Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Order Approving a Proposed Rule Change To Adopt Rule 21.23 (Complex Solicitation Auction Mechanism), 68231-68235 [2019-26851]
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Federal Register / Vol. 84, No. 240 / Friday, December 13, 2019 / Notices
Exchange would not have the
manufacturer resources available to
solve connectivity issues or replace
switches. Users’ connections to the
Exchange could be compromised or
wholly cut off. At the same time, if a
User requested a new or replacement
LCN 10 Gb connection, the Exchange
would not be able to obtain one. It
would be contrary to the protection of
investors and the public interest if the
Exchange were to continue to offer a
connectivity option that it could not
support, or if Users were compromised
or wholly unable to use their
connectivity to connect to the Exchange.
For the reasons described above, the
Exchange believes that the proposed
rule change reflects this competitive
environment.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed
rule change pursuant to Section
19(b)(3)(A)(iii) of the Act 34 and Rule
19b–4(f)(6) thereunder.35 Because the
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
prior to 30 days from the date on which
it was filed, or such shorter time as the
Commission may designate, if
consistent with the protection of
investors and the public interest, the
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act and Rule 19b–4(f)(6)(iii)
thereunder.36
At any time within 60 days of the
filing of such 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
34 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6).
36 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires the Exchange 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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Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 37 of the Act 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:
Number SR–NYSENAT–2019–29 and
should be submitted on or before
January 3, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.38
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–26847 Filed 12–12–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
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–
NYSENAT–2019–29 on the subject line.
[Release No. 34–87692; File No. SR–
CboeEDGX–2019–064]
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–NYSENAT–2019–29. 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
December 9, 2019.
37 15
PO 00000
U.S.C. 78s(b)(2)(B).
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68231
Self-Regulatory Organizations; Cboe
EDGX Exchange, Inc.; Order
Approving a Proposed Rule Change To
Adopt Rule 21.23 (Complex Solicitation
Auction Mechanism)
I. Introduction
On October 23, 2019, Cboe EDGX
Exchange, Inc. (the ‘‘Exchange’’ or
‘‘EDGX’’) filed with the Securities and
Exchange Commission (‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to adopt Rule
21.23, the Complex Solicitation Auction
Mechanism (‘‘C–SAM’’), a solicited
order mechanism for larger-sized
complex orders. The proposed rule
change was published for comment in
the Federal Register on November 6,
2019.3 The Commission has received no
comments regarding the proposal. This
order approves the proposed rule
change.
II. Description of the Proposed Rule
Change
As described more fully in the
Notice,4 the Exchange proposes to adopt
Rule 21.23 5 allowing complex orders to
be submitted to and processed in its
solicited order mechanism. The
proposal permits an Options Member
38 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 87435
(October 31, 2019), 84 FR 59866 (‘‘Notice’’).
4 See id.
5 For purposes of proposed Rule 21.23, the term
‘‘SBBO’’ means the synthetic best bid or offer
calculated using the best displayed price for each
component of a complex strategy from the simple
book at the particular point in time applicable to
the reference. The Exchange notes that there is no
national best bid or offer for complex orders, as
complex orders may be executed without
consideration of any prices for the complex strategy
that might be available on other exchanges trading
the same complex strategy. See Rule 21.20(c)(2)(E).
1 15
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(the ‘‘Initiating Member’’) to execute
electronically a larger-sized complex
order it represents as agent (‘‘Agency
Order’’) against a solicited complex
order(s) (‘‘Solicited Order’’), provided
that it submits both the Agency Order
and Solicited Order into the C–SAM.6
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A. Eligibility and C–SAM Auction
Process
The Initiating Member may initiate a
C–SAM in any class traded on the
Exchange.7 The smallest leg of an
Agency Order marked for C–SAM
processing must be 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.8 The size of the
Solicited Order(s) must be for/total the
same size as the Agency Order.9 The
system will automatically handle each
of the Agency Order and Solicited Order
as an all-or-none (‘‘AON’’) order,10 and
the price of the Agency Order and
Solicited Order must be in an increment
of $0.01.11 Also, an Initiating Member
may not designate an Agency Order or
Solicited Order as Post Only 12 and may
only submit an Agency Order after the
complex order book (‘‘COB’’) opens.13
The Solicited Order must stop the
entire buy (sell) Agency Order at a price
that is at or better than the then-current
SBO (SBB) or the price of the bestpriced sell (buy) complex order on the
COB.14 Regarding resting simple orders
that are on the same side as the Agency
Order, the proposal provides that if the
Agency Order is to buy (sell), the stop
price must be at or better than the SBB
(SBO), unless the applicable side of the
BBO on any component of the complex
strategy represents a Priority Customer
order on the simple book, in which case
the stop price must be at least $0.01
better than the SBB (SBO).15 Regarding
resting complex orders that are on the
same side as the Agency Order, the
proposal provides that if the Agency
Order is to buy (sell), the stop price
must be at least $0.01 better than the bid
6 The Solicited Order cannot have a capacity of
F for the same EFID as the Agency Order. The
Agency Order and Solicited Order cannot both be
for the accounts of a customer.
7 See proposed Rule 21.23(a)(1).
8 See proposed Rule 21.23(a)(3).
9 See id.
10 See id. The Exchange notes that it intends to
separately amend Rule 21.21, which currently states
that an Initiating Member must designate the
Agency Order and Solicited Order as AON, to
conform to proposed Rule 21.23(a)(3). See Notice,
supra note 3, at 59867 n.12.
