Justia Agencies And Commissions Securities And Exchange Commission 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 Automated Improvement Mechanism and Solicitation Auction Mechanism for 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, 54659-54671 [2019-22157]

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 Automated Improvement Mechanism and Solicitation Auction Mechanism for 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, 54659-54671 [2019-22157]

Download as PDF Federal Register / Vol. 84, No. 197 / Thursday, October 10, 2019 / Notices 19(b)(3)(A) of the Act 28 and subparagraph (f)(6) of Rule 19b–4 thereunder.29 A proposed rule change filed pursuant to Rule 19b–4(f)(6) under the Act 30 normally does not become operative for 30 days after the date of its filing. However, Rule 19b–4(f)(6)(iii) 31 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. The Commission notes that waiver of the operative delay would allow the Exchange to effect the changes to its Rulebook and By-Laws, which would eliminate obsolete provisions in the Exchange’s Rulebook and better align provisions in the Exchange’s By-Laws with those in the By-Laws of its affiliates, in time for the Exchange Board meeting on September 25, 2019. The Commission believes that waiver of the 30-day operative delay is consistent with the protection of investors and the public interest. Accordingly, the Commission hereby waives the operative delay and designates the proposed rule change operative upon filing.32 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule change should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. 28 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. 30 17 CFR 240.19b–4(f)(6). 31 17 CFR 240.19b–4(f)(6)(iii). 32 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). 29 17 VerDate Sep<11>2014 19:50 Oct 09, 2019 Jkt 250001 54659 Comments may be submitted by any of the following methods: SECURITIES AND EXCHANGE COMMISSION Electronic Comments [Release No. 34–87237; File No. SR–CBOE– 2019–093] • 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– GEMX–2019–14 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–GEMX–2019–14. 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–GEMX–2019–14 and should be submitted on or before October 31, 2019. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.33 Jill M. Peterson, Assistant Secretary. [FR Doc. 2019–22141 Filed 10–9–19; 8:45 am] BILLING CODE 8011–01–P 33 17 PO 00000 Fmt 4703 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 4, 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 automated improvement mechanism (‘‘AIM’’) and solicitation auction mechanism (‘‘SAM’’) for flexible exchange options (‘‘FLEX Options’’) (‘‘FLEX AIM’’ and ‘‘FLEX SAM,’’ respectively) and moves those Rules from the currently effective Rulebook (‘‘current Rulebook’’) to the shell structure for the Exchange’s Rulebook that will become effective upon the migration of the Exchange’s trading platform to the same system used by the Cboe Affiliated Exchanges (as defined below) (‘‘shell Rulebook’’). The text of the proposed rule change is provided in Exhibit 5. 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). 2 17 CFR 200.30–3(a)(12). Frm 00075 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 Automated Improvement Mechanism and Solicitation Auction Mechanism for 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 Sfmt 4703 E:\FR\FM\10OCN1.SGM 10OCN1 54660 Federal Register / Vol. 84, No. 197 / Thursday, October 10, 2019 / Notices 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 Rule provision Current rule (current rulebook) Proposed rule (shell rulebook) A FLEX Trader may electronically submit for execution an order (which may be a simple or complex order) it represents as agent (‘‘Agency Order’’) against principal or solicited order(s) (except for the account of any FLEX MarketMaker 6 with an appointment in the applicable FLEX Option class on the Exchange (an ‘‘Initiating Order’’) provided it submits the Agency Order for electronic execution into a FLEX AIM Auction. Rule 24A.5A, introductory paragraph and Interpretations and Policies .04 and .05. Rule 5.73, introductory paragraph. An Agency Order must be in a FLEX Option class the Exchange designates as eligible for FLEX AIM Auctions. The Agency Order and Initiating Order must each be a FLEX Order that complies with Rule 5.72(b) in a permissible FLEX Option series that complies with Rule 4.21. Rule 24A.5A(a)(1). N/A ..................... Rule 5.73(a)(1) .. The Initiating FLEX Trader must mark an Agency Order for FLEX AIM Auction processing. There is no minimum size for Agency Orders. The Initiating Order must be for the same size as the Agency Order. Rule ................... 24A.5A(b)(1)(i) ... Rule 24A.5A(a)(1) and (2) and Interpretation and Policy .03. Rule ................... 5.73(a)(3) ........... Rule 5.73(a)(4) .. 5 See SR–CBOE–2019–045 (proposed changes to the Exchange’s non-FLEX AIM Auction); SR– CBOE–2019–051 (proposed changes to the Exchange’s non-FLEX complex AIM Auctions); SR– CBOE–2019–063 (proposed changes to the Exchange’s non-FLEX SAM Auction); SR–CBOE– 2019–064 (proposed changes to the Exchange’s nonFLEX C–SAM Auction); and SR–CBOE–2019–084 technology migration, the Exchange has a shell Rulebook that resides alongside its current Rulebook, which shell Rulebook will contain the Rules that will be in place upon completion of the Cboe Options technology migration. The proposed rule change amends current Rules 24A.5A and 24A.5B regarding the FLEX AIM Auction and the FLEX SAM Auction, respectively. The proposed changes reflect recent amendments to general FLEX trading rules as well as recent amendments to the non-FLEX AIM and SAM Auctions.5 The proposed rule change amends and moves the following provisions regarding the terms of FLEX AIM and SAM Auctions 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, update cross-references and paragraph numbering and lettering, reorganize certain provisions, and eliminate redundant provisions. Proposed substantive changes FLEX AIM Auction VerDate Sep<11>2014 19:50 Oct 09, 2019 Jkt 250001 PO 00000 Frm 00076 Rule 5.73(a)(2) .. Fmt 4703 The proposed rule change clarifies that an Initiating Order may consist of one or more solicited orders, as further discussed below. The proposed rule change also specifies in the introductory paragraph that both simple and complex orders may be submitted into a FLEX AIM Auction, as the auction will apply to both simple and complex orders in a substantially similar manner, as further discussed below. The proposed rule change deletes a price requirement related to the best bid or offer (‘‘BBO’’),7 because there will no longer be an electronic book (and thus no BBO) for FLEX Options.8 Because the Exchange does not currently have an electronic book for FLEX Option classes, and thus there are no resting orders to potentially execute at the conclusion of a FLEX AIM Auction, deletion of this provision will have no impact on how FLEX AIM Auctions operate. None. This requirement is not explicitly stated in the current Rules; however, it is consistent with current functionality, and the proposed rule change merely states this in the Rules. For a FLEX AIM Auction to occur, the orders submitted would need to be in a series eligible for FLEX trading, and thus include all the terms necessary to comprise a FLEX Option series.9 None. The proposed rule change deletes the provision from current subparagraph (a)(1) that permits the Exchange to designate eligibility size parameters for FLEX AIM Auctions. The Exchange has not designated any such eligibility size parameters, and intends to continue to have no minimum size requirements for Agency Orders, so the Exchange no longer needs this flexibility. The proposed rule change clarifies in the Rules that the Initiating Order must be for the same size as the Agency Order, which is implied by the current Rules.10 Sfmt 4703 (proposed changes to the Exchange’s FLEX trading rules). E:\FR\FM\10OCN1.SGM 10OCN1 Federal Register / Vol. 84, No. 197 / Thursday, October 10, 2019 / Notices 54661 Current rule (current rulebook) Proposed rule (shell rulebook) The price of the Agency Order and Initiating Order must be in an increment the Exchange determines on a class basis (which may not be smaller than the amounts set forth in Rule 5.4(c)(4)11 of the shell Rulebook). The price must be in the same format (i.e., price or percentage) as the exercise price of the FLEX Option series. If the Agency Order and Initiating Order are complex orders, the price must be a net price 12 for the complex strategy. Rule ................... 24A.5A(b)(1)(vii) and Interpretation and Policy .05. Rule 5.73(a)(5) .. An Initiating FLEX Trader may only submit an Agency Order to a FLEX AIM Auction after trading in FLEX Options is open pursuant to Rule 5.7114. The System rejects or cancels both an Agency Order and Initiating Order submitted to a FLEX AIM Auction that do not meet the conditions in proposed paragraph (a). The Initiating Order must stop the entire Agency Order at a price in the same format (i.e., price or percentage) as the exercise price of the FLEX Option series. If the Agency Order and Initiating Order are complex orders, the price must be a net price for the complex strategy. The Initiating FLEX Trader must specify (1) a single price at which it seeks to execute the Agency Order against the Initiating Order (a ‘‘single-price submission’’), including whether it elects to have last priority in allocation (as described in proposed subparagraph (e)(4)); or (2) an initial stop price and instruction to automatically match the price and size of all FLEX AIM responses (‘‘auto-match’’) at each price, up to a designated limit price, better than the price at which the balance of the Agency Order can be fully executed ( the ‘‘final auction price’’). The System rejects or cancels both an Agency Order and Initiating Order submitted to a FLEX AIM Auction that do not meet the conditions in proposed paragraph (b). One or more FLEX AIM Auctions in the same FLEX Option series or complex strategy, as applicable, may occur at the same time. N/A ..................... Rule ................... 5.73(a)(6) ........... N/A ..................... Rule 5.73(a) ....... This is consistent with current functionality and the concept of eligibility requirements, and the proposed rule change explicitly states this in the Rule. Rule ................... 24A.5A(b)(1)(vii) and Interpretation and Policy .05. Rule ................... 24A.5A(a)(2) and (b)(1)(i). Rule 5.73(b) ....... The proposed rule change references Rule 5.4 in the shell Rulebook, which describes the permissible minimum increments for FLEX Option series, rather than repeats those increments. There is no substantive change to the permissible minimum increments for orders submitted to a FLEX AIM Auction. Rule 5.73(b)(1) and (2). The proposed rule change deletes the provision that the Agency Order will be stopped at the better of the BBO or the Agency Order’s limit price if designated as auto-match, and instead will have an initial stop price, because there will no longer be an electronic book (and thus no BBO) for FLEX Options.15 N/A ..................... Rule 5.73(b) ....... This is consistent with current functionality and the concept of eligibility requirements, and the proposed rule change explicitly states this in the Rule. Rule ................... 24A.5A(b) and Interpretation and Policy .05. Rule 5.73(c)(1) ... The System initiates the FLEX AIM Auction process by sending a FLEX AIM Auction notification message detailing the side, size, Auction ID, the length of the FLEX AIM Auction period, and FLEX option series or complex strategy, as applicable, of the Agency Order to all FLEX Traders that elect to receive FLEX AIM Auction notification messages. FLEX AIM Auction notification messages are not disseminated to OPRA. Rule ................... 24A.5A(b)(1)(ii) and (vi). Rule 5.73(c)(2) ... The ‘‘FLEX AIM Auction period’’ is a period of time designated by the Initiating FLEX Trader, which may be no less than three seconds and no more than five minutes. The designated length of the FLEX AIM Auction period may not be longer than the amount of time remaining until the market close. Rule ................... 24A.5A(b)(1)(iii) Rule 5.73(c)(3) ... An Initiating FLEX Trader may not modify or cancel an Agency Order or Initiating Order after submission to a FLEX AIM Auction. Rule ................... 24A.5A(b) ........... Rule 5.73(c)(4) ... Any FLEX Trader may submit responses to a FLEX AIM Auction that are properly marked specifying price, size, side, and the Auction ID for the FLEX AIM Auction to which the FLEX Trader is submitting the response. A FLEX AIM response may only participate in the FLEX AIM Auction with the Auction ID specified in the response. Rule ................... 24A.5A(b)(1)(iv) and (v). Rule 5.73(c)(5) ... The proposed rule change permits concurrent FLEX AIM Auctions, which the current rule prohibits, as further discussed below. The proposed rule change also deletes the provision that says unrelated FLEX Orders may not be submitted to the electronic book for the duration of a FLEX AIM Auction, because there will no longer be an electronic book (and thus no BBO) for FLEX Options. The current rule states the auction message (currently called a request for responses (‘‘RFR’’)) details the size and side of the order, which message is set to all FLEX Traders that have elected to receive RFRs upon receipt of a properly designated Agency Order for FLEX AIM processing. Other than changes to terminology and other nonsubstantive changes, the proposed rule change adds that this message will also include the Auction ID and options series or complex strategy, as applicable, of the Agency Order. This is consistent with the current RFR that is disseminated, and the proposed rule change merely adds details to the rule. The proposed rule change to add that the FLEX AIM Auction notification message includes the length of the FLEX AIM Auction period relates to the proposed change below that the Initiating FLEX Trader, rather than the Exchange, will designate the length of the FLEX AIM Auction period (and therefore FLEX Traders will know how long they have to respond to a FLEX AIM Auction). The proposed rule change also adds that AIM Auction notification messages are not included in the disseminated OPRA, which is also consistent with current functionality.16 The proposed rule change adds a maximum time to the range for the FLEX AIM Auction period (the minimum potential auction period remains three seconds), which proposed maximum time is consistent with current Exchange authority under the current Rules. Additionally, this corresponds to the same permissible time range as that for electronic FLEX Auctions pursuant to Rule 5.72(c) in the shell Rulebook, and permits the Initiating FLEX Trader to designate the length of the FLEX AIM Auction when submitting the Agency Order rather than have the Exchange establish a length for all FLEX AIM Auctions. It also ensures that a FLEX AIM Auction will conclude prior to the close of trading to prevent executions after the market close. This is consistent with the standard FLEX electronic auction, which permits FLEX Traders to designate the length of that auction (and permits it to be from three seconds to five minutes). This provides consistency among electronic FLEX auctions. Additionally, it provides FLEX Traders with flexibility regarding the duration of the exposure time, which it may want to be longer than three seconds due to the terms of the FLEX Option series being auctioned.17 The proposed rule change makes only nonsubstantive changes to this provision, as well as clarifies that the prohibition on the Initiating FLEX Trader from modifying or cancelling an order after submission to a FLEX AIM Auction applies to both the Agency Order and the Initiating Order (the current rules only references the Agency Order; however, they are submitted as a pair, and thus not being able to modify or cancel the Agency Order means that the Initiating FLEX Trader is not able to modify or cancel the Initiating Order either). The current rule specifies that responses must include prices and sizes; the proposed rule change adds responses must also specify side and an Auction ID, which is consistent with current functionality and merely adds details to the rule. The proposed rule change adds that a FLEX AIM response may only participate in the AIM Auction with the Auction ID specified in the response. This is consistent with current functionality. The Exchange proposes to include this language given the above proposal that permits concurrent FLEX AIM Auctions. The proposed rule change deletes the provision that caps the price of a FLEX AIM response at the opposite side of the BBO, because there will no longer be an electronic book (and thus no BBO) for FLEX Options. Rule provision VerDate Sep<11>2014 19:50 Oct 09, 2019 Jkt 250001 PO 00000 Frm 00077 Fmt 4703 Proposed substantive changes The current rule state the minimum increment for responses and the Initiating TPH’s submission is determined by the Exchange but may not be smaller than $0.01 or .01%, and premiums are rounded to the nearest minimum increment. This is consistent with the minimum increment available for all FLEX Trading, so the proposed rule change merely references Rule 5.4(c)(4) in the shell Rulebook, which describes the permissible minimum increments for FLEX Option series, rather than repeats those increments. Additionally, while current rules permit bids and offers (including the price submitting into a FLEX AIM Auction) to be in a different format than the exercise price of a FLEX Option series, the current functionality does not permit this. Rule 5.3(e)(3) in the shell Rulebook 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.13 There is no substantive change to the permissible minimum increments for orders submitted to a FLEX AIM Auction. The proposed rule change maintains the rule provision that complex Agency and Initiating Orders must include a net price. See the discussion below regarding the application of FLEX AIM to complex orders, including proposed changes to current Rule 24A.5A, Interpretation and Policy .05. This is consistent with current functionality, as executions cannot occur prior to the opening of trading. The proposed rule change clarifies this in the Rule. Sfmt 4703 E:\FR\FM\10OCN1.SGM 10OCN1 54662 Federal Register / Vol. 84, No. 197 / Thursday, October 10, 2019 / Notices Current rule (current rulebook) Rule provision Proposed rule (shell rulebook) Proposed substantive changes The minimum price increment for FLEX AIM responses is the same as the one the Exchange determines for a class pursuant to subparagraph (a)(4) above, and must be in the same format (i.e., price or percentage) as the exercise price of the FLEX Option series. A response to a FLEX AIM Auction of a complex Agency Order must have a net price. The System rejects a FLEX AIM response that is not in the applicable minimum increment or format. A FLEX Trader may submit multiple FLEX AIM responses at the same or multiple prices to a FLEX AIM Auction. For purposes of a FLEX AIM Auction, the System aggregates all of a FLEX Trader’s FLEX AIM responses for the same EFID at the same price. The System caps the size of a FLEX AIM response, or the aggregate size of a FLEX Trader’s FLEX AIM responses for the same EFID at the same price, at the size of the Agency Order (i.e., the System ignores size in excess of the size of the Agency Order when processing the FLEX AIM Auction). FLEX AIM responses must be on the opposite side of the market as the Agency Order. The System rejects a FLEX AIM response on the same side of the market as the Agency Order. FLEX AIM responses are not visible to AIM Auction participants or disseminated to OPRA. A FLEX Trader may modify or cancel its FLEX AIM responses during the FLEX AIM Auction. Rule ................... 24A.5A(b)(1)(vii) and Interpretation and Policy .05. Rule 5.73(c)(5)(A). The proposed rule change adds that the System rejects a FLEX AIM response that is not in the applicable minimum increment or format, which is consistent with current functionality and merely adds detail to the rule. See the discussion below regarding the application of FLEX AIM to complex orders, including proposed changes to current Rule 24A.5A, Interpretation and Policy .05. N/A ..................... Rule ................... 5.73(c)(5)(B) and (C). This is consistent with current functionality. Current Rule 24A.5A contains no restriction on how many responses a FLEX Trader may submit; the proposed rule change merely makes this explicit in the Rules. The proposed rule change also states for purposes of a FLEX AIM Auction, the System aggregates all of a FLEX Trader’s FLEX AIM responses for the same EFID at the same price. This (combined with the proposed size cap) will prevent a FLEX Trader from submitting multiple orders, quotes, or responses at the same price to obtain a larger pro-rata share of the Agency Order. N/A ..................... Rule ................... 5.73(c)(5)(D) ...... Rule ................... 24A.5A(b)(1)(vi) Rule ................... 24A.5A(b)(1)(viii) Rule ................... 5.73(c)(5)(E) ...... Rule ................... 5.73(c)(5)(F) ....... This is consistent with current functionality, and the proposed rule change merely adds this detail to the rules. Additionally, the Exchange believes this is reasonable given that the purpose of an AIM response is to trade against the Agency Order in the AIM Auction into which the AIM response was submitted. None. A FLEX AIM Auction concludes at the earliest to occur of the following times: (1) The end of the FLEX AIM Auction period; and (2) any time the Exchange halts trading in the affected series, provided, however, that in such instance the FLEX AIM Auction concludes without execution. At the conclusion of the FLEX AIM Auction, the System allocates the Initiating Order or FLEX AIM responses against the Agency Order at the best price(s) to the price at which the balance of the Agency Order can be fully executed (the ‘‘final auction price’’). If the FLEX AIM Auction results in no price improvement, the System executes the Agency Order at the stop price in the following order: Priority Customer responses receive first priority at each price level, the Initiating Order participation entitlement (50% or 40% depending on how many FLEX Traders submitted FLEX AIM responses at the same price receives second priority at the final auction price, all other responses have third priority and are allocated on a pro-rata basis pursuant to Rule 5.32(a)(1)(B), and the Initiating Order would have fourth priority to the extent there are any remaining contracts. If the FLEX AIM Auction results in price improvement for the Agency Order and the Initiating FLEX Trader selected a single-price submission, at each price better than the final auction price, the System executes the Agency Order first to Priority Customer responses (in time priority) and then to all other FLEX AIM responses, allocated on a pro-rata basis. At the final auction price, the System executes any remaining contracts from the Agency Order at that price in the order set forth in proposed subparagraph (e)(1). If the FLEX AIM Auction results in price improvement for the Agency Order and the Initiating FLEX Trader selected auto-match, at each price level better than the final auction price up to the designated limit price, the System executes the Agency Order against the Initiating Order for the number of contracts equal to the aggregate size of all FLEX AIM responses and then executes the Agency Order against those responses in the order set forth in proposed subparagraph (e)(2). At the final auction price, the System executes contracts at that price in the order set forth in proposed subparagraph (e)(1). If the Initiating FLEX Trader selects a single-price submission, it may elect for the Initiating Order to have last priority to trade against the Agency Order. If the Initiating FLEX Trader elects last priority, then notwithstanding proposed subparagraphs (e)(1) and (2), the System only executes the Initiating Order against any remaining Agency Order contracts at the stop price after the Agency Order is allocated to all FLEX AIM responses at all prices equal to or better than the stop price. Last priority information is not available to other market participants and may not be modified after it is submitted. A FLEX Trader may only use a FLEX AIM Auction where there is a genuine intention to execute a bona fide transaction. Rule ................... 24A.5A(b)(2) ...... Rule ................... 5.73(d) ............... Rule 24A.5A(b)(3). Rule 5.73(e) ....... The proposed rule change deletes references to executions against FLEX Orders, and whether the final auction price locks an order on the electronic book, because there will no longer be an electronic book (and thus no BBO) for FLEX Options, and thus Agency Orders will only execute responses or the Initiating Order, as applicable. The proposed rule change deletes the reference to a FLEX Appointed Market-Maker participation entitlement, as there are currently no FLEX Appointed Market-Makers, and the Exchange has not applied a participation entitlement, and as a result, the Exchange is deleting FLEX Appointed Market-Makers from the Rules.18 The proposed rule change provides that non-Priority Customer FLEX AIM responses will be allocated in a pro-rata manner rather than price-time. The majority of classes on the Exchange currently have a base allocation algorithm of pro-rata, and therefore the Exchange believes it is a reasonable manner in which to allocate FLEX AIM responses. FLEX AIM Priority Customer 19 responses will continue to have priority at each price level (in time priority); however, non-TPH broker-dealers will not and will be treated in the same manner as all other non-Priority Customer responses, as further discussed below. The Exchange notes the current rule states public customer orders have priority, rather than Priority Customers. Currently, the Exchange does not permit the submission of FLEX Orders with a Professional Capacity code, and so the terms public customer and Priority Customer practically mean the same thing. However, the Exchange plans to make the Professional Capacity code available for FLEX orders following migration, and because the System handles Professional orders like brokerdealer orders, those orders will not receive priority in a FLEX AIM Auction. Therefore, only Priority Customer responses will receive priority.20 The proposed rule change also permits the Initiating FLEX Trader to select last priority, as further discussed below. Finally, the proposed rule change adds that any unexecuted responses (or portions) at the conclusion of the FLEX AIM Auction will be cancelled. Rule ................... 24A.5A, Interpretation and Policy .01. Rule ................... 24A.5A, Interpretation and Policy .02. Rule ................... 5.73, Interpretation and Policy .01. Rule ................... 5.73, Interpretation and Policy .02. None. It will be deemed conduct inconsistent with just and equitable principles of trade and a violation of Rule 10.1 (to which the Exchange intends to move Rule 4.1 from the current Rulebook) to engage in a pattern of conduct where the Initiating FLEX Trader breaks up an Agency Order into separate orders for the purpose of gaining a higher allocation percentage than the Initiating FLEX Trader would have otherwise received in accordance with the allocation procedures contained in paragraph (e) above. VerDate Sep<11>2014 19:50 Oct 09, 2019 Jkt 250001 PO 00000 Frm 00078 Fmt 4703 The current Rule permits FLEX Traders to cancel a FLEX AIM response, 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). The proposed rule change deletes the provision that says a FLEX AIM Auction will conclude any time an RFR response matches the BBO on the opposite side of the market from the RFR responses, because there will no longer be an electronic book (and thus no BBO) for FLEX Options. The proposed rule change deletes the language that states the Agency Order cannot be broken up into separate orders for ‘‘two (2) or fewer contracts,’’ as that language is not in the corresponding provision for non-FLEX AIM (see Rules 5.37, Interpretation and Policy .02 and 5.38, Interpretation and Policy .02 of the shell Rulebook). Deletion of this language does not have any impact on the prohibited conduct in this provision, and provides consistency among the rules in the shell Rulebook regarding AIM Auctions. Sfmt 4703 E:\FR\FM\10OCN1.SGM 10OCN1 Federal Register / Vol. 84, No. 197 / Thursday, October 10, 2019 / Notices Current rule (current rulebook) Rule provision Proposed rule (shell rulebook) 54663 Proposed substantive changes FLEX SAM Auction A FLEX Trader (the ‘‘Initiating FLEX Trader’’) may electronically submit for execution an order (which may be a simple or complex order) it represents as agent (‘‘Agency Order’’) against a solicited order(s) (which cannot have a Capacity of F for the same EFID as the Agency Order or for the account of any FLEX Market Maker with an appointment in the applicable FLEX Option class on the Exchange) (‘‘Solicited Order’’) if it submits the Agency Order for electronic execution into a FLEX SAM Auction pursuant to this Rule. An Agency Order must be in a FLEX Option class the Exchange designates as eligible for FLEX SAM Auctions. The Agency Order and Solicited Order must each be a FLEX Order that complies with Rule 5.72(b) in a permissible FLEX Option series that complies with Rule 4.21. Rule ................... 