Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Make Permanent Certain Options Market Rules That Are Linked to the Equity Market Plan To Address Extraordinary Market Volatility, 57096-57099 [2019-23169]
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Federal Register / Vol. 84, No. 206 / Thursday, October 24, 2019 / Notices
while the Exchange and the other
national securities exchanges consider a
permanent proposal for clearly
erroneous execution reviews. For this
reason, the Commission hereby waives
the 30-day operative delay and
designates the proposed rule change as
operative upon filing.18
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: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) 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
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:
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Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEARCA–2019–75 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–NYSEARCA–2019–75. 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
18 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
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17:34 Oct 23, 2019
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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–NYSEARCA–2019–75 and
should be submitted on or before
November 14, 2019.
solicit comments on the proposed rule
change from interested persons.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.19
Eduardo A. Aleman,
Deputy Secretary.
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.
[FR Doc. 2019–23162 Filed 10–23–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87348; File No. SR–C2–
2019–021]
Self-Regulatory Organizations; Cboe
C2 Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Make Permanent
Certain Options Market Rules That Are
Linked to the Equity Market Plan To
Address Extraordinary Market
Volatility
October 18, 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
16, 2019, Cboe C2 Exchange, Inc. (the
‘‘Exchange’’ or ‘‘C2’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Exchange filed the
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
19 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(6).
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe C2 Exchange, Inc. (‘‘C2’’ or the
‘‘Exchange’’) is filing with the Securities
and Exchange Commission (the
‘‘Commission’’) to make permanent
certain options market rules that are
linked to the equity market Plan to
Address Extraordinary Market
Volatility. The text of the proposed rule
change is provided in Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
options/regulation/rule_filings/ctwo/),
at the Exchange’s Office of the
Secretary, and at the Commission’s
Public Reference Room.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to make permanent certain
options market rules in connection with
the equity market Plan to Address
Extraordinary Market Volatility (the
‘‘Limit Up-Limit Down Plan’’ or the
‘‘Plan’’). This change is being proposed
in connection with the recently
approved amendment to the Limit UpLimit Down Plan that allows the Plan to
continue to operate on a permanent
basis (‘‘Amendment 18’’).5
In an attempt to address extraordinary
market volatility in NMS Stocks, and, in
particular, events like the severe
volatility on May 6, 2010, U.S. national
securities exchanges and the Financial
Industry Regulatory Authority, Inc.
(collectively, ‘‘Participants’’) drafted the
Plan pursuant to Rule 608 of Regulation
1 15
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5 See Securities Exchange Act Release No. 85623
(April 11, 2019), 84 FR 16086 (April 17, 2019)
(Order Approving Amendment No. 18).
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NMS under the Act.6 On May 31, 2012,
the Commission approved the Plan, as
amended, on a one-year pilot basis.7
Though the Plan was primarily designed
for equity markets, the Exchange
believed it would, indirectly, potentially
impact the options markets as well.
Thus, the Exchange has previously
adopted and amended Rules 6.39 and
Interpretation and Policy .01 to Rule
6.29 to ensure the option markets were
not harmed as a result of the Plan’s
implementation and implemented such
rules on a pilot basis that has coincided
with the pilot period for the Plan
(collectively, the ‘‘Options Pilots’’).8
Rule 6.39 essentially serves as a
roadmap for the Exchange’s universal
changes due to the implementation of
the Plan and Rule 6.29.01 provides that
transactions executed during a limit or
straddle state are not subject to the
obvious and catastrophic error rules. A
limit or straddle state occurs when at
least one side of the National Best Bid
(‘‘NBB’’) or Offer (‘‘NBO’’) bid/ask is
priced at a non-tradable level.
Specifically, a straddle state exists when
the NBB is below the lower price band
while the NBO is inside the prices band
or when the NBO is above the upper
price band and the NBB is within the
band, while a limit state occurs when
the NBO equals the lower price band
(without crossing the NBB), or the NBB
equals the upper price band (without
crossing the NBO). The Exchange
adopted the Options Pilots to protect
investors because when an underlying
security is in a limit or straddle state,
there will not be a reliable price for the
security to serve as a benchmark for the
price of the option. Specifically, the
Exchange adopted Rule 6.29.01 because
the application of the obvious and
catastrophic error rules would be
impracticable given the potential for
lack of a reliable NBBO in the options
market during limit and straddle states.
