\29\ The proposed rule change also updates the subparagraph
numbering in Rule 5.3(e) in the shell Rulebook.
\30\ The term ``premium'' refers to the prices at which a market
participant is willing to trade an option, which is also referred to
as a bid or offer. The proposed rule change just uses the terms bids
and offers in proposed Rule 5.3(e)(3), which is consistent with the
bid and offer provisions for other types of options in Rule 5.3 in
the shell Rulebook.
\31\ It is also consistent with language applicable to bids and
offers in non-FLEX Options. See Rule 5.3(a) in the shell Rulebook.
\32\ The proposed rule change deletes the provision regarding
the Exchange's pronouncement of minimum increments for FLEX by
regulatory circular, as the Exchange will announce all
determinations pursuant to Rule 1.5 in the shell Rulebook (see also
Rule 1.2 in the current Rulebook).
\33\ The proposed rule change also updates the subparagraph
numbering in Rule 5.4(c) in the shell Rulebook.
\34\ The Exchange notes the current rules reference the term
``minimum tick'' as well as ``other decimal increment.'' The term
``minimum tick'' generally refers to the minimum increment
applicable to an option, which in non-FLEX trading is a dollar
amount. Because FLEX Options may also have a minimum increment in a
percentage, that is included in the reference in the current rules
to ``other decimal increment.'' However, the Exchange believes the
term ``minimum increment'' applies to both formats (dollars and
percentage), and therefore eliminates the reference to tick.
\35\ The proposed rule change deletes all additional provisions
in current Chapter XXIVA of the current Rulebook related to these
trade conditions.
\36\ As set forth in proposed Rule 5.72(c)(3)(B), and as
discussed below, a FLEX Order may trade in whole or in part
following an electronic FLEX Auction, as any unexecuted FLEX Order
(or unexecuted portion) cancels at the conclusion of the auction.
---------------------------------------------------------------------------
Pursuant to Rule 5.6(a) in the shell Rulebook, the Exchange may
make order types, Order Instructions, and Times-in-Force available on a
class basis. Pursuant to that authority, which authority the Exchange
currently has pursuant Rule 6.53 in the current Rulebook, the proposed
rule change adopts Rule 5.70(a) in the shell Rulebook to state that it
may make the following order types, Order Instructions, and Times-in-
Force available for orders submitted in FLEX Options (``FLEX Orders''):
\37\
---------------------------------------------------------------------------
\37\ See Rule 5.6 in the shell Rulebook for definitions of these
order types, Order Instructions, and Times-in-Force. The proposed
rule change deletes the corresponding current definition of FLEX
Order in current Rule 24A.1(j). The only proposed substantive change
to the definition of FLEX Order is the deletion of the reference to
the submission of FLEX Orders to the electronic book, as there will
no longer be a FLEX Book available (consistent with the Exchange's
current authority to not make a FLEX Book available), as discussed
below. Because all FLEX Traders, including FLEX Market-Makers, will
submit FLEX Orders, and responses to FLEX Auctions, in the same
manner, the proposed rule change does not distinguish between bids
and offers submitted by different types of FLEX Traders, and also
deletes the defined term ``FLEX Quote'' from current Rule 24A.1(k).
[[Page 54677]]
---------------------------------------------------------------------------
Order Types--limit orders
Order Instructions--All Sessions, Attributable, Direct to PAR,
Electronic Only, Non-Attributable, Not Held, and RTH Only
Times-in-Force--Day
Given that FLEX Orders will only be eligible to trade following an
electronic or open outcry FLEX Auction and not rest in an electronic
book or route away (for which most Order Instructions and Times-in-
Force set forth in Rule 5.6 in the shell Rulebook are relevant), the
Exchange believes these are appropriate designations for FLEX Orders.
Because there is no existing market for FLEX Options, and thus no price
protections available to ensure execution of FLEX Orders at reasonable
prices, the Exchange believes it is appropriate to only permit FLEX
Options be submitted as limit orders. The Direct to PAR and Electronic
Only Order Instructions permit a FLEX Trader to determine whether it
wants a FLEX Order to be eligible for electronic execution or subject
to manual handling for execution in open outcry on the Exchange's
trading floor. Additionally, as set forth in Rule 5.1(c) of the shell
Rulebook, following the migration the Exchange may designate certain
FLEX Option classes as eligible for trading during the Global Trading
Hours sessions, and the All Sessions and RTH Only designations will
permit a FLEX Trader to determine in which trading session(s) it wants
a FLEX Order to be eligible for execution. While not specified in the
Rules, FLEX Traders may designate a FLEX Order as Attributable
(pursuant to the Exchange's authority pursuant to current Rule 6.53,
which permits the Exchange to make certain order types available on a
class basis). FLEX Orders not designated as Attributable will be Non-
Attributable.\38\
---------------------------------------------------------------------------
\38\ See definitions of ``Attributable Order'' and ``Non-
Attributable Order'' in current Rule 6.53 (Rule 5.6(c) in the shell
Rulebook). Attribution has no impact on trading, and merely relates
to information that a FLEX Trader may want disseminated with respect
to its orders.
---------------------------------------------------------------------------
Current Rules 24A.4(a)(2) and 24A.5, Interpretation and Policy .01
contemplate the availability of complex orders for FLEX trading.
Proposed Rule 5.70(b) explicitly states the Exchange may make complex
orders, including security future-option orders and stock-option
orders,\39\ available for FLEX trading. Complex FLEX Orders may have up
to the maximum number of legs determines by the Exchange. Each leg of a
complex FLEX Order:
---------------------------------------------------------------------------
\39\ See definition of complex order in Rule 1.1 of the current
Rulebook and Rule 1.1 of the shell Rulebook, which provide that
unless the context otherwise requires, the term ``complex order''
includes a stock-option order and a security future-option order.
Additionally, proposed Rule 5.70(b) is consistent with current
Exchange authority to determine in which classes complex orders
(including FLEX classes) may be made available for trading, and to
determine the maximum number of legs for a complex order. See
definition of complex order in Rule 1.1 of the current Rulebook
(which states the Exchange determines in which classes complex
orders are eligible for processing). The proposed rule change merely
states this authority explicitly for FLEX complex orders.
---------------------------------------------------------------------------
Must be for a FLEX Option series authorized for trading
\40\ with the same underlying equity security or index; \41\
---------------------------------------------------------------------------
\40\ Current Rule 24A.4(a)(2) provides that each component of a
multi-legged RFQ or FLEX Order must contain the information required
for a FLEX series, as specified in that Rule and in proposed Rule
4.21(b).
\41\ This is consistent with current Rules (see Rule 1.1 of the
current Rulebook and Rule 1.1 of the shell Rulebook), as a complex
order may consist of legs in multiple series in the same class
(i.e., the same underlying security or index). Therefore, the
proposed rule change merely explicitly states this in the rules for
FLEX Option complex orders.
---------------------------------------------------------------------------
must have the same exercise style (American or European);
and
for a FLEX Index Option, may have different settlement
types (a.m.-settled or p.m.-settled),\42\ except each leg must have the
same settlement type if designated as Asian-settled or Cliquet-settled.
---------------------------------------------------------------------------
\42\ The current Rules does not restrict legs of a complex order
to all be either a.m.-settled or p.m.-settled.
The Exchange believes requiring the legs of a FLEX Option complex order
to have the same exercise style is appropriate given the conflict that
would arise with legs with different exercise styles. Similarly, the
Exchange believes requiring the legs of a FLEX Option complex order to
have the same settlement type for Asian-settled and Cliquet-settled
FLEX Index Options is appropriate given the complex nature of those
settlement types. The Exchange believes this may alleviate any
potential difficulties that may arise if the market needed to price
such complex strategies. The Exchange notes it has not receive any
complex orders at least within the last year that have legs with
difference exercise styles, or that have legs that are Asian-settled
and Cliquet-settled with other legs that have a different settlement
types.
Proposed Rule 5.70(c) states a FLEX Trader may enter a FLEX Order
into the System during the times set forth in Rule 5.7 of the shell
Rulebook.\43\ This proposed rule change merely applies the rule that
sets forth the times at which the System is available to receive orders
to FLEX Orders. The System only available for receipt of a FLEX Order
at the times at which the System is available for all other orders.
---------------------------------------------------------------------------
\43\ Rule 5.7 in the shell Rulebook provides that Users can
enter orders and quotes into the System, or cancel previously
entered orders and quotes, from 2:00 a.m. Eastern Time until Regular
Trading Hours market close, subject to certain terms and conditions.
---------------------------------------------------------------------------
A FLEX Trader must designate a FLEX Order entered prior to the
opening of the applicable trading session or during a trading halt as
Direct to PAR; the System rejects a FLEX Order designated as Electronic
Only prior to the opening of the applicable trading session or during a
trading halt. As discussed below, there will be no electronic book in
which FLEX Orders may rest, and FLEX Orders may only be submitted for
electronic execution into a FLEX auction. Therefore, a FLEX Order
designated for electronic execution would have nowhere to rest if
submitted when trading on the Exchange is not open. Because a FLEX
Order designated as Direct to PAR (like any order designated as Direct
to PAR) would rest on a PAR workstation and be available for manual
handling by a Floor Broker after the opening of trading, there is not
risk of execution of such an order submitted to the Exchange while
trading is not available on the Exchange.
Proposed Rule 5.72 describes the procedures for FLEX trading on the
Exchange following the migration. As noted above, trading of FLEX
Options is subject to all other Rules applicable to the trading of
options on the Exchange, unless otherwise provided in proposed Chapter
5, Section F of the shell Rulebook.\44\ Because there will be no
electronic book available in which FLEX Orders may rest,\45\ a FLEX
Option series is only eligible for trading if a FLEX Trader (the
``Submitting FLEX Trader'') (a) submits a FLEX Order for that series
into an electronic FLEX Auction pursuant to proposed Rule 5.72(c) (as
described below); (b) represents the FLEX Order in an open outcry FLEX
Auction pursuant to proposed Rule 5.72(d) (as described below); or
submits the FLEX Order to a FLEX AIM or SAM Auction pursuant to Rule
5.73 or 5.74, respectively, of the shell Rulebook.\46\
[[Page 54678]]
This is consistent with current Rule 24A.5(a), which states the current
RFQ process is required to open trading in a new series (unless the
auction process in current Rules 24A.5A or 24A.5B (current Rules
describing FLEX AIM and SAM Auctions, respectively) is used to open
trading in a new series), which RFQ process may be conducted through
the System or in open outcry. The proposed rule change only makes
nonsubstantive changes, including to update rule cross-references and
conform terminology to the proposed trading procedures.
---------------------------------------------------------------------------
\44\ See proposed Rule 5.72(a) (current Chapter XXIV,
Introduction).
\45\ This is consistent with current Exchange authority pursuant
to current Rule 24A.5(b) to not make an electronic book available
for FLEX Auctions.
\46\ See proposed Rule 5.72(b).
---------------------------------------------------------------------------
The proposed rule change makes explicit the requirements for both
simple and complex FLEX Orders:
A FLEX Order for a FLEX Option series submitted to the
System must include all terms for a FLEX Option series set forth in
Rule 4.21 (including that a non-FLEX Option series with identical terms
is not listed for trading), size, side of the market, and a bid or
offer price, subject to the order entry requirements set forth in Rule
5.7 of the shell Rulebook.\47\
---------------------------------------------------------------------------
\47\ See proposed Rule 5.72(b)(1).
---------------------------------------------------------------------------
A FLEX Order for a FLEX Option complex strategy submitted
to the System must satisfy the criteria for a complex FLEX Order set
forth in proposed Rule 5.70(b) (see discussion above) and include size,
side of the market, a net debit or credit price, and a bid or offer
price for each leg of the FLEX Order, which leg prices must add
together to equal the net price.\48\ Additionally, each leg of the FLEX
Option complex strategy must include all terms for a FLEX Option series
set forth in Rule 4.21 (including that a non-FLEX Option series with
identical terms is not listed for trading), subject to the order entry
requirements set forth in Rule 5.7 of the shell Rulebook.\49\
---------------------------------------------------------------------------
\48\ As discussed below, current Rules requires a FLEX Trader to
input leg prices for a complex FLEX Order following a transaction.
The proposed rule change merely moves the requirement to input this
information upon submission of the FLEX Order, rather than following
a transaction.
\49\ See proposed Rule 5.72(b)(2).
---------------------------------------------------------------------------
These proposed order requirements are consistent with current Rule
24A.4(a)(2), 24A.4(a)(3)(iv), and 24A.4(a)(4). Those current provisions
state every RFQ Order must contain one element from each contract term
category and the same transaction specifications as the related RFQ
(and any additional trade conditions, which as discussed below, will no
longer be available following migration), and that every RFQ Order must
contain the quote type and form sought (i.e., the RFQ order must
specify whether it seeks bids or offers, the size of the order, whether
it seeks responses as a dollar amount or percentage, and contingencies
and trade conditions (which will no longer be available following
migration)). Additionally, with respect to complex orders, the current
rules add that each component series in a multilegged FLEX RFQ or FLEX
Order must include all terms of a FLEX Option series. As discussed
above, pursuant to the proposed rule change, bids and offers for a FLEX
Option series must be expressed in dollars and decimals, if the
exercise price of the series is a fixed price, or as a percentage, if
the exercise price of the series is a percentage of the closing value
of the underlying equity security or index. Therefore, the proposed
rule change does not require the submission of a FLEX Order to identify
whether it seeks bid and offer responses in the form of a dollar amount
or percentage, as that is dictated by the format of the exercise price
of the FLEX Option series in the FLEX Order. Rule 5.7 of the shell
Rulebook includes provisions that apply to all order submitted to the
Exchange, including FLEX Orders. Therefore, the proposed rule change
makes no substantive changes to the required information for a simple
FLEX Order, and makes only nonsubstantive changes to the language in
the proposed provision.