24A.5B, introductory paragraph and Interpretations and Policies .01 and .04. Rule ................... 5.74, introductory paragraph. Rule ................... 24A.5B(a)(1) ...... N/A ..................... Rule ................... 5.74(a)(1) ........... Rule ................... 5.74(a)(2) ........... The Initiating FLEX Trader must mark an Agency Order for FLEX SAM Auction processing. The Agency Order must be for at least the minimum size designated by the Exchange (which may not be less than 500 standard option contracts or 5,000 mini-option contracts). The Solicited Order must be for (or must total, if the Solicited Order is comprised of multiple solicited orders) the same size as the Agency Order. The System handles each of the Agency Order and the Solicited Order as all-or-none. Rule ................... 24A.5B(b)(1)(i) ... Rule ................... 24A.5B(a)(1) and (2). Rule ................... 5.74(a)(3) ........... Rule ................... 5.74(a)(4) ........... The price of the Agency Order and Solicited Order must be in an increment the Exchange determines on a class basis (which may not be smaller than the amounts set forth in Rule 5.4(c)(4)). The price must be in the same format (i.e., price or percentage) as the exercise price of the FLEX Option series. If the Agency Order and Solicited Order are complex orders, the price must be a net price for the complex strategy. Rule ................... 24A.5B(a)(3) ...... Rule ................... 5.74(a)(5) ........... An Initiating FLEX Trader may only submit an Agency Order to a FLEX SAM Auction after trading in FLEX Options is open pursuant to Rule 5.71. The System rejects or cancels both an Agency Order and Solicited Order submitted to a FLEX SAM Auction that do not meet the conditions in proposed paragraph (a). The Solicited Order must stop the entire Agency Order at a price in the same format (i.e., price or percentage) as the exercise price of the FLEX Option series. If the Agency Order and Solicited Order are complex orders, the price must be a net price for the complex strategy. The Initiating FLEX Trader must specify a single price at which it seeks to execute the Agency Order against the Solicited Order. The System rejects or cancels both an Agency Order and Solicited Order submitted to a FLEX SAM Auction that does not meet the conditions in proposed paragraph (b). One or more FLEX SAM Auctions in the same FLEX Option series or complex strategy, as applicable, may occur at the same time. N/A ..................... Rule ................... 5.74(a)(6) ........... N/A ..................... Rule 5.74(a) ....... This is consistent with current functionality, and the proposed rule change explicitly states this in the Rule. Rule ................... 24A.5B(a)(3) and Interpretation and Policy .01, and 24A.5B(b)(1). Rule ................... 5.74(b) ............... Rule ................... 24A.5B(b) and Interpretation and Policy .01. Rule ................... 5.74(c)(1) ........... The System initiates the FLEX SAM Auction process by sending a FLEX SAM Auction notification message detailing the side, size, price, Capacity, Auction ID, the length of the FLEX SAM Auction period, and FLEX Option series or complex strategy, as applicable, of the Agency Order to all FLEX Traders that elect to receive FLEX SAM Auction notification messages. FLEX SAM Auction notification messages are not disseminated to OPRA. Rule ................... 24A.5B(b)(1)(ii) .. Rule ................... 5.74(c)(2) ........... The proposed rule change adds that the System rejects or cancels both an Agency Order and Solicited Order submitted to a FLEX SAM Auction that does not meet the conditions in proposed paragraph (b). This is consistent with current functionality, and the proposed rule change explicitly states this in the Rule. Additionally, while current rules permit bids and offers (including the price submitting into a FLEX SAM Auction) to be in a different format than the exercise price of a FLEX Option series, the current functionality does not permit this. Rule 5.3(e)(3) in the shell Rulebook 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.23 The proposed rule change permits concurrent FLEX SAM Auctions, which the current rule prohibits, as further discussed below. The proposed rule change also deletes the provision that says unrelated FLEX Orders may not be submitted to the electronic book for the duration of a FLEX SAM Auction, because there will no longer be an electronic book (and thus no BBO) for FLEX Options. The current rule states the auction message (currently called a request for responses (‘‘RFR’’)) details the price, size, and side of the order, which message is set to all FLEX Traders that have elected to receive RFRs upon receipt of a properly designated Agency Order for FLEX SAM processing. Other than changes to terminology and other nonsubstantive changes, the proposed provision specifies that the message will detail the Capacity of the Agency Order, an Auction ID, and the option series, in addition to the price, side, and size, of the Agency Order, which message is sent to all TPHs that elect to receive SAM Auction notification messages. This is consistent with the current auction message that is disseminated; the proposed rule change adds these details to the rule. The proposed rule change to add that the FLEX SAM Auction notification message includes the length of the FLEX SAM Auction period relates to the proposed change below that the Initiating FLEX Trader, rather than the Exchange, will designate the length of the FLEX SAM Auction period (and therefore FLEX Traders will know how long they have to respond to a FLEX SAM Auction). The proposed rule change also adds that FLEX SAM Auction notification messages are not included in the disseminated OPRA, which is also consistent with current functionality.24 VerDate Sep<11>2014 19:50 Oct 09, 2019 Jkt 250001 PO 00000 Frm 00079 Fmt 4703 The proposed rule change adds that the Solicited Order cannot have a Capacity F for the same executing firm ID (‘‘EFID’’) as the Agency Order. Current Rule 24A.5B does not contain a similar provision, but the Exchange currently enforces the requirement that the contra-side order be a solicitation rather than a facilitation through surveillance. The proposed rule change adds this functionality, which will help with the enforcement of this requirement, in addition to surveillance. The proposed rule change also specifies in the introductory paragraph that both simple and complex orders may be submitted into a FLEX SAM Auction, as the auction will apply to both simple and complex orders in a substantially similar manner, as further discussed below. None. This requirement is not explicitly stated in the current Rules; however, it is consistent with current functionality, and the proposed rule change merely states this in the Rules. For a FLEX SAM Auction to occur, the orders submitted would need to be in a series eligible for FLEX trading, and thus include all the terms necessary to comprise a FLEX Option series.21 None. The proposed rule change deletes the requirement that the Initiating FLEX Trader must designate each order entered into a FLEX SAM Auction as all-or-none (‘‘AON’’). The Exchange’s new system has been designed to automatically handle any orders submitted into a SAM Auction (using the appropriate messaging) as all-or-none, so the Initiating FLEX Trader will no longer be required to add any specific AON designations to the Agency Order or Solicited Order. Therefore, the proposed rule change adds that the System handles each of the Agency Order and the Solicited Order as all-or-none. The proposed rule change clarifies the size requirements for mini-option contracts, which are 1/10th the size of standard option contracts. This is consistent with current functionality and is merely adding detail to the rule. See Rule 5.5, Interpretation and Policy .22 in the current Rulebook (which permits the listing of mini-options); see also Rule 5.39(a)(3) (which has the same size requirements for non-FLEX SAM Auctions). The proposed rule change clarifies in the Rules that the Solicited Order must be for the same size as the Agency Order, which is implied by the current Rules.22 The current rule state the minimum increment for the Initiating TPH’s submission is determined by the Exchange but may not be smaller than $0.01 or .01%, and premiums are rounded to the nearest minimum increment. This is consistent with the minimum increment available for all FLEX Trading, so the proposed rule change merely references Rule 5.4(c)(4) in the shell Rulebook, which describes the permissible minimum increments for FLEX Option series, rather than repeats those increments. There is no substantive change to the permissible minimum increments for orders submitted to a FLEX SAM Auction. The proposed rule change maintains the rule provision that complex Agency and Initiating Orders must include a net price. See the discussion below regarding the application of FLEX SAM to complex orders, including proposed changes to current Rule 24A.5B, Interpretation and Policy .01. This is consistent with current functionality, as executions cannot occur prior to the opening of trading. The proposed rule change clarifies this in the Rule. Sfmt 4703 E:\FR\FM\10OCN1.SGM 10OCN1 54664 Federal Register / Vol. 84, No. 197 / Thursday, October 10, 2019 / Notices Current rule (current rulebook) Proposed rule (shell rulebook) The ‘‘FLEX SAM Auction period’’ is a period of time designated by the Initiating FLEX Trader, which may be no less than three seconds and no more than five minutes. The designated length of the FLEX SAM Auction period may not be longer than the amount of time remaining until the market close. Rule ................... 24A.5B(b)(1)(iii) Rule ................... 5.74(c)(3) ........... The Initiating FLEX Trader may not modify or cancel an Agency Order or Solicited Order after submission to a SAM Auction. Rule ................... 24A.5B(b) ........... Rule ................... 5.74(c)(4) ........... Any FLEX Trader other than the Initiating FLEX Trader (determined by EFID) may submit responses to a FLEX SAM Auction that are properly marked specifying price, size, side, and the Auction ID for the FLEX SAM Auction to which the FLEX Trader is submitting the response. A FLEX SAM response may only participate in the FLEX SAM Auction with the Auction ID specified in the response. Rule ................... 24A.5B(b)(1)(iii) and (vi). Rule ................... 5.74(c)(5) ........... The minimum price increment for FLEX SAM responses is the same as the one the Exchange determines for a class pursuant to subparagraph (a)(4) above, and must be in the same format (i.e., price or percentage) as the exercise price of the FLEX Option series. A response to a FLEX SAM Auction of a complex Agency Order must have a net price. The System rejects a FLEX SAM response that is not in the applicable minimum increment or format. A FLEX Trader may submit multiple FLEX SAM responses at the same or multiple prices to a FLEX SAM Auction. For purposes of a FLEX SAM Auction, the System aggregates all of a FLEX Trader’s FLEX SAM responses for the same EFID at the same price. The System caps the size of a FLEX SAM response, or the aggregate size of a FLEX Trader’s FLEX SAM responses for the same EFID at the same price, at the size of the Agency Order (i.e., the System ignores size in excess of the size of the Agency Order when processing the FLEX SAM Auction). FLEX SAM responses must be on the opposite side of the market as the Agency Order. The System rejects a FLEX SAM response on the same side of the market as the Agency Order. FLEX SAM responses are not visible to FLEX SAM Auction participants or disseminated to OPRA. A FLEX Trader may modify or cancel its FLEX SAM responses during the FLEX SAM Auction. Rule ................... 24A.5B(b)(1)(v) and Interpretation and Policy .01. Rule ................... 5.74(c)(5)(A) ...... N/A ..................... Rule ................... 5.74(c)(5)(B) and (C). This is consistent with current functionality. Current Rule 24A.5B contains no restriction on how many responses a FLEX Trader may submit; the proposed rule change merely makes this explicit in the Rules. The proposed rule change also states for purposes of a FLEX SAM Auction, the System aggregates all of a FLEX Trader’s FLEX SAM responses for the same EFID at the same price. This (combined with the proposed size cap) will prevent a FLEX Trader from submitting multiple orders, quotes, or responses at the same price to obtain a larger pro-rata share of the Agency Order. N/A ..................... Rule ................... 5.74(c)(5)(D) ...... Rule ................... 24A.5B(b)(1)(iv) Rule ................... 24A.5B(b)(1)(vii) Rule ................... 5.74(c)(5)(E) ...... Rule ................... 5.74(c)(5)(F) ....... This is consistent with current functionality, and the proposed rule change merely adds this detail to the rules. Additionally, the Exchange believes this is reasonable given that the purpose of a FLEX SAM response is to trade against the Agency Order in the FLEX SAM Auction into which the FLEX SAM response was submitted. None. A FLEX SAM Auction concludes at the earliest to occur of the following times: (1) The end of the FLEX SAM Auction period; and (2) any time the Exchange halts trading in the affected series, provided, however, that in such instance the FLEX SAM Auction concludes without execution. The Agency Order executes against the Solicited Order at the stop price if there are no Priority Customer FLEX SAM responses and the aggregate size of FLEX SAM responses at an improved price(s) is insufficient to satisfy the Agency Order. The Agency Order executes against FLEX SAM responses if: (a) There is a Priority Customer FLEX SAM response and the aggregate size of that response and all other FLEX SAM responses is sufficient to satisfy the Agency Order or (b) the aggregate size of FLEX SAM responses at an improved price(s) is sufficient to satisfy the Agency Order. At each price level, Priority Customer FLEX SAM responses have first priority, and all other FLEX SAM responses are allocated second on a pro-rata basis. There is no execution at the conclusion of a FLEX SAM Auction if there is a Priority Customer FLEX SAM response and the aggregate size of that response and other FLEX SAM responses is insufficient to satisfy the Agency Order. The System cancels or rejects any unexecuted FLEX SAM responses (or unexecuted portions) at the conclusion of a FLEX SAM Auction. Rule ................... 24A.5A(b)(2) ...... Rule ................... 5.74(d) ............... Rule ................... 24A.5B(b)(3). ..... Rule 5.74(e) ....... Rule provision VerDate Sep<11>2014 19:50 Oct 09, 2019 Jkt 250001 PO 00000 Frm 00080 Fmt 4703 Proposed substantive changes The proposed rule change adds a maximum time to the range for the FLEX SAM Auction period (the minimum potential auction period remains three seconds), which is consistent with current Exchange authority under the current Rules. Additionally, this corresponds to the same permissible time range as that for electronic FLEX Auctions pursuant to Rule 5.72 in the shell Rulebook, and permits the Initiating FLEX Trader to designate the length of the FLEX SAM Auction when submitting the Agency Order rather than have the Exchange establish a length for all FLEX SAM Auctions. It also ensures that a FLEX SAM Auction will conclude prior to the close of trading to prevent executions after the market close. This is consistent with standard FLEX electronic auction, which permits FLEX Traders to designate the length of that auction (and permits it to be from three seconds to five minutes). This provides consistency among FLEX trading. Additionally, it provides FLEX Traders with flexibility regarding the duration of the exposure time, which it may want to be longer than three seconds due to the terms of the FLEX Option series being auctioned.25 The proposed rule change makes only nonsubstantive changes to this provision, as well as clarifies that the prohibition on cancelling a FLEX SAM Auction practically means that the Initiating FLEX Trader may not cancel (or modify, which would change the terms of the auction after it started, essentially creating a new auction) the Agency Order or the Solicited Order, the entry of which (subject to eligibility requirements) initiates the FLEX SAM Auction. The current rule specifies that responses must include prices and sizes; the proposed rule change adds responses must also specify side and an Auction ID, which is consistent with current functionality and merely adds details to the rule. The proposed rule change adds that a FLEX SAM response may only participate in the FLEX SAM Auction with the Auction ID specified in the response. This is consistent with current functionality. The Exchange proposes to include this language given the above proposal that permits concurrent FLEX SAM Auctions. The proposed rule change deletes the provision that caps the price of a FLEX SAM response at the opposite side of the BBO, because there will no longer be an electronic book (and thus no BBO) for FLEX Options. The proposed rule change permits all FLEX Traders (including Market-Makers from another options exchange) to submit responses to a FLEX SAM Auction. By permitting additional participants to submit responses to FLEX SAM Auctions, the Exchange believes this may provide the opportunity for additional liquidity in these auctions, which could lead to additional price improvement opportunities. The proposed rule change adds that the System rejects a FLEX SAM response that is not in the applicable minimum increment or format, which is consistent with current functionality and merely adds detail to the rule. See the discussion below regarding the application of FLEX SAM to complex orders, including proposed changes to current Rule 24A.5B, Interpretation and Policy .01. The current Rule permits FLEX Traders to cancel a FLEX SAM response, 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). The proposed rule change deletes the provision that says a FLEX SAM Auction will conclude any time an RFR response matches the BBO on the opposite side of the market from the RFR responses, , because there will no longer be an electronic book (and thus no BBO) for FLEX Options. The proposed rule change deletes references to executions against FLEX Orders, and whether the execution price is better than the BBO, because there will no longer be an electronic book (and thus no BBO) for FLEX Options, and thus Agency Orders will only execute responses or the Initiating Order, as applicable. The proposed rule change deletes the reference to a FLEX Appointed Market-Maker participation entitlement, as there are currently no FLEX Appointed Market-Makers, and the Exchange has not applied a participation entitlement, and as a result, the Exchange is deleting FLEX Appointed Market-Makers from the Rules (as noted above). The proposed rule change provides that FLEX SAM responses will be allocated in a pro-rata manner rather than time priority. The majority of classes on the Exchange currently have a base allocation algorithm of pro-rata, and therefore the Exchange believes it is a reasonable manner in which to allocate FLEX SAM responses. FLEX SAM Priority Customer responses will continue to have priority at each price level; however, non-TPH broker-dealers will not and will be treated in the same manner as all other non-Priority Customer responses, as further discussed below. Finally, the proposed rule change adds that any unexecuted responses (or portions) at the conclusion of the FLEX SAM Auction will be cancelled. See discussion above with respect to FLEX AIM regarding changing the term ‘‘public customer’’ to ‘‘Priority Customer,’’ as the same reasoning applies to the proposed change in the FLEX SAM rule. Sfmt 4703 E:\FR\FM\10OCN1.SGM 10OCN1 Federal Register / Vol. 84, No. 197 / Thursday, October 10, 2019 / Notices Rule provision Prior to entering Agency Orders into a FLEX SAM Auction on behalf of customers, Initiating FLEX Traders must deliver to the customer a written notification informing the customer that his order may be executed using the FLEX SAM Auction. The written notification must disclose the terms and conditions contained in proposed Rule 5.74 and be in a form approved by the Exchange. Under proposed Rule 5.74, Initiating FLEX Traders may enter contra-side orders that are solicited. FLEX SAM provides a facility for FLEX Traders that locate liquidity for their customer orders. FLEX Traders may not use the FLEX SAM Auction to circumvent Rule 5.9 or 5.73 in the shell Rulebook limiting principal transactions. This may include, but is not limited to, FLEX Traders entering contra-side orders that are solicited from (a) affiliated broker-dealers or (b) broker-dealers with which the FLEX Trader has an arrangement that allows the FLEX Traders to realize similar economic benefits from the solicited transaction as it would achieve by executing the customer order in whole or in part as principal. The proposed rule change clarifies in the proposed introductory paragraph of 6 A FLEX Market-Maker with an appointment in a FLEX Option class is not what is currently referred to as a ‘‘FLEX Appointed Market-Maker’’ in the current Rulebook. Under current Rules, a ‘‘FLEX Qualified Market-Maker’’ is an Exchange-registered Market-Maker that is eligible to trade FLEX Options and is appointed to one or more FLEX Option classes, and a ‘‘FLEX Appointed Market-Maker’’ is an Exchange-registered Market-Maker that is eligible to trade FLEX Options that is selected by the Exchange to serve in such capacity for one or more FLEX Option classes, which has certain FLEX quoting obligations. See current Rule 24A.9. The Exchange currently has no FLEX Appointed Market-Makers in any FLEX Option class, and does not intend to, so it has deleted its rules related to FLEX Appointed Market-Makers. See Securities Exchange Act Release No. 87024 (September 19, 2019), 84 FR 50545 (September 25, 2019) (SR– CBOE–2019–059). 7 With respect to FLEX Options, the term ‘‘BBO’’ means the best bid or offer, or both, as applicable, entered in response to a Request for Quotes or resting in the electronic book. With respect to FLEX AIM and SAM Auctions, which are different than a Request for Quotes, the BBO only incorporates any bids and offers resting in the electronic book. While the Exchange currently has an electronic book 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. Therefore, it is unlikely there would be resting FLEX Orders to be incorporated into the BBO. The Exchange will no longer have an electronic FLEX Book. See SR–CBOE–2019–084. Additionally, there is no RFQ process that is part of a FLEX AIM Auction. 8 See SR–CBOE–2019–084 (which filing describes the current minimal, limited use of an electronic FLEX Book and the elimination of a book for FLEX Orders as of the System migration, and deletes rule provisions related to a FLEX electronic book from the rules in current Chapter XXIV). 9 See Rule 5.72(b) of the shell Rulebook (which states that submission of a FLEX Order into a FLEX AIM Auction establishes a FLEX Option series as eligible for trading); see also Rule 4.21 (which describes the permissible terms of FLEX Option series, and states that a FLEX Option series may not have the same terms as a non-FLEX Option series on the same undelyring security or index that is already available for trading) and Rule 4.22 (which describes fungibility provisions when the Exchange lists for trading a non-FLEX Option series with identical terms as a FLEX Option series). 10 See current Rule 24A.5A(a)(2), which states the Initiating TPH must stop the ‘‘entire’’ Agency Order. 11 Pursuant to Rule 5.4(c)(4) in the shell Rulebook, the minimum increment for bids and VerDate Sep<11>2014 19:50 Oct 09, 2019 Jkt 250001 Current rule (current rulebook) Proposed rule (shell rulebook) Rule 24A.5B, Interpretation and Policy .03. Rule 5.74, Interpretation and Policy .01. None. Rule 24A.5B, Interpretation and Policy .04. Rule 5.74, Interpretation and Policy .02. None. Proposed substantive changes offers on FLEX Options may be no 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. The System rounds bids and offers to the nearest minimum increment. 12 In current Rules 24A.5A, Interpretation and Policy .05 and 24A.5B, Interpretation and Policy .01, the price of a complex order is referenced as a net debit or net credit price, while proposed Rules 5.73 and 5.74 just use the simplified term ‘‘net price’’ as that is consistent with the term used in other FLEX Rules in the shell Rulebook. See, e.g., Rule 5.72(b)(2) in the shell Rulebook. A net debit price is merely a complex order with a net price to buy, and a net credit price is merely a complex order with a net price to sell, so the term net price covers both terms. 13 See also SR–CBOE–2019–084. 14 Pursuant to Rule 5.71 in the shell Rulebook, trading in FLEX Options in a trading session may begin, with respect to the Regular Trading Hours trading session, after 9:30 a.m. of the first disseminated (a) transaction on the primary listing market in the security underlying an equity option or (b) index value for the index underlying an index option, and with respect to the Global Trading Hours trading session, after 3:00 a.m. 15 See supra note 7. 16 This is also consistent with the auction notification message for non-FLEX AIM Auctions. See Rules 5.37(c)(3) and 5.38(c)(3) in the shell Rulebook. 17 The Exchange believes the proposed time range 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, for electronic FLEX trading in the FLEX RFQ process (but not FLEX AIM and SAM Auctions), 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. See SR–CBOE–2019–084. 18 See supra note 6. 19 As defined in Rule 1.1 in the shell Rulebook, a ‘‘Priority Customer’’ is a person or entity that is a Public Customer (which is a person that is not a broker or dealer in securities) or a Professional (which is defined as any person or entity that (a) is not a broker or dealer in securities, and (b) places more than 390 orders in listed options per day on average during a calendar month for its own PO 00000 Frm 00081 Fmt 4703 54665 Sfmt 4703 each of proposed Rules 5.73 and 5.74 that the Initiating Order or Solicited Order, respectively, may consist of one or more solicited orders. This accommodates multiple contra-parties and increases the opportunities for customer orders to be submitted into a FLEX AIM or SAM Auction with the potential for price improvement, since the Initiating Order or Solicited Order, respectively, must stop the full size of the Agency Order. This has no impact on the execution of the Agency Order, which may already trade against multiple contra-parties depending on the final auction price, as set forth in proposed paragraph (e) of each of proposed Rules 5.73 and 5.74. Rules 24A.5A, Interpretation and Policy .05 and 24A.5B, Interpretation and Policy .01 currently describe the applicability of FLEX AIM and SAM Auctions, respectively. Because FLEX AIM and SAM Auctions apply to beneficial account(s); the System handles Professional orders in the same manner as brokerdealer orders unless otherwise specified). 20 This is consistent with other Exchange auction functionality that prioritizes Priority Customer orders, as well as the customer overlay, which prioritizes Priority Customer orders, rather than Public Customer orders. See, e.g., Rules 5.32(a)(2)(A) (describing the Priority Customer overlay), 5.33(d)(5) (describing how Priority Customers receive first priority following a complex order auction), and 5.37(e) (describing how Priority Customers receive first priority at each price level following an AIM Auction). 21 See supra note 9. 22 See current Rule 24A.5B(a)(2) (b)(3), which states each order entered into the FLEX SAM Auction must be AON, and that the Agency Order executes in full or is cancelled, and may be allocated entirely to the Solicited Order, subject to certain conditions. Given that both orders must be AON, if the Solicited Order was not the same size as the Agency Order, they would not be able to execute against each other at the conclusion of a FLEX SAM Auction. 23 See also SR–CBOE–2019–084. 