When adjusting or busting a trade
pursuant to the obvious error rule, the
determination of theoretical value of a
trade generally references the NBB (for
erroneous sell transactions) or NBO (for
erroneous buy transactions) just prior to
6 See Securities Exchange Act Release No. 64547
(May 25, 2011), 76 FR 31647 (June 1, 2011) (File
No. 4–631).
7 See Securities and Exchange Act Release No.
67091 (May 31, 2012) 77 FR 33498 (June 6, 2012).
8 See Securities Exchange Act Release Nos. 69345
(April 8, 2013), 78 FR 21985 (April 12, 2013) (SR–
C2–2013–013) (amending certain options rules to
coincide with the pilot period for the Plan,
including Rule 6.39 and Interpretation and Policy
.08 to Rule 6.15, which was later renumbered to
Interpretation and Policy .01 to Rule 6.29); and
85624 (April 11, 2019), 84 FR 16130 (April 17,
2019) (SR–C2–2019–008) (proposal to extend the
pilot for certain options pilots).
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the trade in question, and is therefore
not reliable when at least one side of the
NBBO is priced at a non-tradeable level,
as is the case in limit and straddle
states. In such a situation, determining
theoretical value may often times be a
very subjective rather than an objective
determination and could give rise to
additional uncertainty and confusion for
investors. As a result, application of the
obvious and catastrophic error rules
would be impracticable given the lack of
a reliable NBBO in the options market
during limit and straddle states, and
may produce undesirable effects or
unanticipated consequences. The
Exchange adopted additional measures
via other Options Pilot rules that are
designed to protect investors during
limit and straddle states. For example,
the Exchange will reject market orders
and not elect stop orders 9 during a
Limit Up-Limit Down state to ensure
that only those orders with a limit price
will be executed during a limit or
straddle state given the uncertainty of
market prices during such a state.
Furthermore, the Exchange believes that
eliminating the application of obvious
error rules during a limit or straddle
state eliminates the re-evaluation of a
transaction executed during such a state
that could potentially create an
unreasonable adverse selection
opportunity due to lack of a reliable
reference price on one side of the
market or another and discourage
participants from providing liquidity
during limit and straddle states, which
is contrary to the goal in limiting
participants’ adverse selection with the
application of the obvious error rule
during normal trading states. For these
reasons, the Exchange believes the
Options Pilots are designed to add
certainty on the options markets, which
encourages more investors to participate
in light of the changes associated with
the Plan. The Plan was originally
implemented on a pilot-basis in order to
allow the public, the participating
exchanges, and the Commission to
assess the operation of the Plan and
whether the Plan should be modified
prior to approval on a permanent basis.
As stated, the Exchange adopted the
Option Pilots to coincide with this pilot;
to continue the protections therein
while the industry gains further
experience operating the Plan.
9 This includes rules in connection with special
handling for market orders, market-on-close orders,
and stop orders, as well as for certain electronic
order handling features in a Limit Up-Limit Down
state, the obvious error rules, and providing that the
Exchange will not require Market-Makers to quote
in series of options when the underlying security
is in a Limit Up-Limit Down state.