11 See proposed Rule 21.23(a)(4).
12 See proposed Rule 21.23(a)(5).
13 See proposed Rule 21.23(a)(6).
14 See proposed Rule 21.23(b).
15 See proposed Rule 21.23(b)(1).
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(offer) of the resting complex order,
unless the Agency Order is a Priority
Customer order and the resting order on
the COB is not a Priority Customer, in
which case the stop price must be at or
better than the bid (offer) of the resting
complex order.16 Regarding resting
simple orders that are on the opposite
side as the Agency Order, the proposal
provides that if the Agency Order is to
buy (sell), the stop price must be at or
better than the SBO (SBB), unless the
BBO of any component of the complex
strategy represents a Priority Customer
order on the simple book, in which case
the stop price must be at least $0.01
better than the SBO (SBB).17 Regarding
resting complex orders that are on the
opposite side as the Agency Order, the
proposal provides that if the Agency
Order is to buy (sell) and the best-priced
sell (buy) complex order on the COB
represents (i) a complex order that is not
a Priority Customer, the stop price must
be at or better than the price of the
resting complex order; or (ii) a Priority
Customer complex order, the stop price
must be at least $0.01 better than the
SBO (SBB).18
The Exchange system will initiate the
C–SAM process by sending a C–SAM
auction notification message detailing
the side, size, price, capacity, auction
ID, and complex strategy of the Agency
Order to all Options Members that elect
to receive C–SAM auction notification
messages.19 C–SAM auction notification
messages will not be disseminated to
the Options Price Reporting Authority
(‘‘OPRA’’).20 The C–SAM auction will
last for a period of time determined by
the Exchange (the ‘‘C–SAM auction
period’’), which may be no less than 100
milliseconds and no more than one
second.21 An Initiating Member may not
modify or cancel an Agency Order or
Solicited Order after submission to a C–
SAM auction.22
Any user other than the Initiating
Member (determined by EFID) may
submit responses to a C–SAM auction
that are properly marked specifying
size, side of the market, and the auction
ID for the C–SAM auction to which the
user is submitting the response.23 C–
SAM responses must be on the opposite
side of the market as the Agency
Order,24 and the minimum price
16 See
proposed Rule 21.23(b)(2).
proposed Rule 21.23(b)(3).
18 See proposed Rule 21.23(b)(4).
19 See proposed Rule 21.23(c)(2).
20 See id.
21 See proposed Rule 21.23(c)(3). The Exchange
will announce the length of the C–SAM auction
period to Options Members pursuant to Rule 16.3.
22 See proposed Rule 21.23(c)(4).
23 See proposed Rule 21.23(c)(5).
24 See proposed Rule 21.23(c)(5)(E).
17 See
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increment for C–SAM responses is
$0.01.25 C–SAM buy (sell) responses are
capped at the better of the SBO (SBB) or
the offer (bid) of a resting complex order
at the top of the COB, or $0.01 better
than the better of the SBO (SBB) or the
offer (bid) of a resting complex order at
the top of the COB if the BBO of any
component of the complex strategy or
the resting complex order, respectively,
is a Priority Customer order.26 For
purposes of the C–SAM auction, the
system will aggregate all of a user’s
complex orders on the COB and C–SAM
responses for the same EFID at the same
price.27 The system will cap the size of
a C–SAM response, or the aggregate size
of a user’s complex orders on the COB
and C–SAM responses for the same
EFID at the same price, at the size of the
Agency Order (i.e., the system will
ignore size in excess of the size of the
Agency Order when processing a C–
SAM auction).28 C–SAM responses will
not be visible to C–SAM auction
participants or disseminated to OPRA.29
A user may modify or cancel its C–SAM
responses during the C–SAM auction.30
One or more C–SAM auctions in the
same complex strategy may occur at the
same time, C–SAM auctions in different
complex strategies may be ongoing at
any given time (even if the complex
strategies have overlapping
components), and a C–SAM auction
may be ongoing at the same time as a
SAM auction in any component of the
complex strategy.31 To the extent there
is more than one C–SAM auction in a
complex strategy underway at a time,
the C–SAM auctions will conclude
sequentially based on the exact time
each C–SAM commenced, unless
terminated early pursuant to proposed
Rule 21.23(d).32 In the event there are
multiple C–SAM auctions underway
that are each terminated early pursuant
25 See
proposed Rule 21.23(c)(5)(A).
proposed Rule 21.23(c)(5)(B).
27 See proposed Rule 21.23(c)(5)(C). The
Exchange notes that this is similar to the
corresponding provision for the Exchange’s simple
SAM auction. See Rule 21.22(c)(5)(C). The
Exchange also notes that this (combined with the
proposed size cap) is intended to prevent an
Options Member from submitting multiple orders or
responses at the same price to obtain a larger prorata share of the Agency Order. See Notice, supra
note 3, at 59870.
28 See proposed Rule 21.23(c)(5)(D). The
Exchange notes that this is similar to the
corresponding provision for the Exchange’s simple
SAM auction. See Rule 21.22(c)(5)(D). The
Exchange notes that this is intended to prevent an
Options Member from submitting an order or
response with an extremely large size in order to
obtain a larger pro-rata share of the Agency Order.
See Notice, supra note 3, at 59870.
29 See proposed Rule 21.23(c)(5)(F).
30 See proposed Rule 21.23(c)(5)(G).
31 See proposed Rule 21.23(c)(1)(A).
32 See proposed Rule 21.23(c)(1)(B).
26 See
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to proposed Rule 21.23(d), the system
will process the C–SAM auctions
sequentially based on the exact time
each C–SAM auction commenced.33 If
the system receives a simple order that
causes a SAM auction and C–SAM
auction (or multiple SAM and/or C–
SAM auctions) to conclude pursuant to
Rule 21.23(d) and Rule 21.21(d), the
system will first process SAM auctions
(in price-time priority) and then process
C–SAM auctions (in price-time
priority).34 At the time each C–SAM
auction concludes, the system will
allocate the Agency Order pursuant to
proposed Rule 21.23(e) and will take
into account all C–SAM responses and
unrelated orders and quotes in place at
the exact time of conclusion.35
B. Conclusion of the C–SAM Auction
The C–SAM will conclude at the
sooner of the following: (i) The end of
the C–SAM auction period; (ii) upon
receipt by the system of an unrelated
non-Priority Customer complex order on
the same side of market as the Agency
Order that would post to the COB at a
price better than the stop price; (iii)
upon receipt by the system of an
unrelated Priority Customer complex
order on the same side of the market as
the Agency Order that would post to the
COB at a price equal to or better than
the stop price; (iv) upon receipt by the
system of an unrelated non-Priority
Customer order or quote that would post
to the simple book and cause the SBBO
on the same side of the market as the
Agency Order to be better than the stop
price; (v) upon receipt by the system of
a Priority Customer order in any
component of the complex strategy that
would post to the simple book and
cause the SBBO on the same side of the
market as the Agency Order to be equal
to or better than the stop price; (vi) upon
receipt by the system of a simple nonPriority Customer order that would
cause the SBBO on the opposite side of
market as the Agency Order to be better
than the stop price, or a Priority
Customer order that would cause the
SBBO on the opposite side of market as
the Agency Order to be equal to or better
than the stop price; (vii) upon receipt by
the system of an order that would cause
the SBBO to be a price not permissible
under the Limit Up-Limit Down Plan or
Regulation SHO, provided, however,
that in such instance, the C–SAM
auction would conclude without
execution; (viii) the market close; and
(ix) any time the Exchange halts trading
33 See
id. See also Notice, supra note 3, at 59868–
69.