24 This is also consistent with the auction notification message for non-FLEX SAM Auctions. See Rules 5.39(c)(3) and 5.40(c)(3) in the shell Rulebook. 25 See supra note 17. E:\FR\FM\10OCN1.SGM 10OCN1 54666 Federal Register / Vol. 84, No. 197 / Thursday, October 10, 2019 / Notices complex orders in the same manner as they apply to simple orders, other than the need for complex orders (and responses to auctions of complex orders) to include a net price (as required in current Rules 24A.5A, Interpretation and Policy .05 and 24A.5B, Interpretation and Policy .01),26 the Exchange no longer believes a separate interpretation and policy is necessary for complex orders. The Exchange makes FLEX AIM and SAM Auctions, respectively, available for complex orders in any FLEX Option class in which it makes the applicable auction available for simple orders, so the Exchange no longer needs separate flexibility to apply each auction to complex orders as provided by current Rules 24A.5A, Interpretation and Policy .05 and 24A.5B, Interpretation and Policy .01 (which state the Exchange may determine on a class-by-class basis to make the FLEX AIM Auction or FLEX SAM Auction, respectively, available for complex orders). As discussed below, the proposed rule change will permit multiple FLEX AIM and SAM Auctions for a complex strategy, and in any of the same individual series legs of the strategy, to be ongoing at the same time, so the proposed rule change deletes the provisions from current Rules 24A.5A, Interpretation and Policy .05 and 24A.5B, Interpretation and Policy .01 that state only one FLEX AIM Auction may be ongoing at any given time. Additionally, the proposed rule change deletes the provision in current Rules 24A.5A, Interpretation and Policy .05 and 24A.5B, Interpretation and Policy .01 that state unrelated FLEX Orders in any individual series legs may not be submitted to the electronic book for the duration of a FLEX AIM or SAM Auction, as there will no longer be a book available for FLEX Orders.27 The Exchange believes this will simplify the FLEX AIM and SAM Auctions. All eligibility requirements for FLEX AIM and SAM Auctions are set forth in the proposed rules,28 so the proposed rule change also deletes the current flexibility to determine order types, origin codes, and marketability that are eligible for those auctions from current Rules 24A.5A, Interpretation and Policy .05 and 24A.5B, Interpretation and Policy .01. As discussed above, complex orders, like simple orders, will only be able to trade against FLEX AIM or SAM responses, as applicable, so the proposed rule change deletes the provisions that state complex orders 26 See supra note 12. SR–CBOE–2019–084. 28 See proposed Rules 5.73(a) and 5.74(a), respectively. will only be eligible to trade with other complex orders through a FLEX AIM or SAM Auction, respectively. Order allocation for simple and complex orders following a FLEX AIM or SAM Auction will continue to be the same, as proposed Rule 5.73(e) and 5.74(e) apply to both simple and complex orders, and therefore the proposed rule change deletes that provision from current Rules 24A.5A, Interpretation and Policy .05 and 24A.5B, Interpretation and Policy .01. Finally, because there will no longer be an electronic book (and thus no BBO) for FLEX Options, the proposed rule change deletes the provisions in Rules 24A.5A, Interpretation and Policy .05 and 24A.5B, Interpretation and Policy .01 regarding the impact of bids and offers in the electronic book on FLEX AIM and SAM Auctions, respectively, and regarding the ability of orders in the individual legs to be submitted to the electronic book during an auction. With respect to FLEX AIM Auctions, the proposed rule change provides that if the Initiating FLEX Trader selects a single-price submission, it may elect for the Initiating Order to have last priority to trade against the Agency Order.29 If the Initiating FLEX Trader selects a single-price submission, it may elect for the Initiating Order to have last priority to trade against the Agency Order. In this case, the Initiating Order would only execute against any remaining Agency Order contracts at the stop price after the Agency Order is allocated to all FLEX AIM responses at all prices equal to or better than the stop price. Last priority information is not available to other market participants and may not be modified after it is submitted. This proposed rule change provides Initiating FLEX Traders with additional control over its execution of an Initiating Order against an Agency Order, which may further encourage FLEX Traders to submit Agency Orders to a FLEX AIM Auction for potential price improvement opportunities for those orders. This may also provide more opportunities for other FLEX Traders to participate in the FLEX AIM Auctions. The proposed last priority option is the same as the last priority provision option available in non-FLEX AIM Auctions, and thus the proposed rule change provides further consistency across the Exchange’s auction mechanisms.30 The proposed rule change permits the Initiating FLEX Trader to designate the length of FLEX AIM and SAM Auctions, rather than the Exchange. The 27 See VerDate Sep<11>2014 19:50 Oct 09, 2019 Jkt 250001 permissible length of the auctions continues to have a minimum of three seconds, which is consistent with the current Rules. The proposed rule change also imposes a maximum for the length of the auctions of five minutes, which is consistent with the permissible times for the FLEX electronic auction.31 This will permit the Initiating FLEX Trader to determine a reasonable timeframe for the duration of an auction based on the FLEX Option series or complex strategy submitted into the auction, as well as provide for a timely execution of Agency Orders. Unlike today, one or more FLEX AIM or SAM Auctions in the same FLEX Option series or complex strategy (as applicable) may occur at the same time. To the extent there is more than one FLEX AIM or SAM Auction in a FLEX Option series or complex strategy (as applicable) underway at the same time, the auctions will conclude sequentially based on the times at which each auction period concludes. At the time each auction concludes, the System allocates the Agency Order pursuant to proposed Rule 5.73(e) or 5.74(e), as applicable, and takes into account all FLEX responses submitted during the auction period. Concurrent auctions will be permitted in various other electronic auctions on the Exchange following migration.32 If a FLEX Trader attempts to initiate a FLEX AIM or SAM 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 AIM or SAM 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 FLEX AIM and SAM Auctions may similarly lead to an increase in these auctions, which may provide additional opportunities for execution of FLEX Orders. The proposed rule change eliminates priority for non-TPH broker-dealer responses at the conclusion of FLEX AIM and SAM Auctions, and thus those responses will be prioritized in the same 31 See 29 See proposed Rule 5.73(e)(4). 30 See Rule 5.37(e) in the shell Rulebook. PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 Rule 5.72(b)(1)(F) in the shell Rulebook. e.g., Rule 5.37(c)(1), 5.38(c)(1), 5.39(c)(1), and 5.40(c)(1). 32 See, E:\FR\FM\10OCN1.SGM 10OCN1 Federal Register / Vol. 84, No. 197 / Thursday, October 10, 2019 / Notices manner as all other non-Priority Customer responses. Non-TPH brokerdealers do not, and have not, received priority in the non-FLEX AIM and SAM Auctions, so the proposed rule change aligns the provision regarding who receives first priority in a FLEX AIM or SAM Auction with the corresponding provisions for non-FLEX AIM and SAM Auctions.33 The Exchange currently prioritizes contra-interest from these market participants to ensure that FLEX AIM and SAM Auctions satisfy the ‘‘G’’ exemption for yielding priority to nonmembers under Section 11(a)(1) of the Act. However, as discussed below, the Exchange believes the FLEX AIM and SAM Auctions, as proposed, satisfy the ‘‘Effect vs. Execute’’ exemption from Section 11(a) under the Act, and therefore does not need to provide additional functionality for TPHs to satisfy another exemption from Section 11(a) under the Act. Priority Customer responses will continue to receive first priority in both FLEX AIM and SAM Auctions, as they do in non-FLEX AIM and SAM Auctions. Therefore, the proposed rule change provides further consistency across the Exchange’s auction mechanisms.34 As proposed, the general framework of the FLEX AIM and SAM Auctions will continue to be the same as the Exchange’s non-FLEX AIM and SAM Auctions, with the differences being only those relating to the differences between FLEX and non-FLEX Options. The Exchange believes it will benefit investors to provide continued consistency across the Exchange’s price improvement mechanisms. The proposed rule change deletes Rule 24A.5A, Interpretation and Policy .06 and Rule 24A.5B, Interpretation and Policy .02 regarding post-trade verification procedures for FLEX AIM and SAM Auctions for complex orders. Due to the System updates in connection with the System migration, parties to executions follow FLEX AIM and SAM Auctions will no longer need to take additional steps with respect to executions of complex orders following an electronic FLEX AIM or SAM Auction.35 These procedures require 33 See Rules 5.37(e), 5.38(e), 5.39(e), and 5.40(e) in the shell Rulebook. 34 See Rules 5.37(e) and 5.39(e) in the shell Rulebook. 35 Note current Rule 24A.5A, Interpretation and Policy .06 and Rule 24A.5B, Interpretation and Policy .02 also apply 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 described in another rule filing, the Exchange will no longer offer exercise prices and premiums based on such a methodology. See SR–CBOE–2019–084 (in which filing the Exchange proposes to delete the provisions from VerDate Sep<11>2014 19:50 Oct 09, 2019 Jkt 250001 FLEX Traders to input the leg price, exercise price, and/or premium information into the System following execution of a complex FLEX Order. Pursuant to Rule 5.72(b)(2) in the shell Rulebook, FLEX Traders must submit all of this information upon entry of a FLEX Order. 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 Official may nullify a transaction following a FLEX AIM or SAM Auction pursuant to Rule 5.75(b) (such as if it did not conform to the terms in Rule 4.21 in the shell Rulebook),36 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 6.67.37 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 deletes Rule 24A.5A, Interpretation and Policy .07 and Rule 24A.5B, Interpretation and Policy .05 regarding determinations made pursuant to those Rules, because the Exchange will announce all determinations it may make with respect to FLEX AIM and SAM Auctions pursuant to Rule 1.5 in the shell Rulebook, making these current interpretations no longer necessary. 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.38 Specifically, the Exchange believes the proposed rule change is consistent with the Section current Rules regarding the ability of FLEX Traders to designate exercise prices and premiums in these formats). 36 Rule 5.75(b) of the shell Rulebook states, among other things, that a FLEX Official may nullify a FLEX Option transaction if it determines the transaction did not conform to the terms of Rules 4.21, 4.22, 5.3, or 5.4 (or the priority principles set forth in Rule 5.72(c) and (d), which do not apply to transactions following a FLEX AIM or SAM Auction). 37 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 moved Rule 6.67 from the current Rulebook to Rule 6.6 in the shell Rulebook in separate rule filings. See Securities Exchange Act Release No. 86920 (September 10, 2019), 84 FR 48687 (September 16, 2019) (SR– CBOE–2019–056); and 87079 (September 24, 2019) (SR–CBOE–2019–062). 38 15 U.S.C. 78f(b). PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 54667 6(b)(5) 39 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) 40 requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. The Exchange’s FLEX AIM and SAM Auctions as proposed—both for simple and complex orders—will function in a substantially similar manner following the technology migration as they do today. The Exchange believes the proposed rule change will remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, protect investors and the public interest by providing continued consistency across the Exchange’s price improvement mechanisms for both FLEX and non-FLEX Option. The general framework of the FLEX AIM and SAM Auction process as proposed to be amended will continue to be substantively the same as the framework for the non-FLEX AIM and SAM Auctions, as the Exchange recently amended, retaining differences that relate to the differences between FLEX and non-FLEX Options (e.g., exercise prices in prices or percentages, no electronic book and thus no BBO).41 The continued similarity of the Exchange’s price improvement auctions will allow the Exchange’s price improvement functionality to continue to fit seamlessly into the options market and benefit market participants with consistency across similar functionality. When auctions have similar functionality, Trading Permit Holders can use the same technology and coding for multiple auctions, rather than have to expend resources to participate in different auctions. Therefore, maintaining consistency across auction functionality will benefit investors. The Exchange also believes this will encourage Trading Permit Holders to compete vigorously to provide the opportunity for price improvement for 39 15 U.S.C. 78f(b)(5). 40 Id. 41 See E:\FR\FM\10OCN1.SGM SR–CBOE–2019–084. 10OCN1 54668 Federal Register / Vol. 84, No. 197 / Thursday, October 10, 2019 / Notices customer orders in FLEX Options in competitive auction processes, which will further benefit and protect investors. The Exchange believes the proposed rule change to permit an Initiating Order submitted into a FLEX AIM Auction, and a Solicited Order submitted into a FLEX SAM Auction, to be comprised of multiple contra-party orders will, in general, protect investors and the public interest, because it may increase the opportunity for customers to have orders participate in a FLEX AIM or SAM Auction. As a result, this may increase opportunities for price improvement, because this will increase the liquidity available for the Initiating Order or Solicited Order, as applicable, which is consistent with the purpose of FLEX AIM and SAM Auctions. The Exchange believes that this is beneficial to participants because allowing multiple contra-parties should foster competition for filling the Initiating Order or Solicited Order, as applicable, and thereby result in potentially better prices, as opposed to only allowing one contra-party and, thereby requiring that contra-party to do a larger size order which could result in a worse price for the trade. As noted above, the proposed rule change will allow FLEX AIM and SAM Auctions to occur concurrently with other FLEX AIM and SAM Auctions. Although FLEX AIM and SAM Auctions will be allowed to overlap, the Exchange does not believe that this raises any issues that are not addressed by the proposed rule change. For example, although overlapping, each FLEX AIM or SAM Auction will be started in a sequence and with a duration that determines its processing. Thus, even if there are two FLEX AIM or SAM 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, and only against responses submitted into that Auction. As discussed above, each FLEX AIM or SAM response is required to specifically identify the FLEX AIM or SAM Auction, respectively, for which it is targeted and if not fully executed will be cancelled back at the conclusion of the Auction. Thus, responses will be specifically considered only in the specified Auction. The proposed rule change to allow multiple auctions to overlap for Agency Orders is consistent with functionality already in place on other exchanges, and will therefore remove impediments to and perfect the mechanism of a free and open market and a national market VerDate Sep<11>2014 19:50 Oct 09, 2019 Jkt 250001 system.42 Additionally, the proposed rule change is consistent with the Exchange’s rules for non-FLEX AIM and SAM Auctions.43 Those issues generally relate to the interaction of auctioned orders with contra-side interest at the end of the various auctions. Different series or complex strategies, as applicable, are essentially different products—orders different strategies or in different series cannot interact, just as orders in different classes cannot interact. Therefore, the Exchange believes concurrent FLEX AIM and SAM Auctions in different series or complex strategies, respectively, is appropriate. The Exchange believes this new functionality may lead to an increase in Exchange volume and should allow the Exchange to better compete against other markets that permit overlapping price improvement auctions, while providing an opportunity for price improvement for Agency Orders and assuring that Priority Customers are protected. Therefore, the Exchange believes this proposed rule change will protect investors and the public interest. While the terms of FLEX Options are different than those of non-FLEX Options, any potential issues raised by concurrent auctions are the same for non-FLEX and FLEX Options. Additionally, unlike in non-FLEX trading, there is no electronic book for FLEX trading. As noted above, responses submitted to a FLEX AIM or SAM Auction may only execute against the Agency Order in the Auction into which the responses were submitted, so there can be no conflict among contraside interest with respect to executions. Further, unlike in non-FLEX trading, because there is no electronic book for FLEX Options, there are no events that cause a FLEX AIM or SAM Auction to conclude prior to the end of the respective auction period that would result in an execution, and therefore, the same event could not cause multiple auctions to conclude early. As discussed above, the proposed rule change addresses any of these potential issues. The proposed range for the length of each of the FLEX AIM and SAM Auction periods is consistent with the range for the exposure interval of the electronic FLEX Auction. Because of the unique terms of FLEX Options, the Exchange believe it is appropriate to provide a reasonable and sufficient 42 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. 43 See Rules 5.37(c)(1), 5.38(c)(1), and 5.39(c)(1) in the shell Rulebook. PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 amount of time in which market participants may submit responses. Therefore, the minimum length of a FLEX AIM and SAM Auction (and is proposed to continue to be) three seconds. The Exchange also proposes a maximum length of an auction period of five minutes, as the Exchange also believes it is appropriate to provide for efficient and timely executions so that customers do not potentially miss a market. The proposed rule change also permits the Initiating FLEX Trader to establish the length of the auction period (which will be included in the auction notification message), as the FLEX Trader can determine a reasonable period of time to provide other FLEX Traders to respond based on the complexity of the FLEX Option series that is the subject of the auction, as well as based on market conditions (for example, in a volatile market, the FLEX Trader may believe it is in the best interests of a customer to have shorter auction given quickly changing prices). The Exchange believes the proposed rule change to permit all FLEX Traders (other than the Initiating FLEX Trader) to respond to FLEX SAM Auctions will promote just and equitable principles of trade, remove impediments to and perfect the mechanism of a free and open market and a national market system, and not designed to permit unfair discrimination between customers, issuers, brokers, or dealers, because it permits all FLEX Traders to submit responses to FLEX SAM Auctions. Permitting all FLEX Traders to submit responses to FLEX SAM Auctions may result in more FLEX Traders having the opportunity to participate in executions at the conclusion of FLEX SAM Auctions. Additionally, it may increase liquidity in FLEX SAM Auctions, which may lead to more opportunities to price improvement, which the Exchange believes ultimately protects investors and the public interest. The Exchange’s SAM Auction for non-FLEX Options similarly permits market-makers from other options exchange to submit responses.44 Additionally, much of the proposed rule change is merely relocating provisions from the FLEX AIM and SAM Auction Rules (such as certain auction eligibility requirements, provisions related to auction responses, and provisions related to executions following the conclusion of an auction) from the current Rulebook to the shell Rulebook and making only nonsubstantive changes, which will 44 See Rules 5.39(c)(5) and 5.40(c)(5) in the shell Rulebook. E:\FR\FM\10OCN1.SGM 10OCN1 Federal Register / Vol. 84, No. 197 / Thursday, October 10, 2019 / Notices therefore have no impact on FLEX AIM and SAM Auctions. The Exchange believes providing a reorganized, holistic rulebook upon migration will also benefit investors. The proposed rule change is also consistent with Section 11(a)(1) of the Act 45 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),46 the ‘‘G’’ exemption for yielding priority to nonmembers under Section 11(a)(1)(G) of the Act and Rule 11a1–1(T) thereunder,47 and ‘‘Effect vs. Execute’’ exemption under Rule 11a2–2(T) under the Act.48 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 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; 49 (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 a FLEX AIM or SAM Auction would satisfy the requirements of Rule 11a2–2(T). The Exchange believes FLEX AIM and SAM Auctions will place all users— both TPHs and non-TPHs—on the 45 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. 46 15 U.S.C. 78k(a)(1)(A). 47 15 U.S.C. 78k(a)(1)(G) and 17 CFR 240.11a1– 1(T). 48 17 CFR 240.11a2–2(T). 49 The member may, however, participate in clearing and settling the transaction. VerDate Sep<11>2014 19:50 Oct 09, 2019 Jkt 250001 ‘‘same footing’’ as intended by Rule11a2–2(T). Given the automated matching and execution at the conclusion of a FLEX AIM or SAM Auction, no TPH would enjoy any special control over the time of execution or special order handling advances for orders executed electronically following a FLEX AIM or SAM 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 each of the FLEX AIM and SAM Auctions 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.50 Because the Exchange’s FLEX AIM and SAM Auctions each receive, 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 a FLEX AIM or SAM Auction from off the Exchange’s trading floor will satisfy the off-floor transmission requirement.51 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 a FLEX AIM or SAM Auction, an order or response will be executed automatically pursuant to the Rules set forth for the applicable Auction. In particular, execution of an order or response sent to a FLEX AIM or SAM Auction depends not on the 50 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’’). 51 See Rule 5.72(e) in the shell Rulebook. PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 54669 FLEX Trader entering the order or 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 an order or 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. The Initiating FLEX Trader may not cancel or modify the Agency Order or applicable contra-side order once submitted into a FLEX AIM or SAM Auction, but FLEX Traders may modify or cancel their responses after being submitted into a FLEX AIM or SAM Auction.52 Once the Agency Order and Initiating Order or Solicited Order, or response, as applicable, have been transmitted, the FLEX Trader that submitted the order or response will not participate in its execution. No FLEX Trader, including the Initiating FLEX Trader, will see a response submitted into a FLEX AIM or SAM Auction, and therefore and will not be able to influence or guide the execution of the Agency Orders (or contra-side orders) or responses, as applicable. Finally, with respect to FLEX AIM, the last priority feature will not permit a FLEX Trader to have any control over an order. The election to apply last priority to an Initiating Order is available prior to the submission of the order and therefore could not be utilized to gain influence or guide the execution of the Agency Order and Initiating Order. The information provided with respect to the last priority feature by the Initiating FLEX Trader will not be broadcast and further, the information may not be modified by the Initiating FLEX Trader during the FLEX AIM Auction.53 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 FLEX AIM and SAM Auctions, 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 52 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’’). 53 See proposed Rule 5.73(e)(4). E:\FR\FM\10OCN1.SGM 10OCN1 54670 Federal Register / Vol. 84, No. 197 / Thursday, October 10, 2019 / Notices transmitting them to the exchange.54 The Exchange represents that the FLEX AIM and SAM Auctions are designed so that no FLEX Trader has any special or unique trading advantage in the handling of its orders or responses after transmitting them to the mechanisms. 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 the FLEX AIM or SAM Auction from the trading floor and satisfy the ‘‘Effect vs. Execute’’ exemption (assuming the other conditions are satisfied).55 However, a TPH, relying on this exemption, could not submit an order for a covered account to its ‘‘house’’ floor broker on the trading floor for execution. Because a TPH may not rely on the ‘‘G’’ exemption when submitting an order to a FLEX AIM or SAM Auction,56 it must 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.57 The Exchange 54 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. 55 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. 56 See Rule 5.72(e) in the shell Rulebook; see also proposed Rules 5.73(e) and 5.74(e) (which do not prioritize non-TPH broker-dealers, as would be necessary for submission of orders into the FLEX AIM and SAM Auctions to comply with the ‘‘G: exemption). 57 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 VerDate Sep<11>2014 19:50 Oct 09, 2019 Jkt 250001 recognizes that FLEX Traders relying on Rule 11a2–2(T) for transactions effected through a FLEX AIM or SAM 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. FLEX AIM and SAM Auctions will continue to be voluntary for FLEX Traders to use and will be available to all FLEX Traders. Additionally, the ability to respond to FLEX SAM Auctions will now be available to all FLEX Traders (except the Initiating TPH, which is consistent with the requirement that the contra-side order be a solicitation rather than a facilitation). These auction mechanisms will apply to all FLEX Traders in the same manner. The Exchange believes the FLEX AIM and SAM Auctions will continue to provide opportunities price improvement for Agency Orders in FLEX Options in a competitive auction process. The Exchange does not believe the proposed rule change will impose any burden on intermarket competition. The Exchange believes keeping FLEX AIM and SAM Auctions aligned with corresponding non-FLEX auction mechanisms, with the only differences relating to the differences between FLEX and non-FLEX options, may further encourage submission of FLEX Orders into these price improvement mechanisms. By enhancing our FLEX trading platform, 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 58 and Rule 19b– 4(f)(6) thereunder.59 A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the Act 60 normally does not become operative for 30 days after the date of its filing. However, Rule 19b–4(f)(6)(iii) 61 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 AIM and SAM Auction functionality to market participants on an uninterrupted basis. In support of its waiver request, the Exchange states that the FLEX AIM and SAM Auctions for both simple and complex orders will function in a substantially similar manner following the technology 58 15 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’’). PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 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. 60 17 CFR 240.19b–4(f)(6). 61 17 CFR 240.19b–4(f)(6)(iii). 59 17 E:\FR\FM\10OCN1.SGM 10OCN1 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, VerDate Sep<11>2014 19:50 Oct 09, 2019 Jkt 250001 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 PO 00000 CFR 200.30–3(a)(12). Frm 00087 Fmt 4703 Sfmt 4703 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 E:\FR\FM\10OCN1.SGM 10OCN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 197 (Thursday, October 10, 2019)]
[Notices]
[Pages 54659-54671]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22157]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87237; File No. SR-CBOE-2019-093]