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57097
In connection with the order
approving the establishment of the
obvious error pilot, as well as the
extensions of the obvious error pilot, the
Exchange committed to submit monthly
data regarding the program and to
submit an overall analysis of the
obvious error pilot in conjunction with
the data submitted under the Plan and
any other data as requested by the
Commission. Pursuant to a rule filing,
approved on April 3, 2014, each month,
the Exchange committed to provide the
Commission, and the public, a dataset
containing the data for each straddle
and limit state in optionable stocks that
had at least one trade on the
Exchange.10 The Exchange has
continued to provide the Commission
with this data on a monthly basis from
October 2015. For each trade on the
Exchange, the Exchange provides (a) the
stock symbol, option symbol, time at the
start of the straddle or limit state, an
indicator for whether it is a straddle or
limit state, and (b) for the trades on the
Exchange, the executed volume, timeweighted quoted bid-ask spread, timeweighted average quoted depth at the
bid, time-weighted average quoted
depth at the offer, high execution price,
low execution price, number of trades
for which a request for review for error
was received during straddle and limit
states, an indicator variable for whether
those options outlined above have a
price change exceeding 30% during the
underlying stock’s limit or straddle state
compared to the last available option
price as reported by OPRA before the
start of the limit or straddle state. In
addition, to help evaluate the impact of
the pilot program, the Exchange has
provided to the Commission, and the
public, assessments relating to the
impact of the operation of the obvious
error rules during limit and straddle
states including: (1) An evaluation of
the statistical and economic impact of
limit and straddle states on liquidity
and market quality in the options
markets, and (2) an assessment of
whether the lack of obvious error rules
in effect during the straddle and limit
states are problematic. The Exchange
has concluded that the obvious error
pilot does not negatively impact market
quality during normal market
conditions,11 and that there has been
10 See Securities Exchange Act Release No. 71856
(April 3, 2014), 79 FR 19676 (April 9, 2014) (SR–
C2–2014–008); see also Cboe Global Markets, LULD
Limit and Straddle Reports, available at https://
markets.cboe.com/us/options/market_statistics/
luld_reports/?mkt=opt.
11 See also Cboe Global Markets, LULD Limit and
Straddle Reports, available at https://
markets.cboe.com/us/options/market_statistics/
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insufficient data to assess whether a
lack of obvious error rules is
problematic, however, the Exchange
believes the continuation of Rule
6.29.01 functions to protect against any
unanticipated consequences in the
options markets during a limit or
straddle state and add certainty on the
options markets.
The Commission recently approved
the Plan on a permanent basis
(Amendment 18).12 In connection with
this approval, the Exchange now
proposes to amend Exchange Rules 6.39
and Interpretation and Policy .01 to
Rule 6.29 that currently implement the
provisions of the Plan on a pilot basis
to eliminate the pilot basis, which
effectiveness expires on October 18,
2019, and to make such rules
permanent. In its approval order to
make the Plan permanent, the
Commission recognized that, as a result
of the Participants’ and industry
analysis of the Plan’s operation, the
Limit Up-Limit Down mechanism
effectively addresses extraordinary
market volatility. Indeed, the Plan
benefits markets and market
participants by helping to ensure
orderly markets, but also, the Exchange
believes, based on the data made
available to the public and the
Commission during the pilot period,
that the obvious error pilot does not
negatively impact market quality during
normal market conditions.13 Rather, the
Exchange believes the obvious error
pilot functions to protect against any
unanticipated consequences in the
options markets during a limit or
straddle state and add certainty on the
options markets. The Exchange also
believes the other Options Pilots rules
provide additional measures designed to
protect investors during limit and
straddle states. For example, the
Exchange will reject market orders and
not elect stop orders 14 during a Limit
Up-Limit Down state to ensure that only
those orders with a limit price will be
executed during a limit or straddle state
given the uncertainty of market prices
during such a state. This removes
impediments to and perfects the
mechanism of a free and open market
and national market system by
encouraging more investors to
participate in light of the changes
associated with the Plan. The Exchange
luld_reports/?mkt=opt. During the most recent
Review Period the Exchange did not receive any
obvious error review requests for Limit-Up-Limit
Down trades, and Limit Up-Limit Down trade
volume accounted for nominal overall trade
volume.
12 See supra note 5.
13 See supra note 11.
14 See supra note 9.
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believes that if approved on a
permanent basis, the Options Pilots
would permanently provide investors
with the above-described additional
certainty of market prices and
mitigation of unanticipated
consequences and unreasonable adverse
selection risk during limit and straddle
states.
The Exchange notes that the
Commission recently approved to make
permanent substantively identical
options pilots within the rules of the
Exchange’s affiliated exchange, Cboe
Options Exchange, Inc. (‘‘Cboe
Options) 15, and understands that the
other national securities exchanges will
also file similar proposals to make
permanent their respective pilot
programs. Since the Commission’s
approval of Amendment 18 allowing the
Plan to operate on a permanent basis,
the Exchange and other national
securities exchanges have determined
that no further amendments should be
made to the Options Pilots; 16 the
current Options Pilots effectively
address extraordinary market volatility,
are reasonably designed to comply with
the requirements of the Plan, facilitate
compliance with the Plan and should
now operate on a permanent basis,
consistent with the Plan. The Exchange
does not propose any substantive or
additional changes to Exchange Rules
6.39 or Interpretation and Policy .01 to
Rule 6.29.