Current Rule 24A.5 describes how electronic and open outcry trading
in FLEX Options may occur on the Exchange today.\50\ To initiate an
electronic RFQ,\51\ a TPH (the ``Submitting TPH'') \52\ submits an RFQ
with the terms of a FLEX Option series, as well as whether the
Submitting TPH is requesting a bid, offer, or both.\53\ The System then
communicates the terms of the RFQ to FLEX Traders.\54\ Only one
electronic RFQ may be ongoing at a given time in a series, and
electronic RFQs may not overlap or queue.\55\ During the RFQ Response
Period (which is the period of time during which FLEX Traders may
provide bids and offers in response to RFQs),\56\ FLEX Traders
(including the Submitting TPH) \57\ may then submit bids and offers in
response to the RFQ, which they may withdraw during that period.\58\
Current Rule 24A.5(a)(1)(ii)(A) does not permit options market-makers
from another options exchange to enter bids and offers (currently
referred to in the Rules as FLEX Quotes (see current Rule 24A.1(k)) in
response to an RFQ. The Exchange does not believe this restriction is
necessary and proposes to delete it, and therefore permit all FLEX
Traders to provide liquidity in electronic FLEX auctions. The Exchange
believes permitting additional participants to submit responses to FLEX
Auctions will provide the opportunity for additional liquidity in these
auctions, which could lead to additional price improvement
opportunities.
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\50\ Current Rule 24A.5, Interpretation and Policy .01 describes
how the electronic RFQ process applies to complex FLEX Orders, which
the proposed rule change also deletes, as complex FLEX orders will
trade electronically in the same manner as simple FLEX orders.
\51\ See current Rule 24A.5(a)(1) for a description of the
electronic RFQ process.
\52\ This proposed definitions replaces the current definition
of a Submitting TPH in current Rule 24A.1(x), which the proposed
rule change deletes. The proposed rule change also deletes the
provision in current Rule 24A.1(x) regarding the ability of a
Submitting TPH to submit a FLEX Order into an electronic book, as
there will be no electronic book available following the migration.
\53\ See current Rules 24A.4(a)(3)(i) and 24A.5(a)(1)(i)(A).
\54\ See current Rule 24A.5(a)(1)(i)(B).
\55\ Id.
\56\ See current Rule 24A.1(u).
\57\ Pursuant to Rule 1.1 in the shell Rulebook, a User must
specify the Capacity (which is defined in Rule 1.1 of the shell
Rulebook as the capacity in which a User submits an order, which the
User specifies by applying the corresponding code to the order; the
Exchange notes the various Capacity codes listed in Rule 1.1 will be
available for FLEX Orders) of each order upon submission to the
Exchange (Rule 5.7(f) in the shell Rulebook requires at least the
information specified in that rule to be input upon submission of an
order prior to representation on the Exchange, and requires any
additional information with respect to that order to be input
contemporaneously). While responses to FLEX Auctions will no longer
be restricted by Capacity, the Exchange uses Capacity information
for a variety of reasons, including prioritization in certain
transactions as well as several surveillances for compliance with
various regulatory obligations.
\58\ See current Rule 24A.5(a)(1)(ii)(B). The proposed rule
change permits responses to be modified or cancelled, as opposed to
just cancelled/withdrawn. Modification of a response is equivalent
to cancelling and reentering a response, which is permitted under
the current rule, and is merely a different type of message to
accomplish the same thing. The proposed rule change deletes the
reference to the obligations of a FLEX Appointed Market-Maker from
that provision in the current Rules, as the Exchange does not
currently have any FLEX Appointed Market-Makers and does not intend
to in the future, and thus is deleting provisions related to FLEX
Appointed Market-Makers from the Rules.
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Currently, the Submitting TPH may designate the length of the RFQ
Response Period when initiating the RFQ, which time must be within a
time range established by the Exchange and not less than three
seconds.\59\ During the RFQ Response Period, the System calculates and
disseminates the then-current market given current FLEX orders and
quotes.\60\ At the conclusion of the RFQ Response Period, the
Submitting TPH may accept or reject the
[[Page 54679]]
bids and offers submitted during the RFQ Response Period within an RFQ
Reaction Period, the length of which the Exchange determines on a
class-by-class basis and may not be more than five minutes.\61\ During
the RFQ Reaction Period, FLEX Traders may continue to submit or cancel
responses, and the Submitting TPH may accept bids and offers or cancel
the RFQ (or let it expire).\62\ During the RFQ Reaction Period, the
System calculates and disseminates the then-current market given
current FLEX orders and quotes.\63\
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\59\ See current Rule 24A.4(a)(3)(iii); see also Cboe Options
Regulatory Circular RG12-056 (April 20, 2012) (which sets the
current range for RFQ Response Periods as three seconds to ten
minutes).
\60\ See current Rule 24A.5(a)(1)(ii)(C).
\61\ See current Rule 24A.5(a)(1)(iii)(A). Currently, the
Exchange has set the maximum time of the Reaction Period at three
minutes. See Cboe Options Regulatory Circular RG12-056 (April 20,
2012).
\62\ See current Rule 24A.5(a)(1)(iii)(B)(I) and (III). The
proposed rule change deletes the reference to the obligations of a
FLEX Appointed Market-Maker from that provision in the current
Rules, as the Exchange does not currently have any FLEX Appointed
Market-Makers and does not intend to in the future, and thus is
deleting provisions related to FLEX Appointed Market-Makers from the
Rules. The proposed rule change also deletes the provision regarding
the inability to submit FLEX Orders to the electronic book during
the RFQ Reaction Period, as there will be no electronic book for
FLEX Orders, as further discussed below.
\63\ See current Rule 24A.5(a)(1)(iii)(B)(II).
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If the Submitting TPH chooses to trade, it may enter the RFQ Order
to trade with one side of the market provided by the RFQ.\64\ The FLEX
Order will trade with contra-side interest first at the best prices. If
there are multiple bids or offers available at the same price, then the
FLEX Order is allocated as follows:
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\64\ See current Rule 24A.5(a)(1)(iii)(B)(IV). If the Submitting
TPH enters a response during the RFQ Reaction Period, it must bid or
offer for at least the crossing exposure period prior to entering
the FLEX Order (which period the Exchange establishes on a class-by-
class basis and may not be less than three seconds, which the
Exchange has currently established as three seconds).
---------------------------------------------------------------------------
Bids and offers for the account of public customers and
non-TPH broker-dealers in time priority;
bids and offers of a FLEX Appointed Market-Maker if the
Exchange has applied a participation entitlement; \65\ and
---------------------------------------------------------------------------
\65\ See current Rule 24A.5(d)(2)(ii). Current Rule 24A.1(h)
defines a ``FLEX Market-Maker'' as a FLEX Trader (see proposed Rule
3.57 in the shell Rulebook) that is appointed as a FLEX Appointed
Market-Maker or a FLEX Qualified Market-Maker, each as described in
current Rule 24A.9. The proposed rule change intends to move the
definition of a FLEX Market-Maker, as well as the rule provisions
regarding the roles of a FLEX Market-Maker, to the shell Rulebook in
a separate rule filing.
---------------------------------------------------------------------------
all other bids and offers in time priority.
Any remaining balance of the FLEX Order would enter the FLEX Book
(if the Exchange made a FLEX Book available) or be cancelled (if there
was no FLEX Book). The Submitting TPH has no obligation to accept any
FLEX bid or offer.\66\
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\66\ See current Rule 24A.5(a)(iii)(C). The current Rules
include additional provisions regarding what happens if the RFQ
Market is locked or crossed, and what happens to any unexecuted
responses at the conclusion of the RFQ Reaction Period. As discussed
below, there will be no market, as FLEX electronic auctions will be
one-sided, so there cannot be a locked or crossed market, and
responses may only execute against the FLEX Order submitted into the
auction.
---------------------------------------------------------------------------
The Exchange proposes to replace the current electronic RFQ process
\67\ with a new electronic FLEX Auction process. Pursuant to proposed
Rule 5.72(c), a Submitting FLEX Trader may electronically submit a FLEX
Order (simple or complex) into an electronic FLEX Auction for
execution. Pursuant to proposed Rule 5.72(c)(1), the Submitting FLEX
Trader may initiate a FLEX Auction if all of the following conditions
are met:
---------------------------------------------------------------------------
\67\ Therefore, the proposed rule change deletes all provisions
that describe the current electronic RFQ process and related
definitions, including Rules 24A.1(a), (b), (k), (r), (s), (t), (u),
(v), and (z) (note certain of these definitions also apply to open
outcry RFQs, which the Exchange proposes to eliminate and replace
with a different manner of open outcry trading for FLEX options, as
discussed below), 24A.4(a)(3), and 24A.5(a)(1).
---------------------------------------------------------------------------
The FLEX Order is in a class of options the Exchange is
authorized to list for trading on the Exchange.\68\ As discussed above
regarding proposed Rule 5.72(b), a FLEX Order must be in a FLEX Option
series (or FLEX Option complex strategy, each of which consists of a
FLEX Option series), which series must be in a FLEX eligible class.\69\
The proposed rule change is therefore consistent with current
requirements for submission of a FLEX Order into a FLEX Auction.
---------------------------------------------------------------------------
\68\ See current Rule 24A.4(a)(2), (b)(1) and (c)(1) (which
provide that a FLEX Order must contain the underlying security or
index, as applicable, which underlying must be eligible for non-FLEX
trading pursuant to current Rules 5.3 or 24.2, respectively).
\69\ See proposed Rule 4.21 and accompanying discussion above,
demonstrating the proposed rule change makes no substantive changes
to the classes that are eligible for FLEX trading on the Exchange.
---------------------------------------------------------------------------
There is no minimum size for FLEX Orders. Current Rule
24A.5 includes no restrictions on the size of FLEX Orders that may be
submitted for electronic execution. Therefore, the proposed rule change
is consistent with current functionality and merely specifies this in
the Rules.
A simple or complex FLEX Order must comply with proposed
paragraph (b) above. As discussed above, current Rules require FLEX
Orders (and RFQ Orders, which are orders submitted into an electronic
FLEX RFQ, which is being replaced by the proposed electronic FLEX
Auction) to include the information in proposed paragraph (b), so this
proposed rule change imposes no new requirements on the submission of
FLEX Orders into an auction. As discussed below, the only difference is
that the Submitting TPH must submit the FLEX Order to initiate the
electronic FLEX Auction, rather than initiate an RFQ and only submit an
order if it chooses to trade following the conclusion of the RFQ
Response Period.
A simple FLEX Order must include a bid or offer price (the
``auction price''). A complex FLEX Order must include a net bid or
offer price and a bid or offer price for each leg of the FLEX Order,
which leg prices must add together to equal the net price (the
``auction price''). Because the current process is an RFQ rather than
an auction, the Submitting TPH does not include a price on RFQ when
initiating an RFQ. Requiring the inclusion of a price on a FLEX Order
when initiating an electronic FLEX Auction is consistent with an
auction process. As discussed below, the auction price will not be
included on the auction notification message disseminated to FLEX
Traders,\70\ and therefore FLEX Traders will be encouraged to submit
their best priced responses in response to the auction as they are
today when submitting their markets in response to the RFQ.
---------------------------------------------------------------------------
\70\ Other Exchange auction mechanisms do not include the price
on the auction notification message disseminated to market
participants. See, e.g., Rules 5.33(d)(1) (regarding the auction
message for a complex order auction (``COA'') and 5.37(d)(2)
(regarding the notification message for an AIM Auction for non-FLEX
Options).
---------------------------------------------------------------------------
The Submitting FLEX Trader may only submit a FLEX Order
for electronic execution in a FLEX Auction after FLEX trading has
opened pursuant to proposed Rule 5.71 (as discussed above). This is
consistent with current Rule 24A.3, which states only after the open of
FLEX trading may FLEX Orders be submitted into a FLEX Auctions pursuant
to current Rules 24A.5, 24A.5A, or 24A.5B.
The Submitting FLEX Trader must designate the length of
the ``exposure interval,'' which must be between three seconds and five
minutes. The designated time may not go beyond the market close.
Current Rule 24A.4(a)(3)(iii) also requires the Submitting FLEX Trader
to designate the length of the RFQ Response Period, the permissible
range of which is established by the Exchange but may not be less than
three seconds. Currently, the Exchange has set the range at three
seconds to ten minutes.\71\ The proposed rule change to set the
exposure interval between three seconds and five minutes is consistent
with the
[[Page 54680]]
Exchange's current authority in the Rules, as it only requires a
minimum of three seconds. The Exchange believes this interval is
reasonable, because it is consistent with the lengths designated by
FLEX Traders in the current electronic RFQ process. Specifically, the
Exchange notes that from January through August of 2019, the average
RFQ Response period is less than nine seconds, and the average RFQ
Reaction period is approximately three minutes. Therefore, the average
length of the electronic RFQ process is within the proposed exposure
interval. Additionally, in 2019, only 25 of 3457 (or 0.7%) of
electronic FLEX RFQs lasted for a total of more than five minutes in
2019, so the Exchange does not believe capping the length of the
proposed electronic FLEX Auction at five minutes will have a
significant impact on FLEX trading. In addition, the Exchange believes
a shorter maximum time is appropriate based on feedback received from
market participants, and because FLEX Traders will only need to submit
responses on the opposite side of the auctioned FLEX Order, rather than
responses on potentially both sides to create a market. As further
discussed below, the Exchange believes a shortened auction process may
increase liquidity in the electronic FLEX market on the Exchange.