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 Automated Improvement Mechanism and 
Solicitation Auction Mechanism for 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 4, 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 automated improvement 
mechanism (``AIM'') and solicitation auction mechanism (``SAM'') for 
flexible exchange options (``FLEX Options'') (``FLEX AIM'' and ``FLEX 
SAM,'' respectively) and moves those Rules from the currently effective 
Rulebook (``current Rulebook'') to the shell structure for the 
Exchange's Rulebook that will become effective upon the migration of 
the Exchange's trading platform to the same system used by the Cboe 
Affiliated Exchanges (as defined below) (``shell Rulebook''). The text 
of the proposed rule change is provided in Exhibit 5.

[[Page 54660]]

    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.
    The proposed rule change amends current Rules 24A.5A and 24A.5B 
regarding the FLEX AIM Auction and the FLEX SAM Auction, respectively. 
The proposed changes reflect recent amendments to general FLEX trading 
rules as well as recent amendments to the non-FLEX AIM and SAM 
Auctions.\5\ The proposed rule change amends and moves the following 
provisions regarding the terms of FLEX AIM and SAM Auctions 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, update cross-references 
and paragraph numbering and lettering, reorganize certain provisions, 
and eliminate redundant provisions.
---------------------------------------------------------------------------

    \5\ See SR-CBOE-2019-045 (proposed changes to the Exchange's 
non-FLEX AIM Auction); SR-CBOE-2019-051 (proposed changes to the 
Exchange's non-FLEX complex AIM Auctions); SR-CBOE-2019-063 
(proposed changes to the Exchange's non-FLEX SAM Auction); SR-CBOE-
2019-064 (proposed changes to the Exchange's non-FLEX C-SAM 
Auction); and SR-CBOE-2019-084 (proposed changes to the Exchange's 
FLEX trading rules).

----------------------------------------------------------------------------------------------------------------
                                      Current rule (current   Proposed rule (shell       Proposed substantive
           Rule provision                   rulebook)               rulebook)                  changes
----------------------------------------------------------------------------------------------------------------
                                                FLEX AIM Auction
----------------------------------------------------------------------------------------------------------------
A FLEX Trader may electronically     Rule 24A.5A,            Rule 5.73,              The proposed rule change
 submit for execution an order        introductory            introductory            clarifies that an
 (which may be a simple or complex    paragraph and           paragraph.              Initiating Order may
 order) it represents as agent        Interpretations and                             consist of one or more
 (``Agency Order'') against           Policies .04 and .05.                           solicited orders, as
 principal or solicited order(s)                                                      further discussed below.
 (except for the account of any                                                       The proposed rule change
 FLEX Market-Maker \6\ with an                                                        also specifies in the
 appointment in the applicable FLEX                                                   introductory paragraph
 Option class on the Exchange (an                                                     that both simple and
 ``Initiating Order'') provided it                                                    complex orders may be
 submits the Agency Order for                                                         submitted into a FLEX AIM
 electronic execution into a FLEX                                                     Auction, as the auction
 AIM Auction.                                                                         will apply to both simple
                                                                                      and complex orders in a
                                                                                      substantially similar
                                                                                      manner, as further
                                                                                      discussed below. The
                                                                                      proposed rule change
                                                                                      deletes a price
                                                                                      requirement related to the
                                                                                      best bid or offer
                                                                                      (``BBO''),\7\ because
                                                                                      there will no longer be an
                                                                                      electronic book (and thus
                                                                                      no BBO) for FLEX
                                                                                      Options.\8\ Because the
                                                                                      Exchange does not
                                                                                      currently have an
                                                                                      electronic book for FLEX
                                                                                      Option classes, and thus
                                                                                      there are no resting
                                                                                      orders to potentially
                                                                                      execute at the conclusion
                                                                                      of a FLEX AIM Auction,
                                                                                      deletion of this provision
                                                                                      will have no impact on how
                                                                                      FLEX AIM Auctions operate.
An Agency Order must be in a FLEX    Rule 24A.5A(a)(1).....  Rule 5.73(a)(1).......  None.
 Option class the Exchange
 designates as eligible for FLEX
 AIM Auctions.
The Agency Order and Initiating      N/A...................  Rule 5.73(a)(2).......  This requirement is not
 Order must each be a FLEX Order                                                      explicitly stated in the
 that complies with Rule 5.72(b) in                                                   current Rules; however, it
 a permissible FLEX Option series                                                     is consistent with current
 that complies with Rule 4.21.                                                        functionality, and the
                                                                                      proposed rule change
                                                                                      merely states this in the
                                                                                      Rules. For a FLEX AIM
                                                                                      Auction to occur, the
                                                                                      orders submitted would
                                                                                      need to be in a series
                                                                                      eligible for FLEX trading,
                                                                                      and thus include all the
                                                                                      terms necessary to
                                                                                      comprise a FLEX Option
                                                                                      series.\9\
The Initiating FLEX Trader must      Rule..................  Rule..................  None.
 mark an Agency Order for FLEX AIM   24A.5A(b)(1)(i).......  5.73(a)(3)............
 Auction processing.
There is no minimum size for Agency  Rule 24A.5A(a)(1) and   Rule 5.73(a)(4).......  The proposed rule change
 Orders. The Initiating Order must    (2) and                                         deletes the provision from
 be for the same size as the Agency   Interpretation and                              current subparagraph
 Order.                               Policy .03.                                     (a)(1) that permits the
                                                                                      Exchange to designate
                                                                                      eligibility size
                                                                                      parameters for FLEX AIM
                                                                                      Auctions. The Exchange has
                                                                                      not designated any such
                                                                                      eligibility size
                                                                                      parameters, and intends to
                                                                                      continue to have no
                                                                                      minimum size requirements
                                                                                      for Agency Orders, so the
                                                                                      Exchange no longer needs
                                                                                      this flexibility. The
                                                                                      proposed rule change
                                                                                      clarifies in the Rules
                                                                                      that the Initiating Order
                                                                                      must be for the same size
                                                                                      as the Agency Order, which
                                                                                      is implied by the current
                                                                                      Rules.\10\

[[Page 54661]]