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.17 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 18 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,
15 See Securities and Exchange Act Release No.
87311 (October 15, 2019) (Notice of Filing of
Amendment No. 2 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified
by Amendment Nos. 1 and 2, to Make Permanent
Certain Options Market Rules That Are Linked to
the Equity Market Plan to Address Extraordinary
Market Volatility) (SR–CBOE–2019–049).
16 See Securities Exchange Act Release No. 85616
(April 11, 2019), 84 FR 16093 (April 17, 2019) (SR–
CBOE–2019–020) (proposal to extend the pilot for
certain options market rules linked to the Plan).
17 15 U.S.C. 78f(b).
18 15 U.S.C. 78f(b)(5).
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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) 19 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the Exchange believes
that the proposed rule supports the
objectives of perfecting the mechanism
of a free and open market and the
national market system because it
promotes transparency and uniformity
across markets concerning rules for
options markets adopted to coincide
with the Plan. As stated, the
Commission recently approved to make
permanent substantively identical
options pilots within the rules of the
Exchange’s affiliated exchange, Cboe
Options, and the Exchange now
proposes the same. The Exchange
believes that eliminating the pilot basis
for the Options Pilots and making such
rules permanent facilitates compliance
with the Plan by adding certainty to the
markets during periods of market
volatility, which has been approved and
found by the Commission to be
reasonably designed to prevent
potentially harmful price volatility in
NMS Stocks. It has been determined by
the Commission that the Plan benefits
markets and market participants by
helping to ensure orderly markets, and,
based on the data made available to the
public and the Commission during the
pilot period for Rule 6.29.01, the Plan
does not negatively impact options
market quality during normal market
conditions. Rather, the Plan, as it is
implemented under the obvious error
pilot, functions to protect against any
unanticipated consequences in the
options markets during a limit or
straddle state and add certainty on the
options markets. During a limit or
straddle state, determining theoretical
value of an option may be a subjective
rather than an objective determination
given the lack of a reliable NBBO, which
may create an unreasonable adverse
selection opportunity and discourage
participants from providing liquidity
during limit and straddle states.
Therefore, the Exchange believes
eliminating obvious error review in
such states would, in turn, eliminate
uncertainty and confusion for investors
and benefit investors by encouraging
more participation in light of the
changes associated with the Plan. As
19 Id.
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stated, the Exchange believes the other
Options Pilots rules provide additional
measures designed to protect investors
during limit and straddle states. For
example, the Exchange will reject
market orders and not elect stop
orders 20 during a Limit Up-Limit Down
state to ensure that only those orders
with a limit price will be executed
during a limit or straddle state given the
uncertainty of market prices during
such a state. Accordingly, the Exchange
believes that making the Options Pilots
permanent will further the goals of
investor protection and fair and orderly
markets as the rules effectively address
extraordinary market volatility pursuant
to the Plan.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change would impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed rule change is necessary to
reflect that the Plan no longer operates
as a pilot and has been approved to
operate on a permanent basis by the
Commission. As such, Exchange Rules
6.39 or Interpretation and Policy .01 to
Rule 6.29, which implement protections
in connection with the Plan, should be
amended to operate on a permanent
basis. The Exchange understands that
the other national securities exchanges
will also file similar proposals to make
permanent their respective pilot
programs, and, as stated above, notes
that the Commission recently approved
to make permanent substantively the
same options pilot rules on Cboe
Options. Thus, the proposed rule
change will help to ensure consistency
across market centers without
implicating any competitive issues.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
20 See
supra note 9.
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become effective pursuant to Section
19(b)(3)(A) of the Act 21 and Rule 19b–
4(f)(6) thereunder.22
A proposed rule change filed under
Rule 19b–4(f)(6) 23 normally does not
become operative prior to 30 days after
the date of the filing. However, Rule
19b–4(f)(6)(iii) 24 permits the
Commission to designate a shorter time
if such action is consistent with the
protection of investors and the public
interest. The Exchange has asked the
Commission to waive the 30-day
operative delay so that the proposed
rule change may become effective and
operative immediately upon filing. The
Commission believes that waiving the
30-day operative delay is consistent
with the protection of investors and the
public interest, as it will allow the
current Options Pilots to continue on a
permanent basis without any changes,
prior to the pilot expiration on October
18, 2019. For this reason, the
Commission hereby waives the 30-day
operative delay and designates the
proposed rule change as operative upon
filing.25
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
21 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.