---------------------------------------------------------------------------
\71\ See Cboe Options Regulatory Circular RG12-056 (April 20,
2012).
The System rejects or cancels a FLEX Order that does not meet the
conditions in proposed Rule 5.72(c)(1). This is consistent with the
concept of eligibility requirements, as well as current Rule
24A.5(a)(1)(i)(A), which states a Submitting TPH may submit a FLEX RFQ
using the form, format, and procedures prescribed by the Exchange.
As described in the bulleted paragraphs above, the proposed
requirements to initiate an electronic FLEX Auction are substantially
similar to the current requirements to initiate an electronic RFQ. The
proposed electronic FLEX Auction will be voluntary, just as the current
electronic RFQ is voluntary, and all FLEX Traders will be able to
initiate an electronic FLEX Auction, just as they are all able to
currently initiate an electronic RFQ, if they so choose. However,
rather than submit an order in response/following to an RFQ if and when
the Submitting TPH determines to trade against RFQ responses, the
proposed rule change requires the Submitting TPH to submit a FLEX Order
to initiate the electronic FLEX Auction. This is consistent with the
Exchange's other electronic auction processes,\72\ as the auction will
result in automatic execution against any responses (if they satisfy
the auction price) at the conclusion of the auction. The unique feature
of FLEX Options is the flexibility with respect to their terms, which
is why current FLEX Rules, and the proposed FLEX Rules, provide a
longer time frame for FLEX Traders to submit bids and offers. As noted
above, the proposed exposure interval is consistent with the Exchange's
authority under the current Rules, and appropriately shortened given
the one-sided nature of the proposed auction.\73\ Additionally, as
further discussed below, the Exchange believes a generally shorter
electronic auction process, combined with the certainty of execution at
the conclusion if responses satisfy the price of the auctioned order,
may encourage additional market participants to submit FLEX Orders to
the Exchange for electronic execution.
---------------------------------------------------------------------------
\72\ See, e.g., current Rules 6.14A (describing the Exchange's
step-up mechanism), 6.53C (describing the Exchange's single-sided
complex order auction), and 6.74A (describing the Exchange's price
improvement automated improvement mechanism), all of which require
an order with a price to initiate.
\73\ As noted above, the length of auction intervals for non-
FLEX Options is generally under one second.
---------------------------------------------------------------------------
Proposed Rule 5.72(c)(2) describes the FLEX Auction process. Upon
receipt of a FLEX Order that meets the conditions in proposed
subparagraph (c)(1), the FLEX Auction Process commences. As it does
today,\74\ the System will initiate a FLEX Auction by sending a FLEX
Auction notification message to FLEX Traders detailing the FLEX Option
series or complex strategy (as applicable).\75\ The current RFQ
identifies the terms of the FLEX Option (see current Rule 24A.4(a)(2)),
which correspond to the series or complex strategy. Additionally, the
current RFQ identifies whether a bid, offer, or both are sought (see
current Rule 24A.4(a)(3)), and whether a price in dollars or percentage
is sought (as discussed above, bids and offers must be in the same
format as the exercise price of the FLEX Option series under proposed
Rule 5.3(e)(3), and thus there is no need to separately identify
whether a price in dollars or percentage is sought, as that will be
dictated by the series' exercise price). Because the proposed process
is a one-sided auction process, the proposed auction notification
message will include the side and size of the auctioned order, which
will permit FLEX Traders to focus their responses on the side on which
a potential execution may occur. Auction ID,\76\ Capacity,\77\ the time
at which the exposure interval will conclude,\78\ and Attribution (if
the FLEX Order is designated as Attributable).\79\ FLEX Auction
notification messages are not disseminated to OPRA.\80\
---------------------------------------------------------------------------
\74\ See current Rule 24A.5(a)(1)(i)(B) (pursuant to which the
System causes the terms and specifications of the RFQ to be
communicated to FLEX Traders upon receipt of an RFQ in proper form).
\75\ See proposed Rule 5.72(c)(2)(A).
\76\ This is new information on the auction message based on the
proposed rule change discussed below, which permits responses to
only execute at the conclusion of the auction into which the
responses were submitted.
\77\ This is new information on the auction message. Because an
order was not previously required to initiate an RFQ, there was no
Capacity to include. Capacity will be provided on the auction
message for informational purposes, and FLEX Traders may consider
the Capacity in any manner they see fit when determining how to
respond to an electronic FLEX Auction.
\78\ While not specified in the Rules, this is true today, so
that FLEX Traders know how long they have to submit responses.
\79\ While not specified in the Rules, this is true today, as it
is consistent with the concept of an attributable order. See
definition of ``Attributable Order'' in current Rule 6.53 (Rule
5.6(c) in the shell Rulebook).
\80\ This is true today, as RFQs are only sent to FLEX Traders.
See id.
---------------------------------------------------------------------------
The FLEX Auction message will not include the price of the
auctioned FLEX Order. The Exchange believes not including the auction
price in the notification message will encourage FLEX Traders to
respond with the best prices at which they are willing to trade against
the auctioned FLEX Order. If the message included the price, FLEX
Traders may only respond to trade at that price; without the price,
FLEX Traders may respond at better prices, which may result in price
improvement opportunities for the auctioned FLEX Order. This is
consistent with other electronic auctions on the Exchange.\81\ This is
similar to the current RFQ process today, in which there is no
disseminated price, and instead market participants submit bids and
offers based on prices at which they are willing to transact in the
series subject to the RFQ.
---------------------------------------------------------------------------
\81\ See also current Rules 6.53C and 6.74A (Rules 5.33 and 5.37
in the shell Rulebook) pursuant to which COA auction messages and
AIM auction messages do not include the auction price.
---------------------------------------------------------------------------
Pursuant to current Rule 24A.5(a)(1)(i)(B), only one electronic RFQ
may be ongoing at any given time in a series, and electronic RFQs in
the same series may not queue or overlap in any manner. Similarly,
pursuant to Rule 24A.5, Interpretation and Policy .01, only one
electronic RFQ may be ongoing at any given time for a given complex
order strategy, and electronic RFQs may not queue or overlap in any
manner.\82\
[[Page 54681]]
Due to current limitations, the Exchange's System is not currently able
to process multiple electronic RFQs at the same time, nor is it able to
process an electronic RFQ for a complex strategy if an order in any of
the leg series that comprise that complex order is present in the
System. However, different types of auctions for the same series or
complex strategy may occur at the same time. For example, the Rules do
not currently prevent a complex order auction (``COA'') of a complex
order from occurring at the same time as an AIM in one of the leg
series of the complex order subject to a COA. The System to which the
Exchange's trading platform will move upon completion of the technology
migration is able to process concurrent auctions for orders in the same
series (including auctions for complex strategies and for legs series
that comprise those strategies).\83\ Therefore, the Exchange believes
it is similarly reasonable to permit multiple FLEX Auctions in the same
series to occur at the same time. As proposed, one or more FLEX
Auctions in the same FLEX Option series or complex strategy (as
applicable) may occur at the same time.\84\ To the extent there is more
than one FLEX Auction in a FLEX Option series or complex strategy (as
applicable) underway at the same time, the FLEX Auctions conclude
sequentially based on the times at which each FLEX Auction's exposure
interval concludes. At the time each FLEX Auction concludes, the System
allocates the FLEX Order pursuant to proposed subparagraph (b)(3) (as
described below), and takes into account all FLEX responses submitted
during the exposure interval. Concurrent auctions will be permitted in
various other electronic auctions on the Exchange following
migration.\85\ If a FLEX Trader attempts to initiate an electronic FLEX
Auction in a FLEX Option series while another auction in that series is
ongoing, the Exchange believes it will provide that second FLEX Order
with an opportunity for execution in a timely manner by initiating
another FLEX Auction, rather than requiring the FLEX Trader to wait for
the first auction to conclude. The second FLEX Trader may not be able
to submit a response to trade in the ongoing FLEX Auction, because the
terms may not be consistent with that FLEX Trader's order (for example,
there may not be sufficient size, and the FLEX Trader may only receive
a share of the auctioned order depending on other responses).
Therefore, the Exchange believes providing this functionality for
electronic FLEX Auctions may similarly lead to an increase in
electronic FLEX Auctions, which may provide additional opportunities
for execution of FLEX Orders. Pursuant to proposed Rule 5.72(c)(2)(C),
the Submitting FLEX Trader may cancel a FLEX Auction prior to its
conclusion. This is consistent with a Submitting TPH's current ability
to not accept any FLEX bid or offer, and thus not execute an order for
which it requests a market pursuant to an RFQ.\86\
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\82\ In the event there are bids (offers) in any of the
individual component series legs represented in the electronic book
when an electronic RFQ for a complex strategy is submitted to the
System, the electronic RFQ will not commence, and an unrelated FLEX
Order in any of the individual series legs may not be submitted to
the electronic book or for electronic RFQ processing during the
duration of an electronic RFQ. See current Rule 24A.5,
Interpretation and Policy .01.
\83\ See Rules 5.33(d), 5.37(c)(1), 5.38(c)(1), 5.39(c)(1), and
5.40(c)(1) in the shell Rulebook; see also EDGX Options Rules
21.19(c)(1), 21.20(d), 21.21(c)(1), and 21.22(c)(1).
\84\ See current Rule 24A.5(a)(1)(i)(B) and Interpretation and
Policy .01; and proposed Rule 5.72(c)(2)(B).
\85\ See, e.g., Rules 5.33, 5.37, and 5.38 in the shell
Rulebook; see also EDGX Options Rules 21.19, 21.20, and 21.22.
\86\ See current Rule 24A.5(1)(iii).
---------------------------------------------------------------------------
Proposed Rule 5.72(c)(2)(D) describes the requirements for
responses that FLEX Traders may submit to an electronic FLEX
Auction.\87\ Any FLEX Trader (including the Submitting FLEX Trader if
it is seeking to effect a cross) \88\ may submit responses to a FLEX
Auction that are properly marked specifying the FLEX Option series or
complex strategy (as applicable), bid or offer price or net price
(respectively), size, side of the market, and the Auction ID for the
FLEX Auction to which the User is submitting the response. This
information is currently required to be included on response to RFQs
(other than an Auction ID), and the proposed rule change merely adds
this detail to the Rules. A FLEX response may only participate in the
FLEX Auction with the Auction ID specified in the response, which is
why the auction notification will include an Auction ID and response
must identify the applicable Auction ID.\89\ The Exchange proposes to
include this given the above proposal that permits concurrent
electronic FLEX Auctions in the same series or complex strategy.
---------------------------------------------------------------------------
\87\ The proposed provisions regarding FLEX responses are
consistent with rules regarding responses to other electronic
auctions. See, e.g., Rules 5.33, 5.37, and 5.38 in the shell
Rulebook; see also EDGX Options Rules 21.19, 21.20, and 21.22.
\88\ Current Rule 24A.5(a)(1)(iii)(B)(IV) states if a Submitting
TPH enters a response (referred to in the current Rule as a FLEX
Quote) during the RFQ Reaction Period (and thus a quote to trade
against the RFQ Order, should the Submitting TPH decide to execute
during the RFQ Reaction Period), it must be bidding (offering) for
at least the crossing exposure period prior to entering the RFQ
Order to trade. The Exchange may determine the duration of this
period, which must be at least three seconds (and which the Exchange
has currently set at three seconds). The purpose of this time period
is to ensure all FLEX Traders have an opportunity to submit
responses if the Submitting TPH decides to execute a cross. Because
the exposure interval (which occurs after the submission of a FLEX
Order) in the new process must be at least three seconds, which will
be the earliest time at which execution of the FLEX Order may occur,
all FLEX Traders will have the same opportunity and time to
participate in an execution against the FLEX Order.
\89\ If there are concurrent FLEX Auctions occurring, a FLEX
Trader may submit responses to all ongoing auctions, and thus
concurrent auctions will not hinder a FLEX Trader's ability to
participate in any FLEX Auction.
---------------------------------------------------------------------------
A FLEX Trader may submit multiple FLEX responses at the same or
multiple prices to a FLEX Auction. This is consistent with current
functionality. Current Rule 24A.5(a)(1) contains no restriction on how
many responses a FLEX Trader may submit; the proposed rule change
merely makes this explicit in the Rules. For purposes of a FLEX
Auction, the System aggregates all of a FLEX Trader's FLEX responses
for the same Executing Firm ID (``EFID'') at the same price. The System
will cap the size of a FLEX response, or the aggregate size of a FLEX
Trader's FLEX responses for the same EFID at the same price, at the
size of the FLEX Order (i.e., the System ignores the size in excess of
the size of the FLEX Order when processing the FLEX Auction). These
provisions are new given the potential for an automatic execution at
the conclusion of the FLEX Auction (unlike the current process which
provides the Submitting TPH with the opportunity to trade or not
trade). Additionally, the Exchange proposes to add these provisions
given the proposed rule change to apply a pro-rata allocation to
responses at the conclusion of an electronic FLEX Auction, as further
discussed below. These provisions are consistent with other auction
functionality that apply a pro-rata allocation to executions following
those auctions.\90\ The Exchange believes these proposed changes are
reasonable to prevent a User from submitting a response with an
extremely large size in order to obtain a larger pro-rata share of the
FLEX Order.