 
The price of the Agency Order and    Rule..................  Rule 5.73(a)(5).......  The current rule state the
 Initiating Order must be in an      24A.5A(b)(1)(vii) and                            minimum increment for
 increment the Exchange determines    Interpretation and                              responses and the
 on a class basis (which may not be   Policy .05.                                     Initiating TPH's
 smaller than the amounts set forth                                                   submission is determined
 in Rule 5.4(c)(4)\11\ of the shell                                                   by the Exchange but may
 Rulebook). The price must be in                                                      not be smaller than $0.01
 the same format (i.e., price or                                                      or .01%, and premiums are
 percentage) as the exercise price                                                    rounded to the nearest
 of the FLEX Option series. If the                                                    minimum increment. This is
 Agency Order and Initiating Order                                                    consistent with the
 are complex orders, the price must                                                   minimum increment
 be a net price \12\ for the                                                          available for all FLEX
 complex strategy.                                                                    Trading, so the proposed
                                                                                      rule change merely
                                                                                      references Rule 5.4(c)(4)
                                                                                      in the shell Rulebook,
                                                                                      which describes the
                                                                                      permissible minimum
                                                                                      increments for FLEX Option
                                                                                      series, rather than
                                                                                      repeats those increments.
                                                                                      Additionally, while
                                                                                      current rules permit bids
                                                                                      and offers (including the
                                                                                      price submitting into a
                                                                                      FLEX AIM Auction) to be in
                                                                                      a different format than
                                                                                      the exercise price of a
                                                                                      FLEX Option series, the
                                                                                      current functionality does
                                                                                      not permit this. Rule
                                                                                      5.3(e)(3) in the shell
                                                                                      Rulebook 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.\13\ There is no
                                                                                      substantive change to the
                                                                                      permissible minimum
                                                                                      increments for orders
                                                                                      submitted to a FLEX AIM
                                                                                      Auction. The proposed rule
                                                                                      change maintains the rule
                                                                                      provision that complex
                                                                                      Agency and Initiating
                                                                                      Orders must include a net
                                                                                      price. See the discussion
                                                                                      below regarding the
                                                                                      application of FLEX AIM to
                                                                                      complex orders, including
                                                                                      proposed changes to
                                                                                      current Rule 24A.5A,
                                                                                      Interpretation and Policy
                                                                                      .05.
An Initiating FLEX Trader may only   N/A...................  Rule..................  This is consistent with
 submit an Agency Order to a FLEX                            5.73(a)(6)............   current functionality, as
 AIM Auction after trading in FLEX                                                    executions cannot occur
 Options is open pursuant to Rule                                                     prior to the opening of
 5.71\14\.                                                                            trading. The proposed rule
                                                                                      change clarifies this in
                                                                                      the Rule.
The System rejects or cancels both   N/A...................  Rule 5.73(a)..........  This is consistent with
 an Agency Order and Initiating                                                       current functionality and
 Order submitted to a FLEX AIM                                                        the concept of eligibility
 Auction that do not meet the                                                         requirements, and the
 conditions in proposed paragraph                                                     proposed rule change
 (a).                                                                                 explicitly states this in
                                                                                      the Rule.
The Initiating Order must stop the   Rule..................  Rule 5.73(b)..........  The proposed rule change
 entire Agency Order at a price in   24A.5A(b)(1)(vii) and                            references Rule 5.4 in the
 the same format (i.e., price or      Interpretation and                              shell Rulebook, which
 percentage) as the exercise price    Policy .05.                                     describes the permissible
 of the FLEX Option series. If the                                                    minimum increments for
 Agency Order and Initiating Order                                                    FLEX Option series, rather
 are complex orders, the price must                                                   than repeats those
 be a net price for the complex                                                       increments. There is no
 strategy.                                                                            substantive change to the
                                                                                      permissible minimum
                                                                                      increments for orders
                                                                                      submitted to a FLEX AIM
                                                                                      Auction.
The Initiating FLEX Trader must      Rule..................  Rule 5.73(b)(1) and     The proposed rule change
 specify (1) a single price at       24A.5A(a)(2) and         (2).                    deletes the provision that
 which it seeks to execute the        (b)(1)(i).                                      the Agency Order will be
 Agency Order against the                                                             stopped at the better of
 Initiating Order (a ``single-price                                                   the BBO or the Agency
 submission''), including whether                                                     Order's limit price if
 it elects to have last priority in                                                   designated as auto-match,
 allocation (as described in                                                          and instead will have an
 proposed subparagraph (e)(4)); or                                                    initial stop price,
 (2) an initial stop price and                                                        because there will no
 instruction to automatically match                                                   longer be an electronic
 the price and size of all FLEX AIM                                                   book (and thus no BBO) for
 responses (``auto-match'') at each                                                   FLEX Options.\15\
 price, up to a designated limit
 price, better than the price at
 which the balance of the Agency
 Order can be fully executed ( the
 ``final auction price'').
The System rejects or cancels both   N/A...................  Rule 5.73(b)..........  This is consistent with
 an Agency Order and Initiating                                                       current functionality and
 Order submitted to a FLEX AIM                                                        the concept of eligibility
 Auction that do not meet the                                                         requirements, and the
 conditions in proposed paragraph                                                     proposed rule change
 (b).                                                                                 explicitly states this in
                                                                                      the Rule.
One or more FLEX AIM Auctions in     Rule..................  Rule 5.73(c)(1).......  The proposed rule change
 the same FLEX Option series or      24A.5A(b) and                                    permits concurrent FLEX
 complex strategy, as applicable,     Interpretation and                              AIM Auctions, which the
 may occur at the same time.          Policy .05.                                     current rule prohibits, as
                                                                                      further discussed below.
                                                                                      The proposed rule change
                                                                                      also deletes the provision
                                                                                      that says unrelated FLEX
                                                                                      Orders may not be
                                                                                      submitted to the
                                                                                      electronic book for the
                                                                                      duration of a FLEX AIM
                                                                                      Auction, because there
                                                                                      will no longer be an
                                                                                      electronic book (and thus
                                                                                      no BBO) for FLEX Options.
The System initiates the FLEX AIM    Rule..................  Rule 5.73(c)(2).......  The current rule states the
 Auction process by sending a FLEX   24A.5A(b)(1)(ii) and                             auction message (currently
 AIM Auction notification message     (vi).                                           called a request for
 detailing the side, size, Auction                                                    responses (``RFR''))
 ID, the length of the FLEX AIM                                                       details the size and side
 Auction period, and FLEX option                                                      of the order, which
 series or complex strategy, as                                                       message is set to all FLEX
 applicable, of the Agency Order to                                                   Traders that have elected
 all FLEX Traders that elect to                                                       to receive RFRs upon
 receive FLEX AIM Auction                                                             receipt of a properly
 notification messages. FLEX AIM                                                      designated Agency Order
 Auction notification messages are                                                    for FLEX AIM processing.
 not disseminated to OPRA.                                                            Other than changes to
                                                                                      terminology and other
                                                                                      nonsubstantive changes,
                                                                                      the proposed rule change
                                                                                      adds that this message
                                                                                      will also include the
                                                                                      Auction ID and options
                                                                                      series or complex
                                                                                      strategy, as applicable,
                                                                                      of the Agency Order. This
                                                                                      is consistent with the
                                                                                      current RFR that is
                                                                                      disseminated, and the
                                                                                      proposed rule change
                                                                                      merely adds details to the
                                                                                      rule. The proposed rule
                                                                                      change to add that the
                                                                                      FLEX AIM Auction
                                                                                      notification message
                                                                                      includes the length of the
                                                                                      FLEX AIM Auction period
                                                                                      relates to the proposed
                                                                                      change below that the
                                                                                      Initiating FLEX Trader,
                                                                                      rather than the Exchange,
                                                                                      will designate the length
                                                                                      of the FLEX AIM Auction
                                                                                      period (and therefore FLEX
                                                                                      Traders will know how long
                                                                                      they have to respond to a
                                                                                      FLEX AIM Auction). The
                                                                                      proposed rule change also
                                                                                      adds that AIM Auction
                                                                                      notification messages are
                                                                                      not included in the
                                                                                      disseminated OPRA, which
                                                                                      is also consistent with
                                                                                      current functionality.\16\
The ``FLEX AIM Auction period'' is   Rule..................  Rule 5.73(c)(3).......  The proposed rule change
 a period of time designated by the  24A.5A(b)(1)(iii).....                           adds a maximum time to the
 Initiating FLEX Trader, which may                                                    range for the FLEX AIM
 be no less than three seconds and                                                    Auction period (the
 no more than five minutes. The                                                       minimum potential auction
 designated length of the FLEX AIM                                                    period remains three
 Auction period may not be longer                                                     seconds), which proposed
 than the amount of time remaining                                                    maximum time is consistent
 until the market close.                                                              with current Exchange
                                                                                      authority under the
                                                                                      current Rules.
                                                                                      Additionally, this
                                                                                      corresponds to the same
                                                                                      permissible time range as
                                                                                      that for electronic FLEX
                                                                                      Auctions pursuant to Rule
                                                                                      5.72(c) in the shell
                                                                                      Rulebook, and permits the
                                                                                      Initiating FLEX Trader to
                                                                                      designate the length of
                                                                                      the FLEX AIM Auction when
                                                                                      submitting the Agency
                                                                                      Order rather than have the
                                                                                      Exchange establish a
                                                                                      length for all FLEX AIM
                                                                                      Auctions. It also ensures
                                                                                      that a FLEX AIM Auction
                                                                                      will conclude prior to the
                                                                                      close of trading to
                                                                                      prevent executions after
                                                                                      the market close. This is
                                                                                      consistent with the
                                                                                      standard FLEX electronic
                                                                                      auction, which permits
                                                                                      FLEX Traders to designate
                                                                                      the length of that auction
                                                                                      (and permits it to be from
                                                                                      three seconds to five
                                                                                      minutes). This provides
                                                                                      consistency among
                                                                                      electronic FLEX auctions.
                                                                                      Additionally, it provides
                                                                                      FLEX Traders with
                                                                                      flexibility regarding the
                                                                                      duration of the exposure
                                                                                      time, which it may want to
                                                                                      be longer than three
                                                                                      seconds due to the terms
                                                                                      of the FLEX Option series
                                                                                      being auctioned.\17\
An Initiating FLEX Trader may not    Rule..................  Rule 5.73(c)(4).......  The proposed rule change
 modify or cancel an Agency Order    24A.5A(b).............                           makes only nonsubstantive
 or Initiating Order after                                                            changes to this provision,
 submission to a FLEX AIM Auction.                                                    as well as clarifies that
                                                                                      the prohibition on the
                                                                                      Initiating FLEX Trader
                                                                                      from modifying or
                                                                                      cancelling an order after
                                                                                      submission to a FLEX AIM
                                                                                      Auction applies to both
                                                                                      the Agency Order and the
                                                                                      Initiating Order (the
                                                                                      current rules only
                                                                                      references the Agency
                                                                                      Order; however, they are
                                                                                      submitted as a pair, and
                                                                                      thus not being able to
                                                                                      modify or cancel the
                                                                                      Agency Order means that
                                                                                      the Initiating FLEX Trader
                                                                                      is not able to modify or
                                                                                      cancel the Initiating
                                                                                      Order either).
Any FLEX Trader may submit           Rule..................  Rule 5.73(c)(5).......  The current rule specifies
 responses to a FLEX AIM Auction     24A.5A(b)(1)(iv) and                             that responses must
 that are properly marked             (v).                                            include prices and sizes;
 specifying price, size, side, and                                                    the proposed rule change
 the Auction ID for the FLEX AIM                                                      adds responses must also
 Auction to which the FLEX Trader                                                     specify side and an
 is submitting the response. A FLEX                                                   Auction ID, which is
 AIM response may only participate                                                    consistent with current
 in the FLEX AIM Auction with the                                                     functionality and merely
 Auction ID specified in the                                                          adds details to the rule.
 response.                                                                            The proposed rule change
                                                                                      adds that a FLEX AIM
                                                                                      response may only
                                                                                      participate in the AIM
                                                                                      Auction with the Auction
                                                                                      ID specified in the
                                                                                      response. This is
                                                                                      consistent with current
                                                                                      functionality. The
                                                                                      Exchange proposes to
                                                                                      include this language
                                                                                      given the above proposal
                                                                                      that permits concurrent
                                                                                      FLEX AIM Auctions. The
                                                                                      proposed rule change
                                                                                      deletes the provision that
                                                                                      caps the price of a FLEX
                                                                                      AIM response at the
                                                                                      opposite side of the BBO,
                                                                                      because there will no
                                                                                      longer be an electronic
                                                                                      book (and thus no BBO) for
                                                                                      FLEX Options.

[[Page 54662]]

 
The minimum price increment for      Rule..................  Rule 5.73(c)(5)(A)....  The proposed rule change
 FLEX AIM responses is the same as   24A.5A(b)(1)(vii) and                            adds that the System
 the one the Exchange determines      Interpretation and                              rejects a FLEX AIM
 for a class pursuant to              Policy .05.                                     response that is not in
 subparagraph (a)(4) above, and                                                       the applicable minimum
 must be in the same format (i.e.,                                                    increment or format, which
 price or percentage) as the                                                          is consistent with current
 exercise price of the FLEX Option                                                    functionality and merely
 series. A response to a FLEX AIM                                                     adds detail to the rule.
 Auction of a complex Agency Order                                                    See the discussion below
 must have a net price. The System                                                    regarding the application
 rejects a FLEX AIM response that                                                     of FLEX AIM to complex
 is not in the applicable minimum                                                     orders, including proposed
 increment or format.                                                                 changes to current Rule
                                                                                      24A.5A, Interpretation and
                                                                                      Policy .05.
A FLEX Trader may submit multiple    N/A...................  Rule..................  This is consistent with
 FLEX AIM responses at the same or                           5.73(c)(5)(B) and (C).   current functionality.
 multiple prices to a FLEX AIM                                                        Current Rule 24A.5A
 Auction. For purposes of a FLEX                                                      contains no restriction on
 AIM Auction, the System aggregates                                                   how many responses a FLEX
 all of a FLEX Trader's FLEX AIM                                                      Trader may submit; the
 responses for the same EFID at the                                                   proposed rule change
 same price. The System caps the                                                      merely makes this explicit
 size of a FLEX AIM response, or                                                      in the Rules. The proposed
 the aggregate size of a FLEX                                                         rule change also states
 Trader's FLEX AIM responses for                                                      for purposes of a FLEX AIM
 the same EFID at the same price,                                                     Auction, the System
 at the size of the Agency Order                                                      aggregates all of a FLEX
 (i.e., the System ignores size in                                                    Trader's FLEX AIM
 excess of the size of the Agency                                                     responses for the same
 Order when processing the FLEX AIM                                                   EFID at the same price.
 Auction).                                                                            This (combined with the
                                                                                      proposed size cap) will
                                                                                      prevent a FLEX Trader from
                                                                                      submitting multiple
                                                                                      orders, quotes, or
                                                                                      responses at the same
                                                                                      price to obtain a larger
                                                                                      pro-rata share of the
                                                                                      Agency Order.
FLEX AIM responses must be on the    N/A...................  Rule..................  This is consistent with
 opposite side of the market as the                          5.73(c)(5)(D).........   current functionality, and
 Agency Order. The System rejects a                                                   the proposed rule change
 FLEX AIM response on the same side                                                   merely adds this detail to
 of the market as the Agency Order.                                                   the rules. Additionally,
                                                                                      the Exchange believes this
                                                                                      is reasonable given that
                                                                                      the purpose of an AIM
                                                                                      response is to trade
                                                                                      against the Agency Order
                                                                                      in the AIM Auction into
                                                                                      which the AIM response was
                                                                                      submitted.
FLEX AIM responses are not visible   Rule..................  Rule..................  None.
 to AIM Auction participants or      24A.5A(b)(1)(vi)......  5.73(c)(5)(E).........
 disseminated to OPRA.
A FLEX Trader may modify or cancel   Rule..................  Rule..................  The current Rule permits
 its FLEX AIM responses during the   24A.5A(b)(1)(viii)....  5.73(c)(5)(F).........   FLEX Traders to cancel a
 FLEX AIM Auction.                                                                    FLEX AIM response, 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).
A FLEX AIM Auction concludes at the  Rule..................  Rule..................  The proposed rule change
 earliest to occur of the following  24A.5A(b)(2)..........  5.73(d)...............   deletes the provision that
 times: (1) The end of the FLEX AIM                                                   says a FLEX AIM Auction
 Auction period; and (2) any time                                                     will conclude any time an
 the Exchange halts trading in the                                                    RFR response matches the
 affected series, provided,                                                           BBO on the opposite side
 however, that in such instance the                                                   of the market from the RFR
 FLEX AIM Auction concludes without                                                   responses, because there
 execution.                                                                           will no longer be an
                                                                                      electronic book (and thus
                                                                                      no BBO) for FLEX Options.
At the conclusion of the FLEX AIM    Rule 24A.5A(b)(3).....  Rule 5.73(e)..........  The proposed rule change
 Auction, the System allocates the                                                    deletes references to
 Initiating Order or FLEX AIM                                                         executions against FLEX
 responses against the Agency Order                                                   Orders, and whether the
 at the best price(s) to the price                                                    final auction price locks
 at which the balance of the Agency                                                   an order on the electronic
 Order can be fully executed (the                                                     book, because there will
 ``final auction price''). If the                                                     no longer be an electronic
 FLEX AIM Auction results in no                                                       book (and thus no BBO) for
 price improvement, the System                                                        FLEX Options, and thus
 executes the Agency Order at the                                                     Agency Orders will only
 stop price in the following order:                                                   execute responses or the
 Priority Customer responses                                                          Initiating Order, as
 receive first priority at each                                                       applicable. The proposed
 price level, the Initiating Order                                                    rule change deletes the
 participation entitlement (50% or                                                    reference to a FLEX
 40% depending on how many FLEX                                                       Appointed Market-Maker
 Traders submitted FLEX AIM                                                           participation entitlement,
 responses at the same price                                                          as there are currently no
 receives second priority at the                                                      FLEX Appointed Market-
 final auction price, all other                                                       Makers, and the Exchange
 responses have third priority and                                                    has not applied a
 are allocated on a pro-rata basis                                                    participation entitlement,
 pursuant to Rule 5.32(a)(1)(B),                                                      and as a result, the
 and the Initiating Order would                                                       Exchange is deleting FLEX
 have fourth priority to the extent                                                   Appointed Market-Makers
 there are any remaining contracts.                                                   from the Rules.\18\ The
 If the FLEX AIM Auction results in                                                   proposed rule change
 price improvement for the Agency                                                     provides that non-Priority
 Order and the Initiating FLEX                                                        Customer FLEX AIM
 Trader selected a single-price                                                       responses will be
 submission, at each price better                                                     allocated in a pro-rata
 than the final auction price, the                                                    manner rather than price-
 System executes the Agency Order                                                     time. The majority of
 first to Priority Customer                                                           classes on the Exchange
 responses (in time priority) and                                                     currently have a base
 then to all other FLEX AIM                                                           allocation algorithm of
 responses, allocated on a pro-rata                                                   pro-rata, and therefore
 basis. At the final auction price,                                                   the Exchange believes it
 the System executes any remaining                                                    is a reasonable manner in
 contracts from the Agency Order at                                                   which to allocate FLEX AIM
 that price in the order set forth                                                    responses. FLEX AIM
 in proposed subparagraph (e)(1).                                                     Priority Customer \19\
 If the FLEX AIM Auction results in                                                   responses will continue to
 price improvement for the Agency                                                     have priority at each
 Order and the Initiating FLEX                                                        price level (in time
 Trader selected auto-match, at                                                       priority); however, non-
 each price level better than the                                                     TPH broker-dealers will
 final auction price up to the                                                        not and will be treated in
 designated limit price, the System                                                   the same manner as all
 executes the Agency Order against                                                    other non-Priority
 the Initiating Order for the                                                         Customer responses, as
 number of contracts equal to the                                                     further discussed below.
 aggregate size of all FLEX AIM                                                       The Exchange notes the
 responses and then executes the                                                      current rule states public
 Agency Order against those                                                           customer orders have
 responses in the order set forth                                                     priority, rather than
 in proposed subparagraph (e)(2).                                                     Priority Customers.
 At the final auction price, the                                                      Currently, the Exchange
 System executes contracts at that                                                    does not permit the
 price in the order set forth in                                                      submission of FLEX Orders
 proposed subparagraph (e)(1). If                                                     with a Professional
 the Initiating FLEX Trader selects                                                   Capacity code, and so the
 a single-price submission, it may                                                    terms public customer and
 elect for the Initiating Order to                                                    Priority Customer
 have last priority to trade                                                          practically mean the same
 against the Agency Order. If the                                                     thing. However, the
 Initiating FLEX Trader elects last                                                   Exchange plans to make the
 priority, then notwithstanding                                                       Professional Capacity code
 proposed subparagraphs (e)(1) and                                                    available for FLEX orders
 (2), the System only executes the                                                    following migration, and
 Initiating Order against any                                                         because the System handles
 remaining Agency Order contracts                                                     Professional orders like
 at the stop price after the Agency                                                   broker-dealer orders,
 Order is allocated to all FLEX AIM                                                   those orders will not
 responses at all prices equal to                                                     receive priority in a FLEX
 or better than the stop price.                                                       AIM Auction. Therefore,
 Last priority information is not                                                     only Priority Customer
 available to other market                                                            responses will receive
 participants and may not be                                                          priority.\20\ The proposed
 modified after it is submitted.                                                      rule change also permits
                                                                                      the Initiating FLEX Trader
                                                                                      to select last priority,
                                                                                      as further discussed
                                                                                      below. Finally, the
                                                                                      proposed rule change adds
                                                                                      that any unexecuted
                                                                                      responses (or portions) at
                                                                                      the conclusion of the FLEX
                                                                                      AIM Auction will be
                                                                                      cancelled.
A FLEX Trader may only use a FLEX    Rule..................  Rule..................  None.
 AIM Auction where there is a        24A.5A, Interpretation  5.73, Interpretation
 genuine intention to execute a       and Policy .01.         and Policy .01.
 bona fide transaction.
It will be deemed conduct            Rule..................  Rule..................  The proposed rule change
 inconsistent with just and          24A.5A, Interpretation  5.73, Interpretation     deletes the language that
 equitable principles of trade and    and Policy .02.         and Policy .02.         states the Agency Order
 a violation of Rule 10.1 (to which                                                   cannot be broken up into
 the Exchange intends to move Rule                                                    separate orders for ``two
 4.1 from the current Rulebook) to                                                    (2) or fewer contracts,''
 engage in a pattern of conduct                                                       as that language is not in
 where the Initiating FLEX Trader                                                     the corresponding
 breaks up an Agency Order into                                                       provision for non-FLEX AIM
 separate orders for the purpose of                                                   (see Rules 5.37,
 gaining a higher allocation                                                          Interpretation and Policy
 percentage than the Initiating                                                       .02 and 5.38,
 FLEX Trader would have otherwise                                                     Interpretation and Policy
 received in accordance with the                                                      .02 of the shell
 allocation procedures contained in                                                   Rulebook). Deletion of
 paragraph (e) above.                                                                 this language does not
                                                                                      have any impact on the
                                                                                      prohibited conduct in this
                                                                                      provision, and provides
                                                                                      consistency among the
                                                                                      rules in the shell
                                                                                      Rulebook regarding AIM
                                                                                      Auctions.
----------------------------------------------------------------------------------------------------------------