23 17 CFR 240.19b–4(f)(6).
24 17 CFR 240.19b–4(f)(6)(iii).
25 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
22 17
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57099
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–
C2–2019–021 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–C2–2019–021. 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–C2–2019–021 and should
be submitted on or before November 14,
2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.26
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–23169 Filed 10–23–19; 8:45 am]
BILLING CODE 8011–01–P
26 17
E:\FR\FM\24OCN1.SGM
CFR 200.30–3(a)(12).
24OCN1
]]>Agencies
[Federal Register Volume 84, Number 206 (Thursday, October 24, 2019)]
[Notices]
[Pages 57096-57099]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23169]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87348; File No. SR-C2-2019-021]
Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Make
Permanent Certain Options Market Rules That Are Linked to the Equity
Market Plan To Address Extraordinary Market Volatility
October 18, 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 16, 2019, Cboe C2 Exchange, Inc. (the ``Exchange'' or
``C2'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The Exchange
filed the 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.
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\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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe C2 Exchange, Inc. (``C2'' or the ``Exchange'') is filing with
the Securities and Exchange Commission (the ``Commission'') to make
permanent certain options market rules that are linked to the equity
market Plan to Address Extraordinary Market Volatility. The text of the
proposed rule change is provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (https://markets.cboe.com/us/options/regulation/rule_filings/ctwo/), 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
The purpose of the proposed rule change is to make permanent
certain options market rules in connection with the equity market Plan
to Address Extraordinary Market Volatility (the ``Limit Up-Limit Down
Plan'' or the ``Plan''). This change is being proposed in connection
with the recently approved amendment to the Limit Up-Limit Down Plan
that allows the Plan to continue to operate on a permanent basis
(``Amendment 18'').\5\
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\5\ See Securities Exchange Act Release No. 85623 (April 11,
2019), 84 FR 16086 (April 17, 2019) (Order Approving Amendment No.
18).
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In an attempt to address extraordinary market volatility in NMS
Stocks, and, in particular, events like the severe volatility on May 6,
2010, U.S. national securities exchanges and the Financial Industry
Regulatory Authority, Inc. (collectively, ``Participants'') drafted the
Plan pursuant to Rule 608 of Regulation
[[Page 57097]]
NMS under the Act.\6\ On May 31, 2012, the Commission approved the
Plan, as amended, on a one-year pilot basis.\7\ Though the Plan was
primarily designed for equity markets, the Exchange believed it would,
indirectly, potentially impact the options markets as well. Thus, the
Exchange has previously adopted and amended Rules 6.39 and
Interpretation and Policy .01 to Rule 6.29 to ensure the option markets
were not harmed as a result of the Plan's implementation and
implemented such rules on a pilot basis that has coincided with the
pilot period for the Plan (collectively, the ``Options Pilots'').\8\
Rule 6.39 essentially serves as a roadmap for the Exchange's universal
changes due to the implementation of the Plan and Rule 6.29.01 provides
that transactions executed during a limit or straddle state are not
subject to the obvious and catastrophic error rules. A limit or
straddle state occurs when at least one side of the National Best Bid
(``NBB'') or Offer (``NBO'') bid/ask is priced at a non-tradable level.