34 See
35 See
proposed Rule 21.23(c)(1)(B).
proposed Rule 21.23(c)(1)(C).
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in the complex strategy, provided,
however, that in such instance the C–
SAM auction will conclude without
execution.36
An unrelated market or marketable
limit complex order (against the SBBO
or the best price of a complex order
resting in the COB), including a Post
Only complex order, on the opposite
side of the Agency Order received
during the C–SAM will not cause the C–
SAM auction to end early and will
execute against interest outside of the
C–SAM auction or be posted to the
COB.37 If contracts remain from such
unrelated complex order at the time the
C–SAM auction ends, they may be
allocated for execution against the
Agency Order pursuant to proposed
Rule 21.23(e).38
C. Priority and Allocation
At the conclusion of the C–SAM
auction, the system will execute the
Agency Order against the Solicited
Order or contra-side complex interest
(which includes complex orders on the
COB and C–SAM responses) at the best
price(s) as follows (provided that any
execution price(s) must be at or between
the SBBO and the best prices of any
complex orders resting on each side of
the COB at the conclusion of the C–
SAM auction): 39
• The system will execute the Agency
Order against the Solicited Order at the
stop price if there are no Priority
Customer complex orders resting on the
COB on the opposite side of the Agency
Order at or better than the stop price
and the aggregate size of contra-side
interest at an improved price(s) is
insufficient to satisfy the Agency
Order.40
• The system will execute the Agency
Order against contra-side interest (and
cancel the Solicited Order) if (A) there
is a Priority Customer complex order
resting on the COB on the opposite side
of the Agency Order at or better than the
stop price and the aggregate size of that
order and other contra-side interest is
sufficient to satisfy the Agency Order; or
(B) the aggregate size of contra-side
interest at an improved price(s) is
sufficient to satisfy the Agency Order.41
The Agency Order execution against
36 See
proposed Rule 21.23(d)(1).
proposed Rule 21.23(d)(2).
38 See id.
39 See proposed Rule 21.23(e). Additionally, if
there is a Priority Customer order representing any
leg of the SBBO in the simple book, the execution
price must be better than the SBBO, in accordance
with complex order priority. See Rule 21.20(f)(2).
Additionally, any execution price must be better
than the price of any resting Priority Order complex
order on the COB.
40 See proposed Rule 21.23(e)(1).
41 See proposed Rule 21.23(e)(2).
37 See
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68233
such contra-side interest will occur at
each price level, to the price at which
the balance of the Agency Order can be
fully executed, first against Priority
Customer complex orders on the COB
(in time priority) and then against
remaining contra-side interest
(including non-Priority Customer orders
on the COB and C–SAM responses) in
a pro-rata manner.42
• The system will cancel the Agency
Order and Solicited Order with no
execution if (i) execution of the Agency
Order against the Solicited Order at the
stop price would not be at or between
the SBBO at the conclusion of the C–
SAM auction, better than the SBBO if
there is a Priority Customer order in any
leg component in the simple book, at or
better than the best-priced complex
order resting on the COB, or better than
the best-priced complex order resting on
the COB if it is a Priority Customer
complex order; (ii) there is a Priority
Customer complex order resting on the
COB on the opposite side of the Agency
Order at or better than the stop price,
and the aggregate size of the Priority
Customer complex order and any other
contra-side interest is insufficient to
satisfy the Agency Order; or (iii) there
is a non-Priority Customer complex
order resting on the COB on the
opposite side of the Agency Order at a
price better than the stop price, and the
aggregate size of the resting complex
order and any other contra-side interest
is insufficient to satisfy the Agency
Order.43
Executions following a C–SAM
Auction for a complex Agency Order are
subject to the complex order price
restrictions and priority in Rule
21.20(f)(2).44 The system will cancel or
reject any unexecuted C–SAM responses
(or unexecuted portions) at the
conclusion of the C–SAM auction.45 The
Agency Order will only execute against
the Solicited Order or C–SAM responses
and complex orders resting in the COB,
and will not leg into the simple book,
at the conclusion of a C–SAM auction.46
D. Notification Requirement and Order
Exposure Rule
Proposed Rule 21.23, Interpretation
and Policy .01 provides that prior to
entering Agency Orders into a C–SAM
auction on behalf of customers,
Initiating Members must deliver to the
customer a written notification
informing the customer that his order
may be executed using the C–SAM
42 See
id.
proposed Rule 21.23(e)(3).
44 See proposed Rule 21.23(e)(4).
45 See proposed Rule 21.23(e)(5).
46 See Notice, supra note 3, at 59871.
43 See
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auction. The written notification must
disclose the terms and conditions
contained in proposed Rule 21.23 and
be in a form approved by the
Exchange.47
Under Rule 21.23, Initiating Members
may enter contra-side orders that are
solicited. C–SAM provides a facility for
Options Members that locate liquidity
for their customer orders. Proposed Rule
21.23, Interpretation and Policy .02
provides that Options Members may not
use the C–SAM auction to circumvent
Rule 21.19 or 21.22 limiting principal
transactions. This may include, but is
not limited to, Options Members
entering contra-side orders that are
solicited from (a) affiliated brokerdealers or (b) broker-dealers with which
the Options Member has an arrangement
that allows the Options Member 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.48
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III. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange and, in particular,
with Section 6(b) of the Act.49 In
particular, the Commission finds that
the proposed rule change is consistent
with Section 6(b)(5) of the Act,50 which
requires, among other things, that the
rules of a national securities exchange
be designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
The Commission believes that
allowing Options Members to enter
complex orders into the C–SAM could
provide additional opportunities for
such large-sized complex orders to
receive price improvement. The
Commission further believes that the
47 See proposed Rule 21.23, Interpretation and
Policy .01.
48 See proposed Rule 21.23, Interpretation and
Policy .02.
49 15 U.S.C. 78f(b). In approving this proposed
rule change, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
50 15 U.S.C. 78f(b)(5).