[[Page 54663]]

 
                                                FLEX SAM Auction
----------------------------------------------------------------------------------------------------------------
A FLEX Trader (the ``Initiating      Rule..................  Rule..................  The proposed rule change
 FLEX Trader'') may electronically   24A.5B, introductory    5.74, introductory       adds that the Solicited
 submit for execution an order        paragraph and           paragraph.              Order cannot have a
 (which may be a simple or complex    Interpretations and                             Capacity F for the same
 order) it represents as agent        Policies .01 and .04.                           executing firm ID
 (``Agency Order'') against a                                                         (``EFID'') as the Agency
 solicited order(s) (which cannot                                                     Order. Current Rule 24A.5B
 have a Capacity of F for the same                                                    does not contain a similar
 EFID as the Agency Order or for                                                      provision, but the
 the account of any FLEX Market                                                       Exchange currently
 Maker with an appointment in the                                                     enforces the requirement
 applicable FLEX Option class on                                                      that the contra-side order
 the Exchange) (``Solicited                                                           be a solicitation rather
 Order'') if it submits the Agency                                                    than a facilitation
 Order for electronic execution                                                       through surveillance. The
 into a FLEX SAM Auction pursuant                                                     proposed rule change adds
 to this Rule.                                                                        this functionality, which
                                                                                      will help with the
                                                                                      enforcement of this
                                                                                      requirement, in addition
                                                                                      to surveillance. The
                                                                                      proposed rule change also
                                                                                      specifies in the
                                                                                      introductory paragraph
                                                                                      that both simple and
                                                                                      complex orders may be
                                                                                      submitted into a FLEX SAM
                                                                                      Auction, as the auction
                                                                                      will apply to both simple
                                                                                      and complex orders in a
                                                                                      substantially similar
                                                                                      manner, as further
                                                                                      discussed below.
An Agency Order must be in a FLEX    Rule..................  Rule..................  None.
 Option class the Exchange           24A.5B(a)(1)..........  5.74(a)(1)............
 designates as eligible for FLEX
 SAM Auctions.
The Agency Order and Solicited       N/A...................  Rule..................  This requirement is not
 Order must each be a FLEX Order                             5.74(a)(2)............   explicitly stated in the
 that complies with Rule 5.72(b) in                                                   current Rules; however, it
 a permissible FLEX Option series                                                     is consistent with current
 that complies with Rule 4.21.                                                        functionality, and the
                                                                                      proposed rule change
                                                                                      merely states this in the
                                                                                      Rules. For a FLEX SAM
                                                                                      Auction to occur, the
                                                                                      orders submitted would
                                                                                      need to be in a series
                                                                                      eligible for FLEX trading,
                                                                                      and thus include all the
                                                                                      terms necessary to
                                                                                      comprise a FLEX Option
                                                                                      series.\21\
The Initiating FLEX Trader must      Rule..................  Rule..................  None.
 mark an Agency Order for FLEX SAM   24A.5B(b)(1)(i).......  5.74(a)(3)............
 Auction processing.
The Agency Order must be for at      Rule..................  Rule..................  The proposed rule change
 least the minimum size designated   24A.5B(a)(1) and (2)..  5.74(a)(4)............   deletes the requirement
 by the Exchange (which may not be                                                    that the Initiating FLEX
 less than 500 standard option                                                        Trader must designate each
 contracts or 5,000 mini-option                                                       order entered into a FLEX
 contracts). The Solicited Order                                                      SAM Auction as all-or-none
 must be for (or must total, if the                                                   (``AON''). The Exchange's
 Solicited Order is comprised of                                                      new system has been
 multiple solicited orders) the                                                       designed to automatically
 same size as the Agency Order. The                                                   handle any orders
 System handles each of the Agency                                                    submitted into a SAM
 Order and the Solicited Order as                                                     Auction (using the
 all-or-none.                                                                         appropriate messaging) as
                                                                                      all-or-none, so the
                                                                                      Initiating FLEX Trader
                                                                                      will no longer be required
                                                                                      to add any specific AON
                                                                                      designations to the Agency
                                                                                      Order or Solicited Order.
                                                                                      Therefore, the proposed
                                                                                      rule change adds that the
                                                                                      System handles each of the
                                                                                      Agency Order and the
                                                                                      Solicited Order as all-or-
                                                                                      none. The proposed rule
                                                                                      change clarifies the size
                                                                                      requirements for mini-
                                                                                      option contracts, which
                                                                                      are 1/10th the size of
                                                                                      standard option contracts.
                                                                                      This is consistent with
                                                                                      current functionality and
                                                                                      is merely adding detail to
                                                                                      the rule. See Rule 5.5,
                                                                                      Interpretation and Policy
                                                                                      .22 in the current
                                                                                      Rulebook (which permits
                                                                                      the listing of mini-
                                                                                      options); see also Rule
                                                                                      5.39(a)(3) (which has the
                                                                                      same size requirements for
                                                                                      non-FLEX SAM Auctions).
                                                                                      The proposed rule change
                                                                                      clarifies in the Rules
                                                                                      that the Solicited Order
                                                                                      must be for the same size
                                                                                      as the Agency Order, which
                                                                                      is implied by the current
                                                                                      Rules.\22\
The price of the Agency Order and    Rule..................  Rule..................  The current rule state the
 Solicited Order must be in an       24A.5B(a)(3)..........  5.74(a)(5)............   minimum increment for the
 increment the Exchange determines                                                    Initiating TPH's
 on a class basis (which may not be                                                   submission is determined
 smaller than the amounts set forth                                                   by the Exchange but may
 in Rule 5.4(c)(4)). The price must                                                   not be smaller than $0.01
 be in the same format (i.e., price                                                   or .01%, and premiums are
 or percentage) as the exercise                                                       rounded to the nearest
 price of the FLEX Option series.                                                     minimum increment. This is
 If the Agency Order and Solicited                                                    consistent with the
 Order are complex orders, the                                                        minimum increment
 price must be a net price for the                                                    available for all FLEX
 complex strategy.                                                                    Trading, so the proposed
                                                                                      rule change merely
                                                                                      references Rule 5.4(c)(4)
                                                                                      in the shell Rulebook,
                                                                                      which describes the
                                                                                      permissible minimum
                                                                                      increments for FLEX Option
                                                                                      series, rather than
                                                                                      repeats those increments.
                                                                                      There is no substantive
                                                                                      change to the permissible
                                                                                      minimum increments for
                                                                                      orders submitted to a FLEX
                                                                                      SAM Auction. The proposed
                                                                                      rule change maintains the
                                                                                      rule provision that
                                                                                      complex Agency and
                                                                                      Initiating Orders must
                                                                                      include a net price. See
                                                                                      the discussion below
                                                                                      regarding the application
                                                                                      of FLEX SAM to complex
                                                                                      orders, including proposed
                                                                                      changes to current Rule
                                                                                      24A.5B, Interpretation and
                                                                                      Policy .01.
An Initiating FLEX Trader may only   N/A...................  Rule..................  This is consistent with
 submit an Agency Order to a FLEX                            5.74(a)(6)............   current functionality, as
 SAM Auction after trading in FLEX                                                    executions cannot occur
 Options is open pursuant to Rule                                                     prior to the opening of
 5.71.                                                                                trading. The proposed rule
                                                                                      change clarifies this in
                                                                                      the Rule.
The System rejects or cancels both   N/A...................  Rule 5.74(a)..........  This is consistent with
 an Agency Order and Solicited                                                        current functionality, and
 Order submitted to a FLEX SAM                                                        the proposed rule change
 Auction that do not meet the                                                         explicitly states this in
 conditions in proposed paragraph                                                     the Rule.
 (a).
The Solicited Order must stop the    Rule..................  Rule..................  The proposed rule change
 entire Agency Order at a price in   24A.5B(a)(3) and        5.74(b)...............   adds that the System
 the same format (i.e., price or      Interpretation and                              rejects or cancels both an
 percentage) as the exercise price    Policy .01, and                                 Agency Order and Solicited
 of the FLEX Option series. If the    24A.5B(b)(1).                                   Order submitted to a FLEX
 Agency Order and Solicited Order                                                     SAM Auction that does not
 are complex orders, the price must                                                   meet the conditions in
 be a net price for the complex                                                       proposed paragraph (b).
 strategy. The Initiating FLEX                                                        This is consistent with
 Trader must specify a single price                                                   current functionality, and
 at which it seeks to execute the                                                     the proposed rule change
 Agency Order against the Solicited                                                   explicitly states this in
 Order. The System rejects or                                                         the Rule. Additionally,
 cancels both an Agency Order and                                                     while current rules permit
 Solicited Order submitted to a                                                       bids and offers (including
 FLEX SAM Auction that does not                                                       the price submitting into
 meet the conditions in proposed                                                      a FLEX SAM Auction) to be
 paragraph (b).                                                                       in a different format than
                                                                                      the exercise price of a
                                                                                      FLEX Option series, the
                                                                                      current functionality does
                                                                                      not permit this. Rule
                                                                                      5.3(e)(3) in the shell
                                                                                      Rulebook 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.\23\
One or more FLEX SAM Auctions in     Rule..................  Rule..................  The proposed rule change
 the same FLEX Option series or      24A.5B(b) and           5.74(c)(1)............   permits concurrent FLEX
 complex strategy, as applicable,     Interpretation and                              SAM Auctions, which the
 may occur at the same time.          Policy .01.                                     current rule prohibits, as
                                                                                      further discussed below.
                                                                                      The proposed rule change
                                                                                      also deletes the provision
                                                                                      that says unrelated FLEX
                                                                                      Orders may not be
                                                                                      submitted to the
                                                                                      electronic book for the
                                                                                      duration of a FLEX SAM
                                                                                      Auction, because there
                                                                                      will no longer be an
                                                                                      electronic book (and thus
                                                                                      no BBO) for FLEX Options.
The System initiates the FLEX SAM    Rule..................  Rule..................  The current rule states the
 Auction process by sending a FLEX   24A.5B(b)(1)(ii)......  5.74(c)(2)............   auction message (currently
 SAM Auction notification message                                                     called a request for
 detailing the side, size, price,                                                     responses (``RFR''))
 Capacity, Auction ID, the length                                                     details the price, size,
 of the FLEX SAM Auction period,                                                      and side of the order,
 and FLEX Option series or complex                                                    which message is set to
 strategy, as applicable, of the                                                      all FLEX Traders that have
 Agency Order to all FLEX Traders                                                     elected to receive RFRs
 that elect to receive FLEX SAM                                                       upon receipt of a properly
 Auction notification messages.                                                       designated Agency Order
 FLEX SAM Auction notification                                                        for FLEX SAM processing.
 messages are not disseminated to                                                     Other than changes to
 OPRA.                                                                                terminology and other
                                                                                      nonsubstantive changes,
                                                                                      the proposed provision
                                                                                      specifies that the message
                                                                                      will detail the Capacity
                                                                                      of the Agency Order, an
                                                                                      Auction ID, and the option
                                                                                      series, in addition to the
                                                                                      price, side, and size, of
                                                                                      the Agency Order, which
                                                                                      message is sent to all
                                                                                      TPHs that elect to receive
                                                                                      SAM Auction notification
                                                                                      messages. This is
                                                                                      consistent with the
                                                                                      current auction message
                                                                                      that is disseminated; the
                                                                                      proposed rule change adds
                                                                                      these details to the rule.
                                                                                      The proposed rule change
                                                                                      to add that the FLEX SAM
                                                                                      Auction notification
                                                                                      message includes the
                                                                                      length of the FLEX SAM
                                                                                      Auction period relates to
                                                                                      the proposed change below
                                                                                      that the Initiating FLEX
                                                                                      Trader, rather than the
                                                                                      Exchange, will designate
                                                                                      the length of the FLEX SAM
                                                                                      Auction period (and
                                                                                      therefore FLEX Traders
                                                                                      will know how long they
                                                                                      have to respond to a FLEX
                                                                                      SAM Auction). The proposed
                                                                                      rule change also adds that
                                                                                      FLEX SAM Auction
                                                                                      notification messages are
                                                                                      not included in the
                                                                                      disseminated OPRA, which
                                                                                      is also consistent with
                                                                                      current functionality.\24\

[[Page 54664]]