Specifically, a straddle state exists when the NBB is below the lower
price band while the NBO is inside the prices band or when the NBO is
above the upper price band and the NBB is within the band, while a
limit state occurs when the NBO equals the lower price band (without
crossing the NBB), or the NBB equals the upper price band (without
crossing the NBO). The Exchange adopted the Options Pilots to protect
investors because when an underlying security is in a limit or straddle
state, there will not be a reliable price for the security to serve as
a benchmark for the price of the option. Specifically, the Exchange
adopted Rule 6.29.01 because the application of the obvious and
catastrophic error rules would be impracticable given the potential for
lack of a reliable NBBO in the options market during limit and straddle
states. When adjusting or busting a trade pursuant to the obvious error
rule, the determination of theoretical value of a trade generally
references the NBB (for erroneous sell transactions) or NBO (for
erroneous buy transactions) just prior to the trade in question, and is
therefore not reliable when at least one side of the NBBO is priced at
a non-tradeable level, as is the case in limit and straddle states. In
such a situation, determining theoretical value may often times be a
very subjective rather than an objective determination and could give
rise to additional uncertainty and confusion for investors. As a
result, application of the obvious and catastrophic error rules would
be impracticable given the lack of a reliable NBBO in the options
market during limit and straddle states, and may produce undesirable
effects or unanticipated consequences. The Exchange adopted additional
measures via other Options Pilot rules that are designed to protect
investors during limit and straddle states. For example, the Exchange
will reject market orders and not elect stop orders \9\ during a Limit
Up-Limit Down state to ensure that only those orders with a limit price
will be executed during a limit or straddle state given the uncertainty
of market prices during such a state. Furthermore, the Exchange
believes that eliminating the application of obvious error rules during
a limit or straddle state eliminates the re-evaluation of a transaction
executed during such a state that could potentially create an
unreasonable adverse selection opportunity due to lack of a reliable
reference price on one side of the market or another and discourage
participants from providing liquidity during limit and straddle states,
which is contrary to the goal in limiting participants' adverse
selection with the application of the obvious error rule during normal
trading states. For these reasons, the Exchange believes the Options
Pilots are designed to add certainty on the options markets, which
encourages more investors to participate in light of the changes
associated with the Plan. The Plan was originally implemented on a
pilot-basis in order to allow the public, the participating exchanges,
and the Commission to assess the operation of the Plan and whether the
Plan should be modified prior to approval on a permanent basis. As
stated, the Exchange adopted the Option Pilots to coincide with this
pilot; to continue the protections therein while the industry gains
further experience operating the Plan.
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\6\ See Securities Exchange Act Release No. 64547 (May 25,
2011), 76 FR 31647 (June 1, 2011) (File No. 4-631).
\7\ See Securities and Exchange Act Release No. 67091 (May 31,
2012) 77 FR 33498 (June 6, 2012).
\8\ See Securities Exchange Act Release Nos. 69345 (April 8,
2013), 78 FR 21985 (April 12, 2013) (SR-C2-2013-013) (amending
certain options rules to coincide with the pilot period for the
Plan, including Rule 6.39 and Interpretation and Policy .08 to Rule
6.15, which was later renumbered to Interpretation and Policy .01 to
Rule 6.29); and 85624 (April 11, 2019), 84 FR 16130 (April 17, 2019)
(SR-C2-2019-008) (proposal to extend the pilot for certain options
pilots).
\9\ This includes rules in connection with special handling for
market orders, market-on-close orders, and stop orders, as well as
for certain electronic order handling features in a Limit Up-Limit
Down state, the obvious error rules, and providing that the Exchange
will not require Market-Makers to quote in series of options when
the underlying security is in a Limit Up-Limit Down state.
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In connection with the order approving the establishment of the
obvious error pilot, as well as the extensions of the obvious error
pilot, the Exchange committed to submit monthly data regarding the
program and to submit an overall analysis of the obvious error pilot in
conjunction with the data submitted under the Plan and any other data
as requested by the Commission. Pursuant to a rule filing, approved on
April 3, 2014, each month, the Exchange committed to provide the
Commission, and the public, a dataset containing the data for each
straddle and limit state in optionable stocks that had at least one
trade on the Exchange.\10\ The Exchange has continued to provide the
Commission with this data on a monthly basis from October 2015. For
each trade on the Exchange, the Exchange provides (a) the stock symbol,
option symbol, time at the start of the straddle or limit state, an
indicator for whether it is a straddle or limit state, and (b) for the
trades on the Exchange, the executed volume, time-weighted quoted bid-
ask spread, time-weighted average quoted depth at the bid, time-
weighted average quoted depth at the offer, high execution price, low
execution price, number of trades for which a request for review for
error was received during straddle and limit states, an indicator
variable for whether those options outlined above have a price change
exceeding 30% during the underlying stock's limit or straddle state
compared to the last available option price as reported by OPRA before
the start of the limit or straddle state. In addition, to help evaluate
the impact of the pilot program, the Exchange has provided to the
Commission, and the public, assessments relating to the impact of the
operation of the obvious error rules during limit and straddle states
including: (1) An evaluation of the statistical and economic impact of
limit and straddle states on liquidity and market quality in the
options markets, and (2) an assessment of whether the lack of obvious
error rules in effect during the straddle and limit states are
problematic. The Exchange has concluded that the obvious error pilot
does not negatively impact market quality during normal market
conditions,\11\ and that there has been
[[Page 57098]]
insufficient data to assess whether a lack of obvious error rules is
problematic, however, the Exchange believes the continuation of Rule
6.29.01 functions to protect against any unanticipated consequences in
the options markets during a limit or straddle state and add certainty
on the options markets.