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\90\ See, e.g., Rules 5.33, 5.37, and 5.38 in the shell
Rulebook; see also EDGX Options Rules 21.19, 21.20, and 21.22.
---------------------------------------------------------------------------
FLEX responses must be on the opposite side of the market as the
FLEX Order. The System rejects a FLEX response on the same side of the
market as the FLEX Order. Unlike the current RFQ process, FLEX Traders
will know the side of the market on which the Submitting FLEX Trader is
looking to trade, and therefore the Exchange believes this is
reasonable given that the purpose of a response is to trade against the
FLEX Order in the auction into which the response was submitted.
Pursuant to the current RFQ process, the
[[Page 54682]]
Submitting TPH may request bids and offers on both sides of the market.
By only requesting responses on the opposite side of the market, the
proposed rule change will allow FLEX Traders to focus on pricing
responses that would be eligible to execute (i.e., on the opposite side
of the market on which the Submitting FLEX Trader is looking to trade).
FLEX responses are not visible to FLEX Traders or disseminated to
OPRA. RFQ responses are also not currently disseminated to OPRA.\91\
However, while the Exchange does not disseminate all individual
responses to an electronic RFQ, the best market created by responses is
intermittently calculated and disseminated during the RFQ Response
Period and Reaction Period, during which time FLEX Traders may withdraw
those responses.\92\ The proposed rule change is consistent with many
electronic auctions, in which responses are not visible to the
market.\93\ Responses to electronic auctions are not firm prior to the
conclusion of the auction, and thus are not disseminated to OPRA,
because they are not executable until the conclusion of the auction, at
which time their price and size are firm.\94\ For the same reason as
the Exchange does not disseminate the auction price on the auction
notification message as discussed above, the Exchange believes it will
encourage FLEX Traders to submit their best possible priced-responses
if they do not know the prices at which other FLEX Traders are willing
to trade. For example, if during a FLEX Auction of a buy FLEX Order, a
FLEX Trader submitted a response to sell at $1.05, if another FLEX
Trader saw that response, it may merely respond to sell at $1.05, or
maybe $1.04, even though it may ultimately be willing to sell at $1.03.
Without seeing the other responses, the second FLEX Trader may instead
submit a response to sell at $1.03, which could result in price
improvement for the auctioned order. The Exchange appreciates that
there is no disseminated market in FLEX Options. However, the length of
the exposure interval (which, as discussed above, is longer than the
interval in typical electronic auctions and consistent with the minimum
RFQ response period in the current RFQ process) will provide all FLEX
Traders with the same opportunity to submit responses. A FLEX Trader
may modify or cancel its FLEX responses during the exposure interval.
As noted above, the current Rule permits FLEX Traders to withdraw
(which is the equivalent of cancel) a response to a FLEX RFQ, but does
not explicitly state that those responses may be modified. A
modification of a response is equivalent to a cancellation of an
existing response and submission of a new response, but may instead be
done through a different message type. Therefore, the proposed rule
change permits the same activity that can be done pursuant to the
current rule, but merely in a different manner (i.e., modification
rather than cancellation and separate entry).
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\91\ Responses to an RFQ are considered indications of interest,
which are exempt from disseminated bids and offers. See, e.g.,
current Rule 6.80(2).
\92\ See current Rule 24A.5(a)(ii)(C) and (iii)(B)(II).
\93\ See, e.g., current Rules 6.53C and 6.74A (Rules 5.37 and
5.38 in the shell Rulebook); see also EDGX Options Rules 21.19,
21.20, and 21.22.
\94\ See, e.g., Rules 5.33(d)(4)(C) and (D), 5.37(c)(5)(H),
5.38(c)(5)(H), 5.39(c)(5)(F), 5.40(c)(5)(F).
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Pursuant to proposed Rule 5.72(c)(3), the FLEX Auction concludes at
the end of the exposure interval, unless the Exchange halts trading in
the affected series or the Submitting FLEX Trader cancels the FLEX
Auction, in which case the FLEX Auction concludes without execution.
There are no events that will cause the current RFQ Response Period to
conclude early pursuant to current Rule 24A.5(a)(1). While the current
Rule does not discuss how a trading halt may impact an ongoing
electronic RFQ, the proposed rule change is consistent with current
functionality, as the Exchange would not permit any executions to occur
during a trading halt.\95\
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\95\ Concluding an electronic auction without an execution due
to a trading halt is consistent with other electronic auctions on
the Exchange. See, e.g., current Rules 6.53C and 6.74A (Rules 5.33,
5.37, and 5.38 in the shell Rulebook); see also EDGX Options Rules
21.19, 21.20, and 21.22.
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At the conclusion of the FLEX Auction:
The System executes the FLEX Order against the FLEX
responses at the best price(s), to the price at which the balance of
the FLEX Order or the FLEX responses can be fully executed (the ``final
auction price''). If there are multiple FLEX responses at the same
price level, then the contracts in those FLEX responses are allocated
proportionally, according to size (in a pro-rata fashion).\96\
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\96\ The executable quantity is allocated to the nearest whole
number, with fractions \1/2\ or greater rounded up and fractions
less than \1/2\ rounded down. If the executable quantity cannot be
evenly allocated, contracts will be distributed using this pro-rata
priority methodology until there are no contracts remaining. This is
consistent with the Exchange's standard pro-rata electronic
allocation algorithm. See Rule 5.32(a)(1)(B) in the shell Rulebook.
---------------------------------------------------------------------------
The System cancels an unexecuted FLEX Order (or unexecuted
portion).
The System cancels any unexecuted FLEX responses (or
unexecuted portions).
The proposed allocation process is consistent with the electronic
pro-rata allocation with no overlays that they Exchange may apply to
trading in non-FLEX Options.\97\ Unlike the proposed allocation
process, the current allocation at the conclusion of an electronic FLEX
RFQ provides priority to Priority Customers and non-TPH broker-dealers
orders and quotes, the purpose of which was to accommodate TPHs that
rely on the ``G'' exemption from Section 11(a)(1) of the Exchange Act
when submitting orders for electronic execution. While certain other
electronic auctions available on the Exchange prioritize Priority
Customer orders, none prioritize non-TPH broker-dealers, and thus
electronic submission of an order into those auctions would not be
eligible for the ``G'' exemption either. Currently, a minimal number of
TPHs rely on the ``G'' exemption. As discussed below, the Exchange
believes the proposed electronic FLEX Auction satisfies the ``Effect
vs. Execute'' exemption, and will permit TPHs to rely on that exemption
(subject to satisfaction of the requirements of that exemption) when
submitting FLEX Orders for electronic execution. A TPH (not acting in a
market-maker capacity) could submit an order for a covered account from
off of the Exchange's trading floor to an unaffiliated Floor Broker for
submission for execution in the FLEX Auction from the trading floor and
satisfy the ``Effect vs. Execute'' exemption (assuming the other
conditions are satisfied).\98\ However, a TPH could not submit an order
for a covered account to its ``house'' Floor Broker on the trading
floor for execution and rely on this exemption. If a FLEX Trader cannot
satisfy the ``Effect vs. Execute'' exemption (for example, because the
FLEX Trader submits a proprietary order from on the Exchange's trading
floor), it may submit a FLEX Order into the proposed electronic FLEX
Auction only if it satisfies another exemption from Section 11(a)(1) of
the Exchange Act. Alternatively, a FLEX Trader may execute a FLEX Order
in open outcry on the Exchange's trading floor (subject to satisfaction
of an exemption--for example, a FLEX Trader may yield priority as
necessary to satisfy the ``G'' exemption, as it may do today). Because
[[Page 54683]]
there will not be an electronic FLEX Book (as discussed below),\99\
there will be no resting Priority Customer orders resting that would
receive priority at the conclusion of the Auction (or any resting
orders to trade against the auctioned FLEX Order). And because there
will be no FLEX Appointed Market-Makers, there will be no participation
entitlement at the conclusion of the Auction. Therefore, there will
only be responses available at the conclusion of the Auction to execute
against the auctioned FLEX Order. The Exchange has determined to apply
pro-rata allocation to those responses, rather than time priority (as
it does today), because that is the allocation the Exchange applies to
the majority of classes on the Exchange, and therefore this will
provide additional consistency for market participants. Additionally,
the Exchange believes application of pro-rata may encourage FLEX
Traders to submit larger-sized responses, because if the responses are
at the marketable prices, those responses will receive execution based
on size rather than time (as is the case today).
---------------------------------------------------------------------------
\97\ See id.
\98\ Orders for covered accounts that rely on the ``Effect vs.
Execute'' exemption in this scenario must be transmitted from a
remote location directly to the Floor Broker on the trading floor by
electronic means.
\99\ As discussed above, while one customer has recently begin
to submit interest to the FLEX Book, that interest is generally
executed within a few seconds (after the required exposure period)
and, thus, there are generally no orders resting on the FLEX Book
available for allocation following an open outcry RFQ.
---------------------------------------------------------------------------
Current Rule 24A.5(b) states the Exchange may make an electronic
book available into which FLEX Orders may be entered or remaining
balances of FLEX Orders submitted into an RFQ may rest. Currently,
while the Exchange makes an electronic book available for FLEX Orders,
prior to April 2019, no FLEX Traders were submitting FLEX Orders into
the Book in any class. Beginning in April 2019, one FLEX Trader began
submitting FLEX orders for a customer into the FLEX Book, and then
after the required exposure period passed, that FLEX Trader would
submit an order on the opposite side to trade with that resting
customer order (in other words, to execute a cross with that resting
order). The Exchange understands from this FLEX Trader that it does not
submit these orders into an electronic RFQ, because it is difficult for
that FLEX Trader to code to that process, given how different it is
from other electronic auctions.\100\ For the five-month period from
April through August 2019, this activity represented approximately 1.2%
of total FLEX volume during that time. As noted above, only one FLEX
Trader was using the FLEX Book, and only for a limited purpose. While
all FLEX Traders have access to the current FLEX Book, they are
choosing not to use it. There are no FLEX Traders submitting FLEX
Orders into the FLEX Book to rest and wait for another FLEX Trader to
submit interest to trade against that resting order, which is the
general purpose of an electronic book. Therefore, the Exchange does not
intend to make one available following migration, consistent with its
current authority under current Rule 24A.5(b). Therefore, the Exchange
proposes to delete current Rule 24A.5(b) and all other provisions in
its Rules regarding an electronic FLEX Book. As a result, all FLEX
executions currently occur following an electronic RFQ or FLEX
Automated Improvement Mechanism \101\ for electronic execution, and
deletion of the Rules regarding an electronic FLEX Book will have no
significant impact on FLEX trading given the current limited use of a
FLEX Book by one FLEX Trader. The Exchange also notes the Rules
currently provide that there is no electronic book for complex FLEX
Orders, and therefore the proposed rule change will have no impact on
the trading of complex FLEX Orders.\102\
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\100\ Additionally, this FLEX Trader is unable to cross these
orders through a FLEX AIM or SAM, because the solicited contra-side
order is for the account of a Market-Maker, which is not permissible
in those auctions. See current Rules 24A.5A, Interpretation and
Policy .04 and 24A.5B, Interpretation and Policy .04.
\101\ See Rule 24A.5A in the current Rulebook, which the
Exchange intends to move to the shell Rulebook in a separate rule
filing. The Exchange notes current Rule 24A.5B provides for a FLEX
Solicitation Auction Mechanism, which the Exchange has not currently
made available in any FLEX Option classes, but does intend to make
available following migration.
\102\ See Rule 24A.5, Interpretation and Policy .01 in the
current Rulebook.
---------------------------------------------------------------------------
Because the proposed auction will result in automatic execution
following the exposure interval, there is no period equivalent to the
RFQ reaction period in the proposed auction process. The Exchange
believes automatic execution will provide FLEX Traders with more
certainty regarding executions of their FLEX Orders and responses, as
well as more timely executions. The Exchange notes the current maximum
time for the Submitting TPH to decide whether to trade against the RFQ
Market is five minutes, which is the proposed maximum time for the
exposure interval. Additionally, as noted above, in January through
August of 2019, the average length of the entire electronic RFQ process
(as designated by the Submitting TPH) is just over three minutes
(combining the RFQ Response and Reaction periods), during which time
FLEX Traders may submit responses, and less than 1% of electronic RFQs
lasted more than five minutes. Therefore, pursuant to the proposed
electronic FLEX Auction process, the Submitting FLEX Trader may
designate an exposure interval duration during which FLEX Traders may
submit responses consistent with the average duration, and over 99%, of
current electronic RFQs.
The Exchange believes the proposed electronic FLEX Auction
simplifies the process pursuant to which FLEX Traders may execute FLEX
Orders on the Exchange, as it is similar to other electronic auctions
(as noted above) and eliminates the multiple periods in which FLEX
Traders may submit responses. Pursuant to the proposed Auction process,
an electronic FLEX Auction in which an order is entered and exposed to
FLEX Traders, and then automatically executes against best-priced bids
and offers at the conclusion of the auction. As discussed above, the
proposed range for the auction exposure interval is consistent with the
average length of the entire electronic RFQ process. Additionally,
while the proposed range of the exposure interval is shorter than the
current range designated by the Exchange, the proposed range is
consistent with the Exchange's authority under the current Rules, as
the Rules only require that the length of the RFQ Response Period be at
least three seconds. Because the auction message will identify the side
of the auctioned order, and thus responses will only be on the opposite
side of that order, the Exchange believes a shorter maximum time is
appropriate, as FLEX Traders will not need to determine responses on
the side of the market on which there is no potential execution.