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proposal to establish the C–SAM may
allow for greater flexibility in executing
large-sized complex orders, is not novel,
and does not otherwise raise any issues
of first impression.51 The Commission
believes that the proposal includes
appropriate terms and conditions to
assure that the Agency Order is exposed
to Options Members for the possibility
of price improvement and that Priority
Customer orders on the Exchange are
protected. At the conclusion of a C–
SAM, the Agency Order would either be
executed in full (at a price at or between
the SBBO and at or better than the bestpriced complex order resting on the
COB at the conclusion of the C–SAM
auction) or cancelled. The Agency Order
will be executed against the Solicited
Order at the proposed stop price if (i)
there is insufficient size among contraside trading interest at a price better
than the stop price to execute the
Agency Order; and (ii) there are no
Priority Customer complex orders
resting in the COB on the opposite side
of the Agency Order at or better than the
stop price.52 If there are Priority
Customer complex orders and there is
sufficient size to execute the Agency
Order (considering all eligible interest),
then the Agency Order will be executed
against these interests and the Solicited
Order will be cancelled.53 If, however,
there are resting Priority Customer
complex orders at the stop price, but
there is not sufficient size to execute the
Agency Order in full, then both the
Agency Order and the Solicited Order
will be cancelled.54 Finally, if there is
sufficient size to execute the Agency
Order in full at an improved price equal
to or better than the SBBO and the bestpriced complex order resting on the
COB at the conclusion of the C–SAM
auction, the Agency Order will execute
at the improved price and the Solicited
Order will be cancelled. The
Commission believes that the priority
and allocation rules for the C–SAM,
which are consistent with similar
mechanisms on other exchanges,55 are
reasonable and consistent with the Act.
IV. Section 11(a) of the Act
Section 11(a)(1) of the Act 56 prohibits
a member of a national securities
exchange from effecting transactions on
51 The Commission also notes that the proposal is
nearly identical to the requirements set forth for the
complex order solicitation mechanism on another
options exchange. See Cboe Options Rule 5.40. See
also Nasdaq ISE, LLC Options 3, Section 11(e).
52 See proposed Rule 21.23(e)(1).
53 See proposed Rule 21.23(e)(2).
54 See proposed Rule 21.23(e)(3).
55 See, e.g., Cboe Options Rule 5.40 (Complex
Solicitation Auction Mechanism).
56 15 U.S.C. 78k(a)(1).
PO 00000
Frm 00135
Fmt 4703
Sfmt 4703
that exchange for its own account, the
account of an associated person, or an
account over which it or its associated
person exercises investment discretion
(collectively, ‘‘covered accounts’’)
unless an exception applies. Rule 11a2–
2(T) under the Act,57 known as the
‘‘effect versus execute’’ rule, provides
exchange members with an exemption
from the Section 11(a)(1) prohibition.
Rule 11a2–2(T) 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: (i) Must
transmit the order from off the exchange
floor; (ii) may not participate in the
execution of the transaction once it has
been transmitted to the member
performing the execution; 58 (iii) may
not be affiliated with the executing
member; and (iv) with respect to an
account over which the member or an
associated person 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 Commission believes
that Exchange Options Members
entering orders into the C–SAM would
satisfy the requirements of Rule 11a2–
2(T).
The Rule’s first condition is that
orders for covered accounts be
transmitted from off the exchange floor.
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 a remote location
directly to an exchange’s floor by
electronic means.59 The Exchange
represents that its trading system and
the proposed C–SAM receive all orders
electronically through remote terminals
57 17
CFR 240.11a2–2(T).
prohibition also applies to associated
persons. The member may, however, participate in
clearing and settling the transaction.
59 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’’).
58 This
E:\FR\FM\13DEN1.SGM
13DEN1
Federal Register / Vol. 84, No. 240 / Friday, December 13, 2019 / Notices
or computer-to-computer interfaces.60
The Exchange also represents that
orders for covered accounts from
Options Members will be transmitted
from a remote location directly to the
proposed C–SAM by electronic means.
Because no Exchange Options Member
may submit orders into the C–SAM from
on the floor of the Exchange, the
Commission believes that the C–SAM
satisfies the off-floor transmission
requirement.
Second, the Rule requires that the
member and any associated person not
participate in the execution of its order
after the order has been transmitted. The
Exchange represents that at no time
following the submission to the C–SAM
of an order or C–SAM response is an
Options Member able to acquire control
or influence over the result or timing of
the order’s or response’s execution.61
According to the Exchange, the
execution of an order (including the
Agency and the Solicited Order) or a C–
SAM response sent to the C–SAM is
determined by what other orders and
responses are present and the priority of
those orders and responses.62
Accordingly, the Commission believes
that an Options Member does not
participate in the execution of an order
or response submitted to the C–SAM.
Third, Rule 11a2–2(T) requires that
the order be executed by an exchange
member who is unaffiliated with the
member initiating the order. The
Commission has stated that this
requirement is satisfied when
automated exchange facilities, such as
the C–SAM, are used, as long as the
design of these systems ensures that
members do not possess any special or
unique trading advantages in handling
their orders after transmitting them to
the exchange.63 The Exchange
60 See
Notice, supra note 3, at 59876.
id. (also representing, among other things,
that no Options Member, including the Initiating
Member, will see a C–SAM response submitted into
C–SAM and therefore will not be able to influence
or guide the execution of their Agency Orders,
Solicited Orders, or C–SAM responses, as
applicable).
62 See id. The Exchange notes that an Initiating
Member may not cancel or modify an Agency Order
or Solicited Order after it has been submitted into
C–SAM, but that Options Members may modify or
cancel their responses after being submitted to a C–
SAM. See id. at 59876 n.77. As the Exchange notes,
the Commission has stated that the nonparticipation 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’’).
63 In considering the operation of automated
execution systems operated by an exchange, the
Commission noted that, while there is not an
jbell on DSKJLSW7X2PROD with NOTICES
61 See
VerDate Sep<11>2014
17:42 Dec 12, 2019
Jkt 250001
represents that the C–SAM is designed
so that no Options Member has any
special or unique trading advantage in
the handling of its orders or responses
after transmitting its orders to the
mechanism.64 Based on the Exchange’s
representation, the Commission believes
that the C–SAM satisfies this
requirement.
Fourth, 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.65 The Exchange
represents that Options Members
relying on Rule 11a2–2(T) for
transactions effected through the C–
SAM must comply with this condition
of the Rule and that 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.66
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,67 that the
proposed rule change (SR–CboeEDGX–
2019–064) be, and hereby is, approved.
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, supra note 48.
64 See Notice, supra note 3, at 59876.
65 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 or any associated person thereof in
connection with effecting transactions for the
account during the period covered by the statement.
See 17 CFR 240.11a2–2(T)(d). See also 1978
Release, supra note 51, at 11548 (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’’).
66 See Notice, supra note 3, at 59876–77.
67 15 U.S.C. 78s(b)(2).
PO 00000
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Fmt 4703
Sfmt 4703
68235
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.68
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019–26851 Filed 12–12–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Proposed Collection; Comment
Request
Upon Written Request Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736.