 
The ``FLEX SAM Auction period'' is   Rule..................  Rule..................  The proposed rule change
 a period of time designated by the  24A.5B(b)(1)(iii).....  5.74(c)(3)............   adds a maximum time to the
 Initiating FLEX Trader, which may                                                    range for the FLEX SAM
 be no less than three seconds and                                                    Auction period (the
 no more than five minutes. The                                                       minimum potential auction
 designated length of the FLEX SAM                                                    period remains three
 Auction period may not be longer                                                     seconds), which is
 than the amount of time remaining                                                    consistent with current
 until the market close.                                                              Exchange authority under
                                                                                      the current Rules.
                                                                                      Additionally, this
                                                                                      corresponds to the same
                                                                                      permissible time range as
                                                                                      that for electronic FLEX
                                                                                      Auctions pursuant to Rule
                                                                                      5.72 in the shell
                                                                                      Rulebook, and permits the
                                                                                      Initiating FLEX Trader to
                                                                                      designate the length of
                                                                                      the FLEX SAM Auction when
                                                                                      submitting the Agency
                                                                                      Order rather than have the
                                                                                      Exchange establish a
                                                                                      length for all FLEX SAM
                                                                                      Auctions. It also ensures
                                                                                      that a FLEX SAM Auction
                                                                                      will conclude prior to the
                                                                                      close of trading to
                                                                                      prevent executions after
                                                                                      the market close. This is
                                                                                      consistent with standard
                                                                                      FLEX electronic auction,
                                                                                      which permits FLEX Traders
                                                                                      to designate the length of
                                                                                      that auction (and permits
                                                                                      it to be from three
                                                                                      seconds to five minutes).
                                                                                      This provides consistency
                                                                                      among FLEX trading.
                                                                                      Additionally, it provides
                                                                                      FLEX Traders with
                                                                                      flexibility regarding the
                                                                                      duration of the exposure
                                                                                      time, which it may want to
                                                                                      be longer than three
                                                                                      seconds due to the terms
                                                                                      of the FLEX Option series
                                                                                      being auctioned.\25\
The Initiating FLEX Trader may not   Rule..................  Rule..................  The proposed rule change
 modify or cancel an Agency Order    24A.5B(b).............  5.74(c)(4)............   makes only nonsubstantive
 or Solicited Order after                                                             changes to this provision,
 submission to a SAM Auction.                                                         as well as clarifies that
                                                                                      the prohibition on
                                                                                      cancelling a FLEX SAM
                                                                                      Auction practically means
                                                                                      that the Initiating FLEX
                                                                                      Trader may not cancel (or
                                                                                      modify, which would change
                                                                                      the terms of the auction
                                                                                      after it started,
                                                                                      essentially creating a new
                                                                                      auction) the Agency Order
                                                                                      or the Solicited Order,
                                                                                      the entry of which
                                                                                      (subject to eligibility
                                                                                      requirements) initiates
                                                                                      the FLEX SAM Auction.
Any FLEX Trader other than the       Rule..................  Rule..................  The current rule specifies
 Initiating FLEX Trader (determined  24A.5B(b)(1)(iii) and   5.74(c)(5)............   that responses must
 by EFID) may submit responses to a   (vi).                                           include prices and sizes;
 FLEX SAM Auction that are properly                                                   the proposed rule change
 marked specifying price, size,                                                       adds responses must also
 side, and the Auction ID for the                                                     specify side and an
 FLEX SAM Auction to which the FLEX                                                   Auction ID, which is
 Trader is submitting the response.                                                   consistent with current
 A FLEX SAM response may only                                                         functionality and merely
 participate in the FLEX SAM                                                          adds details to the rule.
 Auction with the Auction ID                                                          The proposed rule change
 specified in the response.                                                           adds that a FLEX SAM
                                                                                      response may only
                                                                                      participate in the FLEX
                                                                                      SAM Auction with the
                                                                                      Auction ID specified in
                                                                                      the response. This is
                                                                                      consistent with current
                                                                                      functionality. The
                                                                                      Exchange proposes to
                                                                                      include this language
                                                                                      given the above proposal
                                                                                      that permits concurrent
                                                                                      FLEX SAM Auctions. The
                                                                                      proposed rule change
                                                                                      deletes the provision that
                                                                                      caps the price of a FLEX
                                                                                      SAM response at the
                                                                                      opposite side of the BBO,
                                                                                      because there will no
                                                                                      longer be an electronic
                                                                                      book (and thus no BBO) for
                                                                                      FLEX Options. The proposed
                                                                                      rule change permits all
                                                                                      FLEX Traders (including
                                                                                      Market-Makers from another
                                                                                      options exchange) to
                                                                                      submit responses to a FLEX
                                                                                      SAM Auction. By permitting
                                                                                      additional participants to
                                                                                      submit responses to FLEX
                                                                                      SAM Auctions, the Exchange
                                                                                      believes this may provide
                                                                                      the opportunity for
                                                                                      additional liquidity in
                                                                                      these auctions, which
                                                                                      could lead to additional
                                                                                      price improvement
                                                                                      opportunities.
The minimum price increment for      Rule..................  Rule..................  The proposed rule change
 FLEX SAM responses is the same as   24A.5B(b)(1)(v) and     5.74(c)(5)(A).........   adds that the System
 the one the Exchange determines      Interpretation and                              rejects a FLEX SAM
 for a class pursuant to              Policy .01.                                     response that is not in
 subparagraph (a)(4) above, and                                                       the applicable minimum
 must be in the same format (i.e.,                                                    increment or format, which
 price or percentage) as the                                                          is consistent with current
 exercise price of the FLEX Option                                                    functionality and merely
 series. A response to a FLEX SAM                                                     adds detail to the rule.
 Auction of a complex Agency Order                                                    See the discussion below
 must have a net price. The System                                                    regarding the application
 rejects a FLEX SAM response that                                                     of FLEX SAM to complex
 is not in the applicable minimum                                                     orders, including proposed
 increment or format.                                                                 changes to current Rule
                                                                                      24A.5B, Interpretation and
                                                                                      Policy .01.
A FLEX Trader may submit multiple    N/A...................  Rule..................  This is consistent with
 FLEX SAM responses at the same or                           5.74(c)(5)(B) and (C).   current functionality.
 multiple prices to a FLEX SAM                                                        Current Rule 24A.5B
 Auction. For purposes of a FLEX                                                      contains no restriction on
 SAM Auction, the System aggregates                                                   how many responses a FLEX
 all of a FLEX Trader's FLEX SAM                                                      Trader may submit; the
 responses for the same EFID at the                                                   proposed rule change
 same price. The System caps the                                                      merely makes this explicit
 size of a FLEX SAM response, or                                                      in the Rules. The proposed
 the aggregate size of a FLEX                                                         rule change also states
 Trader's FLEX SAM responses for                                                      for purposes of a FLEX SAM
 the same EFID at the same price,                                                     Auction, the System
 at the size of the Agency Order                                                      aggregates all of a FLEX
 (i.e., the System ignores size in                                                    Trader's FLEX SAM
 excess of the size of the Agency                                                     responses for the same
 Order when processing the FLEX SAM                                                   EFID at the same price.
 Auction).                                                                            This (combined with the
                                                                                      proposed size cap) will
                                                                                      prevent a FLEX Trader from
                                                                                      submitting multiple
                                                                                      orders, quotes, or
                                                                                      responses at the same
                                                                                      price to obtain a larger
                                                                                      pro-rata share of the
                                                                                      Agency Order.
FLEX SAM responses must be on the    N/A...................  Rule..................  This is consistent with
 opposite side of the market as the                          5.74(c)(5)(D).........   current functionality, and
 Agency Order. The System rejects a                                                   the proposed rule change
 FLEX SAM response on the same side                                                   merely adds this detail to
 of the market as the Agency Order.                                                   the rules. Additionally,
                                                                                      the Exchange believes this
                                                                                      is reasonable given that
                                                                                      the purpose of a FLEX SAM
                                                                                      response is to trade
                                                                                      against the Agency Order
                                                                                      in the FLEX SAM Auction
                                                                                      into which the FLEX SAM
                                                                                      response was submitted.
FLEX SAM responses are not visible   Rule..................  Rule..................  None.
 to FLEX SAM Auction participants    24A.5B(b)(1)(iv)......  5.74(c)(5)(E).........
 or disseminated to OPRA.
A FLEX Trader may modify or cancel   Rule..................  Rule..................  The current Rule permits
 its FLEX SAM responses during the   24A.5B(b)(1)(vii).....  5.74(c)(5)(F).........   FLEX Traders to cancel a
 FLEX SAM Auction.                                                                    FLEX SAM response, 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).
A FLEX SAM Auction concludes at the  Rule..................  Rule..................  The proposed rule change
 earliest to occur of the following  24A.5A(b)(2)..........  5.74(d)...............   deletes the provision that
 times: (1) The end of the FLEX SAM                                                   says a FLEX SAM Auction
 Auction period; and (2) any time                                                     will conclude any time an
 the Exchange halts trading in the                                                    RFR response matches the
 affected series, provided,                                                           BBO on the opposite side
 however, that in such instance the                                                   of the market from the RFR
 FLEX SAM Auction concludes without                                                   responses, , because there
 execution.                                                                           will no longer be an
                                                                                      electronic book (and thus
                                                                                      no BBO) for FLEX Options.
The Agency Order executes against    Rule..................  Rule 5.74(e)..........  The proposed rule change
 the Solicited Order at the stop     24A.5B(b)(3)..........                           deletes references to
 price if there are no Priority                                                       executions against FLEX
 Customer FLEX SAM responses and                                                      Orders, and whether the
 the aggregate size of FLEX SAM                                                       execution price is better
 responses at an improved price(s)                                                    than the BBO, because
 is insufficient to satisfy the                                                       there will no longer be an
 Agency Order. The Agency Order                                                       electronic book (and thus
 executes against FLEX SAM                                                            no BBO) for FLEX Options,
 responses if: (a) There is a                                                         and thus Agency Orders
 Priority Customer FLEX SAM                                                           will only execute
 response and the aggregate size of                                                   responses or the
 that response and all other FLEX                                                     Initiating Order, as
 SAM responses is sufficient to                                                       applicable. The proposed
 satisfy the Agency Order or (b)                                                      rule change deletes the
 the aggregate size of FLEX SAM                                                       reference to a FLEX
 responses at an improved price(s)                                                    Appointed Market-Maker
 is sufficient to satisfy the                                                         participation entitlement,
 Agency Order. At each price level,                                                   as there are currently no
 Priority Customer FLEX SAM                                                           FLEX Appointed Market-
 responses have first priority, and                                                   Makers, and the Exchange
 all other FLEX SAM responses are                                                     has not applied a
 allocated second on a pro-rata                                                       participation entitlement,
 basis. There is no execution at                                                      and as a result, the
 the conclusion of a FLEX SAM                                                         Exchange is deleting FLEX
 Auction if there is a Priority                                                       Appointed Market-Makers
 Customer FLEX SAM response and the                                                   from the Rules (as noted
 aggregate size of that response                                                      above). The proposed rule
 and other FLEX SAM responses is                                                      change provides that FLEX
 insufficient to satisfy the Agency                                                   SAM responses will be
 Order. The System cancels or                                                         allocated in a pro-rata
 rejects any unexecuted FLEX SAM                                                      manner rather than time
 responses (or unexecuted portions)                                                   priority. The majority of
 at the conclusion of a FLEX SAM                                                      classes on the Exchange
 Auction.                                                                             currently have a base
                                                                                      allocation algorithm of
                                                                                      pro-rata, and therefore
                                                                                      the Exchange believes it
                                                                                      is a reasonable manner in
                                                                                      which to allocate FLEX SAM
                                                                                      responses. FLEX SAM
                                                                                      Priority Customer
                                                                                      responses will continue to
                                                                                      have priority at each
                                                                                      price level; however, non-
                                                                                      TPH broker-dealers will
                                                                                      not and will be treated in
                                                                                      the same manner as all
                                                                                      other non-Priority
                                                                                      Customer responses, as
                                                                                      further discussed below.
                                                                                      Finally, the proposed rule
                                                                                      change adds that any
                                                                                      unexecuted responses (or
                                                                                      portions) at the
                                                                                      conclusion of the FLEX SAM
                                                                                      Auction will be cancelled.
                                                                                      See discussion above with
                                                                                      respect to FLEX AIM
                                                                                      regarding changing the
                                                                                      term ``public customer''
                                                                                      to ``Priority Customer,''
                                                                                      as the same reasoning
                                                                                      applies to the proposed
                                                                                      change in the FLEX SAM
                                                                                      rule.

[[Page 54665]]

 
Prior to entering Agency Orders      Rule 24A.5B,            Rule 5.74,              None.
 into a FLEX SAM Auction on behalf    Interpretation and      Interpretation and
 of customers, Initiating FLEX        Policy .03.             Policy .01.
 Traders must deliver to the
 customer a written notification
 informing the customer that his
 order may be executed using the
 FLEX SAM Auction. The written
 notification must disclose the
 terms and conditions contained in
 proposed Rule 5.74 and be in a
 form approved by the Exchange.
Under proposed Rule 5.74,            Rule 24A.5B,            Rule 5.74,              None.
 Initiating FLEX Traders may enter    Interpretation and      Interpretation and
 contra-side orders that are          Policy .04.             Policy .02.
 solicited. FLEX SAM provides a
 facility for FLEX Traders that
 locate liquidity for their
 customer orders. FLEX Traders may
 not use the FLEX SAM Auction to
 circumvent Rule 5.9 or 5.73 in the
 shell Rulebook limiting principal
 transactions. This may include,
 but is not limited to, FLEX
 Traders entering contra-side
 orders that are solicited from (a)
 affiliated broker-dealers or (b)
 broker-dealers with which the FLEX
 Trader has an arrangement that
 allows the FLEX Traders to realize
 similar economic benefits from the
 solicited transaction as it would
 achieve by executing the customer
 order in whole or in part as
 principal.
----------------------------------------------------------------------------------------------------------------

    The proposed rule change clarifies in the proposed introductory 
paragraph of each of proposed Rules 5.73 and 5.74 that the Initiating 
Order or Solicited Order, respectively, may consist of one or more 
solicited orders. This accommodates multiple contra-parties and 
increases the opportunities for customer orders to be submitted into a 
FLEX AIM or SAM Auction with the potential for price improvement, since 
the Initiating Order or Solicited Order, respectively, must stop the 
full size of the Agency Order. This has no impact on the execution of 
the Agency Order, which may already trade against multiple contra-
parties depending on the final auction price, as set forth in proposed 
paragraph (e) of each of proposed Rules 5.73 and 5.74.
---------------------------------------------------------------------------

    \6\ A FLEX Market-Maker with an appointment in a FLEX Option 
class is not what is currently referred to as a ``FLEX Appointed 
Market-Maker'' in the current Rulebook. Under current Rules, a 
``FLEX Qualified Market-Maker'' is an Exchange-registered Market-
Maker that is eligible to trade FLEX Options and is appointed to one 
or more FLEX Option classes, and a ``FLEX Appointed Market-Maker'' 
is an Exchange-registered Market-Maker that is eligible to trade 
FLEX Options that is selected by the Exchange to serve in such 
capacity for one or more FLEX Option classes, which has certain FLEX 
quoting obligations. See current Rule 24A.9. The Exchange currently 
has no FLEX Appointed Market-Makers in any FLEX Option class, and 
does not intend to, so it has deleted its rules related to FLEX 
Appointed Market-Makers. See Securities Exchange Act Release No. 
87024 (September 19, 2019), 84 FR 50545 (September 25, 2019) (SR-
CBOE-2019-059).
    \7\ With respect to FLEX Options, the term ``BBO'' means the 
best bid or offer, or both, as applicable, entered in response to a 
Request for Quotes or resting in the electronic book. With respect 
to FLEX AIM and SAM Auctions, which are different than a Request for 
Quotes, the BBO only incorporates any bids and offers resting in the 
electronic book. While the Exchange currently has an electronic book 
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. Therefore, it is unlikely there would be resting FLEX Orders 
to be incorporated into the BBO. The Exchange will no longer have an 
electronic FLEX Book. See SR-CBOE-2019-084. Additionally, there is 
no RFQ process that is part of a FLEX AIM Auction.
    \8\ See SR-CBOE-2019-084 (which filing describes the current 
minimal, limited use of an electronic FLEX Book and the elimination 
of a book for FLEX Orders as of the System migration, and deletes 
rule provisions related to a FLEX electronic book from the rules in 
current Chapter XXIV).
    \9\ See Rule 5.72(b) of the shell Rulebook (which states that 
submission of a FLEX Order into a FLEX AIM Auction establishes a 
FLEX Option series as eligible for trading); see also Rule 4.21 
(which describes the permissible terms of FLEX Option series, and 
states that a FLEX Option series may not have the same terms as a 
non-FLEX Option series on the same undelyring security or index that 
is already available for trading) and Rule 4.22 (which describes 
fungibility provisions when the Exchange lists for trading a non-
FLEX Option series with identical terms as a FLEX Option series).
    \10\ See current Rule 24A.5A(a)(2), which states the Initiating 
TPH must stop the ``entire'' Agency Order.
    \11\ Pursuant to Rule 5.4(c)(4) in the shell Rulebook, the 
minimum increment for bids and offers on FLEX Options may be no 
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. The System rounds bids and 
offers to the nearest minimum increment.
    \12\ In current Rules 24A.5A, Interpretation and Policy .05 and 
24A.5B, Interpretation and Policy .01, the price of a complex order 
is referenced as a net debit or net credit price, while proposed 
Rules 5.73 and 5.74 just use the simplified term ``net price'' as 
that is consistent with the term used in other FLEX Rules in the 
shell Rulebook. See, e.g., Rule 5.72(b)(2) in the shell Rulebook. A 
net debit price is merely a complex order with a net price to buy, 
and a net credit price is merely a complex order with a net price to 
sell, so the term net price covers both terms.
    \13\ See also SR-CBOE-2019-084.
    \14\ Pursuant to Rule 5.71 in the shell Rulebook, trading in 
FLEX Options in a trading session may begin, with respect to the 
Regular Trading Hours trading session, after 9:30 a.m. of the first 
disseminated (a) transaction on the primary listing market in the 
security underlying an equity option or (b) index value for the 
index underlying an index option, and with respect to the Global 
Trading Hours trading session, after 3:00 a.m.
    \15\ See supra note 7.
    \16\ This is also consistent with the auction notification 
message for non-FLEX AIM Auctions. See Rules 5.37(c)(3) and 
5.38(c)(3) in the shell Rulebook.
    \17\ The Exchange believes the proposed time range 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, for 
electronic FLEX trading in the FLEX RFQ process (but not FLEX AIM 
and SAM Auctions), 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. See SR-CBOE-
2019-084.
    \18\ See supra note 6.
    \19\ As defined in Rule 1.1 in the shell Rulebook, a ``Priority 
Customer'' is a person or entity that is a Public Customer (which is 
a person that is not a broker or dealer in securities) or a 
Professional (which is defined as any person or entity that (a) is 
not a broker or dealer in securities, and (b) places more than 390 
orders in listed options per day on average during a calendar month 
for its own beneficial account(s); the System handles Professional 
orders in the same manner as broker-dealer orders unless otherwise 
specified).
    \20\ This is consistent with other Exchange auction 
functionality that prioritizes Priority Customer orders, as well as 
the customer overlay, which prioritizes Priority Customer orders, 
rather than Public Customer orders. See, e.g., Rules 5.32(a)(2)(A) 
(describing the Priority Customer overlay), 5.33(d)(5) (describing 
how Priority Customers receive first priority following a complex 
order auction), and 5.37(e) (describing how Priority Customers 
receive first priority at each price level following an AIM 
Auction).
    \21\ See supra note 9.
    \22\ See current Rule 24A.5B(a)(2) (b)(3), which states each 
order entered into the FLEX SAM Auction must be AON, and that the 
Agency Order executes in full or is cancelled, and may be allocated 
entirely to the Solicited Order, subject to certain conditions. 
Given that both orders must be AON, if the Solicited Order was not 
the same size as the Agency Order, they would not be able to execute 
against each other at the conclusion of a FLEX SAM Auction.
    \23\ See also SR-CBOE-2019-084.
    \24\ This is also consistent with the auction notification 
message for non-FLEX SAM Auctions. See Rules 5.39(c)(3) and 
5.40(c)(3) in the shell Rulebook.
    \25\ See supra note 17.
---------------------------------------------------------------------------

    Rules 24A.5A, Interpretation and Policy .05 and 24A.5B, 
Interpretation and Policy .01 currently describe the applicability of 
FLEX AIM and SAM Auctions, respectively. Because FLEX AIM and SAM 
Auctions apply to

[[Page 54666]]

complex orders in the same manner as they apply to simple orders, other 
than the need for complex orders (and responses to auctions of complex 
orders) to include a net price (as required in current Rules 24A.5A, 
Interpretation and Policy .05 and 24A.5B, Interpretation and Policy 
.01),\26\ the Exchange no longer believes a separate interpretation and 
policy is necessary for complex orders. The Exchange makes FLEX AIM and 
SAM Auctions, respectively, available for complex orders in any FLEX 
Option class in which it makes the applicable auction available for 
simple orders, so the Exchange no longer needs separate flexibility to 
apply each auction to complex orders as provided by current Rules 
24A.5A, Interpretation and Policy .05 and 24A.5B, Interpretation and 
Policy .01 (which state the Exchange may determine on a class-by-class 
basis to make the FLEX AIM Auction or FLEX SAM Auction, respectively, 
available for complex orders). As discussed below, the proposed rule 
change will permit multiple FLEX AIM and SAM Auctions for a complex 
strategy, and in any of the same individual series legs of the 
strategy, to be ongoing at the same time, so the proposed rule change 
deletes the provisions from current Rules 24A.5A, Interpretation and 
Policy .05 and 24A.5B, Interpretation and Policy .01 that state only 
one FLEX AIM Auction may be ongoing at any given time. Additionally, 
the proposed rule change deletes the provision in current Rules 24A.5A, 
Interpretation and Policy .05 and 24A.5B, Interpretation and Policy .01 
that state unrelated FLEX Orders in any individual series legs may not 
be submitted to the electronic book for the duration of a FLEX AIM or 
SAM Auction, as there will no longer be a book available for FLEX 
Orders.\27\ The Exchange believes this will simplify the FLEX AIM and 
SAM Auctions.
---------------------------------------------------------------------------

    \26\ See supra note 12.
    \27\ See SR-CBOE-2019-084.
---------------------------------------------------------------------------

    All eligibility requirements for FLEX AIM and SAM Auctions are set 
forth in the proposed rules,\28\ so the proposed rule change also 
deletes the current flexibility to determine order types, origin codes, 
and marketability that are eligible for those auctions from current 
Rules 24A.5A, Interpretation and Policy .05 and 24A.5B, Interpretation 
and Policy .01. As discussed above, complex orders, like simple orders, 
will only be able to trade against FLEX AIM or SAM responses, as 
applicable, so the proposed rule change deletes the provisions that 
state complex orders will only be eligible to trade with other complex 
orders through a FLEX AIM or SAM Auction, respectively. Order 
allocation for simple and complex orders following a FLEX AIM or SAM 
Auction will continue to be the same, as proposed Rule 5.73(e) and 
5.74(e) apply to both simple and complex orders, and therefore the 
proposed rule change deletes that provision from current Rules 24A.5A, 
Interpretation and Policy .05 and 24A.5B, Interpretation and Policy 
.01. Finally, because there will no longer be an electronic book (and 
thus no BBO) for FLEX Options, the proposed rule change deletes the 
provisions in Rules 24A.5A, Interpretation and Policy .05 and 24A.5B, 
Interpretation and Policy .01 regarding the impact of bids and offers 
in the electronic book on FLEX AIM and SAM Auctions, respectively, and 
regarding the ability of orders in the individual legs to be submitted 
to the electronic book during an auction.
---------------------------------------------------------------------------

    \28\ See proposed Rules 5.73(a) and 5.74(a), respectively.
---------------------------------------------------------------------------

    With respect to FLEX AIM Auctions, the proposed rule change 
provides that if the Initiating FLEX Trader selects a single-price 
submission, it may elect for the Initiating Order to have last priority 
to trade against the Agency Order.\29\ If the Initiating FLEX Trader 
selects a single-price submission, it may elect for the Initiating 
Order to have last priority to trade against the Agency Order. In this 
case, the Initiating Order would only execute against any remaining 
Agency Order contracts at the stop price after the Agency Order is 
allocated to all FLEX AIM responses at all prices equal to or better 
than the stop price. Last priority information is not available to 
other market participants and may not be modified after it is 
submitted. This proposed rule change provides Initiating FLEX Traders 
with additional control over its execution of an Initiating Order 
against an Agency Order, which may further encourage FLEX Traders to 
submit Agency Orders to a FLEX AIM Auction for potential price 
improvement opportunities for those orders. This may also provide more 
opportunities for other FLEX Traders to participate in the FLEX AIM 
Auctions. The proposed last priority option is the same as the last 
priority provision option available in non-FLEX AIM Auctions, and thus 
the proposed rule change provides further consistency across the 
Exchange's auction mechanisms.\30\
---------------------------------------------------------------------------

    \29\ See proposed Rule 5.73(e)(4).
    \30\ See Rule 5.37(e) in the shell Rulebook.
---------------------------------------------------------------------------