Therefore, the Exchange believes the proposed rule change will continue
to provide FLEX Traders with sufficient time to price FLEX Option
series that are auctioned and submit bids or offers at which they would
be willing to effect transactions in the series subject to the auction.
As is the case today, market participants will not know the price
at which the Submitting TPH is seeking to trade an order (which the
Submitting TPH must include a price on the FLEX Order submitted to the
auction, it will not be included in the notification message). The
Exchange believes not notifying FLEX Traders of the auction price, as
well as not permitting FLEX Traders to see prices of other responses,
will encourage FLEX Traders to submit responses at the best prices at
which they would be willing to trade, as noted above.
The proposed electronic FLEX Auction is similar to other electronic
auctions offered by the Exchange, such
[[Page 54684]]
as the Automated Improvement Mechanism (``AIM'') in Rule 6.74A in the
current Rulebook (Rule 5.37 in the shell Rulebook) and the Complex
Order Auction (``COA'') in Rule 6.53C in the current Rulebook (which
the Exchange intends to move to Rule 5.33 in the shell Rulebook). These
electronic auctions do not provide for a request for market, which
concept does not currently exist in electronic trading. The Exchange
believes implementing a simpler electronic FLEX Auction that is similar
to other electronic auctions may encourage TPHs to submit FLEX Orders
for electronic execution. Market participants are more familiar with
this type of functionality and have their systems coded to conform to
these types of auctions. The Exchange has received feedback from market
participants indicating the difficulty and additional resources
necessary to code to the nonstandard FLEX RFQ process given the
multiple intervals. Additionally, the Exchange believes elimination of
a reaction period at the conclusion of an electronic FLEX Auction will
permit executions of FLEX Orders to be completed in a more timely
fashion. As a result, the Exchange believes the proposed auction will
permit FLEX Traders to continue to compete vigorously and potentially
provide price improvement for FLEX Orders in a competitive auction
process, as they do for non-FLEX Orders, and thus will fit more
seamlessly into the Exchange's market.\103\
---------------------------------------------------------------------------
\103\ The Exchange notes it intends to continue to offer a FLEX
AIM process to provide FLEX Orders with price improvement and
electronic crossing opportunities, and will move that from Rule
6.74A in the current Rulebook to Rule 5.73 in the shell Rulebook in
a different rule filing.
---------------------------------------------------------------------------
Current Rule 24A.5(a)(2) describes the current open outcry RFQ
process for FLEX Orders. Currently, a Submitting TPH may submit to a
FLEX Official an RFQ, and then announce the terms of the RFQ to the
trading crowd.\104\ At that point, FLEX Traders in the trading crowd
may respond to the RFQ with bids and offers during an RFQ Response
Period, during which time those responses (referred to in the current
Rule as FLEX Quotes) may be modified or withdrawn.\105\ At the
conclusion of the RFQ Response Period, the Submitting TPH announces the
best market to the trading crowd.\106\ It may then promptly accept or
reject the best priced bids and offers, or announce an intention to
cross the FLEX order (in which it may receive an entitlement pursuant
to Rule 24A.5(b)(3) and (d)(2)).\107\ If the Submitting TPH determines
to execute the FLEX Order against the responses from the trading crowd
(and not cross), the bids and offers are allocated as described
below.\108\ If the Submitting TPH rejects the BBO or accepts it for
less than the entire size requested, all FLEX Traders (other than the
Submitting TPH) may match or improve the BBO during the BBO Improvement
Interval,\109\ after which the Submitting TPH must promptly accept or
reject the BBO.\110\ If the Submitting TPH indicates an intention to
cross, then the Submitting TPH must announce the price to the crowd and
permit the rest of the crowd to attempt to improve or match the BBO
during the BBO Improvement Interval. At the expiration of the BBO
Improvement Interval, the Submitting TPH must promptly accept or reject
the BBO, and may execute the order against responses as described
below.\111\ The Submitting TPH has no obligation to accept any FLEX bid
or offer.\112\
---------------------------------------------------------------------------
\104\ See current Rule 24A.5(a)(2)(i).
\105\ See current Rule 24A.5(a)(2)(ii). The proposed rule change
deletes from that provision the reference to obligations of FLEX
Appointed Market-Makers. As noted above, the Exchange currently has
none and does not intend to have them following migration, so the
Exchange is deleting all references to FLEX Appointed Market-Makers
in the rules. As is the case for electronic RFQs, the open outcry
RFQ Response Period may not be less than three seconds.
\106\ See current Rule 24A.5(a)(2)(ii)(B). The proposed rule
change deletes the reference that the BBO will consider orders in
the electronic book, as there will be no book following migration,
as noted above.
\107\ See current Rule 24A.5(a)(2)(iii)(A).
\108\ See id.
\109\ The ``BBO Improvement Interval'' is the period of time in
respect of the open outcry RFQ process during which FLEX Traders in
the trading crowd may submit responses (referred to in the current
rules as FLEX Quotes) to meet or improve the BBO established during
the RFQ Response Period. See current Rule 24A.1(b). The rules do not
specify a duration of the BBO Improvement Interval, so the Exchange
permits responses to be made in a reasonably prompt manner
(consistent with a similar provision that applies to current open
outcry trading if there are remaining contracts, see current Rule
6.45(b)(i)(B)(5)).
\110\ See current Rule 24A.5(a)(2)(iii)(A).
\111\ See current Rule 24A.5(a)(2)(iii)(B).
\112\ See current Rule 24A.5(a)(2)(iii)(C). Rejection of the BBO
or failure to promptly accept the BBO results in expiration of the
BBO and the RFQ. See current Rule 24A.5(a)(2)(iv). If the Submitting
TPH rejects the BBO or the BBO size exceeds the FLEX transaction
size in the RFQ, FLEX Traders in the crowd may accept the unfilled
balance by public outcry promptly following the rejection of the BBO
(or expiration of the BBO Improvement Interval). See current Rule
24A.5(a)(2)(iii)(D).
---------------------------------------------------------------------------
Current Rule 24A.5(d)(2)(i) provides that the Exchange may
establish a crossing participation entitlement, subject to certain
conditions. The Exchange proposes to delete that provision, as the
Exchange does not intend to establish any priority overlays, including
a crossing participation entitlement, to the proposed FLEX
Auctions.\113\ The Exchange does not currently establish a crossing
participation entitlement for electronic FLEX trading, so this will
have no impact on electronic trading. The Exchange has currently
established a crossing participation entitlement for open outcry FLEX
trading. However, as further discussed below, the Exchange proposes to
permit FLEX Trades to be crossed in accordance with general crossing
rules for open outcry trading, which provide for a similar crossing
procedure and participation entitlement as the current FLEX crossing
procedure and entitlement.
---------------------------------------------------------------------------
\113\ This is consistent with the Exchange's authority under
current Rule 24A.5(d)(2) to not establish any priority overlays.
---------------------------------------------------------------------------
Current Rule 24A.5(d)(2)(ii) provides that the Exchange may
establish a participation entitlement for a FLEX Appointed Market-
Maker. The Exchange currently does not have any FLEX Appointed Market-
Makers, and thus does not have a participation entitlement established,
and deletes that provision from the Rules.\114\
---------------------------------------------------------------------------
\114\ The Exchange intends to delete all provisions regarding
FLEX Appointed Market-Makers from the Rules in a separate rule
filing. To the extent the Exchange determines in the future to
appoint FLEX Appointed Market-Makers (or similar market participant)
or apply a participation entitlement to FLEX Auctions (electronic or
open outcry), the Exchange will submit a separate rule filing.
Because there will no longer be any priority overlays, the proposed
rule change deletes current Rule 24A.5(d)(2)(iii) regarding
announcements of participation entitlements.
---------------------------------------------------------------------------
The highest bid (lowest offer) will have priority at the conclusion
of a FLEX open outcry RFQ. If there are multiple bids or offers at the
same price, any crossing participation entitlements have second
priority, any FLEX Appointed Market-Maker participation entitlements
have third priority, all other response have fourth priority (in time
sequence), and finally orders resting in the book have last
priority.\115\
---------------------------------------------------------------------------
\115\ See current Rule 24A.5(a)(2)(v)(A); see also current Rule
24A.5(d) (which describes current crossing participation
entitlements). As is the case in all open outcry trading, any FLEX
Traders relying on the ``G'' exemption must yield priority to any
bid (offer) at the same price. See current Rule 24A.5(a)(2)(v)(B)
(Rule 5.85(a)(2)(E) in the shell Rulebook).
---------------------------------------------------------------------------
Proposed Rule 5.72(d) provides that a Submitting FLEX Trader may
represent and execute a FLEX Order that complies with paragraph (b)
above on the Exchange's trading floor in the same manner as a TPH may
represent and execute an order for a non-FLEX Option (which includes
systemization of the FLEX Order pursuant to Rule 5.7(f) and routing the
FLEX Order to PAR pursuant to Rule 5.82 of the shell Rulebook) on the
Exchange's trading floor pursuant to Chapter 5, Section G
[[Page 54685]]
of the shell Rulebook,\116\ except (1) In-Crowd Market Participants
(``ICMPs'') will have a reasonable amount of time (which amount of time
must be between three seconds (the current minimum for an RFQ Response
Period) and five minutes) from the time a FLEX Trader requests a quote
in a FLEX Option Series or represents a FLEX Order (including
announcing a crossing transaction pursuant to Rule 5.87 in the shell
Rulebook) to respond with bids and offers; and (2) FLEX Orders are
allocated only to responses from the trading crowd pursuant to Rule
5.85(a)(2)(C) of the shell Rulebook.\117\ The proposed time period is
consistent with the proposed time period for electronic FLEX Auctions
described above, as well as current Rules (which require at last three
seconds to pass),\118\ and the Exchange believes this will ensure there
is sufficient time for the crowd to price a FLEX Option series given
its unique terms as well as ensure executions of FLEX Orders take place
in a timely manner. Whether a reasonable amount of time has passed
before a Submitting TPH determines to represent an order after a
request for quotes, or to execute an order after it was represented
will be based on facts and circumstances, and will be determined by the
Submitting FLEX Trader. This is consistent with general open outcry
trading, in which the representing Floor Broker (which will be the
Submitting FLEX Trader) determines at what time a market is established
and which ICMPs responded at that time and in what order.\119\ As set
forth in Rule 5.85(a)(2), orders represented in open outcry may also be
allocated to Priority Customers resting in the book (which will not
apply to FLEX Options since there will be no book), or to certain
market-makers if there is a participation entitlement (which there will
not be for FLEX Options), or to other orders resting in the book
(which, again, will not apply to FLEX Options since there will be no
book). Therefore, the only interest against which a FLEX Order may
execute in open outcry are bids and offers from the trading crowd.
---------------------------------------------------------------------------
\116\ Therefore, a FLEX Order may be represented and executed,
in addition to Rule 5.85 as described above, pursuant to Rule 5.86
in the shell Rulebook regarding facilitated and solicited
transactions and Rule 5.87 in the shell Rulebook regarding crossing
orders.
\117\ The proposed rule change notes that Rule 5.85(b) through
(e) (complex order priority (this relates to the prices at which
complex orders may trade depending on resting simple orders, which
will not apply given there will be no book for FLEX Options), split-
price priority, multi-class spread orders, and SPX Combo Orders)
does not apply to FLEX Options, which is consistent with FLEX
trading today. See current Rules 24.19 (which sets forth specific
trading rules for multi-class spreads, which are not consistent with
FLEX trading), 24.20 (which sets forth specific trading rules for
SPX Combo Orders, which are not consistent with FLEX trading), and
24A.15 (which provides that split-price priority does not apply to
FLEX trading, and the Exchange moves the provision that states the
inapplicability of split-price priority to the portion of the Rule
regarding open outcry trading, so that all provisions regarding open
outcry priority are included in the same place). To the extent the
Exchange intends to make any of these provisions applicable to FLEX
Options in the future, it will submit a rule filing. As discussed
above, there will be no electronic FLEX Book (and thus no Priority
Customer orders resting that would otherwise have priority).
Additionally, as discussed below, there will be no participation
entitlements. The Exchange notes FLEX Orders may be crossed on the
Exchange trading floor in the same manner as non-FLEX Orders
pursuant to Rule 5.87 in the shell Rulebook, rather than pursuant to
separate crossing rules as is the case today.
\118\ See current Rule 24A.4(a)(3)(iii).
\119\ If another FLEX Trader does not believe there was a
reasonable amount of time to respond permitted, that FLEX Trader may
request a review from a FLEX Official for compliance with the
applicable rules (see proposed Rule 5.75).