Extension:
Rule 147A(f)(1)(iii) Written Representation
as to Purchaser Residency, SEC File No.
270–806, OMB Control No. 3235–0757.
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission
(‘‘Commission’’) is soliciting comments
on the collection of information
summarized below. The Commission
plans to submit this existing collection
of information to the Office of
Management and Budget for extension
and approval.
Rule 147A(f)(1)(iii) (17 CFR
230.147A(f)(1)(iii)) requires the issuer to
obtain from the purchaser a written
representation as to the pruchase’s
residency in order to qualify for safe
harbor under Securities Act Rule 147A
(17 CFR 230.147A). Rule 147A is an
exemption from registration under
Securities Act Section 28 (15 U.S.C.
77z–3). Under Rule 147A, the purchaser
in the offering must be a resident of the
same state or territory in which the
issuer is a resident. While the formal
representation of residency by itself is
not sufficient to establish a reasonable
belief that such purchasers are in-state
residents, the representation
requirement, together with the
reasonable belief standard, may result in
better compliance with the rule and
maintaining appropriate investor
protections. The representation of
residency is not provided to the
Commission. Approximately 700
respondents provide the information
required by Rule 147A(f)(1)(iii) at an
estimated 2.75 hours per response for a
total annual reporting burden of 1,925
hours (2.75 hours x 700 responses).
Written comments are invited on: (a)
Whether this proposed collection of
information is necessary for the
68 17
E:\FR\FM\13DEN1.SGM
CFR 200.30–3(a)(12).
13DEN1
]]>Agencies
[Federal Register Volume 84, Number 240 (Friday, December 13, 2019)]
[Notices]
[Pages 68231-68235]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26851]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87692; File No. SR-CboeEDGX-2019-064]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Order
Approving a Proposed Rule Change To Adopt Rule 21.23 (Complex
Solicitation Auction Mechanism)
December 9, 2019.
I. Introduction
On October 23, 2019, Cboe EDGX Exchange, Inc. (the ``Exchange'' or
``EDGX'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt Rule 21.23, the Complex Solicitation
Auction Mechanism (``C-SAM''), a solicited order mechanism for larger-
sized complex orders. The proposed rule change was published for
comment in the Federal Register on November 6, 2019.\3\ The Commission
has received no comments regarding the proposal. This order approves
the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 87435 (October 31,
2019), 84 FR 59866 (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
As described more fully in the Notice,\4\ the Exchange proposes to
adopt Rule 21.23 \5\ allowing complex orders to be submitted to and
processed in its solicited order mechanism. The proposal permits an
Options Member
[[Page 68232]]
(the ``Initiating Member'') to execute electronically a larger-sized
complex order it represents as agent (``Agency Order'') against a
solicited complex order(s) (``Solicited Order''), provided that it
submits both the Agency Order and Solicited Order into the C-SAM.\6\
---------------------------------------------------------------------------
\4\ See id.
\5\ For purposes of proposed Rule 21.23, the term ``SBBO'' means
the synthetic best bid or offer calculated using the best displayed
price for each component of a complex strategy from the simple book
at the particular point in time applicable to the reference. The
Exchange notes that there is no national best bid or offer for
complex orders, as complex orders may be executed without
consideration of any prices for the complex strategy that might be
available on other exchanges trading the same complex strategy. See
Rule 21.20(c)(2)(E).
\6\ The Solicited Order cannot have a capacity of F for the same
EFID as the Agency Order. The Agency Order and Solicited Order
cannot both be for the accounts of a customer.
---------------------------------------------------------------------------
A. Eligibility and C-SAM Auction Process
The Initiating Member may initiate a C-SAM in any class traded on
the Exchange.\7\ The smallest leg of an Agency Order marked for C-SAM
processing must be 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.\8\ The size of the Solicited Order(s) must
be for/total the same size as the Agency Order.\9\ The system will
automatically handle each of the Agency Order and Solicited Order as an
all-or-none (``AON'') order,\10\ and the price of the Agency Order and
Solicited Order must be in an increment of $0.01.\11\ Also, an
Initiating Member may not designate an Agency Order or Solicited Order
as Post Only \12\ and may only submit an Agency Order after the complex
order book (``COB'') opens.\13\
---------------------------------------------------------------------------
\7\ See proposed Rule 21.23(a)(1).
\8\ See proposed Rule 21.23(a)(3).
\9\ See id.
\10\ See id. The Exchange notes that it intends to separately
amend Rule 21.21, which currently states that an Initiating Member
must designate the Agency Order and Solicited Order as AON, to
conform to proposed Rule 21.23(a)(3). See Notice, supra note 3, at
59867 n.12.
\11\ See proposed Rule 21.23(a)(4).
\12\ See proposed Rule 21.23(a)(5).
\13\ See proposed Rule 21.23(a)(6).
---------------------------------------------------------------------------
The Solicited Order must stop the entire buy (sell) Agency Order at
a price that is at or better than the then-current SBO (SBB) or the
price of the best-priced sell (buy) complex order on the COB.\14\
Regarding resting simple orders that are on the same side as the Agency
Order, the proposal provides that if the Agency Order is to buy (sell),
the stop price must be at or better than the SBB (SBO), unless the
applicable side of the BBO on any component of the complex strategy
represents a Priority Customer order on the simple book, in which case
the stop price must be at least $0.01 better than the SBB (SBO).\15\
Regarding resting complex orders that are on the same side as the
Agency Order, the proposal provides that if the Agency Order is to buy
(sell), the stop price must be at least $0.01 better than the bid
(offer) of the resting complex order, unless the Agency Order is a
Priority Customer order and the resting order on the COB is not a
Priority Customer, in which case the stop price must be at or better
than the bid (offer) of the resting complex order.\16\ Regarding
resting simple orders that are on the opposite side as the Agency
Order, the proposal provides that if the Agency Order is to buy (sell),
the stop price must be at or better than the SBO (SBB), unless the BBO
of any component of the complex strategy represents a Priority Customer
order on the simple book, in which case the stop price must be at least
$0.01 better than the SBO (SBB).\17\ Regarding resting complex orders
that are on the opposite side as the Agency Order, the proposal
provides that if the Agency Order is to buy (sell) and the best-priced
sell (buy) complex order on the COB represents (i) a complex order that
is not a Priority Customer, the stop price must be at or better than
the price of the resting complex order; or (ii) a Priority Customer
complex order, the stop price must be at least $0.01 better than the
SBO (SBB).\18\
---------------------------------------------------------------------------
\14\ See proposed Rule 21.23(b).