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\10\ See Securities Exchange Act Release No. 71856 (April 3,
2014), 79 FR 19676 (April 9, 2014) (SR-C2-2014-008); see also Cboe
Global Markets, LULD Limit and Straddle Reports, available at https://markets.cboe.com/us/options/market_statistics/luld_reports/?mkt=opt.
\11\ See also Cboe Global Markets, LULD Limit and Straddle
Reports, available at https://markets.cboe.com/us/options/market_statistics/luld_reports/?mkt=opt. During the most recent
Review Period the Exchange did not receive any obvious error review
requests for Limit-Up-Limit Down trades, and Limit Up-Limit Down
trade volume accounted for nominal overall trade volume.
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The Commission recently approved the Plan on a permanent basis
(Amendment 18).\12\ In connection with this approval, the Exchange now
proposes to amend Exchange Rules 6.39 and Interpretation and Policy .01
to Rule 6.29 that currently implement the provisions of the Plan on a
pilot basis to eliminate the pilot basis, which effectiveness expires
on October 18, 2019, and to make such rules permanent. In its approval
order to make the Plan permanent, the Commission recognized that, as a
result of the Participants' and industry analysis of the Plan's
operation, the Limit Up-Limit Down mechanism effectively addresses
extraordinary market volatility. Indeed, the Plan benefits markets and
market participants by helping to ensure orderly markets, but also, the
Exchange believes, based on the data made available to the public and
the Commission during the pilot period, that the obvious error pilot
does not negatively impact market quality during normal market
conditions.\13\ Rather, the Exchange believes the obvious error pilot
functions to protect against any unanticipated consequences in the
options markets during a limit or straddle state and add certainty on
the options markets. The Exchange also believes the other Options
Pilots rules provide additional measures designed to protect investors
during limit and straddle states. For example, the Exchange will reject
market orders and not elect stop orders \14\ during a Limit Up-Limit
Down state to ensure that only those orders with a limit price will be
executed during a limit or straddle state given the uncertainty of
market prices during such a state. This removes impediments to and
perfects the mechanism of a free and open market and national market
system by encouraging more investors to participate in light of the
changes associated with the Plan. The Exchange believes that if
approved on a permanent basis, the Options Pilots would permanently
provide investors with the above-described additional certainty of
market prices and mitigation of unanticipated consequences and
unreasonable adverse selection risk during limit and straddle states.
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\12\ See supra note 5.
\13\ See supra note 11.
\14\ See supra note 9.
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The Exchange notes that the Commission recently approved to make
permanent substantively identical options pilots within the rules of
the Exchange's affiliated exchange, Cboe Options Exchange, Inc. (``Cboe
Options) \15\, and understands that the other national securities
exchanges will also file similar proposals to make permanent their
respective pilot programs. Since the Commission's approval of Amendment
18 allowing the Plan to operate on a permanent basis, the Exchange and
other national securities exchanges have determined that no further
amendments should be made to the Options Pilots; \16\ the current
Options Pilots effectively address extraordinary market volatility, are
reasonably designed to comply with the requirements of the Plan,
facilitate compliance with the Plan and should now operate on a
permanent basis, consistent with the Plan. The Exchange does not
propose any substantive or additional changes to Exchange Rules 6.39 or
Interpretation and Policy .01 to Rule 6.29.