---------------------------------------------------------------------------
The Exchange believes the current open outcry RFQ process for FLEX
Orders is substantially similar to the current open outcry process for
non-FLEX Orders, and therefore believes completely aligning the two
processes is appropriate. Currently, in open outcry trading, a Floor
Broker can request a market from the crowd.\120\ ICMPs may then respond
with their markets. There is no formal time frame in which ICMPs may
respond with a market, but ICMPs generally respond promptly with their
market. This is substantially similar to the current RFQ process
described above, in which a FLEX Trader requests a market and provides
FLEX Traders in the crowd with at least three seconds to respond with a
market. The Exchange believes it is appropriate to ensure there is at
least a minimum amount of time FLEX Traders to respond give the unique
terms of FLEX Options. The proposed timeframe in which ICMPs that are
FLEX Traders must respond is consistent with the current Rule, which as
noted above, requires the RFQ Response Period to be at least three
seconds long. The proposed rule change also permits a FLEX Trader to
initially represent a FLEX Order to the trading crowd, and then receive
bids or offers (as appropriate) and trade.\121\ Therefore, other than
eliminating the formal name of the RFQ Response Period which is not
contemplated in non-FLEX Option open outcry trading, the Exchange
believes the proposed rule change will have minimal (if any) impact on
how a FLEX Trader may request a market on the Exchange's trading floor.
---------------------------------------------------------------------------
\120\ A Floor Broker may also initially represent an order to
the trading crowd, and then receives bids or offers, as appropriate,
and trade. However, this is an uncommon scenario but permissible
under the Rules.
\121\ The Exchange notes this is an uncommon scenario in open
outcry trading, but is permissible under the Rules.
---------------------------------------------------------------------------
Unlike the current process, which requires a FLEX Trader to submit
an RFQ to a FLEX Official, the proposed rule change will require a FLEX
Trader to systematize a FLEX Order in the same manner as Floor Brokers
systematize non-FLEX Orders, which is to systematize them pursuant to
current Rule 6.24 (Rule 5.7(f) in the shell Rulebook). TPHs have
familiarity with the systemization process, and the Exchange believes
the proposed rule change will result in a more efficient open outcry
trading process for FLEX Options, as a FLEX Trader can request a market
as soon as it gets that request from a customer rather than first go to
a FLEX Official.\122\ This may ultimately result in a more timely
execution for customers.
---------------------------------------------------------------------------
\122\ Because the proposed rule change will require FLEX Orders
to be systematized in the same manner as all other orders, the
proposed rule change deletes Rule 5.7, Interpretation and Policy
.04, which exempts FLEX Options from systematization requirements.
The Exchange notes systemization will capture FLEX Options in the
Exchange's audit trail, and thus the Exchange will no longer need to
maintain separate records similar to COATS data. The current rule
requires the Exchange to make the data it retained with respect to
FLEX Options available to the SEC upon request. While the proposed
ruled does not explicitly state this (the Rules generally impose
obligations on TPHs rather than the Exchange), the Exchange is
required to maintain these records and provide them to the
Commission upon request pursuant to its SRO obligations. See 17 CFR
240.17a-1 (which requires an exchange to keep and preserve at least
one copy of all documents made or received in the course of its
business and in the conduct of its self-regulatory activity, to
retain such documents for at least five years (in an easily
accessible place for the first two years) subject to destruction and
disposition provisions of Rule 17a-6 under the Act, and to promptly
furnish copies of these documents to the Commission upon request).
---------------------------------------------------------------------------
Once a Floor Broker has received a market from the crowd, the Floor
Broker may then represent its order on the floor (after systematizing
it and routing it to PAR, which it must do prior to representing an
order on the trading floor) and elect to trade against the best prices
or not, or announce an intention to cross at a specific price.\123\ As
discussed above, this is substantially similar to the current RFQ
process, in which a FLEX Trader can elect to trade or not trade with
the best prices from the crowd, or announce an intention to cross.
Currently, the Exchange has set a crossing entitlement for
facilitations and solicitations of FLEX Orders in all
[[Page 54686]]
classes to be 40%.\124\ As set forth in current Rule 6.74(d) (Rule
5.87(f) of the shell Rulebook), the Exchange may similarly set a
crossing entitlement on a class-by-class basis up to 40%. The Exchange
intends to set this entitlement for FLEX Orders at 40% in all classes,
as it does today.\125\ Rule 5.87(f) of the shell Rulebook requires a
Floor Broker representing an eligible-sized order to request bids and
offers for a series. Once the trading crowd has provided a quote, once
a reasonable amount of time has passed, there is a significant change
in the price of the underlying, or the price of the responses has been
improved, the Floor Broker may cross the applicable percentage of the
order, after all Public Customer orders in the book or crowd have been
satisfied. This is similar to how a FLEX Trader may cross a FLEX Order
in open outcry, as noted above. Specifically, a FLEX Trader would
request a market, and after a reasonable amount of time has passed,
announce an intention to cross, and receive a crossing entitlement
after Public Customer interest has been satisfied. Therefore, the
Exchange believes the proposed rule change will have a minimal (if any)
impact on the crossing of FLEX Orders in open outcry.
---------------------------------------------------------------------------
\123\ See current Rule 6.74 (Rule 5.87(f) in the shell
Rulebook), which describes procedures for crossing orders on the
Exchange's trading floor.
\124\ Current Rule 24A.5(d)(2)(i) permits the Exchange to
establish a crossing participation entitlement on a class-by-class
basis up to 40%.
\125\ The Exchange would announce any changes to this percentage
pursuant to Rule 1.5 in the shell Rulebook.
---------------------------------------------------------------------------
The proposed rule change eliminates the formal BBO Improvement
Interval. However, pursuant to general open outcry rules regarding
crossing, as noted in the previous paragraph, if a FLEX Trader
announces an intention to cross a FLEX Order, the FLEX Trader must
provide time for the trading crowd to submit bids and offers (which is
equivalent to what occurs during the BBO Improvement Interval).
Similarly, if there is no intention to cross, but the FLEX Trader
elects to not trade or there is insufficient size, the crowd may make
subsequent bids and offers in a reasonably prompt manner.\126\
---------------------------------------------------------------------------
\126\ See Rule 5.85(a)(2)(C)(v) in the shell Rulebook.
---------------------------------------------------------------------------
The proposed allocation is substantially similar to the allocation
for non-FLEX trading in open outcry, excluding the provisions that are
inapplicable to FLEX trading, and to the current allocation for FLEX
trading in open outcry (if there were no FLEX Appointed Market-Makers,
and if the Exchange determined to not offer an electronic book for FLEX
Options pursuant to its authority under the current Rules). With
respect to allocation, best-priced responses will continue to have
first priority.\127\ With respect to responses at the same price,
because there will be no electronic Book for FLEX Options, there can be
no Priority Customer FLEX Orders resting in the book that would receive
first priority at the same price.\128\ Additionally, there will be no
FLEX Appointed Market-Makers, so there will be no participation
entitlement applicable to FLEX trading.\129\ The crossing participation
will continue to next priority.\130\ All other interest in the crowd
will continue to then have priority in the sequence in which they were
made; to the extent multiple bids or offers were submitted at the same
time, or if the Submitting FLEX Trader cannot reasonable determine the
sequence in which they were made, priority will be apportioned equally
among those bids and offers.\131\ As there will be no electronic book
of orders for FLEX Options, there will be no non-customer orders in the
book that would be eligible for execution after all other interest
trades.\132\ Therefore, the proposed rule change will have minimal (if
any) impact on the allocation of responses in open outcry trades of
FLEX Orders.\133\
---------------------------------------------------------------------------
\127\ See current Rule 24A.5(a)(2)(v)(A) and Rule 5.85(a)(1) in
the shell Rulebook.
\128\ Therefore, Rule 5.85(a)(2)(A) in the shell Rulebook will
be inapplicable to FLEX trading.
\129\ Therefore, Rule 5.85(a)(2)(B) in the shell Rulebook will
be inapplicable to FLEX trading.
\130\ See current Rule 24A.5(a)(2)(v)(A)(I) and Rule 5.87(a) and
(f) in the shell Rulebook.
\131\ See current Rule 24A.5(a)(2)(v)(A)(III) and Rule
5.85(a)(2)(C) in the shell Rulebook.
\132\ As discussed above, while one customer has recently begin
to submit interest to the FLEX Book, that interest is generally
executed within a few seconds (after the required exposure period)
and, thus, there are generally no orders resting on the FLEX Book
available for allocation following an open outcry RFQ. Therefore,
Rule 5.85(a)(2)(D) in the shell Rulebook will be inapplicable to
FLEX Trading.
\133\ As is the case today, and with open outcry non-FLEX
trading, a TPH relying on the exemption in Section 11(a)(1)(G) of
the Exchange Act and Rule 11a-1(T) thereunder may submit a
proprietary order to the Exchange for execution in open outcry if it
yields priority to any bid (offer) at the same price that is
represented by all other bids (offers) that have priority over the
TPH's order. See proposed Rule 5.72(e)(1); see also Rule
5.85(a)(2)(E) in the shell Rulebook and current Rule
24A.5(a)(5)(v)(B).
---------------------------------------------------------------------------
As is the case regarding the proposed electronic FLEX Auction
described above, the proposed rule change simplifies the process
pursuant to which FLEX Traders may execute FLEX Orders on the Exchange
in open outcry. As demonstrated above, the general open outcry trading
rules are substantially similar to the current open outcry RFQ
procedure for FLEX Options. However, the proposed rule change
eliminates the terminology that applies only to FLEX trading. FLEX
Traders are more familiar with the general open outcry trading
procedures, and therefore, by aligning the open outcry trading process
for FLEX Options with that of non-FLEX Options, and permitting FLEX
trading in the same manner as non-FLEX trading on the Exchange's
trading floor, the Exchange believes the proposed rule change may
encourage TPHs to submit FLEX Orders for execution. The Exchange
believes the proposed rule change may reduce confusion regarding how
FLEX Orders may trade in open outcry, given that any minor differences
between the two processes that exist today are being eliminated.
However, as noted above, one difference that will remain is the minimum
amount of time that the trading crowd will have to respond to a request
for a market or to a represented FLEX Order, which will ensure the
crowd has sufficient time to price the unique terms of FLEX Options.
The proposed range of a reasonable time that must be three seconds (but
no more than five minutes), is consistent with the current Rule, which
requires the response period to be at least three seconds. The Exchange
believes the maximum time accommodate this pricing while permitting
executions of FLEX Orders to be completed in a more timely fashion. As
a result, the Exchange believes the proposed auction will fit more
seamlessly into the Exchange's market. The Exchange also believes this
will encourage FLEX Traders to compete vigorously and potentially
provide price improvement for FLEX Orders in a competitive auction
process, as they do for non-FLEX Orders.
The proposed rule change deletes current Rule 24A.5(c), which
states that acceptance of any bid or offer creates a binding contract
under Rule 6.48 in the current Rulebook (which the Exchange intends to
move to Rule 5.11 in the shell Rulebook). Current Rule 6.48 applies to
all acceptances of bids and offers on the Exchange, including FLEX bids
and offers, and thus the Exchange does not believe it is necessary to
include a separate provision in the FLEX Rules. This has no impact on
the binding nature of the acceptance of bids and offers on FLEX Options
pursuant to proposed Rule 5.72.
The proposed rule change moves the provision that states all
transactions must be in compliance with Section 11(a)(1) of the
Exchange Act and the rules promulgated thereunder, including the
description of the activity prohibited by Section 11(a)(1), from
current Rule 24A.5(d)(4) (as well as current Rules 24A.5(a)(2)(v)(B)
and (b)(2)(ii), which are cross-referenced in
[[Page 54687]]
Rule 24A.5(d)(4)) to proposed Rule 5.72(e). The proposed rule change
amends this provision to state that it applies to all executions of
FLEX Orders, as this provision is only applicable to FLEX trading. The
proposed rule change deletes current Rule 24A.5(d)(4)(i) and (iii)
regarding the market-maker exemption and the effect versus execute
exemption, respectively. Those exemptions will continue to be available
to FLEX Traders with respect to FLEX trading. However, there is nothing
unique about the applicability of those exemptions to FLEX trading, as
they are available to all market participants with respect to all
trading in the same manner. Additionally, the proposed rule change
deletes current Rule 24A.5(d)(4)(iv), which states that a TPH may rely
on any other exception to comply with the requirements of Section
11(a)(1) and the rules promulgated thereunder. That will continue to be
true, and is captured by the introductory language in proposed Rule
5.72(e), which references that an exception to Section 11(a)(1) may
apply. Because, FLEX traders may currently rely on the ``G'' exemption
for electronic FLEX trading given the current priority structure but
will no longer be able to rely on that exemption with respect to
electronic FLEX trading given the proposed priority changes (see
discussion above regarding this change),\134\ the proposed rule change
makes clear that the ``G'' exemption will only be available for FLEX
Orders represented in open outcry, as long as the TPH relying on that
exemption yields priority to any bid (offer) at the same price that is
represented by all other bids (offers) that have priority over the
TPH's order pursuant to proposed Rule 5.72. The proposed rule change
also states that a TPH may not submit an electronic FLEX Order pursuant
to proposed Rule 5.72(b), Rule 5.73, or Rule 5.74 to effect any
proprietary order transactions by relying on the ``G'' exemption. As
discussed below, the Exchange believes the proposed rule change is
consistent with Section 11(a) of the Exchange Act.
---------------------------------------------------------------------------
\134\ As discussed below, electronic FLEX trading, like all
other electronic trading on the Exchange, will not allow FLEX
Traders to take advantage of the ``G'' exemption.