\15\ See proposed Rule 21.23(b)(1).
\16\ See proposed Rule 21.23(b)(2).
\17\ See proposed Rule 21.23(b)(3).
\18\ See proposed Rule 21.23(b)(4).
---------------------------------------------------------------------------
The Exchange system will initiate the C-SAM process by sending a C-
SAM auction notification message detailing the side, size, price,
capacity, auction ID, and complex strategy of the Agency Order to all
Options Members that elect to receive C-SAM auction notification
messages.\19\ C-SAM auction notification messages will not be
disseminated to the Options Price Reporting Authority (``OPRA'').\20\
The C-SAM auction will last for a period of time determined by the
Exchange (the ``C-SAM auction period''), which may be no less than 100
milliseconds and no more than one second.\21\ An Initiating Member may
not modify or cancel an Agency Order or Solicited Order after
submission to a C-SAM auction.\22\
---------------------------------------------------------------------------
\19\ See proposed Rule 21.23(c)(2).
\20\ See id.
\21\ See proposed Rule 21.23(c)(3). The Exchange will announce
the length of the C-SAM auction period to Options Members pursuant
to Rule 16.3.
\22\ See proposed Rule 21.23(c)(4).
---------------------------------------------------------------------------
Any user other than the Initiating Member (determined by EFID) may
submit responses to a C-SAM auction that are properly marked specifying
size, side of the market, and the auction ID for the C-SAM auction to
which the user is submitting the response.\23\ C-SAM responses must be
on the opposite side of the market as the Agency Order,\24\ and the
minimum price increment for C-SAM responses is $0.01.\25\ C-SAM buy
(sell) responses are capped at the better of the SBO (SBB) or the offer
(bid) of a resting complex order at the top of the COB, or $0.01 better
than the better of the SBO (SBB) or the offer (bid) of a resting
complex order at the top of the COB if the BBO of any component of the
complex strategy or the resting complex order, respectively, is a
Priority Customer order.\26\ For purposes of the C-SAM auction, the
system will aggregate all of a user's complex orders on the COB and C-
SAM responses for the same EFID at the same price.\27\ The system will
cap the size of a C-SAM response, or the aggregate size of a user's
complex orders on the COB and C-SAM responses for the same EFID at the
same price, at the size of the Agency Order (i.e., the system will
ignore size in excess of the size of the Agency Order when processing a
C-SAM auction).\28\ C-SAM responses will not be visible to C-SAM
auction participants or disseminated to OPRA.\29\ A user may modify or
cancel its C-SAM responses during the C-SAM auction.\30\
---------------------------------------------------------------------------
\23\ See proposed Rule 21.23(c)(5).
\24\ See proposed Rule 21.23(c)(5)(E).
\25\ See proposed Rule 21.23(c)(5)(A).
\26\ See proposed Rule 21.23(c)(5)(B).
\27\ See proposed Rule 21.23(c)(5)(C). The Exchange notes that
this is similar to the corresponding provision for the Exchange's
simple SAM auction. See Rule 21.22(c)(5)(C). The Exchange also notes
that this (combined with the proposed size cap) is intended to
prevent an Options Member from submitting multiple orders or
responses at the same price to obtain a larger pro-rata share of the
Agency Order. See Notice, supra note 3, at 59870.
\28\ See proposed Rule 21.23(c)(5)(D). The Exchange notes that
this is similar to the corresponding provision for the Exchange's
simple SAM auction. See Rule 21.22(c)(5)(D). The Exchange notes that
this is intended to prevent an Options Member from submitting an
order or response with an extremely large size in order to obtain a
larger pro-rata share of the Agency Order. See Notice, supra note 3,
at 59870.
\29\ See proposed Rule 21.23(c)(5)(F).
\30\ See proposed Rule 21.23(c)(5)(G).
---------------------------------------------------------------------------
One or more C-SAM auctions in the same complex strategy may occur
at the same time, C-SAM auctions in different complex strategies may be
ongoing at any given time (even if the complex strategies have
overlapping components), and a C-SAM auction may be ongoing at the same
time as a SAM auction in any component of the complex strategy.\31\ To
the extent there is more than one C-SAM auction in a complex strategy
underway at a time, the C-SAM auctions will conclude sequentially based
on the exact time each C-SAM commenced, unless terminated early
pursuant to proposed Rule 21.23(d).\32\ In the event there are multiple
C-SAM auctions underway that are each terminated early pursuant
[[Page 68233]]
to proposed Rule 21.23(d), the system will process the C-SAM auctions
sequentially based on the exact time each C-SAM auction commenced.\33\
If the system receives a simple order that causes a SAM auction and C-
SAM auction (or multiple SAM and/or C-SAM auctions) to conclude
pursuant to Rule 21.23(d) and Rule 21.21(d), the system will first
process SAM auctions (in price-time priority) and then process C-SAM
auctions (in price-time priority).\34\ At the time each C-SAM auction
concludes, the system will allocate the Agency Order pursuant to
proposed Rule 21.23(e) and will take into account all C-SAM responses
and unrelated orders and quotes in place at the exact time of
conclusion.\35\
---------------------------------------------------------------------------
\31\ See proposed Rule 21.23(c)(1)(A).
\32\ See proposed Rule 21.23(c)(1)(B).
\33\ See id. See also Notice, supra note 3, at 59868-69.
\34\ See proposed Rule 21.23(c)(1)(B).
\35\ See proposed Rule 21.23(c)(1)(C).
---------------------------------------------------------------------------
B. Conclusion of the C-SAM Auction
The C-SAM will conclude at the sooner of the following: (i) The end
of the C-SAM auction period; (ii) upon receipt by the system of an
unrelated non-Priority Customer complex order on the same side of
market as the Agency Order that would post to the COB at a price better
than the stop price; (iii) upon receipt by the system of an unrelated
Priority Customer complex order on the same side of the market as the
Agency Order that would post to the COB at a price equal to or better
than the stop price; (iv) upon receipt by the system of an unrelated
non-Priority Customer order or quote that would post to the simple book
and cause the SBBO on the same side of the market as the Agency Order
to be better than the stop price; (v) upon receipt by the system of a
Priority Customer order in any component of the complex strategy that
would post to the simple book and cause the SBBO on the same side of
the market as the Agency Order to be equal to or better than the stop
price; (vi) upon receipt by the system of a simple non-Priority
Customer order that would cause the SBBO on the opposite side of market
as the Agency Order to be better than the stop price, or a Priority
Customer order that would cause the SBBO on the opposite side of market
as the Agency Order to be equal to or better than the stop price; (vii)
upon receipt by the system of an order that would cause the SBBO to be
a price not permissible under the Limit Up-Limit Down Plan or
Regulation SHO, provided, however, that in such instance, the C-SAM
auction would conclude without execution; (viii) the market close; and
(ix) any time the Exchange halts trading in the complex strategy,
provided, however, that in such instance the C-SAM auction will
conclude without execution.\36\
---------------------------------------------------------------------------
\36\ See proposed Rule 21.23(d)(1).