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\15\ See Securities and Exchange Act Release No. 87311 (October
15, 2019) (Notice of Filing of Amendment No. 2 and Order Granting
Accelerated Approval of a Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2, to Make Permanent Certain Options Market
Rules That Are Linked to the Equity Market Plan to Address
Extraordinary Market Volatility) (SR-CBOE-2019-049).
\16\ See Securities Exchange Act Release No. 85616 (April 11,
2019), 84 FR 16093 (April 17, 2019) (SR-CBOE-2019-020) (proposal to
extend the pilot for certain options market rules linked to the
Plan).
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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.\17\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \18\ 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) \19\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(5).
\19\ Id.
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In particular, the Exchange believes that the proposed rule
supports the objectives of perfecting the mechanism of a free and open
market and the national market system because it promotes transparency
and uniformity across markets concerning rules for options markets
adopted to coincide with the Plan. As stated, the Commission recently
approved to make permanent substantively identical options pilots
within the rules of the Exchange's affiliated exchange, Cboe Options,
and the Exchange now proposes the same. The Exchange believes that
eliminating the pilot basis for the Options Pilots and making such
rules permanent facilitates compliance with the Plan by adding
certainty to the markets during periods of market volatility, which has
been approved and found by the Commission to be reasonably designed to
prevent potentially harmful price volatility in NMS Stocks. It has been
determined by the Commission that the Plan benefits markets and market
participants by helping to ensure orderly markets, and, based on the
data made available to the public and the Commission during the pilot
period for Rule 6.29.01, the Plan does not negatively impact options
market quality during normal market conditions. Rather, the Plan, as it
is implemented under the obvious error pilot, functions to protect
against any unanticipated consequences in the options markets during a
limit or straddle state and add certainty on the options markets.
During a limit or straddle state, determining theoretical value of an
option may be a subjective rather than an objective determination given
the lack of a reliable NBBO, which may create an unreasonable adverse
selection opportunity and discourage participants from providing
liquidity during limit and straddle states. Therefore, the Exchange
believes eliminating obvious error review in such states would, in
turn, eliminate uncertainty and confusion for investors and benefit
investors by encouraging more participation in light of the changes
associated with the Plan. As
[[Page 57099]]
stated, the Exchange believes the other Options Pilots rules provide
additional measures designed to protect investors during limit and
straddle states. For example, the Exchange will reject market orders
and not elect stop orders \20\ during a Limit Up-Limit Down state to
ensure that only those orders with a limit price will be executed
during a limit or straddle state given the uncertainty of market prices
during such a state. Accordingly, the Exchange believes that making the
Options Pilots permanent will further the goals of investor protection
and fair and orderly markets as the rules effectively address
extraordinary market volatility pursuant to the Plan.
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\20\ See supra note 9.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed rule change is
necessary to reflect that the Plan no longer operates as a pilot and
has been approved to operate on a permanent basis by the Commission. As
such, Exchange Rules 6.39 or Interpretation and Policy .01 to Rule
6.29, which implement protections in connection with the Plan, should
be amended to operate on a permanent basis. The Exchange understands
that the other national securities exchanges will also file similar
proposals to make permanent their respective pilot programs, and, as
stated above, notes that the Commission recently approved to make
permanent substantively the same options pilot rules on Cboe Options.
Thus, the proposed rule change will help to ensure consistency across
market centers without implicating any competitive issues.
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 \21\ and Rule 19b-
4(f)(6) thereunder.\22\
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\21\ 15 U.S.C. 78s(b)(3)(A).
\22\ 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 under Rule 19b-4(f)(6) \23\ normally
does not become operative prior to 30 days after the date of the
filing. However, Rule 19b-4(f)(6)(iii) \24\ permits the Commission to
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposed
rule change may become effective and operative immediately upon filing.
The Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest, as
it will allow the current Options Pilots to continue on a permanent
basis without any changes, prior to the pilot expiration on October 18,
2019. For this reason, the Commission hereby waives the 30-day
operative delay and designates the proposed rule change as operative
upon filing.\25\
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\23\ 17 CFR 240.19b-4(f)(6).
\24\ 17 CFR 240.19b-4(f)(6)(iii).
\25\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-C2-2019-021 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-C2-2019-021. 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-C2-2019-021 and should be submitted on
or before November 14, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-23169 Filed 10-23-19; 8:45 am]
BILLING CODE 8011-01-P