    The proposed rule change permits the Initiating FLEX Trader to 
designate the length of FLEX AIM and SAM Auctions, rather than the 
Exchange. The permissible length of the auctions continues to have a 
minimum of three seconds, which is consistent with the current Rules. 
The proposed rule change also imposes a maximum for the length of the 
auctions of five minutes, which is consistent with the permissible 
times for the FLEX electronic auction.\31\ This will permit the 
Initiating FLEX Trader to determine a reasonable timeframe for the 
duration of an auction based on the FLEX Option series or complex 
strategy submitted into the auction, as well as provide for a timely 
execution of Agency Orders.
---------------------------------------------------------------------------

    \31\ See Rule 5.72(b)(1)(F) in the shell Rulebook.
---------------------------------------------------------------------------

    Unlike today, one or more FLEX AIM or SAM Auctions in the same FLEX 
Option series or complex strategy (as applicable) may occur at the same 
time. To the extent there is more than one FLEX AIM or SAM Auction in a 
FLEX Option series or complex strategy (as applicable) underway at the 
same time, the auctions will conclude sequentially based on the times 
at which each auction period concludes. At the time each auction 
concludes, the System allocates the Agency Order pursuant to proposed 
Rule 5.73(e) or 5.74(e), as applicable, and takes into account all FLEX 
responses submitted during the auction period. Concurrent auctions will 
be permitted in various other electronic auctions on the Exchange 
following migration.\32\ If a FLEX Trader attempts to initiate a FLEX 
AIM or SAM 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 AIM or SAM 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 FLEX AIM and SAM Auctions may 
similarly lead to an increase in these auctions, which may provide 
additional opportunities for execution of FLEX Orders.
---------------------------------------------------------------------------

    \32\ See, e.g., Rule 5.37(c)(1), 5.38(c)(1), 5.39(c)(1), and 
5.40(c)(1).
---------------------------------------------------------------------------

    The proposed rule change eliminates priority for non-TPH broker-
dealer responses at the conclusion of FLEX AIM and SAM Auctions, and 
thus those responses will be prioritized in the same

[[Page 54667]]

manner as all other non-Priority Customer responses. Non-TPH broker-
dealers do not, and have not, received priority in the non-FLEX AIM and 
SAM Auctions, so the proposed rule change aligns the provision 
regarding who receives first priority in a FLEX AIM or SAM Auction with 
the corresponding provisions for non-FLEX AIM and SAM Auctions.\33\ The 
Exchange currently prioritizes contra-interest from these market 
participants to ensure that FLEX AIM and SAM Auctions satisfy the ``G'' 
exemption for yielding priority to non-members under Section 11(a)(1) 
of the Act. However, as discussed below, the Exchange believes the FLEX 
AIM and SAM Auctions, as proposed, satisfy the ``Effect vs. Execute'' 
exemption from Section 11(a) under the Act, and therefore does not need 
to provide additional functionality for TPHs to satisfy another 
exemption from Section 11(a) under the Act. Priority Customer responses 
will continue to receive first priority in both FLEX AIM and SAM 
Auctions, as they do in non-FLEX AIM and SAM Auctions. Therefore, the 
proposed rule change provides further consistency across the Exchange's 
auction mechanisms.\34\
---------------------------------------------------------------------------

    \33\ See Rules 5.37(e), 5.38(e), 5.39(e), and 5.40(e) in the 
shell Rulebook.
    \34\ See Rules 5.37(e) and 5.39(e) in the shell Rulebook.
---------------------------------------------------------------------------

    As proposed, the general framework of the FLEX AIM and SAM Auctions 
will continue to be the same as the Exchange's non-FLEX AIM and SAM 
Auctions, with the differences being only those relating to the 
differences between FLEX and non-FLEX Options. The Exchange believes it 
will benefit investors to provide continued consistency across the 
Exchange's price improvement mechanisms.
    The proposed rule change deletes Rule 24A.5A, Interpretation and 
Policy .06 and Rule 24A.5B, Interpretation and Policy .02 regarding 
post-trade verification procedures for FLEX AIM and SAM Auctions for 
complex orders. Due to the System updates in connection with the System 
migration, parties to executions follow FLEX AIM and SAM Auctions will 
no longer need to take additional steps with respect to executions of 
complex orders following an electronic FLEX AIM or SAM Auction.\35\ 
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. Pursuant to Rule 5.72(b)(2) in the shell 
Rulebook, FLEX Traders must submit all of this information upon entry 
of a FLEX Order. 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 Official may nullify a transaction following a FLEX 
AIM or SAM Auction pursuant to Rule 5.75(b) (such as if it did not 
conform to the terms in Rule 4.21 in the shell Rulebook),\36\ 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.\37\ 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.
---------------------------------------------------------------------------

    \35\ Note current Rule 24A.5A, Interpretation and Policy .06 and 
Rule 24A.5B, Interpretation and Policy .02 also apply 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 
described in another rule filing, the Exchange will no longer offer 
exercise prices and premiums based on such a methodology. See SR-
CBOE-2019-084 (in which filing the Exchange proposes to delete the 
provisions from current Rules regarding the ability of FLEX Traders 
to designate exercise prices and premiums in these formats).
    \36\ Rule 5.75(b) of the shell Rulebook states, among other 
things, that a FLEX Official may nullify a FLEX Option transaction 
if it determines the transaction did not conform to the terms of 
Rules 4.21, 4.22, 5.3, or 5.4 (or the priority principles set forth 
in Rule 5.72(c) and (d), which do not apply to transactions 
following a FLEX AIM or SAM Auction).
    \37\ 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 moved Rule 
6.67 from the current Rulebook to Rule 6.6 in the shell Rulebook in 
separate rule filings. See Securities Exchange Act Release No. 86920 
(September 10, 2019), 84 FR 48687 (September 16, 2019) (SR-CBOE-
2019-056); and 87079 (September 24, 2019) (SR-CBOE-2019-062).
---------------------------------------------------------------------------

    The proposed rule change deletes Rule 24A.5A, Interpretation and 
Policy .07 and Rule 24A.5B, Interpretation and Policy .05 regarding 
determinations made pursuant to those Rules, because the Exchange will 
announce all determinations it may make with respect to FLEX AIM and 
SAM Auctions pursuant to Rule 1.5 in the shell Rulebook, making these 
current interpretations no longer necessary.
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.\38\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \39\ 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) \40\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78f(b).
    \39\ 15 U.S.C. 78f(b)(5).
    \40\ Id.
---------------------------------------------------------------------------

    The Exchange's FLEX AIM and SAM Auctions as proposed--both for 
simple and complex orders--will function in a substantially similar 
manner following the technology migration as they do today. The 
Exchange believes the proposed rule change will remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and, in general, protect investors and the public 
interest by providing continued consistency across the Exchange's price 
improvement mechanisms for both FLEX and non-FLEX Option. The general 
framework of the FLEX AIM and SAM Auction process as proposed to be 
amended will continue to be substantively the same as the framework for 
the non-FLEX AIM and SAM Auctions, as the Exchange recently amended, 
retaining differences that relate to the differences between FLEX and 
non-FLEX Options (e.g., exercise prices in prices or percentages, no 
electronic book and thus no BBO).\41\ The continued similarity of the 
Exchange's price improvement auctions will allow the Exchange's price 
improvement functionality to continue to fit seamlessly into the 
options market and benefit market participants with consistency across 
similar functionality. When auctions have similar functionality, 
Trading Permit Holders can use the same technology and coding for 
multiple auctions, rather than have to expend resources to participate 
in different auctions. Therefore, maintaining consistency across 
auction functionality will benefit investors. The Exchange also 
believes this will encourage Trading Permit Holders to compete 
vigorously to provide the opportunity for price improvement for

[[Page 54668]]

customer orders in FLEX Options in competitive auction processes, which 
will further benefit and protect investors.
---------------------------------------------------------------------------

    \41\ See SR-CBOE-2019-084.
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change to permit an 
Initiating Order submitted into a FLEX AIM Auction, and a Solicited 
Order submitted into a FLEX SAM Auction, to be comprised of multiple 
contra-party orders will, in general, protect investors and the public 
interest, because it may increase the opportunity for customers to have 
orders participate in a FLEX AIM or SAM Auction. As a result, this may 
increase opportunities for price improvement, because this will 
increase the liquidity available for the Initiating Order or Solicited 
Order, as applicable, which is consistent with the purpose of FLEX AIM 
and SAM Auctions. The Exchange believes that this is beneficial to 
participants because allowing multiple contra-parties should foster 
competition for filling the Initiating Order or Solicited Order, as 
applicable, and thereby result in potentially better prices, as opposed 
to only allowing one contra-party and, thereby requiring that contra-
party to do a larger size order which could result in a worse price for 
the trade.
    As noted above, the proposed rule change will allow FLEX AIM and 
SAM Auctions to occur concurrently with other FLEX AIM and SAM 
Auctions. Although FLEX AIM and SAM Auctions will be allowed to 
overlap, the Exchange does not believe that this raises any issues that 
are not addressed by the proposed rule change. For example, although 
overlapping, each FLEX AIM or SAM Auction will be started in a sequence 
and with a duration that determines its processing. Thus, even if there 
are two FLEX AIM or SAM 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, and only against responses 
submitted into that Auction. As discussed above, each FLEX AIM or SAM 
response is required to specifically identify the FLEX AIM or SAM 
Auction, respectively, for which it is targeted and if not fully 
executed will be cancelled back at the conclusion of the Auction. Thus, 
responses will be specifically considered only in the specified 
Auction.
    The proposed rule change to allow multiple auctions to overlap for 
Agency Orders is consistent with functionality already in place on 
other exchanges, and will therefore remove impediments to and perfect 
the mechanism of a free and open market and a national market 
system.\42\ Additionally, the proposed rule change is consistent with 
the Exchange's rules for non-FLEX AIM and SAM Auctions.\43\ Those 
issues generally relate to the interaction of auctioned orders with 
contra-side interest at the end of the various auctions. Different 
series or complex strategies, as applicable, are essentially different 
products--orders different strategies or in different series cannot 
interact, just as orders in different classes cannot interact. 
Therefore, the Exchange believes concurrent FLEX AIM and SAM Auctions 
in different series or complex strategies, respectively, is 
appropriate. The Exchange believes this new functionality may lead to 
an increase in Exchange volume and should allow the Exchange to better 
compete against other markets that permit overlapping price improvement 
auctions, while providing an opportunity for price improvement for 
Agency Orders and assuring that Priority Customers are protected. 
Therefore, the Exchange believes this proposed rule change will protect 
investors and the public interest.
---------------------------------------------------------------------------

    \42\ 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.
    \43\ See Rules 5.37(c)(1), 5.38(c)(1), and 5.39(c)(1) in the 
shell Rulebook.
---------------------------------------------------------------------------

    While the terms of FLEX Options are different than those of non-
FLEX Options, any potential issues raised by concurrent auctions are 
the same for non-FLEX and FLEX Options. Additionally, unlike in non-
FLEX trading, there is no electronic book for FLEX trading. As noted 
above, responses submitted to a FLEX AIM or SAM Auction may only 
execute against the Agency Order in the Auction into which the 
responses were submitted, so there can be no conflict among contra-side 
interest with respect to executions. Further, unlike in non-FLEX 
trading, because there is no electronic book for FLEX Options, there 
are no events that cause a FLEX AIM or SAM Auction to conclude prior to 
the end of the respective auction period that would result in an 
execution, and therefore, the same event could not cause multiple 
auctions to conclude early. As discussed above, the proposed rule 
change addresses any of these potential issues.
    The proposed range for the length of each of the FLEX AIM and SAM 
Auction periods is consistent with the range for the exposure interval 
of the electronic FLEX Auction. Because of the unique terms of FLEX 
Options, the Exchange believe it is appropriate to provide a reasonable 
and sufficient amount of time in which market participants may submit 
responses. Therefore, the minimum length of a FLEX AIM and SAM Auction 
(and is proposed to continue to be) three seconds. The Exchange also 
proposes a maximum length of an auction period of five minutes, as the 
Exchange also believes it is appropriate to provide for efficient and 
timely executions so that customers do not potentially miss a market. 
The proposed rule change also permits the Initiating FLEX Trader to 
establish the length of the auction period (which will be included in 
the auction notification message), as the FLEX Trader can determine a 
reasonable period of time to provide other FLEX Traders to respond 
based on the complexity of the FLEX Option series that is the subject 
of the auction, as well as based on market conditions (for example, in 
a volatile market, the FLEX Trader may believe it is in the best 
interests of a customer to have shorter auction given quickly changing 
prices).
    The Exchange believes the proposed rule change to permit all FLEX 
Traders (other than the Initiating FLEX Trader) to respond to FLEX SAM 
Auctions will promote just and equitable principles of trade, remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers, because 
it permits all FLEX Traders to submit responses to FLEX SAM Auctions. 
Permitting all FLEX Traders to submit responses to FLEX SAM Auctions 
may result in more FLEX Traders having the opportunity to participate 
in executions at the conclusion of FLEX SAM Auctions. Additionally, it 
may increase liquidity in FLEX SAM Auctions, which may lead to more 
opportunities to price improvement, which the Exchange believes 
ultimately protects investors and the public interest. The Exchange's 
SAM Auction for non-FLEX Options similarly permits market-makers from 
other options exchange to submit responses.\44\
---------------------------------------------------------------------------

    \44\ See Rules 5.39(c)(5) and 5.40(c)(5) in the shell Rulebook.
---------------------------------------------------------------------------

    Additionally, much of the proposed rule change is merely relocating 
provisions from the FLEX AIM and SAM Auction Rules (such as certain 
auction eligibility requirements, provisions related to auction 
responses, and provisions related to executions following the 
conclusion of an auction) from the current Rulebook to the shell 
Rulebook and making only nonsubstantive changes, which will

[[Page 54669]]

therefore have no impact on FLEX AIM and SAM Auctions. The Exchange 
believes providing a reorganized, holistic rulebook upon migration will 
also benefit investors.
    The proposed rule change is also consistent with Section 11(a)(1) 
of the Act \45\ 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),\46\ the ``G'' 
exemption for yielding priority to non-members under Section 
11(a)(1)(G) of the Act and Rule 11a1-1(T) thereunder,\47\ and ``Effect 
vs. Execute'' exemption under Rule 11a2-2(T) under the Act.\48\
---------------------------------------------------------------------------

    \45\ 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.
    \46\ 15 U.S.C. 78k(a)(1)(A).
    \47\ 15 U.S.C. 78k(a)(1)(G) and 17 CFR 240.11a1-1(T).
    \48\ 17 CFR 240.11a2-2(T).
---------------------------------------------------------------------------

    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 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; \49\ 
(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 a FLEX AIM or SAM Auction would 
satisfy the requirements of Rule 11a2-2(T).
---------------------------------------------------------------------------

    \49\ The member may, however, participate in clearing and 
settling the transaction.
---------------------------------------------------------------------------

    The Exchange believes FLEX AIM and SAM Auctions 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 a FLEX AIM or SAM Auction, no TPH would enjoy any special 
control over the time of execution or special order handling advances 
for orders executed electronically following a FLEX AIM or SAM 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 each of the FLEX AIM and SAM 
Auctions 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.\50\ Because the Exchange's FLEX AIM and 
SAM Auctions each receive, 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 a 
FLEX AIM or SAM Auction from off the Exchange's trading floor will 
satisfy the off-floor transmission requirement.\51\
---------------------------------------------------------------------------

    \50\ 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'').
    \51\ See Rule 5.72(e) in the shell Rulebook.
---------------------------------------------------------------------------

    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 a FLEX AIM or SAM Auction, an order or response will be executed 
automatically pursuant to the Rules set forth for the applicable 
Auction. In particular, execution of an order or response sent to a 
FLEX AIM or SAM Auction depends not on the FLEX Trader entering the 
order or 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 an order or 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. The 
Initiating FLEX Trader may not cancel or modify the Agency Order or 
applicable contra-side order once submitted into a FLEX AIM or SAM 
Auction, but FLEX Traders may modify or cancel their responses after 
being submitted into a FLEX AIM or SAM Auction.\52\ Once the Agency 
Order and Initiating Order or Solicited Order, or response, as 
applicable, have been transmitted, the FLEX Trader that submitted the 
order or response will not participate in its execution. No FLEX 
Trader, including the Initiating FLEX Trader, will see a response 
submitted into a FLEX AIM or SAM Auction, and therefore and will not be 
able to influence or guide the execution of the Agency Orders (or 
contra-side orders) or responses, as applicable. Finally, with respect 
to FLEX AIM, the last priority feature will not permit a FLEX Trader to 
have any control over an order. The election to apply last priority to 
an Initiating Order is available prior to the submission of the order 
and therefore could not be utilized to gain influence or guide the 
execution of the Agency Order and Initiating Order. The information 
provided with respect to the last priority feature by the Initiating 
FLEX Trader will not be broadcast and further, the information may not 
be modified by the Initiating FLEX Trader during the FLEX AIM 
Auction.\53\
---------------------------------------------------------------------------

    \52\ 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'').
    \53\ See proposed Rule 5.73(e)(4).
---------------------------------------------------------------------------

    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 FLEX AIM and SAM 
Auctions, 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

[[Page 54670]]

transmitting them to the exchange.\54\ The Exchange represents that the 
FLEX AIM and SAM Auctions are designed so that no FLEX Trader has any 
special or unique trading advantage in the handling of its orders or 
responses after transmitting them to the mechanisms.
---------------------------------------------------------------------------

    \54\ 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.
---------------------------------------------------------------------------

    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 the FLEX AIM or 
SAM Auction from the trading floor and satisfy the ``Effect vs. 
Execute'' exemption (assuming the other conditions are satisfied).\55\ 
However, a TPH, relying on this exemption, could not submit an order 
for a covered account to its ``house'' floor broker on the trading 
floor for execution. Because a TPH may not rely on the ``G'' exemption 
when submitting an order to a FLEX AIM or SAM Auction,\56\ it must 
ensure another exception applies in this situation.
---------------------------------------------------------------------------

    \55\ 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.
    \56\ See Rule 5.72(e) in the shell Rulebook; see also proposed 
Rules 5.73(e) and 5.74(e) (which do not prioritize non-TPH broker-
dealers, as would be necessary for submission of orders into the 
FLEX AIM and SAM Auctions to comply with the ``G: exemption).
---------------------------------------------------------------------------

    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.\57\ The 
Exchange recognizes that FLEX Traders relying on Rule 11a2-2(T) for 
transactions effected through a FLEX AIM or SAM 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.
---------------------------------------------------------------------------

    \57\ 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'').
---------------------------------------------------------------------------

    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. FLEX AIM and SAM Auctions will continue to be voluntary 
for FLEX Traders to use and will be available to all FLEX Traders. 
Additionally, the ability to respond to FLEX SAM Auctions will now be 
available to all FLEX Traders (except the Initiating TPH, which is 
consistent with the requirement that the contra-side order be a 
solicitation rather than a facilitation). These auction mechanisms will 
apply to all FLEX Traders in the same manner. The Exchange believes the 
FLEX AIM and SAM Auctions will continue to provide opportunities price 
improvement for Agency Orders in FLEX Options in a competitive auction 
process.
    The Exchange does not believe the proposed rule change will impose 
any burden on intermarket competition. The Exchange believes keeping 
FLEX AIM and SAM Auctions aligned with corresponding non-FLEX auction 
mechanisms, with the only differences relating to the differences 
between FLEX and non-FLEX options, may further encourage submission of 
FLEX Orders into these price improvement mechanisms. By enhancing our 
FLEX trading platform, 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 \58\ and Rule 19b-
4(f)(6) thereunder.\59\
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    \58\ 15 U.S.C. 78s(b)(3)(A).
    \59\ 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 \60\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \61\ 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 AIM and SAM Auction functionality 
to market participants on an uninterrupted basis. In support of its 
waiver request, the Exchange states that the FLEX AIM and SAM Auctions 
for both simple and complex orders will function in a substantially 
similar manner following the technology

[[Page 54671]]

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\
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    \60\ 17 CFR 240.19b-4(f)(6).
    \61\ 17 CFR 240.19b-4(f)(6)(iii).
    \62\ See supra note 41.
    \63\ 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/.
    \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).
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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. 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-2019-093 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\
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    \65\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-22157 Filed 10-9-19; 8:45 am]
 BILLING CODE 8011-01-P

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