---------------------------------------------------------------------------
An unrelated market or marketable limit complex order (against the
SBBO or the best price of a complex order resting in the COB),
including a Post Only complex order, on the opposite side of the Agency
Order received during the C-SAM will not cause the C-SAM auction to end
early and will execute against interest outside of the C-SAM auction or
be posted to the COB.\37\ If contracts remain from such unrelated
complex order at the time the C-SAM auction ends, they may be allocated
for execution against the Agency Order pursuant to proposed Rule
21.23(e).\38\
---------------------------------------------------------------------------
\37\ See proposed Rule 21.23(d)(2).
\38\ See id.
---------------------------------------------------------------------------
C. Priority and Allocation
At the conclusion of the C-SAM auction, the system will execute the
Agency Order against the Solicited Order or contra-side complex
interest (which includes complex orders on the COB and C-SAM responses)
at the best price(s) as follows (provided that any execution price(s)
must be at or between the SBBO and the best prices of any complex
orders resting on each side of the COB at the conclusion of the C-SAM
auction): \39\
---------------------------------------------------------------------------
\39\ See proposed Rule 21.23(e). Additionally, if there is a
Priority Customer order representing any leg of the SBBO in the
simple book, the execution price must be better than the SBBO, in
accordance with complex order priority. See Rule 21.20(f)(2).
Additionally, any execution price must be better than the price of
any resting Priority Order complex order on the COB.
---------------------------------------------------------------------------
The system will execute the Agency Order against the
Solicited Order at the stop price if there are no Priority Customer
complex orders resting on the COB on the opposite side of the Agency
Order at or better than the stop price and the aggregate size of
contra-side interest at an improved price(s) is insufficient to satisfy
the Agency Order.\40\
---------------------------------------------------------------------------
\40\ See proposed Rule 21.23(e)(1).
---------------------------------------------------------------------------
The system will execute the Agency Order against contra-
side interest (and cancel the Solicited Order) if (A) there is a
Priority Customer complex order resting on the COB on the opposite side
of the Agency Order at or better than the stop price and the aggregate
size of that order and other contra-side interest is sufficient to
satisfy the Agency Order; or (B) the aggregate size of contra-side
interest at an improved price(s) is sufficient to satisfy the Agency
Order.\41\ The Agency Order execution against such contra-side interest
will occur at each price level, to the price at which the balance of
the Agency Order can be fully executed, first against Priority Customer
complex orders on the COB (in time priority) and then against remaining
contra-side interest (including non-Priority Customer orders on the COB
and C-SAM responses) in a pro-rata manner.\42\
---------------------------------------------------------------------------
\41\ See proposed Rule 21.23(e)(2).
\42\ See id.
---------------------------------------------------------------------------
The system will cancel the Agency Order and Solicited
Order with no execution if (i) execution of the Agency Order against
the Solicited Order at the stop price would not be at or between the
SBBO at the conclusion of the C-SAM auction, better than the SBBO if
there is a Priority Customer order in any leg component in the simple
book, at or better than the best-priced complex order resting on the
COB, or better than the best-priced complex order resting on the COB if
it is a Priority Customer complex order; (ii) there is a Priority
Customer complex order resting on the COB on the opposite side of the
Agency Order at or better than the stop price, and the aggregate size
of the Priority Customer complex order and any other contra-side
interest is insufficient to satisfy the Agency Order; or (iii) there is
a non-Priority Customer complex order resting on the COB on the
opposite side of the Agency Order at a price better than the stop
price, and the aggregate size of the resting complex order and any
other contra-side interest is insufficient to satisfy the Agency
Order.\43\
---------------------------------------------------------------------------
\43\ See proposed Rule 21.23(e)(3).
---------------------------------------------------------------------------
Executions following a C-SAM Auction for a complex Agency Order are
subject to the complex order price restrictions and priority in Rule
21.20(f)(2).\44\ The system will cancel or reject any unexecuted C-SAM
responses (or unexecuted portions) at the conclusion of the C-SAM
auction.\45\ The Agency Order will only execute against the Solicited
Order or C-SAM responses and complex orders resting in the COB, and
will not leg into the simple book, at the conclusion of a C-SAM
auction.\46\
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\44\ See proposed Rule 21.23(e)(4).
\45\ See proposed Rule 21.23(e)(5).
\46\ See Notice, supra note 3, at 59871.
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D. Notification Requirement and Order Exposure Rule
Proposed Rule 21.23, Interpretation and Policy .01 provides that
prior to entering Agency Orders into a C-SAM auction on behalf of
customers, Initiating Members must deliver to the customer a written
notification informing the customer that his order may be executed
using the C-SAM
[[Page 68234]]
auction. The written notification must disclose the terms and
conditions contained in proposed Rule 21.23 and be in a form approved
by the Exchange.\47\
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\47\ See proposed Rule 21.23, Interpretation and Policy .01.
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Under Rule 21.23, Initiating Members may enter contra-side orders
that are solicited. C-SAM provides a facility for Options Members that
locate liquidity for their customer orders. Proposed Rule 21.23,
Interpretation and Policy .02 provides that Options Members may not use
the C-SAM auction to circumvent Rule 21.19 or 21.22 limiting principal
transactions. This may include, but is not limited to, Options Members
entering contra-side orders that are solicited from (a) affiliated
broker-dealers or (b) broker-dealers with which the Options Member has
an arrangement that allows the Options Member 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.\48\
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\48\ See proposed Rule 21.23, Interpretation and Policy .02.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange
and, in particular, with Section 6(b) of the Act.\49\ In particular,
the Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\50\ which requires, among other things,
that the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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\49\ 15 U.S.C. 78f(b). In approving this proposed rule change,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\50\ 15 U.S.C. 78f(b)(5).