---------------------------------------------------------------------------
The proposed rule change deletes current Rule 24A.5, Interpretation
and Policy .03 regarding post-trade verification procedures for
electronic RFQs for complex orders. Due to the System updates in
connection with the System migration, parties to FLEX transactions will
no longer need to take additional steps with respect to executions of
complex orders following an electronic FLEX Auction.\135\ These
procedures require FLEX Traders to input the leg price, exercise price,
and/or premium information into the System following execution of a
complex FLEX Order. As discussed above, FLEX Traders must submit all of
this information upon entry of a FLEX Order.\136\ Therefore, pursuant
to the proposed rule change, a FLEX Trader will be required to input
the same information for each leg of a complex FLEX Order prior to
submission rather than following execution. A FLEX Trader may request
nullification of a FLEX Option transaction if it did not conform to the
terms in proposed Rule 4.21, or update any inaccurate information in a
complex FLEX Order in the same manner as any TPH may update any
inaccurate information in any order pursuant to current Rule 6.67.\137\
Because all FLEX Orders will now be systematized, as discussed above,
there is no longer a need for separate procedures regarding the
correction of inaccurate information entered for FLEX transactions.
---------------------------------------------------------------------------
\135\ Note current Rule 24A.5, Interpretation and Policy .03
also applies to electronic transactions in FLEX Options with
exercise prices and premiums based on a methodology for fixing that
number or based on a percentage. As noted above, the Exchange will
no longer offer exercise prices and premiums based on such a
methodology.
\136\ See proposed Rule 5.72(b)(2).
\137\ Rule 6.67 in the current Rulebook describes the Exchange's
Cboe Trade Match System, which permits TPHs to correct bona fide
errors, subject to certain restrictions. The Exchange intends to
move Rule 6.67 from the current Rulebook to Rule 6.6 in the shell
Rulebook in a separate rule filing.
---------------------------------------------------------------------------
The proposed rule change moves the provisions in Rules 24A.1(i) and
24A.14 in the current Rulebook regarding FLEX Officials to Rule 5.75 in
the shell Rulebook. The proposed rule change makes only nonsubstantive
changes to this Rule, including to make the Rule plain English, delete
redundant language (such as saying any TPH approved to act as a Market-
Maker, as pursuant to Rule 8.1 in the current Rulebook, a Market-Maker
must be a TPH), incorporate defined terms (including the term ``ICMP,''
which is an in-crowd Market-Maker, on-floor designated primary market-
maker or lead market-maker with an allocation in a class, or a floor
broker or PAR official representing an order in the trading crowd on a
trading floor \138\), and update cross-references and paragraph
lettering and numbering. FLEX Officials will have the same
responsibilities as they do today.
---------------------------------------------------------------------------
\138\ See Rule 1.1 in the shell Rulebook.
---------------------------------------------------------------------------
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.\139\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5)\140\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5)\141\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------
\139\ 15 U.S.C. 78f(b).
\140\ 15 U.S.C. 78f(b)(5).
\141\ Id.
---------------------------------------------------------------------------
In particular, the Exchange believes the proposed rule change will
remove impediments to and perfect the mechanism of a free and open
market, and protect investors and the public interest. As described
above, the proposed electronic FLEX Auction is closely aligned to the
Exchange's other electronic auctions for non-FLEX Options, and the
proposed open outcry FLEX Auction is closely aligned with the current
open outcry trading process for non-FLEX Options, but are still similar
to the FLEX trading processes in place today. The proposed rule change
merely eliminates many of the differences between FLEX and non-FLEX
trading to eliminate potential confusion for market participants given
the current differences, while implementing trading processes with
which market participants are more familiar. As a result, the Exchange
believes the proposed rule change will have minimal impact on the
trading of FLEX Auctions, and possibly increase participation in FLEX
Auctions, which could add liquidity to the Exchange's FLEX Market,
which ultimately benefits investors. Additionally, with respect to
electronic trading, market participants are more familiar with this
type of functionality and have their systems coded to conform to these
types of
[[Page 54688]]
auctions. The Exchange has received feedback from market participants
indicating the difficulty and additional resources necessary to code to
the nonstandard FLEX RFQ process given the multiple intervals.
Additionally, the Exchange believes the proposed rule change will
permit executions of FLEX Orders to be completed in a more timely
fashion, while providing the crowd with sufficient time to price the
unique terms of FLEX Options (as the proposed ranges for the duration
of the electronic and open outcry FLEX Auctions are consistent with
current Rules).\142\ The Exchange believes the proposed auction
processes will ultimately benefit investors, as they will provide TPHs
with greater harmonization of auction mechanisms on the Exchange. The
Exchange believes the proposed auctions will provide mechanisms for
more efficient and timely executions of FLEX Options, given
participants' familiarity with the trading processes and reasonable
durations of the auctions. Additionally, by providing for automatic
executions following electronic auctions of FLEX Orders, the Exchange
believes there will be more certainty of execution at the end of an
auction, unlike today, when a FLEX Trader may reject the market after a
period of potentially minutes. The Exchange believes the proposed
auctions will encourage FLEX Traders to continue to compete vigorously
and potentially provide price improvement for FLEX Orders in a
competitive auction process, as they do for non-FLEX Orders, as they
will be encouraged to submit their best-priced bids and offers during
the auctions to have the opportunity to execute against the FLEX Order.
---------------------------------------------------------------------------
\142\ See current Rule 24A.4(a)(3)(iii) and proposed Rule
5.72(c)(1)(E) and (d)(1) (which all provide for a minimum of three
seconds of response time).
---------------------------------------------------------------------------
By permitting FLEX Options to trade in a manner similar to non-FLEX
Options, the Exchange believes this further improves a comparable
alternative to the over-the-counter (``OTC'') market in customized
options. By enhancing our FLEX trading platform and making it similar
to trading procedures in non-FLEX options, with which market
participants are generally more familiar, the Exchange believes it may
be a more attractive alternative to the OTC market. The Exchange
believes market participants benefit from being able to trade
customized options in an exchange environment in several ways,
including but not limited to the following: (1) Enhanced efficiency in
initiating and closing out position; (2) increased market transparency;
and (3) heightened contra-party creditworthiness due to the role of OCC
as issuer and guarantor of FLEX Options.
The Exchange believes the proposed rule change to eliminate the
ability for FLEX Traders to specify exercise prices for FLEX Index
Options as a method for fixing an index value or dollar amount at the
time of a FLEX RFQ or a FLEX Order is traded, or as a percentage of the
index value calculated at the time of the trade, and for FLEX Equity
Options, as a method for fixing a dollar amount at the time of a FLEX
RFQ or a FLEX Order is traded, or as a percentage of the price of the
underlying security at the time of the trade will have no impact on
FLEX Trading.\143\ As noted above, FLEX Traders only designate an
exercise price for a FLEX series as a fixed amount or a percentage of
the closing value of the underlying security or index, as applicable,
on the trade date. Similarly, the Exchange believes the proposed rule
change to eliminate the ability for FLEX traders to apply the hedge
trade condition to orders will have no impact on FLEX Trading.\144\ As
noted above, FLEX Traders do not apply this trade condition to FLEX
Orders. Because FLEX Traders do not use this functionality, the
Exchange believes it will benefit investors if the Exchange does not
expend resources to rebuild on a new System functionality that is not
in demand, and to not include references to unused functionality in the
Exchange's rules. In addition, the current Rules permit the Exchange to
make a FLEX Book available on a class-by-class basis.\145\ The Exchange
currently makes a FLEX Book available; however, FLEX Traders were not
submitting orders into that Book until recently (April 2019).
Additionally, at that time (and since that time), only one FLEX Trader
has been submitting FLEX Orders into the FLEX Book, and only for a
limited purpose, as discussed above. The activity in the FLEX Book
represented only approximately 1.2% of all FLEX trading from the period
of April to August 2019. As a result, the proposed elimination of the
Exchange's ability to make a FLEX Book available is consistent with the
Exchange's current authority to not make a FLEX Book available, and
will also have no significant impact on FLEX trading, given that the
vast majority of FLEX trading occurs outside of the book, and given
that only one customer has recently been using the book for a limited
purpose.
---------------------------------------------------------------------------
\143\ See current Rule 24A.4(b)(2) and (c)(2).
\144\ See current Rule 24A.1(y). As discussed above, elimination
of the IOC trade condition will have no impact, as it is no longer
necessary given that all FLEX Orders submitted for electronic
execution may only execute following an auction or be cancelled.
\145\ See current Rule 24A.5(b).
---------------------------------------------------------------------------
The Exchange believes the proposed rule change to allow multiple
electronic FLEX auctions to overlap will benefit investors, as it may
lead to an increase in Exchange volume and permit the Exchange to
further compete with the OTC market, while providing for additional
opportunities for price discovery and execution. Although electronic
FLEX Auctions will be allowed to overlap, the Exchange does not believe
that this raises any issues that are not addressed through the proposal
as described above. For example, although overlapping, each Auction
will be started in a sequence and with a time that will determine its
processing. Thus, even if there are two Auctions that commence and
conclude, at nearly the same time, each Auction will have a distinct
conclusion at which time the Auction will be allocated. Additionally,
FLEX Orders submitted into an electronic FLEX Auction will be able to
execute only against FLEX responses submitted to that Auction. If
market participants desire to have interest execute against both FLEX
Orders subject to concurring FLEX Auctions, market participants may
submit responses to both Auctions.
Additionally, the proposed rule change to permit concurrent
auctions is not novel, and is consistent with functionality already in
place on other exchanges with respect to other types of auctions.\146\
The Exchange does not believe the unique terms of FLEX Options create
any additional issues not previously considered by the Commission with
respect to concurrent auctions. As described above, the Exchange
believes concurrent auctions may increase execution opportunities, and
permit more timely executions, of FLEX Orders in a more timely fashion,
which would ultimately benefit investors. Additionally, the Rules do
not currently prevent a COA of a complex order from occurring at the
same time as an AIM in one of the components of a complex order subject
to a COA. Therefore, the Exchange believes it is similarly reasonable
to permit multiple
[[Page 54689]]
FLEX Auctions in the same series to occur at the same time.
---------------------------------------------------------------------------
\146\ See, e.g., EDGX Rules 21.19(c)(1) and 21.22(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. Other Exchange rules to take
effect following the migration also permit concurrent auctions. See,
e.g., Rules 5.33, 5.37, and 5.38 in the shell Rulebook.
---------------------------------------------------------------------------
The proposed rule change to permit all FLEX Traders to respond to
electronic FLEX Auctions will benefit investors. Permitting all FLEX
traders to submit responses, as opposed to not permitting options
market-makers at away exchanges to respond, may result in more FLEX
Traders having the opportunity to participate in executions at the
conclusion of electronic FLEX Auctions. Additionally, it may increase
liquidity in these auctions, which may lead to more opportunities to
price improvement and ultimately benefit investors.
The Exchange believes the proposed rule change regarding the time
at which trading in FLEX Options will be available will benefit
investors. Because market participants incorporate transaction prices
of underlying securities or the values of underlying indexes when
pricing options (including FLEX Options), the Exchange believes it will
benefit investors for FLEX Options trading to not be available until
that information has begun to be disseminated in the market. Because
the Exchange will have no electronic book of resting orders for FLEX
Options, and no opening rotation, at the time at which FLEX Trading
opens, there are (and will be) no automatic executions. Therefore,
being ``open'' for FLEX trading merely means that FLEX Traders may
submit FLEX Orders into one of the various FLEX Auctions, at the
conclusion of which executions in FLEX Auctions may occur (which are
all discussed below). Additionally, the proposed trigger events occur
for many underlying securities or indexes within one second of 9:30
a.m. Eastern Time (which is consistent with the current time at which
the Exchange has determined to open FLEX Option classes), and the
majority occur within ten seconds. Therefore, pursuant to the proposed
rule change, the opening of FLEX Options for trading may occur over a
longer timeframe, which would further reduce any potential market
impact of the change to the opening time for FLEX Options. While the
Exchange believes it is important to open series for trading as soon as
possible, the Exchange also believes the proposed rule change will
permit it to manage the number of FLEX Option series that may begin to
trade during a short time period to ensure a fair and orderly opening
in all options listed on the Exchange. The Exchange further believes
aligning the trigger events for the opening of FLEX and non-FLEX
Options may eliminate any confusion among market participants regarding
when options with the same underlying are open for trading. The
Exchange also notes that FLEX Options trading volume currently
represents approximately 1.5% of total trading volume on the Exchange,
and therefore the Exchange believes any potential market impact of this
change would be de minimis.
The Exchange believes the proposed order types and instructions
that will be available for FLEX Orders will promote just and equitable
principles of trade, and benefit investors, because they will provide
FLEX Traders with control over the executions of their FLEX Orders
while being consistent with the proposed FLEX trading processes.
Instructions that are available for non-FLEX Orders but will not be
available for FLEX Orders are consistent with the fact that FLEX Orders
will only be eligible to trade following an electronic or open outcry
FLEX Auction and not rest in an electronic book or route away, and
because there is no market for FLEX Options (for which most Order
Instructions and Times-in-Force set forth in Rule 5.6 in the shell
Rulebook are relevant). The Exchange believes making these order types,
instructions, and times-in-force available for FLEX Orders is
consistent with the Exchange's authority to designate availability of
orders types on a class-by-class basis.\147\ The Exchange believes the
proposed rule change will benefit investors by specifying the order
types that are available for FLEX trading, as it provides investors
with additional transparency.
---------------------------------------------------------------------------
\147\ See Rule 6.53 in the current Rulebook and Rule 5.6 in the
shell Rulebook.