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The Commission believes that allowing Options Members to enter
complex orders into the C-SAM could provide additional opportunities
for such large-sized complex orders to receive price improvement. The
Commission further believes that the proposal to establish the C-SAM
may allow for greater flexibility in executing large-sized complex
orders, is not novel, and does not otherwise raise any issues of first
impression.\51\ The Commission believes that the proposal includes
appropriate terms and conditions to assure that the Agency Order is
exposed to Options Members for the possibility of price improvement and
that Priority Customer orders on the Exchange are protected. At the
conclusion of a C-SAM, the Agency Order would either be executed in
full (at a price at or between the SBBO and at or better than the best-
priced complex order resting on the COB at the conclusion of the C-SAM
auction) or cancelled. The Agency Order will be executed against the
Solicited Order at the proposed stop price if (i) there is insufficient
size among contra-side trading interest at a price better than the stop
price to execute the Agency Order; and (ii) there are no Priority
Customer complex orders resting in the COB on the opposite side of the
Agency Order at or better than the stop price.\52\ If there are
Priority Customer complex orders and there is sufficient size to
execute the Agency Order (considering all eligible interest), then the
Agency Order will be executed against these interests and the Solicited
Order will be cancelled.\53\ If, however, there are resting Priority
Customer complex orders at the stop price, but there is not sufficient
size to execute the Agency Order in full, then both the Agency Order
and the Solicited Order will be cancelled.\54\ Finally, if there is
sufficient size to execute the Agency Order in full at an improved
price equal to or better than the SBBO and the best-priced complex
order resting on the COB at the conclusion of the C-SAM auction, the
Agency Order will execute at the improved price and the Solicited Order
will be cancelled. The Commission believes that the priority and
allocation rules for the C-SAM, which are consistent with similar
mechanisms on other exchanges,\55\ are reasonable and consistent with
the Act.
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\51\ The Commission also notes that the proposal is nearly
identical to the requirements set forth for the complex order
solicitation mechanism on another options exchange. See Cboe Options
Rule 5.40. See also Nasdaq ISE, LLC Options 3, Section 11(e).
\52\ See proposed Rule 21.23(e)(1).
\53\ See proposed Rule 21.23(e)(2).
\54\ See proposed Rule 21.23(e)(3).
\55\ See, e.g., Cboe Options Rule 5.40 (Complex Solicitation
Auction Mechanism).
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IV. Section 11(a) of the Act
Section 11(a)(1) of the Act \56\ 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 investment discretion
(collectively, ``covered accounts'') unless an exception applies. Rule
11a2-2(T) under the Act,\57\ known as the ``effect versus execute''
rule, provides exchange members with an exemption from the Section
11(a)(1) prohibition. Rule 11a2-2(T) 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: (i) Must transmit the order from off the exchange
floor; (ii) may not participate in the execution of the transaction
once it has been transmitted to the member performing the execution;
\58\ (iii) may not be affiliated with the executing member; and (iv)
with respect to an account over which the member or an associated
person 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 Commission believes that Exchange Options Members entering
orders into the C-SAM would satisfy the requirements of Rule 11a2-2(T).
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\56\ 15 U.S.C. 78k(a)(1).
\57\ 17 CFR 240.11a2-2(T).
\58\ This prohibition also applies to associated persons. The
member may, however, participate in clearing and settling the
transaction.
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The Rule's first condition is that orders for covered accounts be
transmitted from off the exchange floor. 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 a remote location directly to an exchange's floor by
electronic means.\59\ The Exchange represents that its trading system
and the proposed C-SAM receive all orders electronically through remote
terminals
[[Page 68235]]
or computer-to-computer interfaces.\60\ The Exchange also represents
that orders for covered accounts from Options Members will be
transmitted from a remote location directly to the proposed C-SAM by
electronic means. Because no Exchange Options Member may submit orders
into the C-SAM from on the floor of the Exchange, the Commission
believes that the C-SAM satisfies the off-floor transmission
requirement.
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\59\ 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'').
\60\ See Notice, supra note 3, at 59876.
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Second, the Rule requires that the member and any associated person
not participate in the execution of its order after the order has been
transmitted. The Exchange represents that at no time following the
submission to the C-SAM of an order or C-SAM response is an Options
Member able to acquire control or influence over the result or timing
of the order's or response's execution.\61\ According to the Exchange,
the execution of an order (including the Agency and the Solicited
Order) or a C-SAM response sent to the C-SAM is determined by what
other orders and responses are present and the priority of those orders
and responses.\62\ Accordingly, the Commission believes that an Options
Member does not participate in the execution of an order or response
submitted to the C-SAM.
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\61\ See id. (also representing, among other things, that no
Options Member, including the Initiating Member, will see a C-SAM
response submitted into C-SAM and therefore will not be able to
influence or guide the execution of their Agency Orders, Solicited
Orders, or C-SAM responses, as applicable).
\62\ See id. The Exchange notes that an Initiating Member may
not cancel or modify an Agency Order or Solicited Order after it has
been submitted into C-SAM, but that Options Members may modify or
cancel their responses after being submitted to a C-SAM. See id. at
59876 n.77. As the Exchange notes, the Commission has stated that
the non-participation requirement does not preclude members from
cancelling or modifying orders, or from modifying instructions for
executing orders, after they have been transmitted so long as such
modifications or cancellations are also transmitted from off the
floor. See Securities Exchange Act Release No. 14563 (March 14,
1978), 43 FR 11542, 11547 (the ``1978 Release'').
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Third, Rule 11a2-2(T) requires that the order be executed by an
exchange member who is unaffiliated with the member initiating the
order. The Commission has stated that this requirement is satisfied
when automated exchange facilities, such as the C-SAM, are used, as
long as the design of these systems ensures that members do not possess
any special or unique trading advantages in handling their orders after
transmitting them to the exchange.\63\ The Exchange represents that the
C-SAM is designed so that no Options Member has any special or unique
trading advantage in the handling of its orders or responses after
transmitting its orders to the mechanism.\64\ Based on the Exchange's
representation, the Commission believes that the C-SAM satisfies this
requirement.
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\63\ 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, supra note 48.
\64\ See Notice, supra note 3, at 59876.
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Fourth, 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.\65\ The Exchange represents that Options Members
relying on Rule 11a2-2(T) for transactions effected through the C-SAM
must comply with this condition of the Rule and that 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.\66\
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\65\ 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 or any associated person thereof in connection with effecting
transactions for the account during the period covered by the
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra
note 51, at 11548 (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'').
\66\ See Notice, supra note 3, at 59876-77.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\67\ that the proposed rule change (SR-CboeEDGX-2019-064) be, and
hereby is, approved.
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\67\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\68\
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\68\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-26851 Filed 12-12-19; 8:45 am]
BILLING CODE 8011-01-P