---------------------------------------------------------------------------
Similarly, the proposed rule change regarding FLEX Order
requirements will benefit investors, because it provides investors with
additional transparency regarding complex order entry requirements for
FLEX Options. As noted above, certain of the proposed requirements are
consistent with current rules, while the restrictions on permissible
combinations of exercise styles and settlement types on the leg
components will have no impact on trading, as FLEX Traders do not
currently trade complex orders with legs in the combinations that the
proposed rule change proposes to restrict. Additionally, as noted
above, the proposed rule change to require FLEX Traders to input the
leg prices of complex FLEX Orders upon entry merely moves this
requirement to the time of order submission rather than post-trade (as
is required today). Additionally, much of the proposed rule change is
merely relocating rules from the current Rulebook to the shell
Rulebook, including flexible terms (such as settlement type, exercise
price, exercise style, and expiration date) and fungibility provisions,
and making only nonsubstantive changes, which will therefore have no
impact on FLEX trading. The Exchange believes providing a reorganized,
holistic rulebook upon migration will also benefit investors.
The proposed rule change to adopt electronic and open outcry FLEX
Auctions is also consistent with Section 11(a)(1) of the Act \148\ and
the rules promulgated thereunder. Generally, Section 11(a)(1) of the
Act restricts any member of a national securities exchange from
effecting any transaction on such exchange for (i) the member's own
account, (ii) the account of a person associated with the member, or
(iii) an account with respect to which the member or a person
associated with the member exercises investment discretion, unless a
specific exemption is available. Examples of common exemptions include
the exemption for transactions by broker dealers acting in the capacity
of a market maker under Section 11(a)(1)(A),\149\ the ``G'' exemption
for yielding priority to non-members under Section 11(a)(1)(G) of the
Act and Rule 11a1-1(T) thereunder,\150\ and ``Effect vs. Execute''
exemption under Rule 11a2-2(T) under the Act.\151\
---------------------------------------------------------------------------
\148\ 15 U.S.C. 78k(a). Section 11(a)(1) prohibits a member of a
national securities exchange from effecting transactions on that
exchange for its own account, the account of an associated person,
or an account over which it or its associated person exercises
discretion unless an exception applies.
\149\ 15 U.S.C. 78k(a)(1)(A).
\150\ 15 U.S.C. 78k(a)(1)(G) and 17 CFR 240.11a1-1(T).
\151\ 17 CFR 240.11a2-2(T).
---------------------------------------------------------------------------
As noted above, FLEX Traders that effect FLEX transactions in open
outcry may qualify for the ``G'' exemption by yielding priority to any
bid (offer) at the same price of any other bid (offer) that has
priority over those broker-dealer orders under this Rule. However, FLEX
Traders may not rely on the ``G'' exemption to execute proprietary
orders in the electronic FLEX Auctions as set forth in proposed Rule
5.72(e). Therefore, a FLEX Trader must ensure it complies with another
exemption, such as the ``Effect vs. Execute'' exemption, when
submitting proprietary FLEX Orders for electronic execution.
The ``Effect vs. Execute'' exemption permits an exchange member,
subject to certain conditions, to effect transactions for covered
accounts by arranging for an unaffiliated member to execute
transactions on the exchange. To
[[Page 54690]]
comply with Rule 11a2-2(T)'s conditions, a member: (a) Must transmit
the order from off the exchange floor; (b) may not participate in the
execution of the transaction once it has been transmitted to the member
performing the execution; \152\ (c) may not be affiliated with the
executing member; and (d) with respect to an account over which the
member has investment discretion, neither the member nor its associated
person may retain any compensation in connection with effecting the
transaction except as provided in the Rule. For the reasons set forth
below, the Exchange believes that TPHs entering orders into an
electronic FLEX Auction would satisfy the requirements of Rule 11a2-
2(T).
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\152\ The member may, however, participate in clearing and
settling the transaction.
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The Exchange believes the electronic platform component of the
electronic FLEX Auction will place all users--both TPHs and non-TPHs on
the ``same footing'' as intended by Rule11a2-2(T). Given the automated
matching and execution at the conclusion of an electronic FLEX Auction,
no TPH would enjoy any special control over the time of execution or
special order handling advances for orders executed electronically
following an electronic FLEX Auction, because such orders would be
centrally processed for execution by computer, as compared to being
handled by a member through bids and offers on the trading floor.
Because the electronic trading platform components are designed to
prevent any TPHs from gaining any time and place advantages, the
Exchange believes the proposed electronic FLEX Auction satisfies the
four components of the ``Effect vs. Execute'' rule as well as the
general policy objectives of Section 11(a) of the Act.
In the context of automated trading systems, the Commission has
found that the off-floor transmission requirement is met if a covered
account order is transmitted from off the floor directly to the
Exchange by electronic means.\153\ Because the Exchange's electronic
FLEX Auction receives, and will continue to receive, orders from FLEX
Traders electronically through remote terminals or computer-to-computer
interfaces, the Exchange believes that orders submitted to an
electronic FLEX Auction from off the Exchange's trading floor will
satisfy the off-floor transmission requirement.
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\153\ See, e.g., Securities Exchange Act Release Nos. 61419
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031)
(approving BATS options trading); 59154 (December 23, 2008), 73 FR
80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity
securities listing and trading on BSE); 57478 (March 12, 2008), 73
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 53128 (January 13, 2006), 71
FR 3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq
Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November
1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility); and 15533
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979
Release'').
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The second condition of Rule 11a2-2(T) requires that neither a
member nor an associated person of such member participate in the
execution of its order. The Exchange represents that, upon submission
to an electronic FLEX Auction, an order or FLEX response will be
executed automatically pursuant to the Rules set forth for electronic
FLEX Auctions. In particular, execution of a FLEX Order or FLEX
response sent to the electronic FLEX Auction depends not on the FLEX
Trader entering the FLEX Order or FLEX response, but rather on what
other orders and responses are present and the priority of those orders
and responses. Thus, at no time following the submission of a FLEX
Order or FLEX response is a FLEX Trader or associated person of such
FLEX Trader able to acquire control or influence over the result or
timing of order or response execution.\154\ Once the FLEX Order or FLEX
response, as applicable, has been transmitted, the FLEX Trader that
submitted the order or response, respectively, will not participate in
its execution. No FLEX Trader, including the Submitting FLEX Trader,
will see a FLEX response submitted into an electronic FLEX Auction, and
therefore and will not be able to influence or guide the execution of
their FLEX Orders or FLEX responses, as applicable.
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\154\ Submitting FLEX Traders may modify or cancel their FLEX
Orders, and all FLEX Traders may modify or cancel their responses,
after being submitted to an electronic FLEX Auction. The Exchange
notes that the Commission has stated that the non-participation
requirement does not preclude members from cancelling or modifying
orders, or from modifying instructions for executing orders, after
they have been transmitted so long as such modifications or
cancellations are also transmitted from off the floor. See
Securities Exchange Act Release No. 14563 (March 14, 1978), 43 FR
11542, 11547 (the ``1978 Release'').
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Rule 11a2-2(T)'s third condition requires that the order be
executed by an exchange member who is unaffiliated with the member
initiating the order. The Commission has stated that the requirement is
satisfied when automated exchange facilities, such as the electronic
FLEX Auction, are used, as long as the design of these systems ensures
that members do not possess any special or unique trading advantages in
handling their orders after transmitting them to the exchange.\155\ The
Exchange represents that the electronic FLEX Auction is designed so
that no FLEX Trader has any special or unique trading advantage in the
handling of its orders after transmitting its orders to the mechanism.
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\155\ In considering the operation of automated execution
systems operated by an exchange, the Commission noted that, while
there is not an independent executing exchange member, the execution
of an order is automatic once it has been transmitted into the
system. Because the design of these systems ensures that members do
not possess any special or unique trading advantages in handling
their orders after transmitting them to the exchange, the Commission
has stated that executions obtained through these systems satisfy
the independent execution requirement of Rule 11a2-2(T). See 1979
Release.
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A TPH (not acting in a market-maker capacity) could submit an order
for a covered account from off of the Exchange's trading floor to an
unaffiliated Floor Broker for submission for execution in the FLEX
Auction from the trading floor and satisfy the ``Effect vs. Execute''
exemption (assuming the other conditions are satisfied).\156\ However,
a TPH could not submit an order for a covered account to its ``house''
Floor Broker on the trading floor for execution and rely on this
exemption. Because a TPH may not rely on the ``G'' exemption when
submitting a FLEX Order to an electronic FLEX Auction,\157\ it would
need to ensure another exception applies in this situation.
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\156\ Orders for covered accounts that rely on the ``Effect vs.
Execute'' exemption in this scenario must be transmitted from a
remote location directly to the Floor Broker on the trading floor by
electronic means.
\157\ See proposed Rule 5.72(e).
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Rule 11a2-2(T)'s fourth condition requires that, in the case of a
transaction effected for an account with respect to which the
initiating member or an associated person thereof exercises investment
discretion, neither the initiating member nor any associated person
thereof may retain any compensation in connection with effecting the
transaction, unless the person authorized to transact business for the
account has expressly provided otherwise by written contract referring
to Section 11(a) of the Act and Rule 11a2-2(T) thereunder.\158\ The
Exchange
[[Page 54691]]
recognizes that FLEX Traders relying on Rule 11a2-2(T) for transactions
effected through the electronic FLEX Auction must comply with this
condition of the Rule, and the Exchange will enforce this requirement
pursuant to its obligations under Section 6(b)(1) of the Act to enforce
compliance with federal securities laws.
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\158\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule
11a2-2(T)(d) requires a member or associated person authorized by
written contract to retain compensation, in connection with
effecting transactions for covered accounts over which such member
or associated persons thereof exercises investment discretion, to
furnish at least annually to the person authorized to transact
business for the account a statement setting forth the total amount
of compensation retained by the member in connection with effecting
transactions for the account during the period covered by the
statement which amount must be exclusive of all amounts paid to
others during that period for services rendered to effect such
transactions. See also 1978 Release (stating ``[t]he contractual and
disclosure requirements are designed to assure that accounts
electing to permit transaction-related compensation do so only after
deciding that such arrangements are suitable to their interests'').
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Therefore, Exchange believes that the instant proposal is
consistent with Rule 11a2-2(T), and that therefore the exception should
apply in this case. Therefore, the Exchange believes the proposed rule
change is consistent with Section 11(a) of the Act and the rules
thereunder.
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 rule change will apply in the same manner
to all FLEX Orders submitted for electronic or open outcry execution.
The trading of FLEX Auctions, and the use of either of the proposed
FLEX Auctions, are voluntary for TPHs to use and will be available to
all TPHs that register with the Exchange as FLEX Traders. As discussed
above, the Exchange believes the proposed rule change should encourage
FLEX Traders to compete amongst each other by responding with their
best price and size for a particular auction. Because bids and offers
in response to an Auction (whether electronic or open outcry) will have
the same opportunity to execute against the FLEX Order (which is
allocated in a pro-rata manner against bids and offers at the same
price), a FLEX Trader will be encouraged to respond to FLEX Auctions
with bids and offers at the best and most aggressive prices. The
Exchange believes the proposed rule change will encourage FLEX Traders
to compete vigorously to provide the opportunity for price improvement
for FLEX Orders in a competitive auction process.
The Exchange does not believe the proposed rule change will impose
any burden on intermarket competition. The proposed rule change
simplifies the FLEX trading principles, and harmonizes the FLEX auction
trading procedures with the non-FLEX trading. The Exchange believes
aligning FLEX trading processes with non-FLEX trading processes with
which FLEX Traders are familiar may further encourage FLEX trading on
the Exchange. The Exchange believes this is a further improved and
comparable alternative to the OTC market in customized options. By
enhancing our FLEX trading platform and making it similar to trading
procedures in non-FLEX options, with which market participants are
generally more familiar, the Exchange believes it may be a more
attractive alternative to the OTC market. The Exchange believes market
participants benefit from being able to trade customized options in an
exchange environment in several ways, including but not limited to the
following: (1) Enhanced efficiency in initiating and closing out
position; (2) increased market transparency; and (3) heightened contra-
party creditworthiness due to the role of OCC as issuer and guarantor
of FLEX Options.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \159\ and Rule
19b-4(f)(6) thereunder.\160\
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\159\ 15 U.S.C. 78s(b)(3)(A).
\160\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \161\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \162\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has requested that the Commission 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 FLEX trading functionality to market
participants on an uninterrupted basis. In support of its waiver
request, the Exchange cites to similarities between its proposed rule
and the rules for non-FLEX transactions pursuant to the Exchange's
standard auction process.\163\ In addition, the Exchange notes
similarities to certain functionalities already in place on other
exchanges.\164\ Additionally, the Exchange states that the proposal
relocates certain rules from the current Rulebook to the shell
Rulebook, including flexible terms and fungibility provisions, and
makes only non-substantive changes to such provisions, which the
Exchange believes will have no impact on FLEX trading. The Exchange
further notes that it has provided market participants with notice of
this change in advance of the system migration.\165\ For these reasons,
the Commission believes that waiving 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 upon filing.\166\
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\161\ 17 CFR 240.19b-4(f)(6).
\162\ 17 CFR 240.19b-4(f)(6)(iii).
\163\ See, e.g., Rule 5.33(d) and Rule 5.85(a) of the shell
Rulebook.
\164\ See supra note 146.
\165\ See supra note 6.
\166\ 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).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission 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.
[[Page 54692]]
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-2019-084 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-2019-084. 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-2019-084 and should be submitted on
or before October 31, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\167\
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\167\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-22144 Filed 10-9-19; 8:45 am]
BILLING CODE 8011-01-P